The Taxation of Settlements and Awards: What Lawyers Need to Know (Paper)

Presenters:

Katerina Wendt, Barrister, Richmond Chambers

Robert Grignon, Senior Legal Advisor, Chapman Tripp

Synopsis:

Advocating for clients to achieve the best financial outcome is critical. Whether they receive a court award or settle out of court, in disputes involving money your client will ultimately be concerned with their bottom line.

But what happens if they receive an unexpected tax bill and don’t pocket what they were expecting? Alternatively if your client is on the other side of the dispute and paying out, will a tax deduction be available to relieve some of the burden?

The objective of these materials is to familiarise you with key income tax and GST considerations you should keep in mind when negotiating settlements or pleading claims.

While your client may not expect you to be a tax expert, you should understand the basic questions to ask, when to ask them, the potential ramifications to you and your client if tax considerations are overlooked, and when to recommend that your client seek specialist tax advice.

These materials will help you:

• Understand the basic principles of when settlements and court awards are subject to income tax.
• Learn when apportionment of lump sums is necessary, including understanding Inland Revenue’s approach to apportioning sums for income tax purposes.
• Understand what happens when lump sums cannot be apportioned.
• Understand when GST may be payable on settlements and court awards.
• Learn the importance of knowing whether payments will be made by an insurer rather than the counterparty, how this can create an unexpected GST liability for your client and strategies for protecting your client.
• Understand how potential law changes could alter the incidence of GST on payments from insurers.
• Understand the circumstances in which GST can apply to court costs awards.
  

Intended audience

Lawyers who want to enhance the value of the services they provide to clients by better understanding fundamental tax principles that apply to court awards and settlement payments.