About lump sum tax offsets
You may be eligible for lump sum tax offsets if you receive a lump sum payment in arrears (LSPIA). A lump sum payment is taxable in the year you receive it but is for an earlier income year.
Eligible payments usually relate to:
- employment
- compensation
- welfare payments.
The lump sum tax offsets help you reduce your tax payable and Medicare levy surcharge in the income year you receive the lump sum payment.
We will work out the amounts for you based on the information you provide in your tax return. The calculations are complex, so there is no online calculator. The myTax estimate doesn't include the offset.
Reporting a lump sum payment in arrears
You will need to include any lump sum payment in arrears amount you receive in your tax return in the income year you receive the payment.
You will also need to provide a breakdown of the payment into each income year.
Report the payment in your tax return at Lump Sum E.
Lump sum payments that qualify for a tax offset
To qualify for a lump sum tax offset, your lump sum payment in arrears must be either:
- salary or wages (accrued during the period earlier than 12 months before payment)
- a government education or training payment
- salary or wages paid to a person after reinstatement to duty following suspension - The payment is for the period of suspension, even if within the preceding 12 months
- deferred payment of a retiring allowance, retirement pension or annuity (or supplement)
- compensation, sickness or accident pay for incapacity to work - (Not for insurance payments made under an insurance policy)
- Australian Government and repatriation pensions, benefits and allowances paid by Services AustraliaExternal Link or the Department of Veterans' AffairsExternal Link, or similar payments made under a law of a foreign country, state or province. (Not for exempt income.)
Eligible amount
The lump sum payment amount must be 10% or more of your taxable income in the year you receive it. This is after you deduct any:
- amounts that accrued in earlier years (that is, this payment)
- amounts received on termination of employment in lieu of annual or long service leave
- employment termination payments
- income stream and lump sum superannuation payments
- net capital gains
- taxable professional income that exceeds the average for the profession.
Tax offset for Medicare levy surcharge (LSPIA)
The Medicare levy surcharge lump sum payment in arrears (LSPIA) tax offset reduces your liability to pay the surcharge. This is when the payment pushes your family income over a threshold. You, and in some cases your spouse, may receive a tax offset.
The lump sum payments must be either:
- eligible payments for lump sum tax offset received in the relevant income year
- lump sum payment of 'exempt foreign employment income' for the relevant year. You must have accrued this for a period more than 12 months before the date it was paid.
Your lump sum must also be 10% or more of your:
- taxable income in the relevant year
- exempt foreign employment income for the current year
- amounts that would be included in assessable income if a family trust distribution was ignored
- reportable employer superannuation contributions for the current year
- total net investment loss for the current year.
Tax offset amount for Medicare levy surcharge
The tax offset is equal to the Medicare levy surcharge on the lump sum paid in arrears. It can only reduce your liability to zero. It can't exceed the total liability.
The myTax estimate doesn't include this tax offset.
Tax offset for Medicare levy surcharge for a spouse
The Medicare levy surcharge threshold is based on your combined family income, including your spouse.
If your lump sum results in a surcharge liability for your spouse, they will receive a tax offset. This will be equal to the liability caused by your lump sum if:
- you are entitled to the tax offset for Medicare levy surcharge (LSPIA)
- both of you were not already liable for the surcharge because your other income exceeded the family threshold.
If you and your spouse were already liable for the surcharge, only you will receive the tax offset if you are eligible.
How receiving a lump sum tax offset reduces your tax and Medicare surcharge
The intent of the lump sum payment in arrears (LSPIA) tax offsets is to ensure you don't overpay tax or Medicare levy surcharge in the income year you receive a lump sum.
You usually pay more tax in the year you receive the lump sum than you would if tax was withheld in the year you earned it.
The lump sum payment can impact your tax and non-tax entitlements such as:
- student loans
- child support and welfare payments.
You may find that compared to the income year you earned the payment:
- you are in a higher tax bracket and pay more tax
- you are in the same tax bracket and pay the same amount of tax
- you are in a lower tax bracket and pay less tax
- you have a new or increased Medicare levy surcharge as the lump sum pushes you over an income threshold.
The tax offset prevents you being disadvantaged when you receive a lump sum payment in a later income year.