Underpayment of Wages Compensation and Tax Offsets

A recent AATA matter of Guttikonda and Sheth and Commissioner of Taxation confirms the application of the Lump Sum Payments in Arrears (LSPIA) tax offset arrangements that will apply in cases where compensation is received in relation to the underpayment of wages.

Income tax provisions provide a Tax Offset for taxpayers who receive compensation in one year which relates to one or more past income tax years.  If this process did not exist, it is possible (depending on the individual circumstances), the recipient of the compensation may end up paying more income tax on the receipt of the past income if it was all assessed in one year, compared to being received during the prior years.

This tax offset is designed so that the taxpayer does not pay more tax than in the year in which the money should have been received. Section 159ZRA ITAA 1936, sets the eligibility criteria, for example, it must be an ‘eligible lump sum’, such as compensation for salary and wages.

The nature of the compensation and the basis upon which the compensation is being paid is important, especially in group or class actions. For example, it is most likely that if a payment for underpayment of income was received and the claimant/group member is not an employee but a contractor, then the tax offset will not be available. This could then lead to the claimant/group member paying more income tax on their compensation than they would otherwise have paid had they received the income in the normal course of their engagement. If this is the case, then the impact of the additional tax payable should be considered as an additional head of loss.

Another issue this case highlights is that interest on the losses is assessable.  Other impacts of back payment of income could affect other areas such as Centrelink benefits and childcare support payments.

In these group and class action situations, the impact of income tax and the disclosure of information to claimants/group members is a consideration that should not be overlooked.  If you have a matter which you require advice, assistance or compensation assessment, please contact us.

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If you have a matter which you require advice, assistance or compensation assessment, please contact us.

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