In a speech to the Tax Agents Institute conference in Greymouth last Wednesday, Revenue Minister Peter Dunne confirmed that he would push ahead with legislation on income splitting.
His prospects of success look bleak. With marginal rate tax cuts for the wealthy already on the table for this year’s budget there is unlikely to be any money or political appetite for another middle class tax break.
Despite being common overseas, income splitting is generally criticised by economists and tax policy makers on efficiency and equity grounds. Social welfare policy makers also worry that income splitting entrenches social inequalities by conferring a special tax status on the traditional nuclear family: putting more money in the hands of breadwinners while reducing the incentives for the primary caregiver to achieve their economic independence.
Ironically, of course, we already have income splitting in New Zealand – investment income and income from family owned businesses can already be split through the mechanism of trust taxation. Income splitting would do no more than give wage and salary earners the right to do what dairy farmers have been doing for years.
At the time the first Discussion Document was issued, submissions were made to Government that the benefits of income splitting could be achieved by making minor changes to the tax treatment of gifts. The suggestion for a “deductible gifting regime” would have permitted a donor to deduct the amount of a gift if the donee elected to be taxable on the same amount. It was suggested that:
- the deductible gifting regime apply only to genuine gifts between natural persons (so as to avoid the kind of shenanigans engaged in by the Duke of Westminster); and
- the usual gift duty rules would continue to apply, so that gifts over a certain threshold in any 12 month period would continue to be subject to gift duty (it was also suggested that the current thresholds be adjusted).
Such a proposal would have had the benefit of simplicity and, unlike the income splitting proposal in the Discussion Document, would not be arbitrarily restricted to two parent families with dependant children. Requiring an actual gift of money ought to have been sufficient protection against any potential abuse and would also have ensured that the income was genuinely “split” between the donor and the donee rather than through the expedient of ticking a box on a tax return.
These proposals were rejected in favour of a more complicated, orthodox and inequitable income splitting proposal that is now destined for the lesislative scrap heap.
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