Indexation loss tightens screws on Working for Families

Changes to prevent Working for Families payments from rising automatically with inflation will save the government more than the high profile measures to stop tax dodgers exploiting the WFF scheme.

The Budget anticipates that "non-compensatory" WFF changes will net an extra $65 million in tax revenue a year by 2013/14, $40 million of which will be achieved by axing the indexation of the WFF abatement  threshold.

The threshold cuts in at $36,827 and currently rises automatically every time cumulative inflation rises more than 5%.  Abolishing automatic indexation has the effect of gradually reducing entitlement for eligible working families. 

A further $25 million a year will come from new rules to prevent investment losses being used to reduce personal income to create WFF eligibility.  The Tax Working Group found a suspicious clustering of personal incomes around the eligibility thresholds after WFF was introduced, suggesting wealthy individuals were offsetting other income with investment losses, such as from residential properties, to qualify for WFF support payments intended for low and middle income families.

Approximately 9700 taxpayers are currently claiming rental property losses and receiving WFF.

However, that $25 million annual clawback from investment losses could yet rise. 

"Large amounts of income, particularly in the case of trust-owned businesses can be distributed through a trust, meaning families on a high actual income can appear to have quite a low income for the purposes of WFF," Budget documents say.

An issues paper due for release this year will examine whether other forms of income, including income from some PIE and superannuation schemes, and fringe benefits should be counted.

More Budget coverage:

Biggest tax package in a generation builds on lessons of global crisis

Finely balanced tax package depends on growth dividend

Recovery gives NZ tailwind to rebalance economy, cut taxes

Property depreciation write-offs: here today, gone tomorrow

Government cuts tax on savings vehicles to 28%

Government closes loophole and aligns tax rates for LAQCs

Businesswire.co.nz

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