The Working For Families Tax Credit ("WFFTC") scheme has been in place for some years, but has over time been amended and tinkered with.
For the vast majority of taxpayers, it is simply a matter of calculating their baseline WFFTC entitlement (including factoring in family circumstances such as determining the primary caregiver and the number of dependants), and then reducing that base-line entitlement by way of an abatement calculation that is based on "family scheme income".
For families who are receiving only salary or wage income, this is a pretty simple calculation, based on their tax returns. Accordingly, having regular WFFTC payments is achievable without much risk (accepting there are calculations that arise upon changes of circumstance).
However, over time, the Government has become uncomfortable about the ability of some people to shelter income from various sources away from the WFFTC abatement calculation (i.e. by understating the true value of family income). To remedy this, through successive Budgets, the Government has sought to drag other forms of income into the "family scheme income" net.
Initially, the adjustments were limited to things such as income derived by closely held companies owned by the principal caregiver and spouse (and only to the extent of their percentage share of income), and the disallowance of LAQC losses attributed to individuals, among other things.
However, from 1 April 2011, WFFTC registration/calculation process became a lot more complex, to the extent that the income from other, less directly-held entities were also added to the "family scheme income" calculation for an individual caregiver/taxpayer, including the income derived by a family trust where the primary caregiver/spouse is one of the settlors, the income of a company owned by such a trust, various forms of tax-exempt income, deemed income, attributable fringe benefits, income of non-resident spouses, deposits into the income equalisation scheme plus interest received on those deposits, and periodic payments received by the caregiver from extended family members in the support of family activities.
Without wanting to go into any significant detail on this calculation, what this does mean is that where anybody has any type of other structures (trusts or companies) or holds investments or is receiving cash from any other sources, the calculation of the net entitlement to WFFTC is far more complex, and can probably only be done properly on an annual basis.
Thus, people in this situation might want to give some thought to receiving WFFTC on an annual basis, or if it is required on a more regular basis, accept that there might be a repayment needed at year end, depending on circumstances.
It is my concern that in the effort to close what is, to be fair, an obvious loophole, the complexity that arises from these changes will result in some people spending more money on the compliance calculations than they will ultimately receive from the WFFTC scheme itself. At the least, some external advice/assistance will likely be required by those who are not just salary and wage earners.
• Scott Mason is a Tax Consulting Principal at WHK in Dunedin
