About 61,000 families will be worse off as a result of a move to income-test the Best Start tax credit in the first year of a baby's life, according to a regulatory impact statement prepared by officials.
It was announced in the Budget on Thursday that an increase in the household income threshold at which Working for Families payments start to be clawed back would be paid for by a reduction in the number of households receiving the Best Start payment.
At the moment, the payment is available to all households with a new baby in the child's first year, as long as they are not receiving paid parental leave. It is then income-tested at a rate of 21 percent for incomes above $79,000 in the child's second and third year.
But the government said introducing an abatement threshold for the first year would mean the money was more targeted in support of lower-income families. A household's entitlement will reduce once they earn $79,000 and be cancelled out when income reaches $97,000.
"Around 61,000 families would receive a reduction of income. Of these families, 89 percent have taxable incomes over $100,000 (an average decrease of $43 per fortnight)," the regulatory impact statement said.
"This includes 53,000 families who become ineligible for Best Start (average decrease of $49 per fortnight), and 9000 families earning over $79,000 and with children aged 0-1 years old who receive an abated amount of Best Start."
Social Development Minister Louise Upston says the changes will mean more support for low and middle-income families. Photo: RNZ / Samuel Rillstone
It said income testing the first year could also mean less take-up of Working for Families more broadly because many households discovered what they were eligible for in the process of appling for Best Start.
Just over 140,000 families received the Best Start credit in the 2022-23 tax year.
The Government said about 142,000 families would receive an average $14 a fortnight extra from Working for Families when the threshold was adjusted from April.
The vast majority have an annual family income under $100,000.
There have been concerns that the threshold has not increased as incomes have lifted, which means that even some lower-income households have been facing high effective marginal tax rates as support was clawed back when they earned more.
The statement noted that a household with someone earning the minimum wage and working 34.9 hours a week would be subject to abatement with the current settings.
"The current threshold has been unchanged since 2018, despite inflation and wage growth. This means the scheme has become less effective at supporting low and middle-income families," Social Development Minister Louise Upston said.
"Accordingly, the government is lifting the Working for Families abatement threshold from $42,700 to $44,900 and raising the abatement rate from 27 percent to 27.5 percent. Families with incomes close to the new threshold will get greater additional payments - up to $23 a fortnight."
Families of children born before 1 April will not have their Best Start payments income tested and will continue to receive the maximum amount until their child turns one.
Revenue Minister Simon Watts said the government was also concerned about Working for Families debt.
There is hundreds of millions of dollars of debt owed through the scheme, often because people earned more than they expected to, and so received more Working for Families payments than they should have. https://www.rnz.co.nz/news/national/519689/warning-as-working-for-families-debt-increases-by-more-than-42m
"To address this, the government is releasing a discussion document with proposals to make Working for Families payments more accurate, including using past income, over shorter periods, to calculate entitlements. We know that having debt with Inland Revenue can be distressing so we are interested in what people think of the proposals," Watts said.
That could involve calculating income based on a period such as a month to work out what people should receive.
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