Workplace Injuries

WorkCover & Tax: Everything you need to know

August 2, 2021
Man filing his taxes

When you’re injured at work, your entire life can change. Everyday normality shifts as your priorities become focused on recovery and returning to work quickly.

But that’s what workers’ compensation is for, right? To help pay the bills, support their families and work towards their goals.

For some, this may be being able to put food on the table, or financially supporting their kids through uni. Others may even want to buy a home, an investment property or invest in the stock market to safeguard their future.

You can generally do whatever you like with your weekly benefits, lump-sum payout or settlement money. But you might still have questions like do you have to pay tax on your workers’ compensation payments? Or can you use the money to invest? Let’s explore.

Weekly WorkCover payments vs a lump sum payment when it comes to tax?

There are two types of benefits you can receive from WorkCover: a weekly payment and a lump-sum payout.

Any weekly WorkCover payments you receive are treated as your income and therefore taxable. Since it’s designed to replace your salary while you’re off work, it takes on the same value in the eyes of the ATO; and WorkCover will take out a portion for tax each week.

Just like you would your normal income, you must also declare it in your yearly tax return. WorkCover should send you a statement of payments like a PAYG summary that you can use.

But if you receive a lump-sum payout, or a settlement from a common law claim for your work injury, you are generally not required to pay tax on it. This is because this payment type is designed to not only compensate you for the loss of past and future earnings (calculated on a net basis) if you’re deemed to have a permanent injury, but also for the loss of your physical abilities.

In saying that, in accordance with the Workers’ Compensation and Rehabilitation Act 2003 any settlement from a common law claim will include a refund to WorkCover for any weekly compensation payments and any other payments made to you by them during the course of your claim. This includes the tax paid on your behalf.

What tax deductions can I claim on workers' compensation?

Although acting as a replacement for your wage, your workers' compensation payments are technically not from your employer, but rather an insurer. And because you're not working, your standard deductions won't apply.

For example, you can't claim a uniform allowance for a uniform you're not wearing, because you’re off work. However, you may be able to claim some travel costs.

The good news is that any legal fees you might have to pay for throughout your workers’ compensation claim are generally tax-deductible.

And if you’re required to provide an ongoing medical certificate as a condition of being paid, you can claim what it costs to go to and from the doctor’s surgery (this doesn’t include travel for additional medical appointments or treatment).

Your travel costs can be claimed as a deduction based on:

  • The cents/km rate for the kilometres travelled to and from your doctors
  • Any out of pocket costs – bus, train, taxi, or Uber fares

If I use my compensation money to invest or purchase a property, is this taxable?

You’ve found a house you really like, and think would be a worthy investment; or your mate has told you about this awesome new share that’s doing wonders. And you want to know whether you can use your settlement money to invest.

The answer? Why not! As mentioned, once you’ve received your lump sum settlement monies you can choose to use this in whatever way suits you, and your family.

However, while the money is tax-free at the time you receive it, be aware that you may have to pay some kind of tax if you use it to invest:

  1. if you place it in a high-interest savings account or buy shares, any interest or dividends you earn are taxable;
  2. if you use the money to purchase a home, when you sell it, any money you make on this purchase will incur capital gains tax.

This is not unlike what the ATO would normally expect of any income or loss throughout the financial year.

In summary, here's a couple of examples of tax obligations on workers' compensation payments in Queensland

Bob recently injured himself at work. Luckily it wasn't permanent or too severe. He received WorkCover payments and returned to work fully recovered after six weeks. The weekly payments he received in place of his usual wage are taxable, and he will need to declare these payments when he does his tax return.

Poor Jane, on the other hand, wasn't so lucky. Her injuries were more severe, and she was off work for quite some time. Eventually, WorkCover deemed her to have a permanent injury, and Jane received a lump sum payment. Jane will need to declare the weekly payments she received (as they are taxable) but does not need to include the lump sum payment.

Profile Picture of Amanda Edwards

Amanda is an Associate Solicitor and Practice Group Leader for Smith’s Lawyers, based in our Gold Coast office.

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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.

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