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  • Lump sum payments in arrears tax offsets

    Work out if you can claim an offset for lump sum payments you receive in arrears (LSPIA).

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    Eligibility for LSPIA

    Lump sum payments in arrears (LSPIA) are taxable in the year you receive payment. You may be eligible for a tax offset to reduce your tax payable.

    A lump sum payment in arrears amount, is a payment that relates to earlier income years.

    Eligible payments usually relate to:

    • employment
    • compensation
    • welfare payments.

    Reporting LSPIA

    You will need to include any LSPIA amounts you receive in your tax return in the income year you receive the payment.

    You will also need to provide a breakdown of the payment into each income year.

    To work out where to show the amount in your tax return, see myTax 2022 Salary, wages, allowances, tips, bonuses etc.

    Impact of receiving LSPIA

    The intent of the LSPIA tax offset is to ensure you don't overpay tax. You usually pay more tax in the year you receive the lump sum than you would if tax was withheld in the year you earned it. The tax offset reduces the tax you pay.

    As the LSPIA is taxable in the year you receive it, it can impact your tax and non-tax entitlements such as:

    • student loans
    • child support and welfare payments.

    You may find:

    • you are in a higher tax bracket and pay more tax than you would have if you received the amount when you earned it
    • you are in the same tax bracket and pay the same amount of tax as you would have if you received the amount when you earned it
    • you are in a lower tax bracket and pay less tax than you would have if you received the amount when you earned it
    • you have a new or increased Medicare levy surcharge obligation, because the lump sum pushes you over a Medicare levy surcharge threshold.

    Eligible tax offsets in relation to your LSPIA are:

    If you are eligible for these offsets, we will work out the offsets and apply them to your tax return.

    The intent of the Medicare levy surcharge (MLS) LSPIA tax offset is to reduce your liability to pay the MLS. This applies where you become liable for MLS because the lump sum pushes you over a MLS threshold.

    We will work out the tax offsets for you based on the information you provide in your tax return.

    Payments that qualify for the tax offsets

    To qualify for one of the tax offset treatments, your LSPIA amounts must be either:

    • salary or wages (only applies to the extent the salary or wages were accrued during the period earlier than 12 months before payment)
    • a government education or training payment
    • salary or wages paid to a person after reinstatement to duty following a period of suspension (only to the extent the payment was for the period of suspension, even if that period was within the preceding 12 months)
    • deferred payment of a retiring allowance, retirement pension or annuity (or a payment which is a supplement to any of those payments)
    • compensation, sickness or accident pay for incapacity to work (the concession is not available on payments made to the owner of an insurance policy under which the payment is made)
    • Social Security and repatriation pensions, benefits and allowances paid by Social Security or the department of Veterans' Affairs or similar payments made under a law of a foreign country, state or province, but not exempt income.

    LSPIA tax offset

    To be eligible for the tax offset, a LSPIA must be 10% or more of your taxable income in the year of receipt after you deduct any:

    • amounts that accrued in earlier years (that is, this payment)
    • amounts received on termination of employment in lieu of annual or long service leave
    • employment termination payments (ETPs)
    • income stream and lump sum superannuation payments
    • net capital gains
    • any taxable professional income that exceeds the average taxable professional income.

    The calculation of this tax offset is complex, therefore, there is no online calculator. The myTax estimate also doesn't include this tax offset as part of the estimate.

    Tax offset for Medicare levy surcharge (LSPIA)

    You, and in some cases your spouse, may be eligible to the tax offset for Medicare levy surcharge (LSPIA). The tax offset is available for a MLS that exists or is increased because you received an eligible lump sum payment in arrears.

    Eligible lump sum payments in arrears for this tax offset consist of:

    • eligible income for the purposes of the LSPIA tax offset (listed above) received in the relevant income year
    • LSPIA of 'exempt foreign employment income' for the relevant year which you accrued for a period more than 12 months before the date it was paid.

    Also consistent with the LSPIA tax offset, you will only be eligible for this tax offset if the lump sum represents 10% or more of your:

    • taxable income in the relevant year
    • exempt foreign employment income for the current year
    • amounts that would be included in assessable income if family trust distribution was ignored
    • reportable employer superannuation contributions for the current year
    • total net investment loss for the current year.

    Tax offset amount for Medicare levy surcharge

    If you're eligible, the tax offset is equal to the amount of MLS liability payable on the lump sum.

    The tax offset amount can only reduce your MLS liability to zero. It can't exceed the total liability.

    The myTax estimate doesn't include this tax offset.

    Tax offset for Medicare levy surcharge for spouses

    MLS liability is determined for families by combining both spouse’s income. Your LSPIA may affect your spouse’s MLS liability. If your LSPIA results in a MLS liability for your spouse, they will receive a tax offset equal to the MLS liability caused by your LSPIA., if:

    • you are entitled to the tax offset for Medicare levy surcharge (lump sum payments in arrears)
    • you both were not already liable for the MLS because your other income exceeded the family threshold.

    If you and your spouse were already liable for MLS (based on your income excluding the LSPIA), only you will receive the tax offset if you meet the eligibility criteria.

    Last modified: 08 Jun 2022QC 63791