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Changes to better target Working for Families

Hon Bill English
Minister of Finance

Hon Paula Bennett
Minister for Social Development

Hon Peter Dunne
Minister of Revenue

19 May 2011

Changes to better target Working for Families

The Government is making changes that will better target Working for Families to lower income earners and ensure its cost remains sustainable into the future, Finance Minister Bill English, Social Development Minister Paula Bennett and Revenue Minister Peter Dunne say.

Working for Families will be altered over time so that eventually the scheme has:

• A slightly lower abatement threshold of $35,000, compared to the current $36,827.

• A slightly higher abatement rate of 25 cents in the dollar, compared to the current 20 cents in the dollar.

• An alignment between the Family Tax Credit (FTC) payments for children aged 16 years and over and the FTC payments for those aged 13 to 15.

To minimise the impact on affected families, the changes will take place in four steps, starting on 1 April 2012. Each step will take place when FTC payments are adjusted upwards for inflation, which on current forecasts will occur every two years. Payments to families earning less than the abatement threshold, for children aged under 16 will not be impacted.

“Working for Families is a broad and generous scheme and that will remain the case. But these changes will better target payments towards lower income families, ensuring the scheme is sustainable into the future,” Mr English says.

“The cost of Working for Families has roughly doubled from about $1.5 billion in 2005/06 to about $2.8 billion this year. That kind of growth is no longer sustainable and without changes the scheme would quite quickly become unaffordable.

“These changes will save $448 million over the next four years, compared to what the scheme was forecast to cost. The total cost of Working for Families will reduce to $2.6 billion in 2014/15.

“At a time when the Government is dealing with costs from the global financial crisis and two Canterbury earthquakes, these savings will free up funding for other Government priorities such as improving frontline public services and reducing borrowing,” Mr English says.

Ms Bennett says the changes will better target Working for Families to those most in need.

“Lower income families and beneficiaries will be largely unaffected by these changes, and the majority of families currently receiving Working for Families will get an increase in their payments after 1 April 2012.

“A number of families higher up the Working for Families scale, however, will receive a little less than they currently do now, or will no longer qualify,” Ms Bennett says.

Mr Dunne says implementing the changes in four gradual steps ensures the effect on families is small and the scheme continues to provide good work incentives for those moving into the workforce.

“Once these changes are fully implemented, the scheme will still be more generous than Labour's original scheme – before Labour extended it in the 2005 election campaign on the back of larger than expected tax revenue. Clearly those tax gains were neither permanent, nor sustainable.

“After 1 April, 2012, based on Treasury inflation forecasts, we expect the other three indexation dates to be 1 April 2014, 2016 and 2018,” Mr Dunne says.

Fact sheet – Working for Families changes

Why are changes being made?

• The cost of Working for Families has grown from about $1.5 billion in 2005/06 to $2.8 billion a year now. Without changes, it would quickly become unaffordable. These changes make the scheme simpler and more sustainable into the future.

• The changes will save $448 million over four years, which can be used for other Government priorities like improving frontline public services or reducing borrowing.

• The changes will mean lower income families receive a greater slice of WFF funding over time.

What is changing?

• The next four times Family Tax Credit (FTC) payments are adjusted for inflation:

o The WFF abatement threshold will decrease by $477 on the first adjustment, and thereafter each time by $450.

o The WFF abatement rate will increase each time by 1.25 cents in the dollar.

• After those four adjustments, WFF will therefore have:

o A slightly lower abatement threshold of $35,000, compared to the current $36,827.

o A slightly higher abatement rate of 25 cents in the dollar, compared to the current 20 cents in the dollar (this means WFF payments will reduce faster as income increases).

• As the law already prescribes, FTC payments will next be adjusted for inflation on 1 April 2012, and thereafter every time CPI inflation cumulatively reaches 5 per cent or more. On current forecasts these further changes are expected to occur on 1 April 2014, 1 April 2016 and 1 April 2018.

• In addition, inflation adjustments to FTC payments for children aged 16 and over will be temporarily halted until payment rates for children aged 13 to 15 catch up with them, as they will after successive inflation adjustments (this will reduce the number of different FTC payment categories from five to three).

• The Government is making these changes gradually to minimise the impact on affected families.

What does this mean for a family’s WFF payments next year?

• The table below shows the FTC payment rates that are expected to apply in the 2012/13 tax year (i.e., from 1 April 2012), based on current inflation forecasts. These are the maximum payment rates that apply to families below the new abatement threshold of $36,350. Above this threshold, FTC payments will reduce by 21.25 cents for every dollar of family income.
Family Tax Credit amounts Current payment rates for the 2011/12 tax year Forecast payment rates for the 2012/13 tax year
Eldest Child if under 16 $88.03 $92.64
Eldest Child if 16 or over $101.98 $101.98
Subsequent child rate if under 13 $61.19 $64.38
Subsequent child rate if 13 to 15 $69.78 $73.43
Subsequent child rate if 16 or over $91.25 $91.25
• It is impossible to say with any certainty what an individual family will receive from one year to the next – this depends on whether there has been any change in their family income; whether they have any more children; whether any of their children have moved into a different payment category; whether any of their children have got a job, gone on a benefit, left home, or turned 18 and are no longer at school or in tertiary education; and when exactly in the year any of these events happen.

• For a great many families, these sorts of changes will be far more important than small adjustments to FTC rates or abatement.

• Nonetheless, officials have made estimates of how 1 April 2012 changes affect families, assuming that their circumstances next year – including their children's ages – are identical to how they are now.

• Based on these estimates, families earning below the new abatement threshold of $36,350 will:

o Receive an average of $7 extra WFF tax credits per week.

o Receive the full increase in FTC if they have children aged under 16 years.

o Receive the same amount of FTC for children aged 16-18 years.

• It is estimated about 280,000 families earning less than $70,000 a year will receive an increase in WFF payments, while about 110,000 families – mostly earning over $60,000 a year will receive slightly less. Of this second group, about 7,000 families will no longer be eligible for WFF in the 2012/13 year.

• The table below outlines the estimated effect of 1 April 2012 changes by income band.
Family income Families who receive less WFF
on 1 April 2012
Families who receive more WFF
on 1 April 2012

Number Average change
$ per week Number Average change
$ per week
Up to $10,000 – – 16,467 7.02
$10,000 to $20,000 – – 87,452 6.93
$20,000 to $30,000 – – 60,177 6.56
$30,000 to $40,000 N/A N/A 37,501 7.31
$40,000 to $50,000 11,307 -2.68 29,928 2.77
$50,000 to $60,000 11,757 -1.87 27,455 2.70
$60,000 to $70,000 23,982 -3.45 10,984 2.62
$70,000 to $80,000 29,681 -4.44 N/A N/A
$80,000 to $90,000 20,597 -5.43 N/A N/A
$90,000 to $100,000 4,641 -5.14 – –
$100,000 to $110,000 N/A N/A – –
Above $110,000 N/A N/A – –
TOTAL 109,120 278,168
NB: “N/A” represents sample sizes sufficiently small that they are below the margin of error and therefore cannot be reported.

For the reasons outlined on the previous page this is not an accurate guide for individual families. Inland Revenue will contact WFF recipients in February 2012 to inform them of their likely entitlement for the 2012/13 year.

More information

• A range of family examples are included in Working for Families – how 1 April 2012 changes affect New Zealanders.

• Families with younger children – for whom there are fewer variables affecting their circumstances – can also get an idea of how changes may affect them from Working for Families tables - 1 April 2012 changes, attached on the next page.

• Inland Revenue will contact WFF recipients in February 2012 to inform them of their likely entitlement for the 2012/13 year.

Working for Families tables – 1 April 2012 changes
One child family Two child family
Annual income $ One child

1-12 yrs 1 April 2012 Total change (weekly) Two children 1-12 yrs 1 April 2012 Total change (weekly)
25,000 $ 148.04 $ 152.64 +$4.60 $ 209.23 $ 217.02 +$7.79
30,000 $ 148.04 $ 152.64 +$4.60 $ 209.23 $ 217.02 +$7.79
35,000 $ 148.04 $ 152.64 +$4.60 $ 209.23 $ 217.02 +$7.79
40,000 $ 135.84 $ 137.72 +$1.88 $ 197.03 $ 202.10 +$5.07
45,000 $ 116.61 $ 117.29 +$0.68 $ 177.80 $ 181.67 +$3.87
50,000 $ 97.37 $ 96.85 -$0.52 $ 158.56 $ 161.24 +$2.68
55,000 $ 78.14 $ 76.42 -$1.72 $ 139.33 $ 140.81 +$1.48
60,000 $ 58.91 $ 55.99 -$2.92 $ 120.10 $ 120.37 +$0.27
65,000 $ 39.68 $ 35.56 -$4.12 $ 100.87 $ 99.94 -$0.93
70,000 $ 20.45 $ 15.12 -$5.33 $ 81.64 $ 79.51 -$2.13
75,000 $ 1.22 $ - -$1.22 $ 62.41 $ 59.08 -$3.33
80,000 $ - $ - $ - $ 43.18 $ 38.64 -$4.54
85,000 $ - $ - $ - $ 23.95 $ 18.21 -$5.74
90,000 $ - $ - $ - $ 4.72 $ - -$4.72
95,000 $ - $ - $ - $ - $ - $ -


Three child family Four child family
Annual income $ Three children 1-12 yrs 1 April 2012 Total change (weekly) Four children 1-12 yrs 1 April 2012 Total change (weekly)
25,000 $270.42 $281.40 +$10.98 $346.61 $360.79 +$14.18
30,000 $270.42 $281.40 +$10.98 $346.61 $360.79 +$14.18
35,000 $270.42 $281.40 +$10.98 $346.61 $360.79 +$14.18
40,000 $258.22 $266.49 +$8.27 $334.41 $345.87 +$11.46
45,000 $238.99 $246.06 +$7.07 $315.18 $325.44 +$10.26
50,000 $219.75 $225.62 +$5.87 $295.94 $305.01 +$9.07
55,000 $200.52 $205.19 +$4.67 $276.71 $284.57 +$7.86
60,000 $181.29 $184.76 +$3.47 $257.48 $264.14 +$6.66
65,000 $162.06 $164.32 +$2.26 $238.25 $243.71 +$5.46
70,000 $142.83 $143.89 +$1.06 $219.02 $223.28 +$4.26
75,000 $123.60 $12346 -$0.14 $199.79 $202.84 +$3.05
80,000 $104.37 $103.03 -$1.34 $180.56 $182.41 +$1.85
85,000 $ 85.14 $ 82.59 -$2.55 $161.33 $161.98 +$0.65
90,000 $ 65.91 $ 62.16 -$3.75 $142.10 $141.55 -$0.55
95,000 $ 46.68 $ 41.73 -$4.95 $122.87 $121.11 -$1.76
100,000 $ 27.45 $ 21.30 -$6.15 $103.64 $100.68 -$2.96
105,000 $ 8.22 $ 0.86 -$7.36 $ 84.41 $ 80.25 -$4.16
110,000 $ - $ - $ - $ 65.18 $ 59.81 -$5.37
115,000 $ - $ - $ - $ 45.94 $ 39.38 -$6.56
120,000 $ - $ - $ - $ 26.71 $ 18.95 -$7.76
125,000 $ - $ - $ - $ 7.48 $ 0.00 -$7.48

NOTE: These tables only cover families with children aged 1-12 due to the complexity of trying to estimate payments for families with children who are moving into different Family Tax Credit age brackets and becoming eligible for higher payments. Inland Revenue will contact WFF recipients in February 2012 to inform them of their likely entitlement for the 2012/13 year.
Working for Families – how 1 April 2012 changes affect New Zealanders

1. Low income one-child family

Lisa is a sole parent. She earns $30,000 a year and has a 10-year-old child. She currently receives $148.04 a week in Working for Families tax credits. From 1 April 2012, this will go up to $152.64 a week – an increase of $4.60.

2. High income four-child family

Matt and Sarah's family income is $125,000 per year – right near the top of the WFF scale for a four-child family. They have four children aged 11, 13, 14 and 16. Matt and Sarah currently receive $38.62 a week in WFF tax credits. From 1 July 2012, as a result of the slightly lower abatement threshold, a slightly faster abatement rate and the fact there is no inflation increase in the FTC rate for 16-18 year olds, they will receive $25.96 a week – a reduction of $12.66.

3. Low income three-child family

Michael and Kiri's combined family income is $40,000 a year. They have three children aged 10, 13 and 16. They currently receive $280.76 a week in WFF tax credits. From 1 April 2012, this will go up to $284.88 a week – an increase of $4.12.

4. Middle income two-child family

Elaine and Mataio’s combined family income is around $61,000 a year. They have two children, aged 8 and 10. Elaine and Mataio currently receive $116 a week in WFF tax credits. From 1 April 2012, they will continue to receive $116 in WFF tax credits.

5. Average wage two-child family

Tane and Gemma have two children aged 2 and 4. Gemma is not working and Tane earns $50,000 a year, about the average wage. They currently receive $158.56 a week in WFF tax credits. From 1 April, 2012 this will go up to $161.24 a week – an increase of $2.68.


6. Average household income two-child family

Mark and Emma's family income is $77,000 a year – about the same as the average household income and towards the top of the WFF scale for a two-child family. They have two children aged 9 and 11. They currently receive $54.72 a week in WFF tax credits. From 1 April 2012, as a result of the slightly lower abatement threshold and a slightly faster abatement rate, they will receive $50.90 a week – a reduction of $3.82.

7. Higher income three-child family

Ben and Isa's combined family income is $100,000 a year – near the top of the WFF scale for a three-child family. Their children are aged 2, 4 and 6. They currently receive $27.45 a week in WFF tax credits. From 1 April 2012, as a result of the slightly lower abatement threshold and a slightly faster abatement rate, they will receive $21.30 a week – a reduction of $6.15.

8. Minimum wage four-child family

Jenny and Peter have four children aged 7, 9, 11 and 14. Jenny is not working and Peter earns just over $27,000 a year, which is about the minimum wage. Jenny and Peter currently receive $346.61 a week in WFF tax credits. From 1 July 2012, this will go up to $360.79 a week – an increase of $14.18.

9. Higher income two-child family

Chris is a sole parent. He earns $90,000 a year and has two children aged 11 and 16. His income is right near the top of the WFF scale for a two-child family. Chris currently receives $18.66 a week in WFF tax credits. From 1 April 2012, as a result of the slightly lower abatement threshold, a slightly faster abatement rate and the fact that there is no inflation increase in the Family Tax Credit (FTC) rate for 16-18 year olds, Chris will receive $7.12 a week – a reduction of $11.54.

ENDS


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