Effective 1 July 2024, the Australian Taxation Office (ATO) released a formal ruling that changes how some lump sum workers compensation payments are treated for tax purposes in Western Australia.
This may affect both employers and injured workers, particularly how settlements are structured and what may now need to be declared as taxable income.
If you’re considering a settlement, it’s worth understanding which components may be treated as taxable income before you finalise the agreement.
What’s Changed?
In December 2025, the ATO released Class Ruling CR 2025/88. It confirms that weekly income payments, when commuted into a lump sum as part of a workers compensation settlement, will be treated as taxable income.
That means:
- If a settlement includes a lump sum to replace lost income (for example, instead of continuing to receive weekly benefits), that portion must be declared in the worker’s income tax return.
- Other types of compensation, including medical expenses, permanent impairment, pain and suffering, remain non-taxable under this ruling.
Why This Matters
Until now, the tax treatment of workers compensation settlements in WA has been something of a grey area. In many cases, commuted payments were assumed to be non-taxable, and there was no formal public guidance requiring them to be included in a tax return.
This ruling clarifies the ATO’s position and aligns WA with broader national treatment of similar claims. It also signals a firmer stance from the ATO on taxable elements in compensation packages, particularly where payments are replacing income.
Who This Applies To
The ruling applies to:
- Settlements made under Section 149 and Part 2, Division 12 of the Workers Compensation and Injury Management Act 2023 (WA)
- Settlements finalised on or after 1 July 2024
It’s important to note this applies to registered settlement agreements. If you’re an employer, claims manager, or injured worker considering a settlement, it’s important to understand how the components of the agreement may be treated for tax purposes.
What You Should Do
- Workers: Speak with your accountant or tax adviser if you’ve received, or are negotiating, a settlement that includes lost income. That portion will likely need to be declared.
- Employers and HR Managers: Consider how these changes may affect settlement discussions, especially when offering lump sum options in place of weekly payments.
- Claims Managers and Brokers: Settlement structuring should now reflect this tax treatment. Clients should be advised of any potential tax liability attached to income components.
Tip: A clear breakdown of the settlement components in any agreement will assist both workers and their accountants in correctly preparing their tax returns.
Need Advice?
At Elliott Insurance The Green Broker, we help clients navigate the insurance implications of workers compensation matters. While we don’t provide tax advice, we can support you with claims advocacy, settlement structuring, and referrals to trusted partners where required.
If you have a current claim or are reviewing a settlement offer, we’re here to help.
Disclaimer: This article is for general information purposes only and does not constitute financial, legal, or tax advice. Elliott Insurance The Green Broker does not provide advice on tax law or the preparation of income tax returns. You should seek advice from a qualified accountant, tax agent or legal professional to determine how this information applies to your individual circumstances.
