Income equalisation is a scheme designed to help farmers smooth their income over 2 to 5 years.

Income equalisation

Income equalisation is a scheme designed to help farmers smooth their income over 2 to 5 years.

Historically farm incomes vary from year to year, and this year is no exception, with flutuating dairy pay outs, reduced milk production and flood damage, all being detrimental to income. Fortunately there are options to help farmers manage their levels of income and tax.

Income equalisation is a scheme designed to help farmers smooth their income over a 2 to 5 year period. The scheme is simple, a portion of income from a good year is deposited with the IRD and is deducted from the years taxable income. This  defers the amount of tax payable in a good year.  Deposits receive interest of 3% and is usually held for a minimum period of 12months. In cases of financial hardship funds can be withdrawn earlier subject to meeting IRD conditions.

If next year’s income is poor the funds are withdrawn from the IRD and treated as income.

Below is an example of how it works

No Income equalisation                                                                                       2014                      2015

Taxable Income                   200,000               15,000

Tax Payable                           (56920)                (1645)

Total tax paid over 2 years                 $58,565

 Using income equalisation

                                                      2014                  2015      

 

Taxable income

(Before equalisation)           200,000             15,000      

Income equalisation

(deposit) /withdrawal               (60,000)         60,000     

New taxable income                 140,000          75,000

Tax Payable                                (37,120)        (11,165)

Total tax paid over 2 years          $48,285       

In this illustration, farm income in 2014 was $200,000. A cheque for $60,000 was deposited  with the IRD. The 2015 income was significantly down so $60,000 was withdrawn from the IRD and deposited back into the farm account.

The farm benefited by having a reduced amount of tax to pay in 2014, cash of $60,000 to help with cash flow in 2015, and  tax savings of $10280 over a 2 year period.

In an ideal world the deposit to the IRD would be paid from surplus cash. Borrowing funds for the deposit is an option but will need to be weighed against interest and the benefits.

A slightly different option is available if there has been an adverse event. In an adverse event such as floods or drought the adverse event income equalisation scheme allows farmers to carry income from forced livestock sales over to the next income year. Deposits earn interest of 6.5% for a period of 12months. Funds can be redrawn within 12 months. Any deposit not withdrawn within 12 months will be transferred to the main income equalisation scheme.