Working for Families clampdown aims to save $65m a year

The Government expects to save up to $65 million a year in a clampdown on the Working for Families scheme, with most of that coming from limiting the benefit wealthier families enjoy from inflation-linked payment increases.

Yesterday's Budget fleshed out Finance Minister Bill English's intention to reduce wealthier families' access to the Working for Families scheme, which was intended to help low and middle-income families.

The key measure is a change to the scheme's family tax credit - a payment for each dependent child aged 18 or younger.

At present the payment, and the "abatement threshold" - the level of family income above which the family tax credit is progressively reduced - are increased in line with inflation.

That means families with incomes above the abatement threshold benefit far more from increases than those below that level.

The Budget stops the abatement threshold rising with inflation and freezes it at its current level of $36,827 although the Government may choose to increase it in the future.

Assuming the current threshold is retained, the change should save up to $40 million a year by 2013.

Further savings of up $25 million a year are expected to come from not allowing wealthy families to use investment losses - including those from property - to reduce their reported income, thereby increasing their eligibility to Working for Families payments.

The Government will also "urgently" reform the way families' income, including that from trusts, is defined for the purposes of calculating entitlements to Working for Families, student allowances and the community services card.

The Inland Revenue Department has estimated more than 9700 families with rental properties were using losses on them to boost their Working for Families payments.

Other families were found to be using trading companies, sheltered within trusts, to pocket tax credits even though they were making well over $70,000 a year.

THE PROBLEM

*An adjustment for inflation of 5 per cent currently gives a family with two children, earning less than $36,827 a 5 per cent increase in Family Tax Credit payments.

*The same family earning $75,000 would get a 29 per cent increase, because they benefit from both the increase in the amount of the payment and a increase in the amount of income they can earn before their Family Tax Credit is reduced.