Black Saturday survivors payout taxed

Black Saturday survivors will be slugged on the interest on their payouts, with the Australian Tax Office saying its hands are tied.

Lawyers for survivors of Australia's deadliest bushfires are seeking advice on whether to challenge the ATO's decision to tax the interest on their record $500 million payout.

About 5000 victims sued electricity provider SP AusNet, Utility Services Corporation Limited and the Department of Sustainability and Environment after 119 lives were lost Victoria's East Kilmore-Kinglake fires in February 2009, with a $494.7 million settlement approved in December 2014.

Maurice Blackburn says it is considering a challenge to the ATO over a decision to tax the payout, which the Victorian Supreme Court heard on Monday could start flowing to victims by the end of this year.

"We have fought for bushfire survivors every step of this long, tough road and we're not about to let this latest hurdle pass unchallenged either," Maurice Blackburn Principal Andrew Watson said on Monday.

But the ATO said while the payout would not be taxed, the interest had to be taxed as usual.

"We acknowledge this is a difficult situation for all involved," an ATO spokesperson said.

"Unfortunately, the law prevents us from changing the tax outcome, due to the way the arrangements in this case were established."

The ATO said it was working with Maurice Blackburn to find alternative tax options that recognise "the sensitive nature of the claims as well as our requirement to administer the tax system in accordance with the law".