People receiving backdated payments from ACC are losing millions of dollars by being taxed at high rates for lump sums - but the government says changing the system isn't a priority.

Photo: 123RF

One man, who is waiting on payments from ACC spanning eight and a half years, says he is owed nearly half a million dollars.

But he said he would lose about $120,000 because he would be taxed as if all the money was earned in a single year, meaning most would be taxed at the top rate of 33 percent.

He said it was frustrating to finally win a payout but then miss out on a huge chunk of it.

"There are lots of people in the same situation as me and ... they've just all been pounded ... into the ground by ACC," he said.

"Suddenly when they see the light at the end of the tunnel, there's a shark circling wanting to take a big chunk out of them and that's exactly what the IRD are doing, it's soul destroying."

He's not the first to complain - in 2010 the Ombudsman said the way ACC taxed lump sum payments was unfair.

Barrister and accident compensation researcher Warren Forster said the Ombudsman told ACC that if people were missing out because of the tax rules, it could make up the difference with an ex gratia payment.

But he said ACC was only doing that if it thought it was guilty of a serious service failure.

"When ACC looks at it and says 'Oh look we got it wrong back in the day, the person has to pay extra tax but it's not a serious service failure'... the person is then left with no remedy," said Mr Forster.

"They can't go to review and appeal and fix it. That leaves people feeling as though they've been completely put through the mill by the system and then the system has taken away their entitlement to gain."

Phil Schmidt from Schmidt and Peart Law said the unfairness of the tax system was a long-standing issue and he estimated claimants had lost millions of dollars because of it.

"Remember that this was a problem even before the 2001 [Accident Compensation] Act came into play," he said.

"Many hundreds of thousands of back-dated payments are made every year and every time that there's back-dated attendant care [and] weekly compensation, there will be over-taxation."

Photo: VNP / Daniela Maoate-Cox

In a statement, Inland Revenue said it did not know how much money claimants had missed out on by having to pay tax with only one rate.

It said it was not possible under current law to tax lump payments as if they had been earned over multiple years.

Mr Schimdt said it was time the law changed.

"With the new government, hopefully we'll make some progress because at the moment ... these things tend to attract some public attention, then they're put into the too-hard basket life just moves on," he said.

"But for the families and the individuals involved, they've got to live with the consequences of this lack of reform."

But there was no sign the new government would look at making changes.

As a former opposition MP, Iain Lees-Galloway was a frequent critic of ACC, saying that under National it was taking money from people who needed it.

Now as the Minister for ACC, a spokesperson said Mr Lees-Galloway was aware of the tax issue but he would not be commenting and inquiries should be directed to the Revenue Minister, Stuart Nash.

A spokeswoman for Mr Nash said while he also knew about the issue, the Inland Revenue Department did not consider legislative change a priority.

Anyone with concerns should write to Mr Nash, she said.