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 2016 to 30 September 2018. 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 2018/19; 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

$

 

2016/17 (1 April 2016 – 31 March 2017)

120,000

 (12 of 30 months)

2017/18 (1 April 2017 – 31 March 2018)

120,000

 (12 of 30 months)

2018/19 (1 April 2018 – 30 September 2018)

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 2018, 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 2016 to 31 December 2017. Mr L can:  

  • report the whole payment as assessable income for the year of assessment 2018/19, which is the year he was entitled to claim the payment following his employer’s resolution of 30 June 2018; 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

$

 

2015/16 (1 January 2016 – 31 March 2016)

15,000

 (3 of 24 months)

2016/17 (1 April 2016 – 31 March 2017)

60,000

 (12 of 24 months)

2017/18 (1 April 2017 – 31 December 2017)

45,000

 (9 of 24 months)

 

120,000

 

         

Example 3: Deferred Pay when the Period of Service Exceeds 36 Months      

On 30 June 2018, 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 2013 to 31 December 2017 (54 months). He can:  
 

  • report the whole amount as assessable income for the year of assessment 2018/19, which is the year he was entitled to claim the payment following his employer’s resolution of 30 June 2018; or  
  • apply to have the payment related back to the 36 months immediately before 30 June 2018.

The apportionment of the payment to the years would be as follows:                  

Year of Assessment

$

 

2015/16 (1 July 2015 – 31 March 2016)

52,500

 (9 of 36 months)

2016/17 (1 April 2016 – 31 March 2017)

70,000

 (12 of 36 months)

2017/18 (1 April 2017 – 31 March 2018)

70,000

 (12 of 36 months)

2018/19 (1 April 2018 – 30 June 2018)

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 2018, 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 2018, 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 2013 to 31 December 2017 (54 months). However, Mr L’s employment ceased on 31 March 2018. Mr L can:
 

  • report the whole amount as assessable income for the year of assessment 2017/18, as his employment ceased in 2017/18; or  
  • apply to have the payment related back to the 36 months immediately before 31 March 2018.

 The apportionment of the payment to the years would be as follows:                 

Year of Assessment

$

 

2015/16 (1 April 2015 – 31 March 2016)

70,000

 (12 of 36 months)

2016/17 (1 April 2016 – 31 March 2017)

70,000

 (12 of 36 months)

2017/18 (1 April 2017 – 31 March 2018)

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
Last revision date: April 2019
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