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Salary and Wage Adjustments

9.46. It is not uncommon for an employee to receive an amount of wages relating to a period of employment during an earlier year: a wage increase may have been made retrospective to a date in the previous year of income. Less frequently, an employee will receive wages in advance: he may be paid a sum, say in June, for a period of long-service leave he is about to take. The consequence of the cash method of tax accounting applying to employment income is that the wages are taxed in the year of receipt without regard to the period of employment to which they relate. Because of the progressive rate structure, this usually results in greater tax than would have been payable had the wages been received at the time of the employment to which they relate.

9.47. In Chapter 8 it was assumed that in determining the income of a business or profession for tax purposes, efforts should be made to relate receipts to the year of income to which they properly belong. The Committee sees force in the argument that the same should be done for employment income.

9.48. However, the administrative costs in reopening earlier returns, and in deferring the inclusion in other cases to later returns, would be very considerable. They might be mitigated if a lower limit were set on the amount which could be taken into the other return, but this would introduce elements of inequity. Because of the wider marginal tax brackets now obtaining, the number of cases where there will be a significant tax disadvantage is not likely to be very great. In some circumstances, the income equalisation scheme proposed in Chapter 14 will assist the employee to defer the inclusion of an amount to a later return.

9.49. On the balance of considerations, the Committee feels that no change in the existing position is warranted.

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