38.1 Overview

Incapacity payments are made as economic loss compensation by way of income replacement, as distinct from non-economic loss compensation such as for permanent impairment.  Incapacity payments are generally linked to a person's pre-injury earnings and, are taxable at the appropriate marginal tax rate prior to payment to the client.  Instructions as noted on a person's Tax Declaration form must be followed.

The following types of incapacity payments are exempt from taxation by virtue of sections 51-32 and 51-33 of Income Tax Assessment Act 1997:

• Payments for the loss of pay and allowances while on a period of warlike service;
• Payment for the loss of allowances while on a period of non-warlike service; and
• Payment for the loss of pay or allowances as a part time reservist.