ACC - withholding tax on personal service rehabilitation payments

2007 legislation applies a withholding tax of 15 cents in the dollar to payments made by the ACC to a claimant for personal rehabilitation.

Sections CE 12, CF 1, CW 28B, DF 4, LD 1B, LD 1C, OB 1 and OB 2 of the Income Tax Act 2004; sections CE12, CF 1, CW 35, DF 4, LB 7, LB 8, RD 3, YA1 and Part I of Schedule 4 of the Income Tax Act 2007; sections 33A and 33C of the Tax Administration Act 1994; Part F of the Schedule to the Income Tax (Withholding Payments) Regulations 1979

A withholding tax of 15 cents in the dollar will apply to payments made to a claimant by the Accident Compensation Corporation (or an employer that is an accredited employer under the Injury Prevention, Rehabilitation, and Compensation Act 2001) that are for personal rehabilitation.

Backround

Changes were enacted in the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 that provided for a withholding tax to be imposed on ACC attendant care payments. The withholding rate was to have been set by regulations. Details of these changes are set out on page 112 of Tax Information Bulletin Vol 18, No 5 (June 2006).

The Taxation (Business Taxation and Remedial Matters) Act 2007 repeals the changes in the 2006 Act and re-enacts them with some modifications, and delays the application date from 1 April 2008 to 1 July 2008.

Key features

Payments made by the Accident Compensation Corporation (or an employer that is an accredited employer under the Injury Prevention, Rehabilitation, and Compensation Act 2001) for attendant care, home help, child care, training for independence and escorted travel (collectively referred to as "personal service rehabilitation payment") are to be subject to a withholding tax of 15 cents in the dollar.

If the ACC recipient fully uses the after-tax payment received to purchase care, the total amount of the payment will be treated as exempt income to the recipient. The amount paid to the care provider, together with the amount of the withholding tax will be taxable to the care provider, with the tax credit available to the care provider to be offset against his or her tax liability.

Example

Mary was involved in a car accident that reduces her ability to care for herself. ACC assess her entitlement for attendant care at $500 a week. ACC deducts withholding tax of $75.00 from this and pays Mary a net amount of $425.00. Mary fully uses this to pay Molly to come and assist her. Because Mary has fully used the amount she received, her payment is treated as exempt income. Molly's income for tax purposes is the amount received ($425) plus the amount of the withholding tax that was deducted ($75), making a total of $500. Molly is given credit for the tax deducted (the $75) to offset against her tax liability.

However, if the ACC recipient retains part of the payment, the payment is taxable income to the ACC recipient, with a deduction allowed for the pre-tax equivalent amount, and the tax credit is apportioned between the two.

Example

In the previous example, instead of using the full amount received to pay for a caregiver, Mary arranges for her sister, Sally, to assist her for $340 a week. Mary is taxable on the $500 payment less a deduction equal to the pre-tax equivalent of the amount she paid, which is $400, making her net taxable income $100. She receives the proportional amount of the total tax deduction of $75, which in this example is $15.00. Sally is taxable on the amount she received ($340), plus her proportion of the tax credit, which in this example is $60.00, making her total taxable income $400, with a tax credit of $60.

An ACC claimant whose only income is from personal service rehabilitation payments will not be required to file a tax return. The care provider will not be required to file a tax return if his or her total income for the tax year does not exceed $9,500.

Application date

The provisions apply from 1 July 2008.