Tax treatment of income replacement payments

2015 amendments ensure veteran income replacement payments are treated as taxable income, and also included in social policy calculations.

Sections CF 1(1) and CW 28(1)(a) of the Income Tax Act 2007

Amendments have been made to sections CF 1 and CW 28 of the Income Tax Act 2007 to ensure veteran income replacement payments are treated as taxable income. Payments that are taxable income are also included in social policy calculations.

Other payments under the Veterans' Support Act 2014 that relate to impairment compensation, remain tax-exempt.

Background

Income replacement payments contained in the Veterans' Support Act 2014 are intended to be treated the same for tax and social policy purposes as ACC weekly compensation payments. ACC weekly compensation payments are treated as compensation income in section CF 1, and are included in a list of payments specifically excluded from being exempt income in section CW 34 of the Income Tax Act 2007. These treatments ensure ACC weekly compensation payments are treated as taxable income. They also ensure the payments are included in social policy calculations. Changes made in the Taxation (KiwiSaver HomeStart and Remedial Matters) Act 2015 ensure income replacement payments under the Veterans' Support Act 2014 are also treated as taxable "compensation income" and are included in social policy calculations.

Key features

Amendments have been made to section CF 1(1) in order to add weekly compensation, weekly income compensation, and retirement lump sums for veterans, and weekly compensation to veterans' spouses, partners, children and dependants as compensation payments to the list of benefits, pensions, compensation payments and government grants that are treated as income. This ensures these payments are taxed and also included in social policy calculations. Thus, the payment amounts will increase affected veterans' and deceased veterans' spouses, partners, children and dependants' student loan and child support obligations, and reduce their Working for Families entitlements.

An amendment to section CW 28(1)(a) was made in the Veterans' Support Act 2014 to add veteran weekly compensation to the list of payments that are excluded from exempt income under this section. The Taxation (KiwiSaver HomeStart and Remedial Matters) Act 2015 further amends section CW 28(1)(a) by adding weekly income compensation, retirement lump sums for veterans, and weekly compensation to deceased veterans' spouses, partners, children and dependants to this list. This ensures that all of these payments are treated as taxable income and are included in social policy calculations. Other entitlements (such as the disablement pension) under the Veterans' Support Act 2014 remain tax-exempt income.

Note that under section YD 4(18) income replacement payments are treated as having a New Zealand source. When a veteran receiving the payment is a tax resident overseas, a double tax agreement may affect how these payments are taxed.

Application dates

The amendments that relate to weekly compensation, weekly income compensation for veterans, and weekly compensation to deceased veterans' spouses, partners, children and dependants came into force on the date of enactment, being 31 March 2015.

The amendments that relate to retirement lump sum payments for veterans came into force on 7 December 2014, the commencement date of Scheme One in the Veterans' Support Act 2014.