A common question we get from clients involved in a personal injury claim is whether the compensation claim damages are taxable.
The Australian Tax Office (ATO) considers lump sum compensation payment for personal injuries to be not taxable, or in other words, tax-free.
So this means you do not need to declare the settlement or judgement as income, pay the Goods and Services Tax (GST) on the amount or have the damages assessed for capital gains tax.
So good news for claimants as we all remember the Benjamin Franklin letter, where he famously said:
“In this world nothing can be said to be certain, except death and taxes.”
Sorry President Franklin, but the ATO has realised that those who have suffered an injury through no fault of their own in a car, work or other accident have suffered enough to be chased for taxes.
You should be aware though things like legal fees, medical reports and your treatment costs still incur the GST, so the Taxman (or Taxwoman) hasn’t left you off the hook entirely!
Other things to remember include if the compensation payment after the conclusion of your claim generates income, then you will be taxed on the income only.
So if you deposited your damages into a high-interest bank account in Brisbane, then the interest earned will need to be declared as income.
Just as if you used the monies to buy an investment property in a place such as the Gold Coast, then capital gains tax will be payable on the sale.
As solicitors, we will never give you advice on how to invest your compensation payment. We prefer to stick to what we know, advocating for our clients, and suggest you contact a financial advisor for specialist advice.
For further reading check out the ATO’s website.