A key proposal in the discussion document is to improve the certainty, accuracy and timeliness of Working for Families payments by basing them on the family’s actual income in a recent time period, rather than on an estimate of earnings in the year ahead.
Inland Revenue would use the up-to-date information about the income of salary or wage earners, the information received about a person’s earnings from investment income, and its own data about any Child Support payments. Inland Revenue calls this “observable income” because it can see the information about this income during the year.
“Non-observable income” is when Inland Revenue cannot see what a person’s income is until that person tells Inland Revenue at the end of the tax year, for example, when a person has their own business or gets income from rental properties.
For people with non-observable income, their Working for Families payments could still be based on estimates of income. A proposal for change is to allow self-employed or business people to provide information during the year about their recent income, and have their Working for Families payments based on that information.
The proposed changes mean payments would be more accurate because they’d be up to date with what each person is entitled to throughout the year. Inland Revenue would also be able to react more quickly when a person’s income changed so the payments would still be correct. More accurate payments would give people more certainty, because there would be less risk of getting overpaid and having to pay some back.
Options for the “recent” income period for observable income
The Government wants feedback on what the “recent” period income should be for observable income, for example, the previous month, or the previous three months. The discussion document calls this the “period of assessment”.
If Inland Revenue looks back more often, for example, every month, payments would be based on more up-to-date information, but they might go up and down more frequently (as income changes). Some people might prefer this shorter period of assessment because their payments would quickly adjust to changes in income.
Some people might prefer that Inland Revenue looks back less often, for example over the past three months, because their payments wouldn’t change so quickly. Payments would be more predictable with a longer “period of assessment”.
The proposals mean that families who have only observable income would no longer have to estimate their annual income and remember to update it when things changed.
Reassess payments whenever a parent has a change in income
Another option is to use past income information but to do a reassessment for the family whenever a change in their income is reported to Inland Revenue, for example by an employer. For those families whose income fluctuates a lot, this could mean their payments change frequently. For people with a fairly steady income there may not be many changes to payments.
Balancing timeliness and consistency when choosing the “recent” period
There would need to be trade-offs between the different objectives for the proposals (certainty, timeliness and consistency). This table outlines the differences between a shorter period of assessment, when Inland Revenue looks back more often at recent income, or a longer period of assessment, when Inland Revenue looks back less often.
|A longer period of assessment means:||A shorter period of assessment means:|
payments don’t change as quickly, so they are more consistent and reliable, making it easier to budget
payments change more quickly, so people may not know as far in advance what they will be paid in the future
|payments are less responsive to changes in income, so a change in payments will always be slightly behind a change in income||
payments would respond more quickly to changes in income, so they more closely reflect current income and needs
New options for people with non-observable income
For people with non-observable income, there would be new ways for them to provide information during the year to Inland Revenue about their income. The new Accounting Income Method (AIM) for small businesses to calculate and pay provisional tax (from 1 April 2018) will give Inland Revenue more information about the income being earned by these small business owners during the tax year. Their Working for Families payments could then be based on this.
People who are not using AIM could also provide Inland Revenue with information on their business or family income more regularly throughout the year. For example, someone could provide updated information about their business income every two months, and that could then be used to calculate Working for Families payments for the next two months.
Some people with non-observable income, such as from a business or a rental property, will only know at the end of the tax year what their total income was for that year. For this group of people, assessments of income for Working for Families payments could continue to be based on an estimate of annual income.
However, people with “non-observable” income would still have a “square-up” at the end of the year to check that the income they’d declared during the year matched their actual situation at the end of the year.
There would still be a small time delay between the “recent” period and the payment
At the end of each time period, whether it is a month or a quarter, the customer’s income details for that period would be checked and used to calculate the Working for Families payments for the next period. As it takes time for Inland Revenue to process information, the payment period would always be slightly behind the assessment period.