About lump sum payments in arrears
Lump sum payments in arrears (LSPIA) are assessable in the income year you receive the payment.
A consequence of us assessing the LSPIA in the income year you receive it, is that you may pay more tax, Medicare levy and Medicare Levy Surcharge (MLS).
To address this additional tax or Medicare levy amount, if you meet certain conditions and you correctly complete your tax return, we will consider you for:
- a LSPIA tax offset
- an exemption from Medicare levy on the LSPIA amount – from 1 July 2024
- a MLS tax offset
We will work out the amounts for you using the information you provide in your tax return. The calculations are complex and relate to each individuals' personal circumstances, there currently is no online calculator or detail we provide to explain the outcome. The myTax estimate when you prepare your return online also doesn't include the LSPIA tax offset, Medicare levy exemption or MLS tax offset.
Lump sum in arrears payments that qualify
To qualify for a LSPIA tax offset, Medicare levy exemption or MLS tax offset, your lump sum payment in arrears must be a payment for prior years and for one or more of these:
- salary or wages (you accrue during the period earlier than 12 months before payment)
- a government education or training payment
- salary or wages a person receives payment for after reinstatement to duty following suspension - the payment is for the period of suspension, even if within the preceding 12 months
- deferred payment of a retiring allowance, retirement pension or annuity (or supplement)
- compensation, sickness or accident pay for incapacity to work (not including insurance payments made under an insurance policy)
- Australian Government and repatriation pensions, benefits and allowances Services AustraliaExternal Link or the Department of Veterans' AffairsExternal Link pays, or similar payments made under a law of a foreign country, state or province and that aren't exempt income
- exempt foreign employment income (you accrue during the period earlier than 12 months before payment and only applicable if you're liable for MLS).
Multiple payments in one income year
When you receive 2 or more LSPIA within the same income year, add the amounts together and use the total arrears amount for the income year to determine eligibility for LSPIA tax offsets.
Example: receiving LSPIA from multiple payers over multiple income years
Yan works for 2 different employers, ACME and APEX. Both employers are caught underpaying staff and had to pay an LSPIA in 2025. Yan's employers provide him advice that LSPIA amounts relates to prior income years, as follows.
ACME pays Yan an LSPIA of $6,000 showing the breakdown.
Income year | Amount |
|---|---|
2023 | $3,000 |
2022 | $2,000 |
2021 | $1,000 |
APEX pays Yan an LSPIA of $5,000 showing the breakdown.
Income year | Amount |
|---|---|
2022 | $500 |
2021 | $400 |
2020 | $1,700 |
2019 | $1,400 |
2018 | $1,000 |
Yan adds together the amounts that relate to the same income years. Yan would then prepare her Schedule of additional information as follows to lodge with her tax return.
Income year | Arrears |
|---|---|
2023 | $3,000 |
2022 | $2,500 |
2021 | $1,400 |
2020 | $1,700 |
2019 | $1,400 |
2018 | $1,000 |
End of example
10% threshold test
The eligible LSPIA amount must be 10% or more of your threshold test income in the income year you receive it after you deduct any:
- amounts that you accrue in earlier income years (that is, this LSPIA amount)
- amounts you receive on termination of employment in lieu of annual or long service leave
- employment termination payments
- income stream and lump sum superannuation payments
- net capital gains
- taxable professional income that exceeds the average for the profession (we calculate this amount using the current and prior year tax returns – If it applies to you and you meet the 10% threshold test without including this amount then you satisfy this test).
10% threshold test for the MLS tax offset
The 10% threshold test for the MLS tax offset is slightly different because MLS considers amounts that aren't in your taxable income.
The lump sum payments in arrears for the MLS test will include any lump sum payment of 'exempt foreign employment income' that you accrue more than 12 months before the date you receive the payment.
Your lump sum for the MLS must be 10% or more of the sum of your:
- threshold test income you use for the LSPIA tax offset in the current income year
- exempt foreign employment income for the current income year
- amounts that are included in assessable income if a family trust distribution was ignored
- reportable employer superannuation contributions for the current income year
- total net investment loss for the current income year (express this as a positive amount).
LSPIA tax offset
The purpose of the LSPIA tax offset is to reduce the tax payable on the LSPIA by the amount that it exceeds the amount payable in the prior income years.
This tax offset looks at the actual tax overpaid in the most recent accrual years and uses this to work out an average rate for the prior accrual years.
The LSPIA tax offset will be $0 if the tax payable in the current year doesn't exceed the amount you would have to pay in the prior income years. This is common as the LSPIA amount is often in the same tax bracket in the current income year and the income years you accrue the amount.
If you qualify for an amount of LSPIA tax offset greater than $0, it will show on your notice of assessment.
Example: LPSIA that doesn't meet the threshold test
Sudeep receives an eligible lump sum payment in arrears (LSPIA) of $3,500 from his employer on 14 October 2024.
Sudeep's situation in 2024–25:
- Age: 40 years old
- Taxable income: $53,000 (from salary and wages only).
When we process Sudeep's tax return, we work out his normal taxable income as follows in the table.
Description | Amount |
|---|---|
Taxable income | $53,000 |
Subtract LSPIA | $3,500 |
Threshold test income | $49,500 |
10% of threshold test income | $4,950 |
As the LSPIA of $3,500 is less than $4,950 (10% of Sudeep's threshold test income) it doesn't meet the threshold test. Sudeep isn't eligible for a LSPIA tax offset.
End of example
Example: eligible for LSPIA tax offset
Anthony receives an eligible lump sum payment in arrears (LSPIA) of $43,979 from his employer on 6 September 2022.
Anthony's situation in 2022–23:
- Age: is 45 years old
- Taxable income: $314,166 including $111,231 of net capital gains
Anthony's employer provides him advice that the LSPIA amount relates to prior income year, as follows.
Income year | Amount |
|---|---|
2014 | $43,979 |
When we process Anthony's tax return, we work out his threshold test income is as follows in the table.
Description | Amount |
|---|---|
Taxable income | $314,166 |
Subtract LSPIA | $43,979 |
Subtract Net capital gains | $111,231 |
Threshold test income | $152,956 |
10% of threshold test income | $15,296 |
As the LSPIA of $43,979 is more than $15,296 (10% of Anthony's threshold test income), it meets the threshold test.
Anthony is eligible for a LSPIA tax offset.
Using the information in Anthony's current and prior income year's tax return, we make the following calculations to work out Anthony's LSPIA tax offset.
Income year | Tax rate | Tax on LSPIA amount |
|---|---|---|
2014 | 37% | $16,272 |
2023 | 45% | $19,790 |
The tax on his LPSIA in the current income year is $3,518 more than the tax he would pay in the income year 2014.
Anthony receives a LSPIA tax offset of $3,518 to reduce the tax he needs to pay on his LSPIA.
End of exampleMedicare levy exemption
From 1 July 2024, if you receive a qualifying LSPIA and meet the conditions, we will exclude the LSPIA amount when calculating your Medicare levy liability.
If you wouldn't have had to pay the full Medicare levy in the recent accrual income years including the LSPIA, the LSPIA is exempt from the Medicare levy.
If you're entitled to the exemption, the Medicare levy amount on your notice of assessment will reflect your taxable income excluding the LSPIA amount.
Example: entitled to Medicare levy exemption
Heather receives a lump sum payment in arrears of $8,500 from her employer on 15 January 2025.
Heather's situation in 2024–25:
Age: 45 years old, not eligible for senior and pension tax offset
Taxable income: $34,000 (including the LSPIA amount)
Heather's employer provides her advice that the LSPIA amount relates to prior income year, as follows.
Income year | Amount |
|---|---|
2022 | $4,000 |
2023 | $4,500 |
When we process Heather's tax return, we work out her threshold test income as follows in the table.
Description | Amount |
|---|---|
Taxable income | $34,000 |
Subtract LSPIA | $8,500 |
Threshold test income | $25,500 |
10% of threshold test income | $2,550 |
As the LSPIA of $8,500 is more than $2,550 (10% of Heather's threshold test income), it meets the 10% threshold test.
We also check her Medicare levy status for 2022 and 2023 and confirm if she had received the LSPIA amount in these years, she would have been eligible for a Medicare levy reduction.
Heather's LSPIA meets all the eligibility requirements and is exempt from the Medicare levy.
In 2024–25 Heather's income for ML purposes is $25,500 and no Medicare levy is applied.
End of exampleMLS tax offset
The MLS tax offset only applies if you have to pay the MLS. It doesn't consider prior income years as, being unaware of the underpayment, you may have thought you would not be liable for MLS in the current income year. You therefore may not have taken out private health insurance cover.
If you're entitled to the MLS tax offset, we will deduct from the MLS otherwise payable and only the net MLS (if any) will show on the notice of assessment.
If you have a spouse, they may also be eligible for an MLS tax offset as we base MLS on the combined family income. Your spouse will need to follow the tax return instructions to ensure we consider the MLS tax offset when they lodge their tax return.
Reporting a lump sum payment in arrears
You will need to include any lump sum payment in arrears amount 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.
Follow the tax return instructions that apply to your type of lump sum payment in arrears.
Example: LSPIA breakdown
Judy receive a LSPIA from her employer on 23 February 2025 of $800. Her employer advises that the LSPIA is $400 for 2022–23 and $400 for 2021–22.
Judy includes the $800 in her tax return at Lump sum E. She also provides a breakdown to accompany her tax return that shows:
Income year | Amount ($) |
|---|---|
2023 | $400 |
2022 | $400 |
End of example