Rules for taxing children's holiday income
With the novelty of Christmas over and reality of the return to the daily toil looming, parents will be looking for something to keep their children occupied until they return to school.
What better way to manage the situation than paying the children to do some work around the house or the business.
However, as the rules for taxing the income earned by working children are a real chore in themselves, I thought it appropriate to remind people again on how these rules apply.
With effect from the start of the 2012-13 tax year, the simple and well-understood children's tax credit approach was replaced with a system that only a bureaucrat would love.
Instead of the simple tax credit system, we now have a two-tier system: an exemption for income less than $2340 per annum and not taxable at source (that is, not subject to PAYE or withholding tax), and subjecting income that is taxable at source to income tax and ACC levies from the first dollar.
So, children who derive income of up to $2340 from sources that do not require the payer to deduct tax at source, such as income from babysitting, lawn mowing or casual domestic help, will not have to pay tax (and ACC levies) on this income.
Once the income exceeds $2340 in a tax year, it becomes taxable in full, that is, back to the first dollar.
It is also important to point out that the $2340 income exemption does not relate to income from one particular source, but is an aggregate of income from all sources in that income year.
Previously this too would have benefited from the tax credit and effectively tax free to $2340 also.
This is also where it can get a little tricky - especially for farm work and the like that fall under the old withholding payments rules (now known as the oddly named schedular payment rules).
Many categories of farm work are subject to withholding tax, for example, income from shearing, droving, haymaking or working in orchards and vineyards, and thus any children helping mum and dad on the farm will now be subject to tax when they were not previously.
You can access the types of payments that have to have tax deducted from the IRD website, by entering "IR330" or "schedular payments" into the search engine. It would also be useful to search under "school students" on IRD's website.
This will give you a guide as to what not to employ the children on the farm to do to ensure they keep their $2340 tax exemption.
So what to do when paying school children.
The rule of thumb is that if tax is required to be withheld then it's taxable from the first dollar, but if not there is no obligation to deduct.
For the recipient school child, unfortunately you need to know when the untaxed income exceeds $2340 in a tax year - if you are up on your mathematics and work it out you may realise that in some cases it is more profitable to not earn over this amount - welcome to the peculiarities of tax.
* Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on 03 211 3355.
The Southland Times