What is a Lump Sum Payment in Arrears?

(last updated 05/06/2014)

Lump Sum Payment in Arrears - Lump Sum E

Lump sum payments in arrears, also known as Lump Sum E, is a receipt of income from an earlier financial year or years and should be shown as Lump Sum ‘E’ on your PAYG payment summary – individual non-business.

The lump sum payments you received could be any of the following:

back payments of salary or wages that accrued in a period more than 12 months before the date of payment
salary or wages that accrued during a period of suspension and were paid to you on resuming duty
back payments of non-superannuation annuities that accrued, in whole or in part, in an earlier year or years of income
repatriation and social welfare pensions, allowances or payments, including those paid by foreign governments
periodical workers and accident compensation payments but not payments made to the owner of the policy, and/or
Commonwealth education or training payments.

You may be entitled to a tax offset if you receive lump sum in arrears payments. The tax offset is intended to restrict the amount of tax payable on the payment to the same "marginal" rate that would have applied if it were "received" in the tax year it related to. "Receipt" is the key issue here as tax only applies to income when it is actually "received", not when it is "earned". See this post for a checklist of eTax and Assessable Income.

Example:

In 2014, Jack receives $1000 Lump Sum being an arrears for back pay from 2013. In 2013 Jack's taxable income was $75000 and his marginal tax rate was 32.5%. In 2014, his taxable income is $81000, which includes the Lump Sum in Arrears payment of $1000. The Lump Sum in Arrears payment pushed his income into the next marginal tax rate of 37%. Tax on the Lump Sum at 37% is $370 (ie. only the amount over the margin of $80000 is taxed at the higher rate). If the payment were received in the 2013 year it would have been taxed at 32.5% being $325. Therefore, the Lump Sum in Arrears payment has resulted in Jack being penalised by paying extra tax of $45 (370-325). The rebate is intended to reverse the effect of the extra tax. If, however, the tax effect on Jack was neutral, the rebate would not apply.

There is no specific item to claim the tax offset so information about the payment must be included as an attachment to the return.

E-tax Return

See these posts with tips, calculators and checklists to help you prepare your eTax Return (and get a better refund) with less hassle:

For help with your eTax return see our eTax Return Checklist.

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