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Income Tax Act 2007

General collection rules - Employment-related taxes - Adjustments for certain PAYE income payments

RD 20B: Payments of accident compensation for period of more than 1 year

You could also call this:

“How tax is calculated on lump sum accident compensation payments covering multiple years”

If you receive a lump sum payment for accident compensation or personal service rehabilitation that covers more than one year, this law explains how it will be taxed. This applies to you unless the payment is for converting weekly compensation to a single payment or for reimbursing certain expenses.

The tax rate for this payment depends on your average basic tax rate over the past four years. If your average rate is less than 10.5%, you’ll pay 10.5% tax on the payment. If it’s higher, you’ll pay your average rate. However, if your current year’s tax rate is lower than your average, you’ll pay that lower rate instead.

To figure out your average basic tax rate, the government adds up your basic tax rates for the last four years (for the years they know about) and divides by the number of years used. They use this to decide how much tax to take from your payment.

If the payment is for accident compensation earnings, the person paying you must take out tax at either 10.5% (if your average rate is below that) or at your average rate (if it’s higher).

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS960469.

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Part R General collection rules
Employment-related taxes: Adjustments for certain PAYE income payments

RD 20BPayments of accident compensation for period of more than 1 year

  1. This section applies to a person for a payment (the multi-year compensation payment) that is made in a lump sum and relates to a period of more than 1 income year for the person and is—

  2. an accident compensation earnings-related payment, except to the extent to which the payment is the conversion of weekly compensation to an aggregated payment under schedule 1, part 4, clause 67 of the Accident Compensation Act 2001; or
    1. a personal service rehabilitation payment, except to the extent to which the payment is a reimbursement payment to which section CW 35 (Personal service rehabilitation payments) applies.

      1. The tax rate given by subsection (3) applies to the multi-year compensation payment for the income year in which the person derives the payment.

      2. The tax rate referred to in subsection (2) is—

      3. 10.5%, if the rate given by the formula in subsection (4) (the average basic tax rate) is less than 10.5% and paragraph (c) does not apply; or
        1. the person’s average basic tax rate, if neither of paragraphs (a) and (c) apply; or
          1. the person’s basic tax rate for the income year in which the person derives the multi-year compensation payment, if that basic tax rate is less than the average basic tax rate.

            1. The person’s average basic tax rate for this section is calculated over the period of the 4 income years (the rate averaging period) ending before the income year in which the person derives the multi-year compensation payment using the formula—

              total basic rates ÷ number of income years.

              Where:

              • In the formula in subsection (4),—

              • total basic rates is the sum of the person’s basic tax rate calculated under schedule 1, part A, clause 1 for each of the income years in the rate averaging period for which that rate is known by the Commissioner:
                1. number of income years is the number of income years within the rate averaging period for which the person’s basic tax rate is known by the Commissioner and included in the total basic rates.

                  1. For the purposes of section RA 5 (Tax obligations for employment-related taxes), if the multi-year compensation payment is an accident compensation earnings-related payment, the person making the payment must withhold an amount of tax from the payment at the rate given by subsection (7).

                  2. The rate referred to in subsection (6) is,—

                  3. if the person’s average basic tax rate is less than 10.5%, 10.5%; or
                    1. in any other case, the person’s average basic tax rate.

                      Notes
                      • Section RD 20B: inserted, on , by section 116(1) (and see section 116(2) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).