Working for Families changes

[Rosco]

Working for families
The Inland Revenue Department and government has announced major changes for Working for Families from 1/4/11. If you currently receive working for families assistance, you need to read this information.
Adjustments to your Family Income for Working for Families Tax Credits
There have been changes to the types of income that are included for Working for
Families calculations. In the past it was basically your salary or wage, dividends, interest, rental income, and other normal income that you would pay tax on.


For the year starting 1 April 2011, it now can include:

• Attributable trustee income
• Attributable fringe benefits
• PIE income
• Passive income of children
• Income of non-resident spouse
• Tax exempt salary or wages
• Pensions and Annuities
• Other payments
• Income equalisation scheme deposits (excludes "adverse events" deposits)

IRD Working for Families division phone number is 0800 227 773. If you have these other categories of income, it would be best to ring IRD and advise of this income, as otherwise you may be paid too much, and then after your tax return is filed for the year ending 31/3/12 have to pay back a large amount.

Attributable Trustee Income:
This is basically income of a Trust, where you are the Settlor and the Trust retains profit. This retained Trust profit is attributable to you for Working for Familes purposes.
Settlor Definition – A settlor is not just the person on the Trust deed and the definition is quite wide. It also includes any person who provides services to the Trust at under market value, or anyone who loans money to the Trust but doesn’t charge a fair interest rate.
Example – Joe Bloggs established a family Trust to own his debt free rental property. The Trust made a $10,000 taxable profit that was retained in the Trust, with the Trust paying 33% tax on this income. As Joe is a settlor, the $10,000 will be added to his income for Working for Families.
This can include company income or profits, where the company is owned by a Trust.

Attributable Fringe Benefits
If you hold (or an associate such as a spouse or Trust) 50% or more in a company where you receive Fringe Benefits, then the value of the Fringe Benefit plus there tax (ie FBT payable) will be added to your income for Working for Families.
PIE Income
Excludes Kiwisaver, superannuation funds and Retirement Saving Schemes
Other PIE income needs to be included for Working for Families income.

Passive Income of Children
Any of the following over $500 to your children, needs to be returned for Working for Families Income
- Resident Passive Income – interest, dividends etc
- Royalties
- Rent
- Beneficariy income (excluding from Testamentry Trust)
- Distributions from PIE

Other Payments
Over $5,000 per tax year that is used for regular family expenses
A couple of more likely examples are
- Regular payments from parents or grandparents that pay for day to day family living
- Insurance payments

Ross

[spaceman]

Are losses from rental properties in ones own name still deductible??

I assume so, but it's unclear to me from a quick look at the IRD web site.

Cheers
Spaceman

[CJ]

Spaceman - I thought that had removed that but could be wrong.

[spaceman]

I couldn't find anything one way or the other ..... can't see how they could remove losses if they still want to count profits as income..... after all it is their job to be fair.

Cheers
Spaceman

[Rosco]

My quick thoughts are that the rules are the same in regard to rental losses, but I will double check and report back later this week.
Old rules

- Personal name, partnership, LP, then losses from rentals reduce working for families income
- LAQC losses don't reduce working for families income, unless you are in the business of renting properties, then they do.

Ross

[Keithw]

- LAQC losses don't reduce working for families income, unless you are in the business of renting properties, then they do.

Ross

I thought the "Public Message" the Govt was sending last year was that they were going to get rid of the situation of income earners on $150k offsetting their losses for WFF puposes.

So for most property investors that rent out their LAQC properties, ie their LAQC business is renting property (as opposed to traders - who would be unlikely to be using an LAQC anyway, & if they did for their rental side, it would be tainted by the trading) then losses are counted in the WFF calcs.

But the poor businessman that used an LAQC to establish his business could not offset the losses for WFF

What a stupid set of rules ! - & we wonder why small business doesnt flourish in NZ !

[spaceman]

I think you're a bit discombobulated there Keithw.

So for most property investors that rent out their LAQC properties, ie their LAQC business is renting property ..... then losses are counted in the WFF calcs.

For most property investors with LAQC's, the losses were specifically not counted in the WFF calcs.

Cheers
Spaceman

[Keithw]

No, I think i am quite combobulated spacey

I agree, the general thinking is that "For most property investors with LAQC's, the losses were specifically not counted in the WFF calcs."
but Rosco said "LAQC losses don't reduce working for families income, UNLESS..."
So if they are in the business of rental then the losses are used to reduce WFF income.

perhaps I should have said "ie their LAQC business is that of Renting property..." so that those from the windy South reading this, who seem to live in a different NZ to the rest of the country,(as Perry might describe as Welly Woodenheads) could understand what it means

[spaceman]

oic..... but have you ever been gusted??????

That "in the business of" thing I thought was pretty straight forward until a monkey from the IRD asked me how long I had been in the business of renting properties .... but I think she was jelly.

Cheers
Spaceman

[Ivan McIntosh]

From experience, if you as a sole trader post a loss of say -60k, then your income for WFF purposes that year is zero. However the next year your loss carried forward is ignored, and WFF is calculated on that years business "profit" as if the -60k loss never existed.

[spaceman]

Doh!!!!!

Yay for CJ.... sucks to be me

Section MB 3 has been amended to exclude investment losses such as rental losses from the calculation of family scheme income for WFF tax credit purposes. This means that if a person has or carries on an investment activity in an income year, and that investment produces a net loss, the income and deductions from that investment are ignored when calculating family scheme income for WFF tax credit purposes.

I know I'm the beneficiary of the old rules and thus I'm bound to moan ..... but it really smacks of having your cake and eating it too ......the IRD will surely count any profits as income.



Cheers
Spaceman

[Keithw]

I am in 2 minds about this change.
For a start it doesnt affect me cos my kids have long since flown,
& it bugs me that people earning $150k can create a tax loss and get WFF.
Its supposed to be to help the low earners !

But then on the other hand, if the loss is genuinely from cash losses (as opposed to paper losses through depreciation this year, that wont actually incur replacement cost until future years) then this means they are subsidising the renters, so their net income really is what is left after the losses are accounted for.
& if they dont subsidise the renters, then the Govt is going to have to !

So to be fair to everyone, WFF should be based on actual cash income/ loss.
To exclude any investment losses is pretty unfair really.
The upper limit should be lowered instead

[CJ]

Yay for CJ.... sucks to be me

I know I'm the beneficiary of the old rules and thus I'm bound to moan ..... but it really smacks of having your cake and eating it too ......the IRD will surely count any profits as income.

It was a lucky guess based on policy intent (ie. screw property investors).

I agree with your baking comment (ie. cake) and is wider than just property

They dont count losses but they dont allow you to carry forward to when you make profits.

Issue I have for a relative under a different section. Trust owns company (real operating business employing 10+). Will make losses next year but profits after that. Under new rules, losses dont get attributed (fine with that) but the profits will be attributed to the settlor of the trust. The losses should really carry forward as the profits will be used to paydown debt (which funded the loss) not give the shareholder a nice lifestyle.

[roseneath_rat]

I have little sympathy for the "investor" that deliberately puts money into a loss making investment, where they will reap all the rewards of capital gain but double dip on crying poor for government handouts. Shameful really.

[Keithw]

On the Surface that sounds fair enough RR, but what do you say to those trying to start up a business- remember- those things we used to have in this country that actually produce real things !!!!!
You should be a good person to be able to tell us- what is the expected startup period that it takes to become profitable ?
3 years ? 5 years ?
I know 80 - 90 % of businesses are expected to fail in their first 5 years !!