Income Equalisation Deposit and Hall

If you are one of the many kiwifruit orchards in the Bay of Plenty affected by the November 2014 hail storms then you may only have until 31 January 2015 to take advantage of the tax savings obtained by using the Income Equalisation Scheme.

Inland Revenue recently confirmed that they will be allowing late deposits to the Income Equalisation Scheme up to 31 January for the 2013-2014 tax year for all orchardists affected by the November 2014 hail storms. What this means is that even if your 2013-2014 tax return has been filed the Inland Revenue Department will allow us to amend the tax return to recognise a late deposit to the Income Equalisation Scheme so that you can gain the tax benefits of spreading income from the 2013-2014 tax year to the tax year(s) where your income will be reduced as a result of the affect of the hail storms. If you haven’t yet filed your 2013-2014 tax return then you effectively have until 31 March 2015 to file your tax return and place the Income Equalisation Deposit with the Inland Revenue Department – providing you have a tax agent.

Remember the purpose of an Income Equalisation Deposit is to transfer taxable income from a high marginal tax rate year to a low marginal tax year and achieve permanent tax savings as a result. We also use the scheme to reduce exposure to Use of Money Interest and to spread the timing of tax payments to years that are more affordable for our clients. To take advantage of the scheme you need to physically deposit the amount of the Income Equalisation Deposit with the Inland Revenue Department for a minimum of six months depending on your circumstances.

So what could the tax saving be? Let’s take a typical 5 hectare maturing G3 kiwifruit orchard owned by a couple. For the 2013-2014 tax year the couple will net $40,000 a hectare after all costs making their taxable income $200,000 in total or $100,000 each. On 6 November 2014 their orchard suffered 50% hail damage. They didn’t have any independent hail insurance but will receive compensation from the Zespri Grower Hail Insurance Pool. After allowing for the effect the hail storm has on growing costs and timing of fruit and insurance payments it is forecasted that their 2014-2015 taxable income will be $250,000 and their 2015-2016 taxable income will be only $50,000. Prior to considering Income Equalisation Deposits the couples tax bill for the three years is $59,485 each. By using the scheme to shift $40,000 of taxable income from the 2013-2014 year to the 2015-2016 year and $90,000 of taxable income from the 2014-2015 year to the 2015-2016 year they will achieve a total permanent tax saving of $8,450. Even after allowing for the possible interest cost of financing the deposits the tax savings are well worth chasing.

If you were significantly affected by the November 2014 hail storms give us a call so that we can discuss whether the use of the Income Equalisation Deposit Scheme will save you tax.