Assessing compensation payments from personal injury insurance schemes 117-22092101

Payments made from personal injury insurance schemes replace the income lost through a person’s inability to work due to injury or illness.

Personal injury insurance payments include payments from:

• a superannuation fund, such as disability benefits in the form of income protection payments
• an employer such as salary continuance payments
• an insurer, such as sickness and accident policy or trauma payments
• an approved friendly society

Consider the nature, source and purpose of the payment to determine whether to treat the payment as compensation or ordinary income.

An offset clause will make sure the compensation recipient does not receive more in 'replacement income' than if they had not been injured.

Offset clauses allow the compensation payer to reduce payments by the person’s other income while unable to work (for example WorkCover payments or Centrelink income support payments). Offset rights must be included in the policy contract and are not common law rights.

When assessing these payments, a copy of the policy is usually required to determine the details. When the information is being requested from an insurer, use the Compensation Personal Sickness and Accident Claim (SS485) form.

Payments from superannuation funds are not compensation. They may be treated as ordinary income depending on the customer’s circumstances. This includes regular, ongoing payments made under Total and Permanent Disability (TPD) and/or Total and Temporary Disability (TTD), regardless of whether:

• an offset clause exists and
• the individual or a third party (for example, union or employer) contributes to the premium

Periodic and/or lump sum compensation payments made under a personal sickness and accident policy or income protection policy are compensation if they are for:

• lost earnings or
• lost capacity to earn as a result of personal injury

However, policy/scheme payments are treated as ordinary income when:

• the person made payments towards policy, and
• the policy does not have an offset clause, or
• the policy has an offset clause which has not been invoked

Trauma payments from insurance companies are made for a specific medical trauma or event. They do not relate to a person’s lost earnings and are not assessed as compensation.

• Lump sum trauma payments are exempt but are subject to ongoing income and asset assessment
• Periodic trauma payments are assessed as ordinary income

Salary continuance payments are provided by employers to employees who cannot work because of injury or illness. Staff can purchase the payments through salary deductions or be part of their salary package.

It is sometimes unclear who has made contributions to the payments.

If it is not clear who has made the contributions and there is no offset clause (or it has not been invoked), and if the employee opted out of the continuance and it:

• resulted in a pay rise, payments are treated as ordinary income
• did not result in a pay rise, payments are treated as compensation