When a back payment of salary or wages is made as a lump sum payment in arrears, a special income tax instalment calculation (Nat 3348) is used to determine the tax instalments.
The effect of the Nat 3348 is to prevent the payments being too highly taxed according to the normal tax scale, which would otherwise treat the payment as attributable to a single pay period.
A qualifying “back payment” is a payment (or part of one) which was meant to have been made in a previous period.
It may include:
- lump sum payments in arrears
- a bonus or similar payment
and may also be
- taxable compensation or sickness or accident payments for an incapacity for work
- Austudy or ABSTUDY
- assessable Social Security or Veterans’ Entitlements or similar
Examples of Eligible Payments in Arrears
Generally, the eligible back payments are in the nature of “catch-up” payments.
Examples drawn from Nat 3348 include:
- wages which were underpaid in a past period due to having overlooked an award allowance
- a bonus paid later than it should have
- leave loading – if it is made as a lump sum and not on a pro rata basis as leave is taken
- a once-only compensation payment for a changed work location
- a sign-on bonus for entering a workplace agreement
- potentially any lump sum allowance.
What Does Nat 3348 do?
Using Nat 3348 provides a step-by-step calculation sequence to effectively reduce the tax rate to an average which reflects the recipient’s earnings in the relevant time periods. That removes the tax rate hike which would otherwise apply.
It is important that the Nat 3348 calculation schedule is not mis-applied, because an incorrect calculation could result in the employee being under-taxed, and then the possibility of an unexpected tax bill arising when the tax return is lodged.
Tax Return – Lump Sum Payment In Arrears Tax Offset
When the day of reckoning arrives and a tax return is being prepared, it is the Delayed Income Tax Offset which reduces the tax on lump sum payments for tax assessment purposes. The offset applies to “eligible income” as defined in Section 159ZR ITAA 1936.
The offset is calculated by determining the effect of the lump sum on average tax rates over the tax years in which the lump sum was earned and when it was paid. How this works in detail is explained here.
This page was last modified on 18 Aug 2017