The effect of compensation on Social Security payments 108-03190010

Compensation is defined in section 17 of the Social Security Act 1991 as any payment made for a personal injury, illness or condition that has been made at least in part to cover a person's loss of earnings or lost capacity to earn (economic loss). The types of compensation under this definition include:

• Damages from a worker's compensation scheme
• Motor vehicle third party scheme
• Personal accident, sickness and accident or income replacement policy
• Professional negligence claim, for example, medical negligence that includes a component for lost earnings
• Other personal injury compensation payments

A compensation affected payment (CAP) is any social security benefit or pension affected by the receipt of compensation payments. Most Centrelink income support payments are a CAP. This means they are subject to the compensation provisions set out in Part 3.14 of the Social Security Act 1991.

The compensation provisions have the following effect:

• A person who can claim compensation, but does not do so, may not be paid an income support payment. See Reasonable action to claim compensation
• Lump sum compensation amounts may preclude a CAP for a period (preclusion period)
• Lump sum compensation payments are considered an asset
• Periodic compensation payments affect the rate of the CAP as either a direct deduction or other ordinary income
• Compensation payments are not counted as employment income or other ordinary income

Compensation payments that are not subject to compensation provisions set out in Part 3.14 of the Social Security Act 1991 are treated as other ordinary income.

Compensation payments are recorded in the Compensation Management System (CMS) on the compensation recipient's record. Other payments that do not meet the definition of compensation are recorded elsewhere in the recipient's record for example, Other Income screen (OIN), and Pensions Annuities screen (SUP).

Do not use Employment Income Details (EAN) screen to record periodic compensation paid as part of a customer's wages. It is not employment income and to do so may result in an incorrect payment as well as incorrectly allowing a Working Credit offset.

When income from compensation is treated as other ordinary income:

• it is used in calculating the accrual of Working Credits
• it is not used in calculating the depletion of Working Credits which can only be depleted by employment income
• it is used in calculations for the accrual and depletion of Student Income Bank
• the customer is unable to deplete their Working Credit balance to offset compensation income

Work Bonus applies to customers of Age Pension age receiving employment and self-employment income. Compensation payments do not affect the accrual or depletion of a customer's Work Bonus.

Compensation can be paid as a:

• periodic payment, which generally reduces CAP dollar for dollar
• lump sum payment, where a person may be required to serve a preclusion period, or
• a combination of both

Excess periodic compensation can affect partners as their own ordinary income if it is paid at a higher rate than the maximum CAP rate. Periodic compensation is treated under the ordinary income test when:

• a compensable event occurs, and
• the customer is in receipt of a CAP at the time of the compensable event

Compensation recipients must take reasonable action to claim or obtain any compensation they are potentially entitled to.

If a compensation payment does not fall under the Social Security Law definition of 'compensation' then it is assessed as ordinary unearned income unless it is subject to an income test exemption. This is regarded as a compensatory payment. How a compensatory payment will affect a social security entitlement depends on whether it is paid as a lump sum or as a periodic payment:

• other ordinary income when:
• paid periodically or
• a lump sum is received instead of periodical payments
• not social security income when:
• a lump sum is received that does not replace periodical payments

Compensatory payments are assessed as other ordinary income unless subject to an income test exemption.

Examples are payments:

• made for criminal injuries by victims compensation schemes
• for the death of a relative or dependency-based death benefits claims
• for unlawful dismissal, sexual harassment or racial discrimination
• related to a natural disaster
• from a personal accident or insurance policy when:
• the person contributed to the premium and there is no offset clause or
• the person contributed to the premium and there is an offset clause but it has not been invoked
• for sporting injury compensation (unless the policy contains an offset clause against social security payments that has been invoked)
• some payments from the Department of Veterans' Affairs that are not Incapacity Payments
• as periodic personal injury compensation when the compensation recipient is currently in receipt of a saved compensation affected payment (SCAP) see Compensation affected payments (CAP)
• as compensation payments for the assessment of a Low Income Health Care Card (LIC)

Compensation Recovery Technical Support staff can provide assistance in determining how a payment should be assessed.

Do not refer compensatory payments to the CRT for clearance. Record these payments on the Other Income (OIN) screen.

Do not refer payments made from a superannuation fund. These payments are not compensation. Record these payments following the coding instructions on Income from personal injury insurance schemes and disability benefits.

If the customer and/or partner is only claiming for a LIC:

• the periodic payments are recorded on CMS and on the LIC claim as income for 8 weeks before the actual claim
• the lump sum is recorded on CMS apportioned across 52 weeks from the day the person is entitled to receive it

Lump sums or pensions paid to the surviving partner of a deceased person are assessed as ordinary income. This includes:

• workers compensation
• some motor accident authorities

These are not compensation for personal injury. See Assessment of income for Centrelink payments.

Different rules apply to ABSTUDY for the treatment of compensation payments.

Where ABSTUDY Pension Education Supplement (PES) is paid with a:

• compensation affected payment (CAP), the PES is assessed as a CAP
• payment that is not a CAP (such as ABSTUDY), the PES is not considered a CAP

Compensation paid for part-time Australian Defence Force Reserve activity, and replacing part-time Australian Defence Force Reserve wages, is exempt from both the compensation provisions and ordinary income test.

However, any compensation paid in respect of a person being unable to attend their usual workplace because of part-time Australian Defence Force Reserve activity is NOT exempt and should be treated as compensation.

Payments of compensation affect Family Assistance payments in the following ways:

• Taxable compensation payments count as part of the person's taxable income in the year the compensation is received
• Periodic compensation (including arrears) for loss of earnings is usually taxable
• Some lump sum compensation may be taxable if it has an identifiable economic loss component
• Certain non-taxable payments made by the Military Rehabilitation and Compensation Commission also affect the family assistance Income Test