‘Imaginary income’ lands family $4000 Working for Families bill

Tax expert Terry Baucher highlighted low abatement thresholds and called for a complete rethink of the system. Photo / 123rf

By Susan Edmunds of RNZ

A New Zealander who has left for Australia says he’s been hit hard by Inland Revenue “annualising” his income to claw back Working for Families credits.

Kenneth, who wanted to be identified only by his first name, said he moved with his family from Auckland to Australia in January last year.

“My total New Zealand earnings for that tax year were just under $84,000. However, the IRD has annualised my income, claiming I should be treated as if I earned closer to $110,000.

“Because of this imaginary higher income, they are demanding we pay back $4000 in Working for Families tax credits – money my wife used to keep us afloat while caring for our youngest in one of the most expensive cities in the world.”

He said a number of one-off payments were being treated as though they were daily wages, including $7213 in final holiday pay and $7027 in back pay from a two-year salary negotiation.

“When we challenged this, staff explained that if someone earned $20,000 in one month and nothing for the rest of the year, the IRD would treat them as if they earned $240,000. It is a rigid, ‘computer says no’ approach that is leaving families who are already struggling with a massive bill on their way out the door.

“I believe many other Kiwis are being ‘ripped off’ by this same rule without realising the maths is flawed.”

Tax expert Terry Baucher said Inland Revenue took this approach out of concern that otherwise people who left early in a tax year could end up paying less tax than they would otherwise be meant to.

He said the issue was also clearly connected to the abatement level, at which Working for Families credits are removed.

When households earn more than $42,700 a year, their Working for Families entitlements are cut at a rate of 27%.

“The threshold is so low, and everything above that is abated at 27c on the dollar. So we have an extremely low threshold, it’s now below the minimum wage. Someone getting 40 hours of minimum wage is now above that. So that’s the real kicker. The extra $26,000 of income just exacerbates that.”

He said the threshold had not been increased since 2018 and when the abatement rate was first introduced it was only 20c in the dollar.

Working for Families debt has been highlighted as a problem for some time. Hundreds of millions of dollars are owing, often because people earned more than expected in a year and received too much Working for Families support. RNZ earlier reported on a couple who were overpaid $20,000 and have to pay it back at $350 a fortnight.

The Government last year announced a review of Working for Families intended to avoid households getting into debt. Options being considered included more frequent reporting of income to ensure that people were not overpaid.

In the 2022 year, only 24% of households receiving weekly or fortnightly payments who were squared up by IRD had received the right amount of Working for Families credits.

Baucher said Inland Revenue could use tax codes to claw back overpayments.

“Instead of requiring people to suddenly front up with $4000 at a time, it’s probably easier for them to say, ‘okay, we’re going to adjust your PAYE code and take a bit extra to claw that back’. It would be for those families far more manageable … but to me the review’s window dressing, to be frank.

“The whole question around abatements and thresholds, and the amounts of being paid just needs complete rethink, in my view.”

- RNZ