Less tax on lump sum ACC payments for injured kiwis

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Chartered accountants around the country are pleased to see changes that will address the long-standing unfair tax treatment of New Zealanders who receive backdated lump sum payments from the Accident Compensation Corporation (ACC), says CA ANZ NZ Tax Leader John Cuthbertson FCA.

As detailed in the latest taxation omnibus Bill, the tax liability on backed lump sum payments is set to be calculated on an averaged basis over a four year period, rather than solely in the year of receipt.

“Under current tax law, if an individual receives a backdated lump sum payment from the ACC, they are taxed in the year that it is received, at their marginal tax rates, even if the sum relates to compensation from earlier years,” said Mr Cuthbertson.

“That means more of the payment goes back to the Government, and less to the individual, which is just plain unfair.”

“It’s a familiar scenario for many kiwis who have an accident, suffer a serious injury, and then been in dispute with ACC about eligibility for compensation, or the amount of compensation.”

“These disputes can take multiple years to resolve so when the payment finally comes through it can bump them into the next tax bracket and beyond. It’s unfair, because if there hadn’t been a dispute, they would have been paid out across multiple years and would be much less likely to shift the client into a higher marginal tax bracket.”

Between 2012 and 2016, over 6,000 clients won their ACC decision reviews, some of which ran over multiple years.

“The proposal is that a backdated lump sum ACC payment will be taxed at the individual’s average tax rate, calculated as if the payment had been spread over the preceding four years.”

“Having an accident and being off work is stressful enough, without a tax technicality taking more of your money. This has been a longstanding issue that we’ve raised so we’re pleased to see this change.”

Mr Cuthbertson provided an example of the current legislation’s unfairness.

“Say someone on an annual salary of $68,000 – just under the up to $70,000, 30% tax bracket – has a serious accident, can’t work, and applies for ACC. For whatever reason there’s a dispute, which is resolved 3 years later, and they get a lump sum payment of 80% of their salary over that period, which comes to $163,200.  Unfortunately, that shifts them into the 33% tax bracket, due to no fault of their own, and they’re going to pay a significant chunk – over $93,000 – at the higher 33% tax rate. That’s been the situation for many kiwis over the years and it’s not fair. And it’s not uncommon for the sums in question to be bigger, and the disputes to run much longer.”

“However, we are not quite there yet, as the proposed change is only intended to apply to payments made from 1 April 2024. This is a cruel and unsatisfactory outcome for pre-1 April 2024 recipients, who if they are aware of the proposed change, would not push ACC to settle their claim in the remaining months.”

“It’s CA ANZ’s view that the solution should apply to payments made on, or after the date that the proposed changes were announced (18 May 2023), or that any ACC recipients who received a payment during the year ended 31 March 2024 should be eligible for the new tax treatment,” concluded Mr Cuthbertson.

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