Is interest on compensation and damages payments taxable?

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Is interest on a lump sum compensation payment for personal injury taxable?

According to the Tax Office, pre-judgement interest received as part of a lump sum payment for personal injury is generally not assessable because it is a capital receipt. Post-judgement interest however can be assessable.

Pre-judgement interest is calculated from the date the cause of action (for example the accident) occurred until the date the judgement is made.

A judgement is taken to be finalised when the final judgement takes effect. The final judgement takes effect after any appeals (or after the appeal period expires if there are no appeals) or when any appeal is settled or discontinued.

In non-personal injury cases, pre-judgement interest is assessable provided there is an identifiable amount on which the interest is paid. If the amount paid is an undissected amount (which comprises both capital and income components) then any interest is treated as amounts of capital and not as interest of an income nature.

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