State and territory taxes
Workers compensation
Workers compensation is insurance employers must carry to cover injured employees, arranged under state and territory schemes, not by the ATO, and rules and premiums vary by jurisdiction.
Workers compensation is a system that provides payments and medical support to employees who are injured or become ill because of their work. Employers are required to hold workers compensation insurance, generally by taking out a policy with an approved insurer or a state scheme. The system is set by state and territory law and regulated by state and territory authorities, not the ATO, so the details vary by jurisdiction.
Premiums are usually based on the employer's total wages and the industry classification, often adjusted by the employer's claims history. Higher risk industries typically pay higher premium rates. Employers declare their wages to the insurer or scheme, often annually, with a possible adjustment after the year ends. The definition of wages for premium purposes can differ from the definition used for payroll tax or super, so check each one.
Who counts as a worker can be wider than who counts as an employee under other laws. Some contractors may be treated as workers for workers compensation purposes, and the rules differ between states and territories. Businesses that engage contractors should check whether they need to include those payments in their wages declaration or whether the contractors hold their own cover.
For income tax, workers compensation insurance premiums are generally deductible to the employer in the year paid or incurred, since they are a cost of running the business. Payments that an employer makes to an injured worker may also be deductible, and they are usually treated as part of employment costs. Amounts that a worker receives under workers compensation are treated under the tax rules in various ways, depending on what they replace.
For GST, premiums are generally for an insurance supply, so the insurer charges GST on the premium, and a GST-registered employer can generally claim a credit if it holds a tax invoice and the purchase is for a creditable purpose. However, the treatment can depend on the scheme and how premiums are set up, so check the invoice for GST. Compulsory state-run schemes may differ in how they show charges.
A common mistake is under-declaring wages, which can lead to adjustments or penalties from the insurer. Another is assuming contractors are automatically excluded. This is general information only, so confirm your situation with your state or territory workers compensation authority or a registered tax professional.
Worked example
Assume, purely for illustration, an employer's workers compensation premium invoice is $3,300 including GST. The GST credit is $3,300 / 11 = $300, claimed in the BAS for the period of the tax invoice, provided the invoice shows GST. The GST-exclusive amount of $3,000 is deductible for income tax. Actual premiums depend on wages, industry and the scheme in your state or territory.
Practical tips
- Declare wages accurately to your insurer, as under-declaring can lead to extra premiums or penalties.
- Check whether payments to contractors must be included in your wages declaration in your state or territory.
- Look at the premium invoice to see whether it includes GST before claiming a credit.