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Many New Zealanders are able to claim Working for Families Tax Credits (WFFTC) to assist them in meeting their living costs. However, some situations catch people out or cause unexpected issues.
For those that earn a PAYE deducted wage, and do not have trusts or companies, the entitlement to WFFTC can be calculated relatively easily and is reasonably accurate.
However, where a trust or a company is involved, the rules become a little more complicated. Income earned by a trust of which you are a settlor is included in your income calculation, as is income from a company in which you are a major shareholder (presuming you meet certain criteria).
One thing that is not clear is whether ‘drawings’ or current account balances need to be included in your income. If you are a beneficiary of a trust or a shareholder of a company, you may have funds paid or applied for your benefit. Often these become entries in a current account. The current account itself is not taken into account when determining your income, but there is some debate about the correct treatment of ‘drawings’.
Under the WFFTC rules, any payment you receive that is used to meet your living costs should be included in your income. On the face of it, if you draw funds from a company or a trust, this is a ‘payment’ to you. If you then use those drawings for meeting your usual living costs, the payments should be treated as income when calculating your entitlement to WFFTC. However, the IRD often takes a different approach, suggesting that because the drawings are already included in the company or trust income, the drawings do not need to be included separately in your income.
Because it is better to be safe than sorry, it is usually best to include drawings and have the IRD adjust it out. You can, therefore, be more comfortable that you will not have to pay any amount you receive back, as this is often a hefty burden on those that have spent the money to cover their family’s living costs.
Another thing to remember is that if you have moved to New Zealand from overseas and you are entitled to transitional resident status, meaning you need only pay tax in New Zealand on your New Zealand sourced income, an application for WFFTC will mean that you cannot be a transitional resident. This would mean you need to pay tax on your worldwide income in New Zealand. This can be a greater cost than the tax relief received under the WFFTC rules.