4.13.1.20 Assessment of Compensatory Type Payments

This topic

This topic contains information on the following:

• compensation/compensatory payments assessed as ordinary unearned income,
• disability benefits paid from superannuation funds,
• treatment of compensation/compensatory payments assessed as ordinary unearned income, and
• payments which are compensatory in nature-specifically excluded as income.

Summary

Generally, if a compensation payment does not come within the section 17(2) definition of 'compensation' then it is assessed as ordinary unearned income. Exactly how the compensation affects social security payments depends on whether the compensation is paid as a lump sum or as a periodic payment.

Periodic compensation that falls within the section 17(2) definition of compensation affects the compensation recipient under Part 3.14. However, for some compensation recipients, the periodic compensation payment will still be assessed as ordinary unearned income. Periodic compensation may affect a compensation recipient's partner but only the excess, after the compensation recipient's rate is reduced to nil, is treated as the partner's ordinary unearned income.

Compensation assessed as ordinary unearned income is NOT employment income (1.1.E.102).

Some compensation payments may not be assessed as 'ordinary unearned income' OR 'compensation', see 'Payments which are compensatory in nature-specifically excluded as income'.

Act reference: SSAct section 8(1A)(d) A reference in this Act to employment income..., section 17(2) Compensation, Part 3.14 Compensation recovery

Policy reference: SS Guide 4.13.1.10 What is Compensation

Compensation/compensatory payments assessed as ordinary unearned income

A compensation payment is assessed as ordinary unearned income if it does not fall within the section 17(2) definition of 'compensation'.

This may include payments which are compensatory in nature but do not contain economic loss due to personal injury.

Examples of payments that DO NOT fall within the section 17(2) definition:

• victims of crime schemes, including statutory criminal injury compensation and death benefits,
• disability insurance lump sum payment from a superannuation fund where the calculation is totally based on the person's entitlement from the insurance from the superannuation fund,
• a payment for professional negligence by a solicitor (where the professional negligence has not caused personal injury),
• state and territory 'compensation to relatives' legislation,
• death benefits,
• DVA disability pension,
• compensation for unlawful dismissal, sexual harassment or racial discrimination,
• payments for a personal accident or insurance policy; an income replacement insurance policy; salary continuance payments; or sporting injury compensation, WHEN:
  • the person has made contributions towards the policy, AND
  • the policy does NOT include an offset clause, OR
  • the policy contains an offset clause but it has not been invoked.

Exceptions: The $25,000 ex-gratia payment by the Australian Government made to Australian Defence Force personnel and civilians held as prisoners of war by the Japanese between 7 December 1941 and 29 October 1945, or to their widows, and the $25,000 one-off ex gratia payment to Australian veterans interned by the North Korean military forces between 27 June 1950 and 19 April 1956, or their surviving partner, are exempt from the income test for both pensions AND allowances or benefits. It also results in a permanent $25,000 reduction in the value of the person's assets, BUT if invested is subject to the income test deeming rules.

Note: None of the above payments are compensation for the purposes of SSAct Part 3.14.

Act reference: SSAct section 17(2) Compensation, Part 3.14 Compensation recovery

Compensation (Japanese internment) Act 2001

Veterans' Entitlements (Clarke Review) Act 2004

Policy reference: SS Guide 3.1.9.10 Compensation & Payability, 4.3.2.35 Income Exempt from Assessment - s8(11) Exempt Lump Sums, 4.3.5.10 How Income from DVA is Assessed, 4.13.3.10 Overview of Periodic Compensation Payments, 4.3.9.30 Income from Personal Injury Insurance Schemes

Disability benefits paid from superannuation funds

A disability benefit paid from a superannuation fund, whether or not there is an 'offset' clause, is NOT a compensation payment. This includes regular, ongoing payments made under a sickness and accident policy and/or income protection policy when paid from a superannuation fund, whether funded by the person, or another party (e.g. their union or employer).

Explanation: A series of regular and ongoing payments made from superannuation funds are income streams for social security purposes.

Policy reference: SS Guide 4.9.1.30 Specific Provisions for Assessing Income Streams

Treatment of compensation/compensatory payments assessed as ordinary unearned income

The following table shows how payments that are compensatory in nature are assessed as ordinary unearned income for allowances/benefit and pensions:

* If a lump sum is received instead of periodical payments and the lump sum is calculated at a set weekly, fortnightly or monthly rate over a specific period, the payment is treated as if periodical payments were being made throughout the relevant period.

Note: The initial treatment of a compensation lump sum does NOT affect the treatment of any on-going income generated by the lump sum. The initial treatment of this lump sum does not make this an exempt lump sum. The continuing assets and income tests treatment will be determined by how a person makes use of the funds. The funds may be used to obtain additional assets such as a car. For a purchase such as this the assets test would apply. Or, the funds may be invested with a financial institution. The funds have then become a financial asset, assessable as an asset and subject to the income test deeming rules.

Act reference: SSAct section 8 Income test definitions

Policy reference: SS Guide 4.3.9.30 Income from Personal Injury Insurance Schemes

Payments which are compensatory in nature-specifically excluded as income

Some payments to compensate for adverse circumstances are specifically excluded as income, whether they are received as lump sums or as periodic payments. These payments are:

• emergency relief or like assistance,
• loss or damage to buildings, plant or personal effects,
• a medically acquired HIV trust such as The Mark Fitzpatrick Trust or the NSW Medically Acquired HIV Trust,
• restitution payments to victims of National Socialist (Nazi) persecution.

Act reference: SSAct section 8(8) Excluded amounts - general (see (c), (k), (n))

Policy reference: SS Guide 4.3.2.30 Income Exempt from Assessment - Legislated, 4.3.6.30 Holocaust Restitution Payments - Germany & Austria, 4.3.6.31 Holocaust Restitution Payments - Other Countries, 4.3.6.40 Restitution Payments - Netherlands

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Last reviewed: 1 July 2011