Tax treatment of payments for hurt and humiliation

Over the last few years, the tax treatment of payments for hurt and humiliation has become an area of focus for the IRD, with many public sector entities receiving amended PAYE assessments in relation to these payments.

Under section 123(1)(c)(i) of the Employment Relations Act 2000, where the Employment Relations Authority or the Employment Court determines that an employee has a personal grievance it may provide for a compensation payment for humiliation, loss of dignity, or injury to feelings. Employers may also make an out of court settlement based on an employee’s right to compensation under section 123(1)(c)(i).

A personal grievance is defined as a grievance in relation to unjustified dismissal, discrimination, sexual harassment, racial harassment, duress associated with union membership, or an unjustified action by the employer that results in the employee being disadvantaged. The test for unjustified dismissal and unjustified action is based on what a fair and reasonable employer would have done in all of the circumstances.

Public Ruling BR Pub 06/05 states that payments that are genuinely and entirely for compensation for humiliation, loss of dignity, or injury to feelings under section 123 are non-taxable. However, payments that in reality relate to lost income, redundancy entitlements or exit inducements are taxable, and subject to PAYE. Simply classifying the payment as hurt and humiliation in a settlement agreement signed by a mediator does not make the payment non-taxable.

If the IRD reviewed one of these payments, the employer would need to be able to show that the employee had a genuine personal grievance (as defined), and that the amount paid was reasonable based on the hurt and humiliation suffered by the employee. It should be noted that most of the amounts awarded by the Courts for hurt and humiliation are under $20,000 (

In an investigation, any payments over $10,000 are likely to attract IRD attention. In general, it would be difficult to convince the IRD that any payments over $30,000 were not at least partially taxable. Tax liabilities may also exist in relation to much smaller payments. In cases where there is no evidence of a genuine personal grievance, the IRD could consider the entire payment to be taxable.

This document is intended only as a general guide, and should not be used or relied upon as a substitute for specific professional advice. No liability is accepted for loss or damage incurred by persons who rely on this document.

Page last updated: 4 May 2021