Declaration of Drought changes the rules for the use of Income Equalisation Deposits.
The Government have declared a drought “large-scale adverse event” for the whole of the North Island and parts of the South Island. No surprise, you may say.
This now means Income Equalisation Scheme discretionary relief is available. The change means possible improvements to cashflow as funds don’t need to be held by the IRD for the full 12 months to spread the tax to future income years.
How does this work?
The Income Equalisation Scheme was introduced to enable farmers to smooth income levels from year to year. Normally deposits need to be held by IRD for 12 months to transfer taxable income from one year to a future year, when it will then be taxed in the year when withdrawn. Also after 12 months, interest is paid at 3% by IRD.
The drought declaration means even if your 2019 Tax returns have been filed, IRD allow up to 30 April 2020 to deposit the funds and your tax returns are able to be reassessed without penalty. This decreases your 2019 income by the same amount. If you request an immediate withdrawal of the funds from the IED scheme, this will increase your 2020 income. However, if you have a May balance date and wait until 1 June 2020 to request the withdrawal, it can be 2021 which incurs the reassessed income. Terminal tax on the 2021 year profit is not due until 7 April 2022. This could effectively delay a substantial amount of tax being paid for two years.
A caution needs to be added in respect to marginal tax rates. It is an additional advantage if income can be spread from being taxed at 33% to a lower rate such as 17.5%, but not the other way around.
This early withdrawal is applicable for areas where the drought has been declared. But in other regions or other years, farmers can withdraw the money after 6 months if it is used for development, planned repairs and maintenance, purchases of livestock or if it avoids them suffering serious hardship.
If you are thinking you have insufficient borrowing facilities to go ahead with this proposal be aware the money is deposited with the IRD, it is secure and traditionally banks have been very understanding about granting the additional funding.
Tax Traders as another option
Tax Traders is an intermediary company who work with you and the IRD to help provide good financial solutions for taxpayers having difficulty with paying their tax.
Tax Traders have a considerable pool of monies held by IRD and these are used to make your payment on the due date, ie in retrospect as required.
They are able to provide a financial arrangement which will offer a substantially lower interest rate and without the potential penalties which may arise if taxes are simply left unpaid. CooperAitken clients are using this option more and more as the benefits are being realised.
We are able to help you assess whether either of these options may be beneficial for you. With the current uncertainty in the economic environment it is very important to be in control of your business and take any opportunity which is advantageous for you.
This is a good time to have a budget completed to give you confidence of your financial situation in the coming season. This will also help to understand whether the use of Income Equalisation Deposits or Tax Pooling would be of benefit to you. We can help you with this, and also help you use the reports to track your budget versus actual results throughout the season.
If you have any questions or would like us to help with this work, please feel free to contact us and we will be keen to assist.
Chartered Accountant | Director E: firstname.lastname@example.org P: 07 889 7153