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30 Oct 2009
Appeal Status

Backdated ACC compensation not double taxed

2009 case note - Backdated lump sum compensation not characterised as an 'extra emolument' and should be adjusted by CIR - Income tested benefit, PAYE, ACC.

Claire Avon Hollis v the Commissioner of Inland Revenue


The plaintiff received a taxable income-tested benefit and non-taxable supplementary benefits comprising disability and accommodation allowances from Work and Income New Zealand (now Ministry of Social Development and referred to below for convenience as "MSD") for a period for which she was later determined to be entitled to weekly compensation from the Accident Compensation Corporation ("ACC").

The dispute between the parties arose out of what took place when the change-over from MSD to ACC as the paying agency occurred and the effect of that for tax purposes in the 2004 income year.

Impact of decision

The Court found that the backdated compensation paid by lump sum was not properly characterised as an "extra emolument" for tax purposes and should be adjusted by the Commissioner.


This is an appeal from the TRA decision Case Z9 (2009) NZTC 141,000.

Between 1994 and 2004 the plaintiff received an income-tested benefit and non-taxable supplementary benefits comprising of disability and accommodation allowances from MSD. During that time, MSD had on behalf of the plaintiff, paid PAYE to Inland Revenue on the income-tested benefits.

In August 2001 the plaintiff made a written application to ACC for weekly compensation backdated to 1998. In 2003 her claim was accepted under the Accident Rehabilitation Compensation Insurance Act 1992 ("ARCI Act") and backdated to cover the period from November 1998 to April 2003.

During the 2004 income tax year, ACC paid the plaintiff two lump sum payments of backdated ACC weekly compensation in relation to the 1999 to 2004 income tax years as well as ongoing weekly compensation from 28 April 2003.

The plaintiff was no longer entitled to the income-tested and supplementary benefits she had previously received from MSD, therefore MSD required reimbursement of the net amounts she had received in the 1999 to 2004 income tax years.

The plaintiff claims that ACC should have deducted from her back-dated weekly compensation only the net amount of her income-tested benefit, which was refunded to MSD, and that double taxation has resulted due to ACC also deducting an amount equal to PAYE on the income-tested benefit.  


Whether the Taxation Review Authority ("TRA") was correct to find that the amount of income tested benefit and the non-taxable supplementary benefits received from MSD are deemed to be weekly compensation

The hearing before the TRA proceeded on the basis that section 78(2) of the ARCI Act applied, as this Act was in force from 1 July 1992 until 1 July 1999 covering the period for which the plaintiff's claim for weekly compensation was accepted.

However, in light of the High Court decision of Buis v Accident Compensation Corporation (HC AK CIV 2007-404-004703 6 March 2009) the Court proceeded on the basis that the Injury Prevention, Rehabilitation and Compensation Act 2001 (the "IPRC Act") was the applicable Act. The plaintiff's entitlement to compensation was established in April 2003 by which time the 1998 Act had been repealed and the IPRC Act.

The Court agreed with the TRA, that the payments made by ACC were correctly made and that the treatment of the amount of the excess benefit payment as having been paid as weekly compensation arises by operation of law.

At paragraph [19] the Court said:

  • If Ms Hollis were correct that she did not have to pay tax on the lump sum entitlement from ACC because of the tax paid on the benefit received from MSD, she would effectively gain an advantage (ie a grossed-up payment) meant only for beneficiaries of MSD, despite not being entitled to a benefit. Additionally, she would obtain an advantage over and above that of other ACC recipients who did not first (erroneously) obtain a benefit from MSD.

Whether the TRA was correct to find that the plaintiff was not overtaxed in the 2004 income tax year

The Court agreed with the TRA that under the IPRC Act, section CC 1(1)(bc) of the Income Tax Act 1994 applies and that the amount equivalent to the income-tested benefit and the residual weekly compensation are both part of the plaintiff's gross income for the purpose of the Act. The income-tested benefit is deemed by section 252 of the IPRC Act to be weekly compensation and the residual sum is weekly compensation from the outset.

The Court found that it is settled law that in cases involving backdated ACC payments, the taxpayer derives the income when it is received and it cannot be spread back to earlier years to which the computation of the income relates.

The Court did not accept the Commissioner's argument that the residual of the backdated weekly compensation should be taxed at the extra emolument rate. The Commissioner relied on the definition of extra emolument contained in section OB1 sub-clause (a)(ii) as a "retrospective increase in salary or wages":

  • I am not satisfied that the back-dated compensation paid by way of lump sum to Ms Hollis is properly characterised as an "extra emolument" for tax purposes. The lump sum did not amount to an increase in compensation ("wages") she was then receiving for the current period. Rather, it was a payment of the amount to which she was entitled by way of compensation for the prior years i.e. from the date of her accident until the date ACC cover was established. It could not therefore be characterised as an extra payment over and above her ordinary entitlement for the "pay period" in question. I am satisfied that a lump sum payment of back-dated compensation does not fall within the definition of "extra emolument" unless it is a payment additional to the "employee's" ordinary entitlement for the relevant "pay period". An extra emolument is usually a discretionary payment rather than one to which the "employee" has a statutory or contractual entitlement.
    The rate of taxation payable in terms of section NC 2 ITA may still be higher than the rate payable if the lump sums had been received in the appropriate years but is likely to be less than the extra emolument rates. The rate payable will have to be assessed by the Commissioner and adjusted accordingly.

Whether the TRA was correct to find that the plaintiff was not entitledto deduct certain expenses from her assessable income in the 2004 income tax year

The Court agreed with the TRA that the expenses claimed by the plaintiff could not be deducted because the dispute was concerned solely with the 2004 income tax year and the expenses had not been incurred in that year.

The Court recommended that Inland Revenue Department provide a full account summary to the plaintiff in relation to her tax affairs over the period from the date of her accident in 1992 until the present time.

Income Tax Act 1994, Tax Administration Act 1994