― 204 ―

Income Equalisation Scheme

14.80. An alternative way of dealing with the problems of fluctuating incomes is by means of an income equalisation scheme. A scheme of this kind permits individuals to spread income at their own discretion by lodging deposits with the government in a particular year, the amount deposited being deductible from that years taxable income. When the deposit is later withdrawn, the amount is added to taxable income in that year.

14.81. New Zealand, which has no averaging for primary producers, operates a scheme of this type, confined to primary producers. Its main features include:

  • (a) Deposits of up to 100 per cent of taxable income from primary production in any one year may be made with the taxation authorities up to six months after the end of the taxation year.
  • (b) The minimum period of deposit is one year and the maximum five.
  • (c) No interest is paid on deposits.
  • (d) Withdrawals cannot be taxed at a greater rate than the tax saved when deposited.

Canada has what amounts to an income equalisation scheme under which persons can purchase income-averaging annuities when specified types of income are received. The Australian drought bonds, described in paragraph 14.64, are another variant. However, these drought bonds have not been extensively used, and some of their provisions have afforded opportunities for tax avoidance.

14.82. The concept of an income equalisation scheme is sound: it would be particularly helpful as a smoothing device for taxpayers receiving large amounts of income sporadically; and it would also provide an alternative to hasty expenditures undertaken near the end of the tax year to reduce taxable income. The basic problem with such schemes is that deposits must be made in cash: taxpayers may not have the necessary liquidity, and even when they have they may be reluctant to tie up funds for twelve months or more. Nevertheless, the Committee sees an income equalisation scheme as a potentially useful supplement to primary producer averaging and recommends that the drought bond provisions be replaced by an income equalisation scheme modelled on New Zealand lines. The treatment would differ in a number of respects from the New Zealand scheme: deposits would be limited to a proportion of the net income, not exceeding taxable income; deposits could only be made up to one month after the end of the taxation year or prior to the lodgement of a return, whichever was the earlier; and interest would be paid on deposits at a rate equal to, say, half the medium-term bond rate. The scheme would be available on election to all primary producers, not just those involved in sheep and beef cattle raising.

14.83. Though the proposal that averaging be extended to other taxpayers has been rejected, the Committee acknowledges that present anti-bunching measures do not adequately cope with the taxation problems of non-primary producers with unstable incomes. Some form of spreading provisions should be available to all taxpayers, and the income equalisation scheme suggested for primary producers might appropriately be called upon to fulfil this role. The Committee therefore recommends that the income equalisation scheme be available to all individual taxpayers. Authors and others, eligible for anti-bunching concessional rates outlined in paragraph 14.66, would be required to choose: it is not envisaged that they would be able to take advantage, in the one year, of both the income equalisation scheme and the antibunching provisions.