Do I Pay Tax on A Personal Injury Settlement?
One of the most frequently asked questions that people have when settling a personal injury claims is “do I have to pay tax on my settlement money?”.
The short answer is no. You do not pay tax on lump sum personal injury settlements.
Pursuant to the Income Tax Assessment Act, personal injury lump sum compensation payments are not considered to be assessable income.
You do not have to record your personal injury compensation payment in your income tax return as taxable income. It also means you do not have to pay tax on your settlement money, nor do you pay any Capital Gains Tax on any lump sum personal injury compensation payment.
When Would I Pay Tax on a Personal Injury Settlement?
If you earn interest on your personal injurysettlement money, the interest earned may be taxable and may need to be recorded in your tax return. Similarly, if you use your settlement money to purchase an asset that is subject to Capital Gains Tax, you may be required to pay Capital Gains Tax when you sell that asset.
This is where things can begin to get a little complicated, so we would recommend asking advice from your accountant to ensure you don’t find yourself breaching any regulations.
Do I Pay Tax on A Workers’ Compensation Claim?
But what about a workers’ compensation claim? Do you have to pay tax on a lump sum payout from WorkCover?
In short, no. You will not pay tax on a lump sum workers’ compensation payout.
This is because the payout is less of a wage subsidy (in the case of less permanent compensation claims) and is more related to the permanent loss of the claimant’s physical abilities.
Lump sum workers’ compensation payments are made for cases of permanent impairment or injury. Lump sum payments are not taxable, and do not to be declared as part of your income when it comes to tax time.
Keep in mind that this only applies to lump sum workers’ compensation payouts in cases of permanent impairment.
When Would I Pay Tax on a Workers’ Compensation Settlement?
If you are receiving weekly benefits from WorkCover or your income protection insurer, this is often taxable. While weekly workers’ compensation payments are not considered a person’s wage necessarily, it is still classed as an income.
Weekly workers’ compensation payments differ from lump settlements in personal injury and workers’ compensation cases in that you must disclose these payments to the ATO so that they can be taxed appropriately.
Cases such as these can get a little complicated, so again we would recommend asking advice from your accountant to ensure you do not find yourself breaching any regulations.
This information should in no way be taken as financial or accounting advice. GC Law recommends that you speak to your accountant or financial planner when deciding how to invest your personal injury settlement money, to ensure that your personal circumstances are properly considered.