Backdated ACC compensation not double taxed
2009 case note - case sets out the mechanics of the relationship between the various benefits, ACC and tax - Income-tested benefit, PAYE, backdated compensation.
Income Tax Act 1994 and Tax Administration Act 1994
The disputant 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
Although confined to its specific facts, this case sets out the mechanics of the relationship between the various benefits, ACC and tax.
During 2004 the disputant received two lump sum payments from ACC, representing weekly entitlements which had not been paid from 1998 to 2003.However, during the period of entitlement the disputant had also been receiving an income-tested benefit and supplementary benefits from MSD. The lump sum ACC payments attributable to the 1998 to 2003 period affected the disputant's eligibility for income-tested benefits and MSD required reimbursement of those amounts which had been paid.
When calculating the lump sum amounts to be paid, ACC deducted an amount equivalent to the gross income-tested benefit which had previously been received by the disputant, being the amount required to repay MSD including PAYE due on that amount. Tax was then deducted from the remaining lump sum amount, being the backdated weekly compensation arrears before the amount of non-taxable supplementary benefit was deducted and reimbursed to MSD. The total amount of tax deducted was then paid to the Inland Revenue Department.
The disputant considered that this resulted in double taxation and also argued that PAYE on the backdated compensation should not have been taxed in one year but spread across the years in which the ACC entitlement arose. This would have resulted in the lump sum payments being taxed at a lower marginal rate.
Barber DCJ held that no double taxation had occurred. The amount equal to the PAYE on the income-tested benefits, which ACC deducted, was the amount of tax due on that portion of the back-dated weekly compensation. That tax was paid on the disputant's behalf by MSD through the multi-department reimbursement process and accordingly, the disputant had not been taxed twice.
Barber DCJ also noted that the disputant's entitlement to the income-tested benefit was a net entitlement and that while PAYE was paid on behalf of the recipients of benefits, they had no entitlement to a refund of that amount.
Barber DCJ considered that because ACC treated the amounts the disputant originally received as having been paid in respect of the disputant's claim, the plain wording of section 78(2) of the Accident Rehabilitation Compensation Insurance Act 1992 deemed those amounts to have been paid as weekly compensation, and therefore part of the disputant's gross income.
Numerous cases were cited to show that it was settled law that a taxpayer derived income when it was received and it could not be spread back into earlier years to which the computation of income related. Accordingly, Barber DCJ held that the amount of the backdated weekly compensation received by the disputant from ACC in the 2004 income tax year was properly assessed as gross income under CC1(1)(b) of the Income Tax Act 1994, in that year.