Are Personal Injury Compensation Payments Taxable?

Tax free sign for personal injury payments
Most lump sum payments are tax free

The short answer is no, lump sum personal injury payments are not taxable. However, read on for more detailed information regarding how tax may impact different types of injury compensation such as weekly WorkCover payments.

When a person is injured as a result of someone else’s negligence, whether they are at work, on the road, or under medical care, they may be eligible to claim compensation for their injuries and loss suffered. After a person goes through the process of making a claim, they may be successful and receive a compensation payment. 

Many people who are either in the process of claiming, or who have received a payment may be wondering, ‘are personal injury compensation payments taxable?’ The short answer to this is, no. Any lump-sum personal injury compensation payment in Queensland (such as workers compensation or motor vehicle accident payments) are not taxable. 

This article is going to explore some of the different types of compensation payments that an injured person may recover, and will also look at how people can be taxed on their earnings. We recommend seeking the advice of a tax advisor or accountant when doing your tax return for the year in which you received a personal injury compensation lump sum settlement.

What can I be compensated for in a personal injury payment?

Compensation payment list

As noted above, if you have been injured as a result of someone else’s negligence you may be able to make a claim for compensation. This compensation will look at the life path you had in place prior to your injury, and estimate your life path in the future because of this injury. Then, a financial assessment will be made to attempt to place you in a similar position - at least financially - as if the injury had not occurred.

When you are awarded a lump sum payment the amount that you receive is not going to be taxable. The process of making a claim for compensation can take some time, and it is important to know what to expect when making a claim for compensation. 

  • A lawyer who is experienced in personal injury compensation will discuss the process of claiming for compensation. 
  • You will need to secure a range of supporting documents and evidence to prove that you have suffered the loss or damage that you are claiming compensation for. 
  • A personal injury lawyer will ensure that your expectations are met and managed throughout the process of claiming for personal injuries. 

When making a claim for compensation the amount of money you will receive will be calculated based on the following losses:

  • Pain and suffering;
  • Loss of wages;
  • Superannuation;
  • Medical bills and expenses;
  • Loss of future earnings;
  • Care expenses;
  • And any other related expenses. 

If you believe you are eligible for a personal injury compensation payment it is important to speak to a lawyer as soon as you are able to. There are certain time limitations in place for making a claim for personal injury, and it is important to commence your claim before these time limits expire.

Do I have to pay tax on a WorkCover payment?

Tax on Workcover

WorkCover is the Australian Government insurance provider responsible for paying workers who have been injured while at work. When a person is eligible for a WorkCover payment they will receive a regular payment which stands in place of their wage or salary for the time they are injured. In some cases, a person will be deemed permanently impaired, in which case there may be a claim for a lump sum payment instead of a regular payment. 

If a worker is receiving regular workers compensation payments while a worker is injured, this amount will be taxable as it stands in the place of a regular wage.

Do I have to pay tax on a compensation payout?

A worker who has been deemed permanently impaired and who receives a lump sum payment will not be taxed on the amount they receive. You do not need to pay tax on this amount as it comes in the form of a lump sum amount and is for your benefit as the injured party. 

How do I report personal injury compensation payout on tax return?

When you have received a personal injury compensation payout you may be exempt from paying tax on the amounts. Some personal injury payments are made as lump sums, while others come in the form of lump sums.

For example, Gavin was injured at the age of 24 when a fence collapsed on him. His lawyers made a claim for compensation against the public authority who admitted liability. A settlement was agreed whereby the public authority paid $570,000 for existing debts and costs, with a personal injury annuity with a life insurance company purchased on Gavin’s behalf. This amount is for $35,000 per year with monthly payments indexed to the consumer price index, and payable for Gavin’s life. These amounts will not be taxable.

Using your compensation claim money to invest - is this taxable?

Tax on investments

So you have been successful in your claim, and you have received a compensation payment from the at-fault party. Now what? You are likely going to seek some financial advice and work out how best to invest or otherwise use this money to save for the future. Now we have noted that while the compensation amount itself is not taxable, in the sense that a lump sum is not taxed, anything that you may use this money for in the future will be taxed at the usual rates. 

  • What this means is that if you put the money into a high-interest savings account, any interest you earn is considered income and is taxed at the usual rate. 
  • Similarly, if you purchase an investment home or apartment with the compensation amount and then sell it in the future, any money you make from this purchase will incur capital gains tax. 

Again, this is why it is worth speaking to a financial advisor if you are in the position of receiving a lump sum payment from a personal injury claim. Depending on how you use your money you may be up for a higher tax bill, or you may be able to save. A financial advisor can assist you to save as much on your tax as you can.

Find out more about your compensation claim today

Working out the final amount of a compensation claim for personal injury is all part of the service that a personal injury lawyer can provide for you. We work with people every day from Brisbane, the Sunshine Coast and the Gold Coast to secure appropriate personal injury compensation amounts for public place accidents, work-related injuries, road accidents, and more.

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It’s important to get advice for your specific situation. Check if you can make a risk-free compensation claim and get free initial advice from our Principal lawyer, Greg Smith.

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Last update on:
July 16, 2020
Disclaimer: This information is designed for general information in relation to Queensland compensation law. It does not constitute legal advice. We strongly recommend you seek legal advice in regards to your specific situation. For expert advice call 1800 266 801 or chat via live chat to arrange free initial advice with our Principal lawyer, Greg Smith.

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