Clarifying the tax treatment of foster care payments
On 10 November 2016, the Social Development Minister, the Hon Anne Tolley, and the Revenue Minister, the Hon Michael Woodhouse, announced that changes to tax laws will clarify that payments to foster carers for the care of children and young people cannot be treated as income and are not subject to income tax.
It was noted in the Cabinet paper “Clarifying the tax treatment of foster care payments” that payments are made to caregivers to cover costs related to the care or needs of a child or young person who is formally in State care. Such payments to caregivers are currently treated as reimbursement of costs incurred and are not included as income for income tax purposes. However, this treatment is not explicitly provided for in tax law and may give rise to inconsistencies, particularly when higher discretionary payments are made.
Similar payments, such as childcare payments made under Parts 5 or 13 of the Accident Insurance Act 1998 or under Part 11 of the Accident Compensation Act 2001, and non-income tested benefits under the Social Security Act 1964 specifically exempt income under the Income Tax Act 2007. However, there is not similar certainty about the proper treatment of foster care payments.
Payments for the care of children made under the Children, Young Persons, and Their Families Act 1989 (CYPF Act) are explicitly excluded as income for social security purposes, but not for income tax purposes.
The Revenue Minister said that “It’s important that our tax system is clear and easy to understand. Introducing legislation will ensure foster parents receive the support they need, while removing any confusion and potential for inconsistencies around tax”.
Legislation clarifying tax laws for caregivers is scheduled to be introduced into Parliament by the end of 2016 as part of a wider Bill which includes the creation of an information sharing framework to keep children safe from harm and allows young people to remain in care or return to care up until the age of 21, with transition support and advice available up to 25.
See the cabinet paper for more detail about the tax changes at http://www.msd.govt.nz/documents/about-msd-and-our-work/work-programmes/investing-in-children/cab-clarifying-tax-status-foster-care-payments.pdf