What is a lump sum arrears payment?
Lump sum payments in arrears are “back payments” of compensation that ought to have been paid over a period of time. Often veterans will receive lump sum arrears payments where they are classified at a higher rate of incapacity for work than they had previously been classified many years after leaving the Defence Force. This means that, for all the years that person was receiving compensation payments less than their true entitlement, they are owed money. The total of all amounts owed over all the years it should have been paid becomes the lump sum payment in arrears.
Lump sum payments in arrears are subject to income tax in the year which they are received. However, this causes an unfair result as the tax rate on large amounts of income is greater than the tax rates on smaller amounts of income. Had the lump sum amount been paid in smaller amounts over a number of years, the tax rate on the whole payment would likely have been much less than the tax rate on one large lump sum payment. For this reason, veterans in receipt of lump sum payments in arrears may be eligible for a tax offset to reduce the tax payable on their lump sum compensation payments to bring their tax assessment in the year of receiving the lump sum payment down to the amount of tax that ought to have been paid had the correct periodic compensation been paid from the start. In some cases, where significant tax has been withheld on the lump sum payment, the inclusion of the tax offset can result in a tax refund.
When it comes to dealing with veterans’ tax obligations, you can count on our experienced team of solicitors to give expert legal advice.