Wellington, Aug 16 NZPA - The Government is reserving judgment on United Future leader Peter Dunne's income-splitting bill and will wait to see how the public reacts to it before deciding whether it should become law.

Under the bill more than 300,000 families would be able to split their income for tax purposes and reduce their liability.

Mr Dunne, who is Minister of Revenue, has government support to get it through a first reading and into a select committee for public submissions.

The voluntary scheme allows parents with children up to age 18 to combine their income and split it down the middle for tax purposes.

That would move each income into lower tax brackets and a tax credit would be paid out at the end of the year.

Mr Dunne launched his bill today and Prime Minister John Key said the Government was backing it through its first reading under the support agreement between National and United Future.

"It will be interesting to see the vigorous public debate that the bill is likely to generate at select committee," he said.

"With the Government's finances remaining constrained there is a very high bar for tax changes that cost the Government money but we will reserve final judgment until the select committee process has run its course."

Because of the way the tax system works, the maximum amount that could be gained is just over $9000 a year.

"The bill will give couples with children the option of having a parent work fewer or more flexible hours, be at home raising their children, and able to increase their combined after-tax income," Mr Dunne said when he launched the bill.

"We constantly hear the term `family-friendly' bandied about, but this bill will actually put money in the pockets of many families who choose to have a parent more actively involved in raising their children."

Mr Dunne acknowledged at a press conference his bill would help high income families the most, and said that was inevitable.

"The more you earn the more you are likely to benefit, but those people have the same stresses and strains as other families and those other families are catered for by Working for Families and other forms of social assistance," he said.

Because of the tax brackets, the scheme works for incomes up to $140,000. People who earn more than that can still split incomes but don't gain more than the maximum $9080 a year.

Mr Dunne said he wanted families to make their case to the select committee which deals with the bill, and believes there will be overwhelming support for it.

"I think it's going to be a big challenge for the Government, should it decide not to proceed with income-sharing legislation," Mr Dunne said.

He has calculated that with maximum uptake, income splitting would cost the Government about $450 million a year in lost revenue.

The Labour Party said it would oppose the bill.

Revenue spokesman Stuart Nash said it favoured wealthy parents over families that really needed extra support.

"Income splitting does not actually help those who really need it," Mr Nash said.

"It is absolute nonsense to claim this policy is about caring for families. It is about giving wealthy families an extra leg up."

If Mr Dunne's bill is enacted, it will come into force on April 1 2012.