Taxation of No fault Compensation
The TAC will withold tax from weekly benefits and remit tax instalment deductions to the Australian Taxation Office (ATO) in accordance with the TAC's taxation chart.
|Description of benefit|
TAC's Liability to deduct tax
|Interim loss of earnings|
|Total loss of earnings|
|Partial loss of earnings|
|Total loss of earning capacity|
|Partial loss of earning capacity|
|Loss of earning capacity - non earners|
|Safety Net Income Benefit|
|Impairment benefit lump sum|
|Impairment annuity benefits|
|Minors' additional benefits|
|Lump sum for surviving partner|
|Surviving partner weekly benefits|
- Education allowance
- Weekly payments
- Lump sum
|Medical & like expenses - (reimbursement to client)|
Rehabilitation & Disabililty expenses - (reimbursement to client)
Statement of earnings
Does the TAC issue a statement of earnings at the end of each financial year?
A statement of earnings will be issued at the end of each financial year where the TAC has paid the following weekly benefits:
- Loss of Earnings benefits
- Safety Net Income benefits
- Surviving Partner weekly benefits
- Surviving Children's weekly benefits.
Do TAC clients need to complete a Tax File Number (TFN) Declaration?
In this answer "client" refers to a TAC client and/or surviving partner and/or surviving child.
Clients in receipt of the benefits listed above need to complete an Australian Taxation Office (ATO) TFN declaration and send this to the TAC. This allows the TAC to withhold the correct level of tax and/or HELP debt amount from the weekly benefit.
Declining to provide a TFN to the TAC is not an offence. However, if a client does not submit a TFN declaration to the TAC, the TAC will withhold tax at the top marginal rate, i.e. at the 'No General Exemption' tax rate, plus the Medicare levy.
The TAC administers tax in place of the client's employer.
All information collected including personal information in the form is treated confidentially by the TAC in line with the Transport Accident Act 1986, the Information and Privacy Act 2000 and the Privacy Act 1988. Protections specifically applicable to TFN information are provided in:
- the Tax File Number Guidelines 2011 (issued under the Privacy Act 1988); and
- the Taxation Administration Act 1953 which provides penalties for offences relating to tax file numbers.
How does the TAC determine the amount of tax to be withheld from a client's loss of earnings benefits (LOE)?
To determine the level of tax to be withheld from a client's loss of earnings benefits (LOE), the TAC will rely on the:
- Evidence of earnings - The TAC will determine the level of tax to be withheld from the client's weekly LOE benefit from the information provided by the client or the client's employer.
- ATO TFN Declaration - In the TFN declaration the client advises of the level of tax he/she wishes the TAC to withhold from his/her LOE benefit. The level of tax is usually the same as that withheld by the client's pre-accident employer.
What level of tax is withheld from a client's partial loss of earnings benefits?
Where a client returns to work on a partial basis (after the transport accident), the TAC is considered to be the client's second employer for taxation purposes only. This means:
- the tax-free threshold applies to the partial wage the client earns from working for his/her current employer, and
- the no general exemption or the higher tax rate applies to the partial LOE benefits the client receives from the TAC.
The TAC can make an exception to this and may apply the tax-free threshold where:
- the client requests the tax-free threshold on the TFN declaration, and
- the employer is not applying the tax-free threshold to the client's continuing wages.
A client who has returned to work on a partial basis and is receiving LOE benefits from the TAC cannot claim the tax-free threshold from his/her current employer and the TAC at the same time.
If a client is an overseas visitor, what level of tax is withheld from his/her LOE benefit?
The TAC applies the higher, 'non-resident tax rate' on an overseas visitor's LOE benefit. This is because the client does not usually live in Australia and is not considered an Australian resident for taxation purposes. Information about overseas visitors is available from the ATO, see Lodging tax returns for foreign residents and Residency for tax purposes.
What tax will the TAC deduct and remit to the ATO from a client's loss of earnings benefits when the client is also receiving part sick or annual leave from the employer?
Where a client has not returned to any work at all and:
- the TAC is paying total LOE benefits under section 44 of the Transport Accident Act 1986 (the Act), and
- the employer is also paying the client partial sick or annual leave, then
- after the TAC has subtracted the partial sick or annual leave paid by the employer from the total LOE entitlement, the TAC will apply the tax-free threshold to the balance.
Are section 44 and section 45 benefits paid to Defence Force personnel subject to income tax deduction?
The ATO regards section 44 and section 45 benefits to be taxable because the compensation a client receives for loss of earnings is paid to replace regular income that would have been earned and received by the client, if not for the transport accident injury.
Defence Force personnel under their employment conditions are exempt from the requirement to pay income tax.
Despite this, the TAC is obliged due to the ATO's ruling on the section 44 and section 45 benefits to withhold tax from loss of earnings benefits paid to all Defence Force personnel. It is recommended that Defence Force personal discuss any tax concerns they may have with their accountant.
Are employer reimbursements made under section 126(1A) of the Act taxed?
The purpose of paying a client's earnings entitlement as a reimbursement payment to an employer instead of the client is to reinstate part of the client's paid leave entitlements such as sick, annual or long service leave, etc. that was used by the client because of the transport accident injury.
The TAC does not withhold tax from the employer reimbursement, as the employer has already made the relevant tax deductions when paying the client the leave entitlement.
What tax is withheld from surviving partner benefits?
The TAC deducts and remits tax for a surviving partner at the top marginal rate, i.e. at the 'no general exemption tax rate' where a surviving partner has not returned the TFN declaration to the TAC after payment of benefits commences.
If a partner is an overseas visitor, what level of tax is withheld from his/her surviving partner benefits?
The TAC applies the higher, 'non-resident tax rate' on a overseas visitor's surviving partner benefit. This is because the partner does not usually live in Australia and is not considered an Australian resident for taxation purposes. Other material related to overseas visitors is obtainable from the ATO, see Lodging tax returns for foreign residents and Residency for tax purposes.
Why does the TAC withhold tax from the surviving children's weekly benefit?
The TAC deducts tax on the weekly surviving children's benefits because the benefit is above the taxable threshold. Also refer to the ATO's What is the tax-free threshold?
Can a client claim tax offsets, e.g. the "dependent spouse tax offset"?
A tax offset reduces the amount of tax deducted from a client's weekly benefit. A client can claim tax offsets from the TAC.
The TAC will apply:
- the same tax offset that applied to the client's weekly wage before the transport accident, or
- the tax offset claimed by the client in the TFN declaration.
Can the Family Tax Benefit be claimed through the ATO tax system?
The option to claim the Family Tax Benefit parts A and B through the ATO ceased on 1 July 2008.
A client can contact the ATO to obtain further information on how this change affects them and if he/she is required to complete a new TFN declaration.
Higher education loan program (HELP) debt
Can a Higher Education Loan Program (HELP) debt be paid back to the Commonwealth from a client's compensation payments?
HELP is a loan scheme set up to help students with their education. This program of loans replaced the Higher Education Contribution Scheme (HECS) as of 1 January 2005. A student can pay back his/her HELP loan by asking his/her employer or compensation payer (the TAC) to deduct additional tax instalments.
Where the client has advised that he/she has a HELP debt the TAC will deduct a weekly HELP amount as an additional tax instalment from a client's entitlement. More information about this is available from the ATO's website. See HELP information for payers.
The TAC will stop making HELP amount deductions when the client has satisfied the HELP debt and completed and returned a new TFN declaration to the TAC.
Are loss of earning capacity benefits (LOEC) taxable?
Loss of earning capacity benefits are "compensation for loss or impairment of earning capacity and as such are no longer considered to be payments in substitution for lost earnings".
The ATO has specifically ruled on section 49 and section 50 payments and also ruled separately in other matters concluding that loss of earning capacity benefits are capital in nature and represent payment for the 'loss of a capital asset' and therefore are not subject to regular income tax deduction.
The TAC does not issue a statement of earnings for LOEC benefits.The TAC pays a client's loss of earning capacity benefit as a nett value.
What should a client do if he/she is unsure of the effect receiving TAC compensation may have on his/her particular tax situation?
The TAC in publishing this policy is not providing taxation advice and that clients should seek their own independent professional advice from an accountant, the ATO and if necessary from Centrelink.
If a client asks, the TAC will confirm in writing the type and amount of compensation paid to the client for the relevant financial year.