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.
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.
However, if you earn interest on your settlement 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 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.