Tax Relief for Drought affected Farmers
Farming is a tough business to be in and we understand that there is no such thing as a ‘perfect season'.
On 16 May 2022, Minister for Rural Communities Damien O’Connor declared a medium-scale adverse event for the Waikato region and South Auckland (Franklin, Manukau, Howick and Manurewa-Papakura wards).
With the declaration of an adverse event comes the availability of tax relief to affected farmers. Note that the term 'farmer' includes anybody carrying on an agricultural business on land in New Zealand.
How can we help?
There are opportunities to take advantage of special provisions allowed for by Inland Revenue including, Income Equalisation Scheme, provisional tax estimates, instalment arrangements for outstanding taxes and Working for Families Tax Credits.
We understand that tax isn't the first thing on your mind. But please contact us with any concerns or questions about tax or income levels, so we can make arrangements to help.
If you qualify, we have until 30 June 2022 to utilise the scheme.
Income Equalisation Scheme
The Income Equalisation Scheme is specially designed to help farmers spread and even out their taxable income over tax years.
Under usual circumstances you are required to deposit funds with Inland Revenue and leave them with Inland Revenue until you would like to include it in your taxable income (the deposit is not able to be withdrawn until they have been there for a year).
When you deposit the funds, you get a tax deduction in that year and when you withdraw the funds it is treated as taxable income. This allows you to utilise lower tax rates and reduce overall tax as well as deferring tax.
For farmers affected by the drought, Inland Revenue have special provisions for the Income Equalisation Scheme. Farmers who have money deposited in this scheme already may be able to make an early withdrawal. One of the special provisions is that the normal timeframe for making deposits to the Income Equalisation scheme has been extended to allow farmers to make late deposits.
• You deposit $100k with IRD 30th June 2022 and withdraw the same amount from IRD on 1 August 2022 (note the withdrawal date is approximate and depends on IRD processing times).
• You would receive a refund of 2021 tax paid of $28,000 as well as 2022 provisional tax (if already paid) of $29,400 right away.
• Once you file your 2023 tax return (including Income Equalisation withdrawal) you will receive the following additional tax bills
28th October 2023 $9,800
28th February 2024 $9,800
7th April 2024 $28,000
28th June 2024 $9,800
Note these dates are based on you being a May balance date, if you are a difference balance date these dates will be slightly different
• This effectively defers tax that was already paid by an average of two years. Based on this example, if your bank overdraft interest rate is 6%, utilising Income Equalisation would save you approximately $6,000
To take advantage of the special provisions affected farmers will need to:
• provide evidence of how they were significantly affected by the drought - the minimum criteria for this is a statement signed by the farmer or tax agent that the farmer was significantly affected
• ensure the deposit is received by us by 30 June 2022
• provide a notice with the deposit stating that:
- it is for the main income equalisation deposit scheme
- it is to apply for the 2021 tax year, and
- the late deposit criteria in this notice apply.
We can manage this process on your behalf so please get in touch with us if you are keen to take advantage of this.
Provisional tax estimates
As provisional tax is based on your prior tax years income if your current year income is affected by the drought it can be tough to meet your provisional tax payments due to restricted cashflow. We can assist you in making an estimate or re-estimate of provisional tax. We can also arrange early refunds if provisional tax has been overpaid.
If you are unable to make full payment of outstanding taxes with Inland Revenue it is always best to let them know upfront. They will consider instalment arrangements for paying outstanding tax in some circumstances and will often waive late payment penalties.
Working for Families Tax Credits
Working for Families Tax Credits entitlements are based on your yearly family income. If your family income changes, your entitlement may change. If your income decreases, you may be entitled to increased payments. If you currently get a lump sum payment at the end of the year you can also change the frequency.
If you have any questions, please get in touch with your Campbell Tyson advisor or call our helpdesk on 0800 883 718.