Income Splitting is Flawed and Costly

March 23, 2011 New Zealand Taxation

24-02-2005Peter Dunne’s income splitting proposal has hit a new roadblock after it failed to win the approval of the New Zealand Finance and Expenditure Committee.

The New Zealand Finance and Expenditure Committee has evaluated the income sharing tax-bill brought forward by the Revenue Minister Peter Dunne, saying that the idea has merit but would be too costly to implement and contains several oversights.

If enacted, the Taxation (Income-sharing Tax Credit) Bill would allow families with dependent children to split the parent’s incomes evenly for tax assessment purposes. Any tax benefits arising after application of the new rules would be given to the taxpayers in the form of an end of year tax credit. The Committee estimates that implementing the new bill would cost approximately NZD 502 million.

The committee’s report suggested that income splitting rules were still worth pursuing, saying, “…while we are recommending that the bill proceed, we acknowledge that the fiscal cost of the bill… is significant.”

The committee suggested several cost-saving changes to the bill, such as exploring different distribution methods for the tax benefits, in an effort to reduce administration costs. Evaluation of the proposal also indicated that nearly 78 percent of the credits would be enjoyed by families with combined incomes exceeding NZD 70 000. The committee recomended that the children should only be considered as dependent up to a maximum age of six, compared to the original proposal of 18. The report warned that the income splitting scheme could be considered as discriminatory based on marital status, and could raise significant controversy in the future.

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