What tax credits are available for low income earner?

1.Independent earner tax credit (IETC) (s LC13)

The IETC provides tax relief to middle-income (income between $24,000 and $44,000) New Zealander who does not receive core assistance from the government (including benefit, working for families tax credits, New Zealand superannuation or overseas superannuation). The IETC delivers $10 per week to individuals and abates at 13c for every dollar of income earned over $44,000, which means it phases out at the net income of $48,000 (all $520 IETC phases out). 

There is an unfortunate consequence if a taxpayer’s income is $23,999, he cannot get any IETC, but if his income is $24,000, he can get $520 IETC.

2.  Family scheme tax credits

To entitle for abating Working for Families (WFF) tax credits, the person must meets following criteria:

·16 or older; and

·The principle caregiver for one or more dependent children;

·A New Zealand resident who has been both resident and present in New Zealand for a continuous period of 12 months at any time, and is tax resident and resident in New Zealand on the date on which a tax credit arises; and

·Not be a transitional resident, and not be the spouse, civil union partner, or de facto partner of a transitional resident.

The family assistance package is made up of the following tax credits:

1)      Family tax credit:

It is a tax credit paid to eligible families with children 18 years or younger for each dependent child (s MD3). The amount ranges from $4,822 ($92 per week) to $5,303($101 per week) for the eldest child, from $ 3,351($64 per week) to $4,745($91 per week) for additional children.

2)      In-work tax credit:

To entitle for this credit, the person must be 16 or older and the principal caregiver for a child who is financially dependent them (s MD4- MD6). They must be a full-time income earner.

Couples must work 30 hours or more and solo parents 20 hours or more a week. The payment amount is $60 per week for families with 1-3 children, with an extra $15 per week for each of the subsequent child.

MD10 ,calculation: The formual is 3120 +  (780 x childern-3) x weekly periods /52

Childern is the greater of 3 and the actual number)

weekly periods is the number of weeks as mentioned in MD9(2) a paye income payment is received by the person or their spouse. 

Example - Mary and Thomas working 30 hours hours a week between them, they have 4 childern, Calculations would be as follows:

3120+780 = $3900

3)      Parental tax credit:

A tax credit of up to $1,200 is paid to caregivers for the first eight weeks- 54 days ($150 per week) after each dependent child is born (s MD12)

You will not get this credit if you are getting parental tax leave or income tested benefit anytime during the 8 weeks period. The formula is Prescribed amount x days/56.

Prescribed amountis $1200, and the days is the number of days in the parental entitlement period for which the person or their spouse do not receive a social assistance payment.

When another person care for the depended childern, the credit amount will be adjusted in proportion (section MD11(4) of ITA 2007)

If the child dies during the first 8 weeks of birth full amount shall be paid to the person. (section MD11(3) of ITA 2007)

4)      Family credit abatement:

It depends on the person’s family income for the period. If the income is more than $36,872, the abatement rate is 20 cents for each dollar of the excess.  

For this perspective family scheme income is defined as by IRD on the below link:

http://www.ird.govt.nz/technical-tax/legislation/2010/2010-130/2010-130-changes-wfftc/

5)      Minimum family tax credit:

Minimum family tax credit is a payment made to families with dependent children aged 18 or younger, so they have a minimum income of $437 a week after tax. It is designed to support families moving off a benefit and into paid work. It ensures that these working families are better off as a result of being in the workforce.

If your annual family income is $22,724 or less after tax, you may be eligible for the minimum family tax credit.

The formula used in calculating MFTC is:

Prescribed amount – net family scheme income*weekly periods/52

The prescribed amount is $22,724 from 1 April 2013.  The weekly periods are the number of weeks when the person is a full time earner (s ME2 defines ‘full time earner’). For example, if a person does not receive any other family scheme income and has a before tax income of less than $22,724, he is entitle to MFCT of $437 per week ($22,724 p.a.).

Net Family scheme income

It is an income of (ME1(3) (b) the person or their spouse or both.

As per ME3 adusted formual is income-adjusted liability+amount received-amount paid.

Adjusted liability is income tax.

Adjusted income, amount paid and amount received as per subpart MB as below

To calculate a person’s family scheme income, the following adjustments are made to a person’s net income (or net loss):

• include an amount of exempt income from overseas pensions (section CW 28(1)(e)) and child support and maintenance payments (section CW 32) derived by the person in the income year.
• exclude the following income (or loss):
1. an amount of a tax loss of a qualifying company that is attributed to the person as a shareholder of the qualifying company under sections HA 20 and HA 24 (which relate to the treatment of tax losses of loss attributing qualifying companies);
2. an amount of income attributed by a portfolio investment entity that is not excluded income of the person;
3. an amount of retirement scheme contribution that is not excluded income of the person and would be their excluded income in the absence of section CX 50B(2) (contributions to retirement savings schemes);
4. loss incurred in carrying on a business: If a person carries on 1 or more businesses in a year, the income of each business must be calculated separately. If a net loss is the result of this, the net loss is treated as nil; and
5. investment losses (from 1 April 2011).

• deduct an amount of any child support or maintenance payments made by the person during the income year (section CW 32) and any liable parent contributions made under section 256 of the Child Support Act 1991.

Weekly period

Is the number of period in which the person is a fulltime earner.

It ensures the minimum take home pay for all person is at acceptable level. For example if Mary and Thomas both are not working more than 30 hours a week between them they will not receive the minimum tax credit, and if any one of them is receiving income tested benefit they will also not receive minimum familty tax credit.

For examle- If Mary is full time mother, and Tom is working 30 hours a week @15 an hour. His take home pay is $20,285 (23,400- tax of 3115). Together they have 3 childern born in 2002,2004 and 2006. They will receive $10,942 family tax credit, and $3120 Inwork tax credit. All up $34,347, the prescribed amount for minimum family tax credit is $22,724 so they will not get anything.