Do you pay tax on medical negligence compensation?

Medical negligence is a claim for compensation that arise out of damages or injuries caused by a medical practitioner. Medical negligence law in Australia is both a complex and sophisticated area. Proving negligence is similar to finding a needle in a haystack. 

Therefore, you must manage your case accurately by hiring a professional, experienced, and skilled lawyer. Many people ask an important question: Do I pay tax on medical negligence compensation? Let us answer this question. Read on! 

Why Don’t You Pay Tax on Medical Negligence Compensation? 

According to the Income Tax Assessment Act, medical negligence lump sum compensation are not accessible income. It means you don’t have to pay tax on your medical negligence compensation. 

You don’t need to disclose your damages payment or compensation achieved from your medical negligence when lodging your tax return with the Australian Taxation Office (ATO). For instance, you receive compensation payments due to your medical negligence claim, and you use that money for your own business. In that case, you will pay tax because the money is not being used for your pain and suffering. 

There is no need to record your medical negligence compensation payment in your income tax return. Similarly, you don’t need to pay tax on the settlement money and any capital gains tax on medical negligence compensation payment. 

Some parts of your medical compensation do not associate with your earnings or loss of income. For example, the insurance company will pay for your pain and suffering because you have lost the usual standard of living or enjoyment of life. 

Because the Australian law does not consider this an income, you won’t pay tax on it. When your claim for medical negligence compensation involves past or future earnings or lost income, the payable amount is calculated based on your net losses. It means the taxable component has already been excluded from your compensation claim. 

When would you pay on Medical Negligence Settlement? 

If you earn interest on your medical negligence compensation, it is taxable and goes on your tax return records. Likewise, if you use your compensation money to buy an asset subjected to Capital Gains Tax, you will pay tax when selling that particular asset. 

For example, if you receive AUD 50,000 in compensation and put the amount in your bank account, the compensation is not taxable income. However, the interest you earn on the amount in your bank account is taxable. 

Remember, this is where things slightly get complicated. That’s why it is always recommended to seek advice from your accountant or attorney to ensure you do not violate any regulations. 


Final Words 

Although medical negligence compensation is not taxable, it might affect your entitlement to other benefits. Therefore, it is crucial to consider an expert lawyer to safeguard your damages. 

Keep in mind that if you use the money for your business or put it in your savings account, you will pay taxes on it. Your lawyer will tell you how to use the compensation money properly and avoid taxes.