This depends on what kind of workers compensation you receive. In general, you must pay tax on any payments that replace your wage or salary.
If your injury was caused by your employer’s negligence, you may also have a common law damages claim. Any lump sum compensation you receive as a result will be subject to the usual tax laws.
Below, we’ll break down workers compensation tax requirements for each scenario.
Whether or not your workers compensation is taxable depends on the type of payment you receive. Most injured workers are automatically entitled to weekly wage-replacement payments. For more serious injuries, you might receive an additional lump sum payment.
You may be eligible to for common law damages claim if your injury was caused by your employer’s negligence. Such claims can result in a substantial lump sum to compensate for your pain and suffering.
Your weekly workers compensation payments replace your wage or salary. This means they’re also subject to the same tax rules as your wage or salary. You must declare your weekly payments as taxable income on your tax return.
As with regular wages, your employer should take out the relevant tax before paying your weekly workers compensation.
If you’re in Queensland, any legal fees you pay for your claim are tax deductible. For NSW workers, your fees are covered by the Independent Review Office. You will never receive a bill from us for our work on your claim.
A lump sum workers compensation payment is a small additional payment to compensate for a more severe or permanent injury. Since it’s not designed to replace your wage, it’s tax-free.
Your lump sum does not qualify as ‘assessable income’ so you don’t need to declare it as taxable income on your tax return. Plus, your lump sum payment is exempt from Capital Gains Tax.
This tax exemption does not extend to anything you do or buy with the lump sum. If you deposit the money into a bank account, you’ll need to declare any interest earned on your tax return. Likewise, if you use your lump sum to purchase an asset that attracts Capital Gains Tax, you will be subject to regular Australian Capital Gains Tax laws. Capital gains and losses are reported on your regular income tax return.
You may also have a common law claim if your employer’s negligence caused your injury or illness. Common law claims include compensation for loss of earnings and medical expenses, as well as ‘non-economic losses’ like pain, suffering and lost opportunity. The inclusion of non-economic losses means your claim can result in a substantial lump sum payment. You do not have to pay tax on common law damages.
However, you may need to pay tax on any further income you generate from your lump sum. This means you’re required to declare any interest earned after depositing the money. You may also be subject to Capital Gains Tax on assets purchased with the lump sum. All Capital gains and losses must be reported on your regular income tax return.
Keep in mind that only lump sum payments are tax-free. You’re still obligated to pay tax on weekly workers compensation benefits.
Most work-related tax deductions do not apply to a worker receiving workers compensation. However, you may be able to claim a tax deduction for travel costs related to your workers compensation agreement. This includes where you’re required to visit a medical professional for a certificate or treatment. Your deduction covers either your out-of-pocket transport costs or your petrol at a set rate per kilometre. It’s important to note that you can’t claim this tax deduction if you’re already claiming travel costs from your insurer.