The 'unfairest' tax law is changing, but victims want the change made retrospective

Thursday, 20 July 2023

Veronica Hoeberechts has been battling ACC, and now Inland Revenue, since 2014.

Campaigners have convinced the Government to change the country’s unfairest tax setting, which punishes injured people for ACC’s mistakes.

The Government’s new Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill includes changes to address the “long-standing unfair tax treatment” of people who received backdated lump-sum payments from ACC, said John Cuthbertson from Chartered Accountants Australia New Zealand.

Lump-sum payments are made to injury victims whose claims were wrongly denied by ACC, sometimes for many years.

But the lump-sum payments, calculated to compensate victims for all the payments they were denied, have been taxed as if the entire lump sum was income in the year it was paid to them.

That often bumped them into higher tax brackets, landing them with inflated tax bills.

Harry Stanley battles with ACC over lump sum tax payment.

One of the victims of ACC lump sum over-taxation was Waikato woman Veronica Hoeberechts, who said the proposed change acknowledged how unfairly people had been treated.

But she said the Government’s planned changes were a poor fix, and called for any changes to be backdated.

For three years, Hoeberechts, who lives near the North Island town of Ngāruawāhia, was denied ACC cover for a disabling wrist injury she suffered in 2014, forcing her to survive on benefits instead of getting weekly compensation.

She fought until ACC was ordered by the District Court to pay her the $188,386.95 it should have paid her in weekly compensation, though a large chunk went to repay benefits she had received.

But it also resulted in a tax bill that she estimates was $35,000 more than she would have paid had ACC not wrongly turned down her claim.

She has been fighting through the courts to get that tax bill overturned, and welcomed a Government trying to do the right thing.

She said the issue had been recognised since the 1980s, but Governments led by both Labour and National had ignored it.

“It should be retrospective back to 2007 [the date of the Income Tax Act], if not even earlier,” she said.

She also said instead of the formula for taxing lump sums in the tax bill, people should simply be required to pay the tax they would have paid, had they been paid their entitlements on time.

As detailed in the latest bill, the tax liability on backdated lump sum payments is set to be calculated on an averaged basis over a four-year period, rather than solely in the year of receipt.

Cuthbertson said the law should be at least backdated to the date on which tax bill was announced in May.

'Under current tax law, if an individual receives a backdated lump sum payment from the ACC, they are taxed in the year that it is received, at their marginal tax rates, even if the sum relates to compensation from earlier years,' says John Cuthbertson from Chartered Accountants Australia New Zealand.

The changes are due to come into effect in April next year.

This could result in a “cruel and unsatisfactory outcome” for some people, who, if they were aware of the proposed change, would not push ACC to settle their claim in the remaining months, he said.

The current law was “just plain unfair”, he said, resulting in more tax for the government because of the errors of government agencies.

“It’s a familiar scenario for many Kiwis who have an accident, suffer a serious injury, and then been in dispute with ACC about eligibility for compensation, or the amount of compensation,” he said.

Harry Stanley battled ACC over tax on a lump sum payment, and won.

“These disputes can take multiple years to resolve so when the payment finally comes through it can bump them into the next tax bracket and beyond. It’s unfair, because if there hadn’t been a dispute, they would have been paid out across multiple years and would be much less likely to shift the client into a higher marginal tax bracket.”

A recent Inland Revenue policy analysis recognised how often the over-taxation had been raised over the years.

“This issue has been raised repeatedly over several years for ACC and MSD payments in complaints to the commissioner of Inland Revenue, ministerial correspondence, media articles and select committee submissions,” it said.

A double unfairness appears to have occurred in many cases.

Some people paid lump sums appeared to have had ACC compensate them for the extra tax, while others were never offered the same.

Auckland Harry Stanley suffered multiple treatment injuries in the early 2000s, including permanent damage to his brain, weakening of bones, and deterioration of joint cartilage, as a result of being given “herbal” treatment by a registered nurse, which contained high levels of the steroid betamethasone.

But when he finally won a lump sum back payment from ACC, he also asked for the extra tax to be covered as well.

“ACC paid me the difference in tax I had to pay Inland Revenue on that occasion, but not on the next back payment made to me, also resulting from ACC's error,” he said.