Income Equalisation for Flood Relief
The income equalisation scheme (IES) involves paying a lump sum into an IRD account the same way you pay your taxes. This payment is an expense that reduces your profit, and therefore changes your tax obligations in that year. The payment into the scheme must apply to the current trading year.
After a year, the deposited sum becomes available for you to withdraw over the course of 5 years. You can withdraw in increments or as a lump sum, and you will receive a payment of interest from IRD upon withdrawal. This withdrawal is used to bolster profit in years of low income, and to help manage tax obligations and cash flow.
Income equalisation is always available to agricultural and horticultural businesses. This is to address potential fluctuations in annual profits and create a smoother, more predictable sequence of annual tax obligations which can allow for better planning.
IRD recently introduced a flood relief rule that allows farmers and orchardists in flood affected areas to apply an income equalisation payment retroactively to the 2022 financial year, with the waiting period to withdraw the funds being reduced from a year to 20 days. This ‘late deposit, early withdrawal’ scheme is intended to provide relief for those affected by the extreme weather in early 2023.
If your profit for 2023 reduced from 2022, and you are anticipating that profits will remain down or you are uncertain of your future position due to flood recovery, it may be advantageous to pay into the scheme to reduce your 2022 profit then use the funds to bolster profits in the 2023 financial year and beyond.
The benefits of using this scheme mostly come from preventing you from being bumped into a higher tax bracket in an unusually profitable period, as well as potentially reducing provisional tax obligations and thereby freeing up cashflow for the leaner years.
This article is for your information but does not constitute tax advice. Every trading entity will have a unique situation, so if you think you are eligible to enter this scheme it is important to consult with a tax agent. If you would like to discuss your eligibility, and whether this scheme is appropriate for your business, please contact us here at Rural Accountants.
The full list of regions deemed “flood affected” between 26 January 2023 and 1 January 2023:
Northland
Auckland
Waikato
Bay of Plenty