Main income equalisation scheme income

(Clauses 4 and 30)

Summary of proposed amendments

The proposed amendments will ensure that refunds of main income equalisation scheme deposits made by an associated entity of a borrower are not included in the income of the borrower, to the extent of the borrower’s interest in the associated entity. However, any interest earned on those deposits that is refunded will be included in the adjusted net income of the borrower in the same proportion as the borrower’s interest in the entity.

Similarly, adjustments to net income to reflect deposits by associated entities of a borrower are to be further adjusted so that they are proportional to the borrower’s interest in the entity.

Application date

The amendments will come into force on the date of enactment.

Key features

Proposed amendments to schedule 3 of the Student Loan Scheme Act 2011, which sets out the required adjustments to net income, will ensure that when a deposit has been made into, or a refund received from, a main income equalisation account by an associated entity of a borrower, the adjustments will affect the adjusted net income of the borrower only to the extent of the borrower’s interest in that associated entity.

Proposed replacement clause 7 of schedule 3 and new clause 7A will apply only to deposits into or refunds from main income equalisation accounts made by a borrower.

However, new clauses 8 and 11 will apply respectively when a borrower is a major shareholder in a close company or is the settlor of a trust. These clauses set out the calculations to be used to ensure that the adjustments to the borrower’s net adjusted income accurately reflect the extent of the borrower’s interest in the associated entities.

Background

The main income equalisation scheme allows taxpayers carrying on an agricultural, fishing or forestry business to smooth their incomes for income tax purposes to deal with large fluctuations in income over several years. A deposit to a main income equalisation scheme is allowed as a deduction for income tax purposes. However, the effect of allowing the deposit as a deduction is to reduce the borrower’s income for student loan purposes when that income would have been available to the borrower to contribute to loan repayments. An adjustment is necessary to net income to add back the deduction for student loan purposes. The treatment extends to deposits made by the borrower or associated entities, such as companies or trusts.

To prevent double counting, refunds from the accounts (excluding interest earned on deposits) are not counted for student loan purposes when they are received. However, the current provisions relating to refunds do not extend to refunds to associated entities (companies or trusts) of the borrower, with the risk that the associated entities’ refunds would be counted in a borrower’s income for a second time.

In addition, the adding back of deductions for deposits made by associated entities is not currently required to be adjusted in proportion to the borrower’s interest in the entity. The proposed amendment will ensure that the borrower’s net adjusted income accurately reflects the extent of the borrower’s interest in the associated entity.