Draft legislation to provide tax relief for certain lump sum payments
The draft legislation will exempt eligible lump sum payments in arrears from the Medicare Levy where they are received by low-income taxpayers.
The government has released exposure draft legislation which makes changes to how certain lump sum payments in arrears are assessed for the purposes of the Medicare Levy.
It implements a measure announced in the 2023-24 Budget and will ensure low-income earners do not pay higher amounts of Medicare Levy as a result of receiving an eligible lump sum payment such as compensation for underpaid wages.
In order to qualify under the proposed measure, taxpayers must be eligible for a reduction in the Medicare levy in the two most recent years, or income year, to which the lump sum accrues.
The taxpayer must also satisfy the eligibility requirements of the existing lump sum payment in arrears tax offset, including that a lump sum accounts for at least 10 per cent of the taxpayer’s income in the year of receipt.
The draft legislation aims to put eligible recipients of lump sum payments in arrears back into a similar position had they been paid correctly, the explanatory materials stated.
Under the existing law, there are two tax offsets for lump sum payments which can reduce the liability for income tax and the Medicare levy surcharge:
- The lump sum payment in arrears tax rebate, and
- The Medicare levy surcharge lump sum payments in arrears tax offset.
“The lump sum payments in arrears tax rebate in section 159ZR of the ITAA 1936 provides a tax offset to limit the tax payable by an individual on eligible lump sum payments,” the EM explained.
“The tax payable, excluding Medicare levy, is limited to an amount comparable to the amount that would have been payable, had the income been received in the year in which it was accrued, provided certain criteria are met.”
The Medicare levy surcharge lump sum payments in arrears tax offset in Subdivision 61-L of the ITAA 1997 provides for a tax offset for the Medicare Levy surcharge when a substantial lump sum is paid to a person in the current year, the lump sum was accrued in whole or in part in a previous year.
The EM said these two tax concessions apply to reduce the recipient’s liability for the Medicare levy surcharge, or limit the tax payable, when the recipient has received an eligible lump sum in arrears.
“However, neither of these two tax offsets reduce the ordinary amount of Medicare levy payable if a recipient receives a lump sum payment in arrears that was accrued in the previous year or years that increases the individual’s current year Medicare levy liability as a result of the Medicare levy threshold being exceeded,” it said.
The Senate Economics Committee’s Inquiry into unlawful underpayment of employees’ remuneration released in March 2022, highlighted that receipt of lump sum in arrears adversely affect these individuals by increasing their liability for the Medicare levy.
“This amendment is intended to address this and compensate taxpayers by calculating the Medicare levy as if the eligible lump sum in arrears had not been paid,” the EM said.
