How Income Equalisation Works
Nov 28, 2018
When your income fluctuates seasonally or for other reasons, it can be a challenge to manage your tax obligations as well as everything else.
The income equalisation scheme, administered through Inland Revenue, allows farmers, fishers and foresters who are eligible taxpayers to even out fluctuations in income by spreading their gross income from year to year.
The scheme can help you with managing your tax planning and be a fallback in case of an unforeseen event which affects your business adversely, such as drought or flooding.
Who is eligible?
You are eligible for the income equalisation scheme if you are:
- a taxpayer in any farming, agricultural or fishing business in New Zealand
- a taxpayer in a forestry businesses deriving gross income from forestry in New Zealand and you are not a company, public or Maori authority or an unincorporated body
- a company carrying on a forestry business in New Zealand, which in any income year derives gross income from thinning operations on the land
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Eligible farming businesses include |
Farming businesses that are not eligible |
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Beekeeping Animal husbandry Dairy farming Grain and seed growing Market gardening Fruit growing Poultry farming Share-milking Tobacco growing Vegetable growing Vineyards |
Dealing in livestock Leasing or bailing livestock by the bailer Aerial topdressing Hobby farming Services provided to a forester to manage tree stock Services provided to persons carrying on a farming or agricultural business, for example agricultural contractors or seed cleaners |
How much can I deposit?
The minimum deposit is $200. You can’t make a deposit that is more than the net income from your farming, agricultural or fishing business or more than the income you’ve derived from a forestry business in the year the deposit is accepted.
When the deposit has been in the scheme for 12 months or more, it will accrue interest at the rate of 3%.
Timeframes
There are rules around timeframes for both deposits and refunds so it’s quite important to consider the timing of your application to either make a deposit or seek a refund.
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When can I make a deposit for this tax year? |
If you want the tax advantage making a deposit gives you for a specific year, you need to make the deposit either six months after your balance date, or one month after the due date for filing your return, whichever falls earlier. |
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When can I apply for a refund? |
You can generally apply for a refund from the scheme after the deposit has been in the scheme for more than 12 months. |
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Can I have a refund then make a deposit in the same year? |
If you obtain a refund in a tax year, you can’t make a deposit after that for the same year unless Inland Revenue is satisfied that all of the refund has been used in your business. |
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Can I use a refund to make a deposit? |
You can obtain a refund and then use it to make a deposit for the previous tax year but you must make a formal election to do this by the due date. The due date is either one month after the date your income tax return is filed with Inland Revenue, or one month after the return is actually due to be filed (31 March), whichever falls earlier. |
What if I change my mind or need that money back?
In normal circumstances an amount may not be withdrawn unless it's been on deposit for at least 12 months.
It is possible to apply for a refund on amounts deposited for less than six months where you have experienced adverse events such as fire, flood, drought or diseased livestock or where you are likely to experience hardship.
Generally speaking, an adverse event such as flood or drought will have affected everyone in the region to some degree. In these cases, Inland Revenue will usually announce that they will offer tax relief through the income equalisation scheme to eligible businesses in the affected region.
Some adverse events will mean it’s a good idea to make a deposit to the scheme, for instance where a farmer needs to carry income from forced livestock sales over to the next income year. In such circumstances, deposits earn interest at a rate of 6.5% a year from the date the deposit is received till the date it is refunded. A deposit can only remain in the adverse event income equalisation scheme for 12 months. If the deposit is not refunded within the 12 month period the amount deposited and accrued interest will be transferred to the main income equalisation scheme.
Other adverse events will mean it’s a good idea to seek a refund from the scheme, sometimes even when the deposit has not been in the scheme for as long as 12 months.
To make deposits or seek refunds where an adverse event has occurred, you need to make an application to Inland Revenue.
Where a taxpayer goes bankrupt, dies or retires, or where a corporate taxpayer goes into liquidation, a refund is automatic although there are some specific rules around what income year the deposit can be allocated to.
Are there other ways it can affect my tax?
Deposits into income equalisation schemes (and some refunds from adverse event/forest thinning equalisation schemes) may count as income for the purposes of calculating thresholds for Working for Families credits and student allowance/loan repayments. This can affect your tax because it changes the amount of your taxable income.