Taxation of benefit payments
This page is to inform injured workers of the Australian Taxation Office (ATO) determinations on the treatment of certain benefit payments for Pay-As-You-Go (PAYG) purposes.
This is not taxation advice and does not exempt you from examining the applicable taxation guidelines and rulings to determine if they apply in the particular circumstances of a benefit payment. WorkCover Queensland is not able to provide accurate advice concerning the income tax treatment of benefit payments without further information regarding your specific circumstances. WorkCover recommends that you obtain your own advice in relation to this matter from the ATO or your registered tax agent.
Tax file number (TFN) declaration
The ATO and WorkCover are authorised by the Taxation Administration Act 1953 to request your (or their dependent's) tax file number (TFN). It's not an offence not to quote your TFN. However, quoting your TFN reduces the risk of administrative errors and having extra tax withheld. WorkCover is required to withhold the top rate of tax from all payments made to you if you do not provide your TFN or claim an exemption from quoting your TFN.
Injured workers may complete a TFN Declaration using Worker Assist. Injured workers can complete their TFN Declaration directly without the need to print and sign forms. Alternatively, injured workers can download the TFN Declaration (PDF, 0.08 MB) and submit with WorkCover.
When you commence suitable duties, you may be paid by both WorkCover and your employer. The ATO generally requires that you only claim the tax-free threshold from one payer at the same time. You would normally claim it from the payer who usually pays the highest salary or wage (this is known as the primary source of income).
PAYG tax withholding
WorkCover is required to withhold an amount from weekly compensation payments under specified policies and send the withheld amount to the ATO. As noted above, WorkCover uses the information contained in TFN Declarations to work out how much tax to withhold. WorkCover is not required to withhold an amount in relation to non-weekly benefits (e.g. a doctor's consultation). If you are a working holiday maker, we note that the ATO has confirmed that the special tax rates will not apply to compensation payments made to you by WorkCover.
WorkCover is required to issue you a PAYG Payment Summary when in receipt of weekly compensation payments by 14 July each year. The PAYG Payment Summary specifies how much we paid you in the financial year (i.e. 1 July – 30 June), and how much WorkCover withheld from the payments. Weekly compensation payments paid to you (as disclosed on your PAYG Payment Summary) should be included in your assessable income and declared on your income tax return each year.
In certain situations, WorkCover is required to issue amendments to PAYG Payment Summaries (i.e. an amended PAYG Payment Summary). Where you have already lodged your income tax return for that year, you may need to lodge an amendment request to your income tax return.
WorkCover is required to provide the ATO your PAYG Payment Summary information (both original and amendments), including the amount of compensation payments and tax withheld for pre-filling into your income tax return.
To ensure that you receive your PAYG Payment Summary in a prompt manner, please ensure that you have provided WorkCover your current mailing address.
The above PAYG taxation treatments have been confirmed by WorkCover in a private ruling (Authorisation Number 1013078368850).
Part-year payment summaries
A request for WorkCover to issue a part-year PAYG Payment Summary must be made in writing to WorkCover before 9 June (21 days before the end of the financial year). WorkCover must provide you with a copy of their PAYG Payment Summary within 14 days of your request.
Lump sum payments
Where a lump sum payment is received by you for a permanent injury occurring at work, it is usually not included in your assessable income. This is on the basis that the lump sum payment relates to the loss of physical abilities.
In some circumstances, a lump sum payment may be received relating to weekly compensation payments in arrears. Where these amounts relate to prior financial years, they are included as a Lump Sum Component E in the PAYG Payment Summary in the year the payment was made, and a breakdown of the financial years the amount relates to will also be provided. This breakdown is needed to complete your income tax return.
Since the inclusion of a prior year’s income into another financial year may result in more tax being withheld than if an amount was included when earned, a Lump Sum in Arrears Offset is available subject to certain eligibility requirements. The intent of the offset is to ensure tax is not overpaid. A similar offset is also available to reduce the Medicare Levy Surcharge, if applicable. The calculation and eligibility of these offsets are complex. Whilst information regarding these offsets are available on the ATO’s website, individuals may prefer to seek professional tax advice.
Payments to dependent children
Payments of weekly benefits in respect of dependent children are taxed at normal PAYG rates, rather than the higher rates that can apply to other types of income of taxpayers under 18 years of age unless the child is not a resident of Australia for tax purposes (in which the PAYG rates applying to non-residents is to apply).
Payments to dependents are subject to normal PAYG taxation requirements including the requesting of TFN Declarations for dependents and issuing PAYG Payment Summaries in their name.
WorkCover has obtained an ATO private ruling (Authorisation Number 1012611694278) in relation to the PAYG taxation requirements in respect of payments to dependent children.
Common law settlements
Under Section 270(1) of the Workers' Compensation and Rehabilitation Act 2003 (the Act), the amount of common law damages that is legally liable to be paid is reduced by the total amount paid to the claimant by way of compensation under the Act, i.e. reduced by weekly compensation and other payments already made to the injured worker. The amount recovered by WorkCover is the gross amount (i.e. including tax withheld). As the tax was withheld from the weekly compensation amounts paid to you, you only received the net amount. By repaying the gross amount, you are out of pocket by the amount of tax paid attributable to the weekly compensation amounts. This difference, that is the tax paid on weekly compensation, may represent an additional loss incurred by you.
As such, a separate claim for the additional tax paid was made as part of your overall claim to ensure you are not out of pocket. This is known as a 'Fox v Wood' claim. Fox v Wood is the case which established such claims. This amount is included in the damages paid either pursuant to a judgement or a settlement. If you have further questions in relation to this case, you should seek further clarification from your solicitors.
Given the above, and in accordance with Section 59-30(3) of the Income Tax Assessment Act 1997, the nature of the compensation payments made to you will not change when such payments are taken into account in calculating the damages amount. That is, you have still received weekly compensation payments from which tax is required to be withheld. Accordingly, the original PAYG Payment Summaries issued are correct and do not require amending. This is confirmed in the decision of Keys v FC of T (2019) AATA 238.
As a matter of due diligence, WorkCover has received advice from the ATO in regards to this matter.
Third party recoveries
WorkCover may recover its claim costs from a third party insurer pursuant to Section 207B of the Act. The fact that the monies paid by WorkCover (including those paid to you as weekly compensation) have been recovered does not change the fact that you have received weekly compensation benefits from WorkCover. You have not personally reimbursed WorkCover for these costs and accordingly, we have no obligation to issue an amended PAYG Payment Summary. As a matter of due diligence, WorkCover has received advice from the ATO in regards to this matter.
You will be required to repay any overpayments made by WorkCover. For example, an overpayment may occur where incorrect wage details were provided to WorkCover or in instances where your employer and WorkCover pay you for the same period.
Where an amount is overpaid to you in a financial year and the overpaid amounts are discovered in a later financial year, you will be required to repay the gross amount (i.e. the overpaid amount actually received plus any tax amount withheld) from your after-tax income. This is because you may have already received a credit in your income tax return for the amount of tax withheld from the overpayment.
In this instance, WorkCover is generally required to issue you an amended PAYG Payment Summary. The amended PAYG Payment Summary will detail the amounts that you should have received in the relevant financial year. The amount of tax withheld on the amended PAYG payment summary will not be adjusted. If you have already lodged your income tax return for that year, you may need to lodge an amendment request to your income tax return. As a matter of due diligence, WorkCover has received advice from the ATO in regards to this matter.