Backdated lump sum changes

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Title: Backdated lump sum payments webinar

Changes coming in April 2024

Narrator

Kia ora everyone and welcome to this webinar.

My name is Patrick Sawyer and with me today is Vicki Cronin.

We are both External Relationship Managers at Inland Revenue.

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Title: Backdated lump sum payments

Sub-title: Overview

• Backdated lump sum payments occur when entitlements were not received when they were due.
• They are currently included as income when calculating tax in the annual income tax return (or automatic assessment).
• The proposed amendments provide a new tax treatment for backdated lump sum payments made after 1 April 2024 by Accident Compensation Corporation and Ministry of Social Development.

Subject to change prior to royal assent.

Narrator

Firstly, I’ll touch briefly on the current state of backdated lump sum payments and then we‘ll look at what the proposed changes are.

Backdated lump sum payments occur when entitlements were not received when they were due. You may be entitled to a backdated payment when:

• you were entitled to compensation but did not receive it, Or
• you received a benefit for earlier years, but this is re-calculated with an increased entitlement

You would receive this payment as a ‘lump sum’ to make up for that.

They are currently included as income when calculating tax in the annual income tax return (or automatic assessment). This can increase your tax liability for the year and also impact:

• Working for Families entitlements,
• Child Support obligations,
• or student loan repayments.

The proposed amendments provide a new tax treatment for backdated lump sum payments made after 1 April 2024 by Accident Compensation Corporation and Ministry of Social Development.

We will now explore in further detail, what these changes mean for each of the different types of payments.

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Title: Backdated lump sum payment

Sub-title: MSD – Tax treatment of backdated lump sum payments

• The changes are intended for the backdated lump sum payments from MSD, which relate to the re-calculation of a main benefit over one or more prior years.
• Tax deducted by MSD from the backdated lump sum payment will be treated as the final tax payable.
• The backdated lump sum payment is not included when calculating tax in the annual income tax return (or automatic assessment).

Subject to change prior to royal assent.

Narrator

We’ll start by looking at the tax treatment for the Ministry of Social Development.

The proposed changes are intended for the backdated lump sum payments from MSD, which relate to the re-calculation of a main benefit over one or more prior years.

This will apply to main benefits such as job seekers benefit but not to national superannuation.

Tax deducted by MSD from the backdated lump sum payment will be treated as the final tax payable.

The backdated lump sum payment is not included when calculating tax in the annual income tax return (or automatic assessment).

The proposed change relates only to the income tax calculation - there is no change to the way social policy entitlements are calculated.

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Title: Backdated lump sum payment

Sub-title: ACC – Tax treatment of backdated lump sum payments

• The changes are to apply to both compensation and personal service rehabilitation payments from ACC that cover more than one income year. 
• If a backdated lump sum payment is due to be made, ACC will request an average tax rate calculation from us.
  • ACC will use this average tax rate to deduct the tax for compensation payments
  • They may use the average tax rate or 10.5% for any personal service rehabilitation payments. 

Narrator

Now we’ll look at the Accident Compensation Corporation tax treatment 

The proposed changes are intending to apply to both compensation and ‘personal service rehabilitation payments’ from ACC that cover more than one income year. 

For ‘personal services rehabilitation payments’ the most common or familiar payments are the attendant care payments.

If a backdated lump sum payment is due to be made, ACC will request an average tax rate calculation from us. This is calculated using the person’s basic tax rate for each of the four previous income years (set at a minimum 10.5%). We have an example of this later in the presentation. 

ACC will use this average tax rate to deduct the tax on the backdated lump sum payment for compensation payments. The ACC claimant may choose to use this or the schedular rate of 10.5% for any personal service rehabilitation payments. 

I’ll now hand over to Vicki to cover the remaining slides.

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Title: Backdated lump sum payment

Sub-title: ACC Tax treatment of backdated lump sum payments

• There is a separate square up for the backdated lump sum payment in the annual return to check if the average tax rate has changed.
• The square up will also check the marginal tax rate for the year. If this is lower than the average tax rate, the marginal rate will be applied.
• This square up is a separate calculation and is not included with other income in the annual income tax return (or automatic assessment)

Subject to change prior to royal assent.

Narrator

Thank you, Patrick. Backdated lump sum payments and the ACC tax treatment of backdated lump sum payments.

There is a separate square up for the backdated lump sum payment in the annual return to check if the average tax rate has changed. (It may change for example, if one of the 4 prior years returns has been amended). The tax calculation on the backdated lump sum payment will be adjusted if this has changed.

The square up will also check the marginal tax rate for the year. If this is lower than the average tax rate, the marginal rate will be applied.

This backdated lump sum payment square up is a separate calculation and is not included with other income in the annual income tax return (or automatic assessment) similar to the way PIE income is treated.

Like we mentioned for MSD backdated lump sum payments, the proposed change relates only to the income tax calculation - there is no change to the way social policy entitlements are calculated.

We will now take a look at an example of the average tax rate calculation.

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Title: Backdated lump sum payment

Sub-title: ACC – request an average tax rate (Automated process) example

Scotty is due a backdated lump sum payment of accident compensation by ACC on 1 April 2024.

Calculation: (12% + 12.8% + 13.7% + 14.2%) divided by 4 = 13.17%

ACC will withhold tax at 13.17% from the payment that will be made to Scotty.

Scotty’s marginal tax rate in his 2025 auto assessment is higher than 13.17% so no further tax is payable, and no tax credit results for the backdated lump sum payment.

Narrator

In this example Scotty is due a backdated lump sum compensation payment from ACC on the first of April 2024.

As this payment covers more than one income year, ACC requests an average tax rate.

Over the last 4 years, Scotty’s basic tax rate has varied from 12%, 12.8%, 13.7% and 14.2%

Using these numbers, the average calculates to be 13.17%

ACC will withhold tax at 13.17% from the payment that will be made to Scotty.

At the end of the income year, Scotty’s marginal tax rate in his 2025 auto assessment is higher than 13.17% so no further tax is payable, and no tax credit results for the backdated lump sum payment.

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Image: Inland Revenue logo

www.ird.govt.nz/April-Release

Thank you

Narrator

That brings us to the end of today’s presentation.

If you want to find out more about the other webinars we’re going to be running, go to www.ird.govt.nz/April-Release

Thank you for watching.