Do I have to pay tax on my workers' comp payment?


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If you receive a compensation payment, determining whether it is taxable can be confusing.

The general rule is that if it relates to the loss of your wages or income only, then the amount will be assessable income, irrespective of whether it is paid to you as a lump sum or on a periodic basis.

This is because the compensation is being provided as a substitute for taxable income - your wages or salary - so it takes on the same character.

workers' compensation tax

Any legal fees that you incur in claiming such compensation would generally be tax deductible.

However, if your claim relates to any wrong or personal injury suffered in your occupation and you agree to a settlement, or a court order, the compensation will be tax free, whether paid as a lump sum or on a periodic basis.

Personal injury includes physical injury, psychological damage and mental injury, while "wrong" includes defamation, breach of privacy, sexual harassment, unlawful discrimination and wrongful dismissal.

Any legal fees would generally not be tax deductible.

Compensation for wrong or personal injury doesn't need to be included in your tax return.

If the payout contains elements of both compensation for wrong/personal injury and loss of income, you may need to allocate it between the two elements.

In many cases, a court order awarding the compensation will set out the split in writing.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.
Glenn Turner
May 27, 2020 5.01pm

Hi Mark,

I am wondering do I have to pay tax on my compensation when I happened. Thanks

Regards Glenn Turner

Murray Constable
May 18, 2021 7.33pm

Do I pay tax on my Workcover back pay I'm owed over 52 weeks payments

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