Family assistance provisions

Sections 103 to 111

Several remedial amendments have been made to the family assistance provisions in the Income Tax Act 2004. Some were required to fine-tune the provisions to ensure that they give full effect to the policy intent of the Working for Families package, while others correct minor drafting errors.

In-work payment and weekly compensation

The changes are intended to remove any doubt that concurrent entitlement to the in-work payment and weekly compensation under the Injury Prevention, Rehabilitation, and Compensation Act 2001 is limited to incapacity suffered on or after 1 January 2006.

Key features

The reference in section KD 2AAA(1)(d) to subsection (7) has been replaced by a reference to subsection (8). The change clarifies that when subsection (8), relating to eligibility for the in-work payment when weekly compensation payments are received as a result of incapacity arising on or after 1 January 2006, applies, the requirements for income from an activity and full-time earner do not apply.

To further remove doubt, paragraph (xvi) of the definition of "salary or wages" has been omitted from the list in section KD 2AAA(5)(a)(i) of source deductions that are not eligible income from an activity. Paragraph (xvi) of the definition of "salary or wages" relates to payments of weekly compensation made under the Injury Prevention, Rehabilitation, and Compensation Act 2001. Instead, new subparagraph KD 2AAA(5)(a)(iii) was inserted to clarify that only weekly compensation payments under the 2001 Act in respect of incapacity before 1 January 2006 are not eligible income from an activity.

Application date

The amendments apply from the tax year beginning 1 April 2006, the application date for the in-work payment.

In-work payments and Paid parental leave

The change clarifies that recipients of parental leave payments are not precluded from entitlement to the inwork payment if they met the necessary full-time work test before receiving paid parental leave.

Key features

Paragraph (x) of the definition of "salary or wages" has been omitted from the list in section KD 2AAA(5)(a)(i) of source deductions that are not eligible income from an activity. Paragraph (x) of the definition of "salary or wages" related to parental leave payments made under Part 7A of the Parental Leave and Employment Protection Act 1987.

The inclusion of parental leave payments in the list created an inconsistency between the requirement to have income from an activity and the requirement to normally be a full-time earner, both of which must be met, with the result that recipients of paid parental leave would have been precluded from entitlement.

Application date

The amendment applies from the tax year beginning 1 April 2006, the application date for the in-work payment.

Family assistance for shared care arrangments

The changes provide flexibility by allowing entitlement to the relevant elements of family assistance when a shared care arrangement is intended to continue for at least four months (one-third of a year), and the proportion of care is such that each parent has exclusive care for at least one-third of the shared care period. This could mean, in some instances, that parts of a shared care period fall in two tax years, something that was previously prevented if the shared care arrangement began within four months of the end of a tax year.

Key features

The rule in section KD 2AA(2) that defines who is a principal caregiver has been replaced with a more flexible rule that maintains the idea of one-third of a year as being an indication of some permanence to the shared care arrangement. The new rule allows any four-month period to apply so that the period does not have to fall entirely within a tax year.

The provision relating to the parental tax credit is unchanged - the requirement is one-third of the entitlement period.

The rule in section KD 2AA(2B) that defines who is a principal caregiver for the purposes of the in-work payment was slightly different in that the period of care does not have to coincide with the period of eligibility for the in-work payment. That rule has also been replaced to allow the greater flexibility in application.

Application date

The amendments apply from the tax year beginning 1 April 2006, the application date for the in-work payment.

In-work payment for continuous eligible periods

The concept of an "eligible period" is a critical component of the family assistance system. Under the changes, when there are eligible periods of part-weeks that together form one continuous period, families will not lose entitlement to the in-work payment in any weeks in which the eligibility criteria are otherwise met.

Key features

The in-work payment is available only when the employment criteria are met for a full week. If an eligible period was less than a week, the law previously would not allow in-work payment to be made for that week even if the eligible period was consecutive with another eligible period. This was contrary to the policy intent.

The replacement definition of "weeks" in section KD 2AAA(2) allows the recognition of contiguous eligible periods as if they were one so that entitlement to the inwork payment is available for all full weeks in which the relevant employment criteria are met. It also maintains the correct treatment when only one unbroken eligible period is involved.

Application date

The amendment applies from the tax year beginning 1 April 2006, the application date for the in-work payment.

Ring-fencng of family support

The change ensures that the ring-fencing provisions reflect the policy intent that maximum family support entitlement would be guaranteed for periods spent on a benefit if a family's annualised monthly income (calculated on a month-by-month basis while on a benefit) is below the abatement threshold.

Key features

Ring-fencing in the family assistance provisions is intended to protect families who move from benefit to work, or vice versa, during the year. Without ringfencing, they would incur an end-of-year overpayment of family support if their full-year income was at a higher level than their on-benefit income.

However, ring-fenced periods did not previously create new "eligible periods". This meant that when the abatement formula was applied to an eligible period that contained a ring-fenced period, it was possible for the income to eliminate entitlement, even for the periods that had been ring-fenced, and the benefits of ring-fencing were lost. The additional paragraph inserted in the definition of "eligible period" in section OB 1 provides for a ringfenced period also to be an eligible period so that it can be excluded from the abatement formula.

Application date

The amendment applies from the tax year beginning 1 April 2005, the commencement date for the ring-fencing provisions.

Minor technical and drafting amendments

A number of amendments correct errors of a minor technical or drafting nature. Some of these are the result of inadvertent wording and printing changes in the drafting of the Taxation (Working for Families) Act. Other amendments clarify the effect of links to definitions that also apply elsewhere in the Income Tax Act 004.

Formula for calculating "net specified income"

The formula in section KD 1(1)(g)(ii) for calculating "net specified income" when the person is a major shareholder in a close company (generally, a company with five or fewer shareholders) has been amended to replace the item "(c - d)" with "c". The change was needed to reflect the current tax position of a close company. Changes to close company and imputation rules created a need to amend the formula, but the need was overlooked when the relevant imputation credit provisions were introduced.

Formula for calculating family assistance tax credits

The definition of item "IWP or CTC" in the formula for calculating the subpart KD credits (family assistance) in section KD 2(2) has been amended to make it clear that a person may get the in-work payment (IWP) or the child tax credit (CTC) but not both concurrently.

Application of definitions

Section KD 3(1) has been amended to clarify that the definitions of "qualifying person" and "employment" specific to the purposes of the family tax credit apply to both the calculation of the family tax credit and the rules for the family tax credit.

Drafting oversight

Section KD 5(6A) (b)(ii) was amended by the Taxation (Working for Families) Act 2004 by replacing the former reference to section KD 5B with the words "sections KD 2 and KD 3", section KD 5B having been repealed in that Act. However, the need for in-work payment in the list of rates to be included in the calculation of interim instalments in the section was overlooked. That oversight has been rectified.

Adjustment of amounts

The method by which the Governor-General, by Order in Council, is to adjust the threshold of the family tax credit is prescribed in section KD 5C.

Section KD 5C has been amended to correct an inadvertent wording change that would have required the Order in Council to change the whole of the family tax credit, rather than just the item amount in the formula, as was intended. This would have had the effect of prescribing a fixed amount of family tax credit, rather than an amount that has regard to after-tax income of an eligible family.

Payment of arrears by the Commissioner

Under the general rules for payment by instalment, instalment payments can be made only for a period going forward from the date of application.

However, the Commissioner is able to pay the arrears of tax credits for the period since a benefit ceased when a person goes off a benefit but delays application for family assistance to be paid by the Commissioner.

The opportunity was taken to remove duplication in the relevant provisions by amending section KD 7(3A) to make it clear in what circumstances the provision can be used, and by repealing section KD 7(3C).

Application date

The minor amendments apply from the tax year beginning 1 April 2006.