Delayed Income Tax Offset

(lump sum payment in arrears tax offset)

The delayed income tax offset is to compensate for the tax spike that occurs when a lump sum income amount received within the year is made up of amounts which have accrued in, or are attributable to, earlier tax year(s).

When prior-year income is received, the whole of the amount is required to be included in the year it is received. But the delayed income offset reduces the tax to that applying when re-attributing the lump sum to the earlier years.

This earlier years’ tax adjustment is estimated by using the actual tax rates for the previous 2 years, and an average of those 2 years’ rates for any years prior to that.

Calculating the offset amount is therefore a matter of comparing the tax amounts calculated before and after the inclusion of the lump sums in the attributable years.

Eligible payments

Payments which qualify for the delayed income tax offset.

  • The delayed income offset applies to “eligible income” as defined in Section 159ZR ITAA 1936.
  • The lump sum payment in arrears tax offset is not available where it is less than 10% of your normal taxable income excluding the lump sum payment.

To be eligible for the offset, the lump sum income must be for arrears payments for salary or wages which accrued from periods earlier than 12 months before payment and/or

  • a Commonwealth education or training payment
  • reinstatement salary or wages covering a period of suspension
  • deferred payment of certain retirement amounts
  • compensation, sickness or accident pay for incapacity to work excluding certain insurance payments
  • certain non-exempt Social Security of Veterans Affairs payments, or similar foreign payments

..and the lump sum must be 10% or more of taxable income in the year of receipt after deducting

  • earlier year accrued amounts
  • termination annual and long service leave and ETP amounts
  • net capital gains
  • taxable professional income which exceeds the average from the four preceding years

Example lump sum in arrears offset calculation

Assume a lump sum income of $140,000 was received in 2013-14 and is attributable as follows:

2013-14: $40,000 
2012-13: $38,000
2011-12: $32,000
..previous years $30,000

Other income for each of the years is assumed to be:

2013-14: $20,000
2012-13: $10,000
2011-12: $5,000

Calculations:

STEP ONE: Identify the “extra” tax for the lump sum when attributed to financial years. That is a calculation of the tax that would have been payable if the income had actually been received in the year to which it relates.

The extra tax is based on a calculation of  ‘notional’ tax: For the current and recent two years, the notional tax does not include medicare, but does include primary producers averaging rebate if applicable. The notional tax for the earlier years is calculated as an average percentage.

2013-14 (Current year)
Total income including lump sum is $160,000; tax thereon is $47,147
Income with attributed lump sum is $60,000; tax thereon is $11,047
Extra tax is the difference: $36,100

2012-13 (First recent past year)
Income before lump sum $10,000; tax thereon is $zero
Income with attributed lump sum is $48,000; tax thereon is $7,147
Extra tax on attributed lump sum $38,000 is
($7,147 – $zero) = $ 7,147
(= an average tax rate of 18.8%)

2011-12 (Second recent past year)
Income before lump sum $5,000; tax thereon is $zero
Income with attributed lump sum is $37,000; tax thereon is $4,650
Extra tax on attributed lump sum $32,000 is
($4,650 – $zero) = $4,650
(= an average tax rate of 14.5%)

All earlier years lump sum amount is $30,000 – the applicable tax rate is estimated by using the average of the recent past years’ average rates which is (18.8%+14.5%) ÷ 2 = 16.7%
The tax on $30,000 at an average rate of 16.7% comes to $5,010

STEP TWO – THE OFFSET AMOUNT
Offset calculation is the current year attributable extra tax, reduced by the earlier years’ extra tax.

The offset amount is:

$36,100 – $7,147 – $4,650 – $5,010 = $19,293

 

How to claim the lump sum in arrears (delayed income) tax offset

This offset is not listed separately under its own heading in the tax return. To trigger an offset claim, and a calculation by the tax office, the income amount must be identified at Item 24.

Normally lump sums in arrears paid by an employer should be identified in the payment summary as “Lump Sum E”.

The details should be entered at Item 24 of your tax return, and Item 20 if foreign employment income.

To get the offset, the ATO also require a listing of the financial years to which the lump sum amount should be attributed – as a schedule to Item 24.

If you are lodging your own paper tax return, a paper schedule is required.

The ATO’s online reference to lump sum arrears is here Item 24 – Other income (2019) – scroll down the page to the heading “Lump sum payments in arrears” and follow the detailed instructions for completion of a “Schedule of additional information – Item 24”.

Online Lodgement With MyTax

For online tax return lodgers using myTax, the app allows lump sum payments in arrears to be entered under “Other Income”.

 

See also: Employer lump sum payments 2019

 

This page was last modified 2019-07-02