ATO ID 2010/200: Assessability of withdrawals from a New Zealand income equalisation account
Date of decision: 21 October 2010
Year of income: Year ended 30 June 2010
Business line: Individuals & Small Business

Issue
When a taxpayer withdraws an amount previously deposited into a New Zealand income equalisation account, is the withdrawn amount assessable income of the taxpayer under Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. When a taxpayer withdraws an amount deposited into a New Zealand income equalisation account, the withdrawn amount is not assessable income of the taxpayer under Division 6 of the ITAA 1997. The income that was previously deposited into the account is assessable under subsection 6-5(2) of the ITAA 1997 in the income year in which the income is derived by the taxpayer.

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 person who derives income from forestry in New Zealand may deposit amounts from that income into a New Zealand income equalisation account with the New Zealand Commissioner of Inland Revenue. 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 the 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 the forestry business in New Zealand in a previous income year, and deposited a portion of that income into a New Zealand income equalisation account. 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. The taxpayer applies for a withdrawal from their New Zealand income equalisation account in the current income year, and the New Zealand Commissioner of Inland Revenue refunds the amount. When an amount is withdrawn from an account, the amount is assessable in New Zealand, usually in the year in which the person applied for the refund.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 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Income from a forestry business is ordinary income for the purpose of subsection 6-5(2) and is derived when the taxpayer initially receives it. In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Schedule 4 to the Agreements Act contains the tax treaty between Australia and New Zealand (New Zealand Convention). Article 7(1) of the New Zealand Convention allows Australia to tax the profits of an enterprise of Australia. Article 3(1)(g) of the New Zealand Convention defines 'enterprise of a Contracting State' as an enterprise carried on by a resident of that State. Hence the forestry business carried on in New Zealand by the Australian resident taxpayer is an enterprise of Australia. As the New Zealand Convention does not disturb Australia's right to tax the forestry income, the income is assessable under subsection 6-5(2) of the ITAA 1997 in the income year in which the taxpayer receives it. The taxpayer is not entitled to a deduction in Australia for the deposits into the New Zealand income equalisation account (see ATO ID 2010/203). When the taxpayer receives a refund of an amount deposited into the account, they receive money which represents money that they previously earned and deposited into the account. This is akin to a taxpayer withdrawing an amount that they have deposited in a bank account, which is not income according to ordinary concepts. Consequently, the taxpayer does not derive ordinary income when they withdraw an amount that they have deposited in a New Zealand income equalisation account. Australia's farm management deposit scheme in Division 393 of the ITAA 1997 does not apply to include an amount of a withdrawal in assessable income because a New Zealand income equalisation account deposit with the New Zealand Commissioner of Inland Revenue is not a 'farm management deposit'. There are no other provisions in Australia's income tax legislation which would include an amount of a withdrawal from a New Zealand income equalisation account in assessable income. Consequently, when a taxpayer withdraws an amount deposited into a New Zealand income equalisation account, the withdrawn amount is not assessable income of the taxpayer under Division 6 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 6 subsection 6-5(2) Division 393 Division 770
Related ATO interpretative decisions: ATO ID 2010/201 | ATO ID 2010/202 | ATO ID 2010/203
Subject references: Foreign income Income equalisation deposits scheme Primary production Primary production income