ATO ID 2010/203: Deductibility of deposits into a New Zealand income equalisation account
Date of decision: 21 October 2010
Year of income: Year ended 30 June 2010
Business line: Small Business/Individual Taxpayers

Issue
Is a taxpayer, a participant in a New Zealand Income Equalisation Scheme, entitled to a deduction for a deposit made into a New Zealand income equalisation account?

Decision
No. The taxpayer, a participant in a New Zealand Income Equalisation Scheme, is not entitled to a deduction for the deposit made into a New Zealand income equalisation account.

Facts
The taxpayer is a resident of Australia. The taxpayer is a primary producer who carries on a forestry business in New Zealand. The taxpayer is a participant in a New Zealand income equalisation scheme (NZ IES). The NZ IES is a form of forward tax averaging in New Zealand, designed to enable primary producers to even out the effects of fluctuating incomes on their tax liabilities over a period of five years. Under the NZ IES, a taxpayer who derives income from forestry in New Zealand may deposit amounts from that income into a New Zealand income equalisation account. The amounts are paid to the New Zealand Commissioner of Inland Revenue and are deposited into a Crown bank account. Amounts in the Crown bank account are the property of the Crown. A taxpayer can apply to withdraw an amount that they have deposited into the income equalisation account. The New Zealand legislation refers to withdrawals as refunds. The New Zealand Commissioner of Inland Revenue must refund an amount provided that the amount has been held in the account for at least one year (and in other limited circumstances). The taxpayer derived income from forestry in New Zealand and deposited a portion of that income into a New Zealand income equalisation account in the current income year. In New Zealand, the taxpayer's forestry income is assessable in the income year in which it is derived. The taxpayer's deposit into the New Zealand income equalisation account is deductible against New Zealand assessable income in the income year in which the deposit is made. When an amount is refunded from an account, the amount is assessable in New Zealand, usually in the year in which the person applied for the refund.

Reasons for decision
Summary: Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a person can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Hence an amount will not be deductible under subsection 8-1(1) of the ITAA 1997 unless it is a loss or outgoing. The term 'loss or outgoing' is not defined in Australia's tax legislation. Therefore the term is presumed to take its ordinary meaning. Paragraph 26 of Taxation Ruling TR 2008/5 explains that an amount that is not a cost or expenditure will not be a loss or outgoing. The taxpayer's deposit into the New Zealand income equalisation account is not a cost or expenditure. Although the deposited amount becomes Crown property while it is in the account, the taxpayer does not lose their entitlement to that amount. This is because when a taxpayer satisfies the requirements for a refund, the New Zealand Commissioner of Inland Revenue must refund an amount at the taxpayer's request. Therefore, a deposit into a New Zealand income equalisation account is not a loss or outgoing. As the deposit into a New Zealand income equalisation account is not a loss or outgoing, no deduction is available under subsection 8-1(1) of the ITAA 1997. There are no other provisions in Australia's income tax legislation which could allow a deduction for a deposit into a New Zealand income equalisation account. (Australia's farm management deposit scheme in Division 393 of the ITAA 1997 does not apply to allow a deduction because a New Zealand income equalisation account deposit with the New Zealand Commissioner of Inland Revenue is not a 'farm management deposit'.) As a result, the taxpayer is not entitled to a deduction for the deposit into the New Zealand income equalisation account.

Legislative references: Income Tax Assessment Act 1997 subsection 8-1(1) Division 393
Related public rulings and determinations: Taxation Ruling TR 2008/5
Related ATO interpretative decisions: ATO ID 2010/200 | ATO ID 2010/201 | ATO ID 2010/202
Subject references: Foreign income Deductions & expenses Income equalisation deposits scheme Primary production Primary production income