Effect of compensation payments

Contributed by Danny Shaw and Dianne Anagnos and current to 1 September 2005

Compensation for an injury or condition can reduce a person’s social security payments, or even make a range of payments not payable. This is to prevent injured or ill people being paid for their loss of income by the federal government when they are being compensated for the same injury or illness by someone else.

Centrelink may require a person to make reasonable attempts to obtain compensation before an affected payment is granted (Social Security Act ss.1166, 1167).

WHAT IS COMPENSATION?

Compensation is defined for social security purposes as a payment for loss of earnings or capacity to earn due to an illness or injury inside or outside Australia (s.17(2)).

What is excluded

Under Centrelink policy guidelines, compensation does not include:

• victims compensation; or
• compensation awarded for

– sporting injuries
– unlawful dismissal
– sexual harassment, or
– racial discrimination.

Compensation for which the person has made previous contributions, such as premiums under a personal disability insurance policy or income replacement policy, is also not regarded as compensation for social security purposes.

What benefits are affected?

From 20 March 1997, most social security payments (except family assistance payments) are affected by the compensation provisions of the Social Security Act (s.17(1)).

BEFORE 20 MARCH 1997

A person should check with Centrelink to see if and how their the payment is affected if:

• they were receiving a pension or benefit before 20 March 1997; or
• they received the compensation before that date.

PAYMENTS NOT AFFECTED

Social security payments (except sickness allowance) that commenced before May 1987 and have been received continuously since then are not affected by the compensation provisions.

Effect on benefits

The effect of compensation depends on:

• whether the compensation is paid as periodic payments or in a lump sum; and
• whether the injury occurred before or after the social security payment was granted.

Periodic payments

INJURIES OCCURRING BEFORE PAYMENT WAS GRANTED

If the injury occurred before the affected payment was granted, the amount of any periodic payment is deducted directly from the affected payment (s.1173). In effect, the person’s payment is reduced dollar for dollar by the amount of their fortnightly compensation.

INJURIES OCCURRING AFTER PAYMENT WAS GRANTED

If the injury occurred after the payment was granted, the periodic compensation is treated as ordinary income, and the ordinary income test for the pension or allowance applies.

Where a partner also receives an affected payment

Where the compensation recipient and their partner both receive an affected payment, the recipient’s social security payment is reduced by the dollar for dollar method. If their social security payment is thereby reduced to nil, any further periodic compensation will be treated as normal income under the relevant income test for their partner.

Lump sum payments

THE COMPENSATION PRECLUSION PERIOD

Generally, a person who receives a lump sum compensation payment will not be paid an affected social security payment for a certain number of weeks. This is called the compensation preclusion period.

THE LOST EARNINGS COMPONENT

To calculate the preclusion period, Centrelink first determines the ‘lost earnings or lost capacity to earn’ component of the lump sum. For compensation payments made on or after 9 February 1988, 50% of the payment is deemed to be for this (the 50% rule – ss.17(3)).

Where a judgment or award sets out heads of damages, the component for lost earnings is the figure taken into account.

PAYMENTS ON OR AFTER 20 MARCH 1997

For lump sum payments received on or after 20 March 1997, the lost earnings component is divided by the amount above which no pension is payable to a single person under the income test. This results in longer preclusion periods than the pre-20 March 1997 method of calculation. However, the recipient’s partner is not affected under these rules. Lump sum compensation received before 20 March 1997 generally resulted in the recipient’s partner also being affected by the preclusion period.

Compensation debts

Any compensation affected social security payment received during the preclusion period must be repaid to Centrelink (s.1179). The repayment is usually deducted by the employer or insurer from the compensation before the person receives it.

Where arrears of periodic payments are paid as a single amount, they are not treated as a lump sum payment (s.17(4A)). The direct deduction rules that apply to periodic payments also apply to the back payment of periodic payments (see Periodic payments above). The amount to be repaid, however, will be the lesser of the total amount of compensation received or the total amount of social security payments received.

‘Special circumstances’

The Social Security Act provides that where there are ‘special circumstances’, Centrelink can disregard some or all of the compensation a person receives (s.1184K). This shortens or eliminates the preclusion period so that the person can receive a social security payment.

Special circumstances are not defined by the Act, but it is accepted by Centrelink and the tribunals that they must be ‘unusual, uncommon or exceptional’. All the circumstances are considered; one factor alone is rarely enough. Factors that may be relevant include:

• financial hardship;
• wrong or inadequate advice from Centrelink;
• medical conditions.

Other factors have also been considered and accepted by Centrelink and the tribunals. For examples of cases where special circumstances have been found, see Social Security and Family Assistance Law.