Tuesday November 13, 2018
Tuesday, 26 June 2018 09:36

Taxing some lump-sum payments in one hit may be unfair, Inland Revenue suggests

The vagaries of taxing redundancy payments was an issue that vexed former revenue minister Peter Dunne. The vagaries of taxing redundancy payments was an issue that vexed former revenue minister Peter Dunne.

People who receive some types of lump-sum payment, such as ACC compensation, may have to pay less tax under a proposal being considered by Inland Revenue.

But Inland Revenue said more favourable tax treatment would not extend to redundancy payments. 

At the moment, lump-sum payments are treated as income in the year in which they are received, and taxed in one hit.

Inland Revenue indicated that could be unfair if – like some backdated ACC payments  – they were intended as compensation for a period of time that spanned more than one tax year. 

"In this case the recipient may pay more tax than they would have if they had been paid the compensation on a weekly basis."  

Also extending a rule change to redundancy payments could make a significant difference to people who lost their jobs, but spokesman Baden Campbell said that was not on the cards. 

Taxing redundancy payments in one hit means it is common for people to pay tax on their entire pay-out at the maximum income-tax rate of 33 per cent – especially if they are made redundant towards the end of the tax year.

Spreading the tax liability would make it much more likely people would pay tax on at least a proportion of their pay-outs at the lower rates of between 10.5 and 30 per cent – particularly if they took a long time to find alternative work.

Deloitte tax expert Robyn Walker gave the example of a neighbour who received a redundancy payment in the last week of March, the last week of the tax year.

"In the next year she was going to have no income at all, so those sorts of situations do raise questions about fairness."

In 2009, on the initiative of former revenue minister Peter Dunne, the top tax on redundancy was reduced from the top marginal rate at the time of 39 per cent to 33 per cent, she noted.

Dunne argued that taxing redundancy payments without taking into consideration the recipient's personal tax rates after redundancy led to "many cases of over-taxation".

"There are still arguments to say that maybe there should be some sort of concessionary treatment for redundancy payments, but it comes down to what your priorities are," Walker said.

Inland Revenue appeared to suggest it did not believe the purpose of redundancy payments was to provide an income over a period of unemployment. 

"While redundancy payments may be calculated based on the number of years worked, they are intended to be paid as a lump sum so are not the same thing. Therefore, redundancy payments aren't part of this work," Campbell said.

Inland Revenue told a select committee that proposals would be developed "around addressing fairness concerns with taxation of lump sum payments", without providing further details. 


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