Low-income earners may receive a lump sum payment in arrears (LSPIA) to cover unpaid wages, workplace compensation, or welfare remunerations. The Medicare Levy LSPIA can sometimes put people’s lump sum income over the threshold, leaving them liable for the Medicare charge by technicality.
Earlier this year (2024), the exposure draft legislation outlined adjustments to how selected lump sum payments are assessed for the Medicare Levy.
Below, we’ve curated a full debrief on these updates and highlighted what this means for taxpayers.
Draft Legislation Key Takeaways
The 2023–2024 budget indicates that low-income taxpayers who earn a LSPIA to cover employment or workplace compensation will not receive a Medicare Levy surcharge.
These changes will work alongside the existing infrastructure listed below:
- LSPIA as a tax rebate: As shown in the ITAA 1936, the tax rebate limits the tax payable by individuals on lump sum payments.
- Medicare Levy surcharge: This tax provision offsets the Medicare Levy surcharge when an individual receives a certain lump sum payment in the current year but was owed it the previous year.
Collectively, these measures aim to reduce income tax and Medicare liability to ensure individuals receive as close to the correct amount of income as possible.
How to Qualify to Lump Sum Payment Tax Relief
As laid out in the draft legislation, eligible tax-relief candidates must satisfy the following criteria:
- Individuals must have been eligible for the Medicare Levy reduction in the two years leading up to the time they receive the lump sum.
- The lump sum payment must account for at least 10% of the taxpayer’s total income for that fiscal year.
How Does the Draft Legislation Resolve Current Problems
Before the draft legislation was released, the Senate Economics Committee Inquiry found that receiving a LSPIA left low-income taxpayers liable for more Medicare Levy, which affected their income.
The proposed amendments address this issue by recalculating the charges as if the lump sum had not been provided.
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