Income equalisation – is it an option for spreading your income?
26 February 2020
Income equalisation is a scheme that enables eligible tax payers to smooth out their taxable income from year to year by enabling them to deposit funds with IRD, these amounts being treated as deductible expenses in the year they are deposited. While in the income equalisation scheme, the funds earn interest. When the funds are withdrawn, the amount is then treated as taxable income.
This scheme is only available to tax payers who meet one of the following criteria:
Engaged in any farming or agricultural business.
Engaged in any business of fishing.
An individual who derives income from forestry.
For an income equalisation deposit to be deductible in any income year it must be made to IRD within the earlier of 30 days of the tax return being filed or within 30 days of the date the tax return is due to be filed. This will therefore depend on whether the tax payer uses a tax agent or files it themselves.
The income that is eligible to be deposited into the income equalisation scheme is only the portion of the income that relates to the eligible activity. For example, the net income from farming derived by the farmer in that year. If they have income included in any year that relates to a non-farming activity, this is not able to be deposited to the income equalisation scheme.
This reduction in taxable income in an income year may not be considered when calculating other concessions such as Working for Families. There are several rules around refunds from the income equalisation scheme but generally these are refunded upon written application by the tax payer.
Withdrawals can be applied for:
After the funds have been in the scheme for one year
On liquidation of a company
When retiring from farming
At time of death
There are specific rules that apply to each of these situations.
There are also some situations where automatic refunds are made. For example, five years from the date of deposit as this is the maximum term that deposits can remain in the scheme.
Income equalisation is also available in adverse events such as a natural disaster or sickness among livestock, which causes a reduction in the carrying capacity of the farm requiring the sell down of livestock. In the case of an adverse event, the general rules around withdrawals don’t apply and the deposit won’t be required to stay in the scheme for a year before it can be withdrawn.
There are also specific calculation rules around the amount that is eligible for deduction in an income year and the amounts must be deposited within one month of balance date. Each situation is unique so make sure you discuss your situation with your tax adviser when considering if income equalisation is an option for you.
If you would like to know more about planning for your professional and personal financial goals, the Business Advisory team at Findex can tailor an approach based on your needs.
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