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The Australian Taxation Office (ATO) has issued guidance on the tax treatment of certain settlement amounts paid under the Western Australian Workers Compensation scheme, giving employers, insurers and other stakeholders greater clarity about how these payments should be treated for income tax purposes.
On 17 December 2025, the ATO published Class Ruling CR 2025/88. The ruling sets out the income tax consequences under the Income Tax Assessment Act 1997 for certain compensation amounts received under a registered settlement agreement made in accordance with section 149 and Part 2, Division 12 of the Workers Compensation and Injury Management Act 2023 (WA).
The ruling applies from 1 July 2024 and includes guidance about who it covers.
On 23 September 2026, the Commissioner of Taxation issued Addendum CR 2025/88A1. The addendum explains how the ruling applies to settlement agreements concluded:
- before 18 December 2025, where the settlement made an allowance for tax
- on or after 18 December 2025, where the settlement agreement had not been adjusted on or after that date
According to the addendum, a settlement agreement was considered concluded where the worker and the employer or insurer had agreed on the settlement sum, and the employer or insurer had acknowledged during negotiations that tax may apply to the income component.
This update is an important reminder that parties settling workers’ compensation claims by agreement need to understand their obligations under tax law. WorkCover WA cannot provide taxation advice, so workers should seek appropriate taxation advice when considering the income compensation component of their settlements.
Recommendations for local government members:
1. Review settlement payments carefully before finalisation
Some workers’ compensation settlement amounts may attract specific income tax treatment, so local governments should look closely at how payments are structured before agreements are finalised.
2. Consider tax implications earlier in the process
Rather than leaving tax issues until the end of negotiations, members should work with LGIS to consider potential tax consequences early to help avoid unexpected issues for councils, insurers and injured workers.
3. Maintain clear and accurate documentation
Local governments should maintain clear and accurate documentation throughout the settlement process to support LGIS in conducting negotiations, recording key discussions and decisions, and confirming agreed settlement terms.
4. Support LGIS with the review of existing or recent agreements where necessary
Local governments should ensure relevant agreements and supporting records are available to LGIS so any agreements reached before or after 18 December 2025 can be reviewed for potential tax treatment impacts.
5. Note the withholding approach for future settlements
Moving forward LGIS will be withholding income taxation from the income compensation component of settlements. The rate applied will be determined by the worker’s 52-weeks payslips supplied at claim submission.