The funds would otherwise be tied up in tax payments and the allowance for early refunds from the income equalisation scheme would give some assurance to banks and farmers.
Revenue Minister Todd McClay welcomed Inland Revenue's decision on the income equalisation to provide relief for the farmers.
''The Government recognises this will be a difficult time for many affected farmers. This assistance from Inland Revenue will give greater flexibility to affected farmers around their tax obligations and is designed to make the coming months easier for them as they deal with the effects of the drought.''
The scheme allowed farmers to better manage peaks and troughs in their income by allowing money to be put aside from a better year and withdrawn against a not-so-good year, Mr McClay said.
Mr Marshall said yesterday the concessions would allow farmers to reopen already filed 2014 income tax returns and release tax payments already made for the 2014 income year, and potentially the 2015 income year, to assist with cash flow through the drought.
For some, it could be the difference between needing to sell capital livestock or retain it. That would have a major impact on how quickly a farmer could recover from the drought.
''The allowance for early refunds from the scheme should go some way to assuring banks and financiers short-term borrowing to utilise the income equalisation scheme will be of great benefit to the farmer.''
In past adverse events, refunds from the scheme had been almost immediate.
''We would welcome IRD taking this pragmatic approach to deposits and refunds from the scheme again,'' Mr Marshall said.
Deloitte tax partner Phil Stevenson said the high payouts received by farmers during the 2014 tax year had probably increased their tax bills and most farmers would have their terminal tax payments for the 2014 year due on April 7.
The announcement from IRD would be good news for farmers, particularly those who had decided not to make a deposit into the scheme, hoping to ride out the worst of falling commodity prices.
However, the continuing fall in prices, and the large decline in productivity due to the drought, would be affecting cash flows for farmers, he said.
The requirement to fund a deposit into the equalisation scheme could be a problem for those where cash was tight.
Some farmers might be able to access financing solutions to make a deposit but there were other options available which could be more effective from a cash flow perspective.
Tax pooling providers could fund the tax payment, avoiding the need to find the cash for an income equalisation deposit.
Farmers needed to consider the solution that best suited them, Mr Stevenson said.
ANZ Bank said it would extend its assistance package to farmers anywhere in New Zealand affected by extreme dry conditions.
The bank would commit an initial $50 million to the assistance package, but would extend it if demand for help from farmers was high.
The options available through ANZ are. -
• Suspending loan repayments.
• Waiving fees associated with restructuring business loans considered necessary due to effects of extreme weather.
• Waiving fees for term finance and investments which improve performance and ability to respond to future climatic variations.
• Waiving interest rate reductions associated with accessing funds on term deposits ahead of maturity date.
• Providing access to discounted short-term funding to help farmers get through immediate challenges while also protecting their long-term finance.
Income equalisation scheme
The scheme works by allowing taxpayers a tax deduction for deposits made into the scheme. When the funds are later withdrawn, the taxpayer includes the withdrawal as taxable income in the year in which the withdrawal occurs. The scheme can be useful to defer tax liabilities.
Inland Revenue's announcement will allow deposits into the scheme for the 2014 year to be made up until April 30, 2015. One of the main benefits of smoothing taxable income using the scheme occurred where the deferral of income resulted in a lower marginal tax rate applying to the income - which does not apply for all taxpayers.
