Back Pay, Contract Gratuities, Deferred Pay and Arrears of Pay
Back pay, contract gratuities, deferred pay and arrears of pay are generally assessable under salaries tax. Here you can learn more about reporting such payments on your tax return and how such lump sum payments can be related back.
Assessment and Relating Back
Back pay, contract gratuities, deferred pay and arrears of pay resulting from an award of salary or wages are taxable, regardless of whether you receive them during the course of employment or upon or after cessation of employment. However, you can apply to have such lump sum payments related back to the service period for which they are made. Where that period exceeds 3 years, the amount will be related back at a constant rate over 36 months ending on the date of entitlement to the payment or the last date of employment, whichever is the earlier.
Application to have a lump sum payment related back can be made when you file your tax return. The Inland Revenue Department will only relate back the lump sum if it will reduce your overall tax liability.
Example 1: Gratuity Paid when the Period of Service is Less than 36 Months
Mr C was employed on contract terms, with a contract covering the period from 1 April 2021 to 30 September 2023. Upon completion of the 30-month contract, he received a gratuity of $300,000. Mr C can:
- report the whole sum of $300,000 as his assessable income for the year of assessment 2023/24; or
- apply to relate the payment back to the contract period with a view to reducing his overall tax liability for the relevant years taken together.
The apportionment of the gratuity to the years would be as follows:
|
Year of Assessment |
$ |
|
|
2021/22 (1 April 2021 – 31 March 2022) |
120,000 |
(12 of 30 months) |
|
2022/23 (1 April 2022 – 31 March 2023) |
120,000 |
(12 of 30 months) |
|
2023/24 (1 April 2023 – 30 September 2023) |
60,000 |
(6 of 30 months) |
|
|
300,000 |
|
Example 2: Deferred Pay when the Period of Service is Less than 36 Months
On 30 June 2023, Mr L’s employer resolved to pay him a lump sum of $120,000 as recompense for his services rendered on Sundays and public holidays during the period from 1 January 2021 to 31 December 2022. Mr L can:
- report the whole payment as assessable income for the year of assessment 2023/24, which is the year he was entitled to claim the payment following his employer’s resolution of 30 June 2023; or
- apply to have the payment related back to the service period for which it was made with a view to reducing his overall liabilities for the relevant years taken together.
The apportionment of the lump sum payment to the years would be as follows:
|
Year of Assessment |
$ |
|
|
2020/21 (1 January 2021 – 31 March 2021) |
15,000 |
(3 of 24 months) |
|
2021/22 (1 April 2021 – 31 March 2022) |
60,000 |
(12 of 24 months) |
|
2022/23 (1 April 2022 – 31 December 2022) |
45,000 |
(9 of 24 months) |
|
|
120,000 |
|
Example 3: Deferred Pay when the Period of Service Exceeds 36 Months
On 30 June 2023, Mr L’s employer resolved to pay him a lump sum of $210,000 as recompense for his services rendered on Sundays and public holidays during the period from 1 July 2018 to 31 December 2022 (54 months). He can:
- report the whole amount as assessable income for the year of assessment 2023/24, which is the year he was entitled to claim the payment following his employer’s resolution of 30 June 2023; or
- apply to have the payment related back to the 36 months immediately before 30 June 2023.
The apportionment of the payment to the years would be as follows:
|
Year of Assessment |
$ |
|
|
2020/21 (1 July 2020 – 31 March 2021) |
52,500 |
(9 of 36 months) |
|
2021/22 (1 April 2021 – 31 March 2022) |
70,000 |
(12 of 36 months) |
|
2022/23 (1 April 2022 – 31 March 2023) |
70,000 |
(12 of 36 months) |
|
2023/24 (1 April 2023 – 30 June 2023) |
17,500 |
(3 of 36 months) |
|
|
210,000 |
|
In this case, the service period for which the lump sum payment was made exceeds 3 years. Therefore, the payment will be related back at a constant rate over 36 months ending on 30 June 2023, the date on which Mr L was entitled to claim the payment.
Example 4: Employment Ceased and Period of Service Exceeds 36 months
On 30 June 2023, Mr L’s employer resolved to pay him a lump sum of $210,000 as recompense for his services rendered on Sundays and public holidays during the period from 1 July 2018 to 31 December 2022 (54 months). However, Mr L’s employment ceased on 31 March 2023. Mr L can:
- report the whole amount as assessable income for the year of assessment 2022/23, as his employment ceased in 2022/23; or
- apply to have the payment related back to the 36 months immediately before 31 March 2023.
The apportionment of the payment to the years would be as follows:
|
Year of Assessment |
$ |
|
|
2020/21 (1 April 2020 – 31 March 2021) |
70,000 |
(12 of 36 months) |
|
2021/22 (1 April 2021 – 31 March 2022) |
70,000 |
(12 of 36 months) |
|
2022/23 (1 April 2022 – 31 March 2023) |
70,000 |
(12 of 36 months) |
|
|
210,000 |
|
The lump sum payment would be related back at a constant rate over the 36 months ending on the date employment ceased, as this date is earlier than the date of entitlement to the payment.
More on termination payments is available through the following link.
Termination payments