Centrelink compensation rules: cause and effect

Tim Sanderson takes a look at the Centrelink compensation rules for those unable to work due to injury.

The Centrelink compensation rules are designed to ensure that people who are unable to work because of injury do not receive both social security and compensation payments for the same period.

Where a client receives a compensation payment, it is important to understand the effect that the compensation will have on any Centrelink payments they, or their partner, receive.

What is compensation?

While compensation can generally refer to many types of payment, for the purposes of the Centrelink compensation rules, compensation refers to payments made wholly or partially in respect of lost earnings or lost capacity to earn as a result of personal injury.

This definition includes compensation for lost wages (including interest), lost future earnings and lost superannuation contributions, and can commonly include payments such as worker’s compensation, third party motor vehicle insurance scheme payments and damages awarded by court or agreed to by settlement of a claim.

Payments from personally owned and funded income protection policies will generally be considered compensation, except where the payments are not reduced by any amount of Centrelink payment being received.

However, income protection benefits received from superannuation are not compensation.

Employer-funded salary continuance insurance payments will be compensation if either opting out of the policy would provide the employee with no increase in remuneration or the payments are not reduced by any amount of Centrelink payment being received.

Compensation may be received as a lump sum, periodic payments, or a combination of both. This article looks exclusively at the receipt of periodic compensation payments.

Are all Centrelink payments affected by compensation?

The majority of Centrelink payments, known as compensation affected payments (CAP), are affected by the compensation provisions.

While many payment types became compensation affected as at 1 May, 1987, some became compensation affected more recently, including:

• age pension – 20 March, 1997;
• partner allowance – 20 September, 1994;
• mature age allowance – 20 March, 1994; and
• carer payment – 1 January, 1993.

Where a client was already in receipt of a Centrelink payment when it became a CAP, it is known as a saved compensation affected payment (SCAP), and different rules will apply.

Treatment of periodic compensation

The treatment of periodic compensation will generally depend on whether a client was already in receipt of a Centrelink payment at the time of the compensable event, for example, the date of an accident that caused injury or the date an illness first became apparent.

Not already receiving a payment

Where the client was not already receiving a CAP at the time of the compensable event, the periodic compensation payments will reduce the CAP that they may now be entitled to receive on a dollar for dollar basis for the period that the compensation is received.

The dollar for dollar reduction is applied after the application of the income and assets tests.

If the client has a partner who is receiving a Centrelink payment, any excess compensation will be treated as ordinary income under the partner’s income test.

Excess compensation is the amount in excess of the client’s maximum basic rate of payment (including pension supplement).

For example, John and Judy are a couple. John is receiving $600 per fortnight in periodic compensation. He then claims a Disability Support Pension (DSP), which has a maximum rate of $540 per fortnight (including pension supplement). After applying the income and assets tests, however, John’s DSP is $200 per fortnight.

The periodic compensation John receives reduces his DSP to nil. The excess of $60 (periodic compensation received of $600 less maximum DSP of $540) would count as income under the income test when calculating Judy’s age pension.

Already receiving a payment

Where the client is already receiving a CAP at the time of the compensable event, the periodic compensation will be treated as ordinary income under the income test for both the client and their partner (if applicable).

This concession aims to encourage those already receiving Centrelink payments to undertake some paid employment without the fear of losing their payment if they become injured in the future.

Clients receiving saved compensation affected payments (SCAP)

Instead of being subject to the current compensation provisions described above, clients receiving a SCAP will have any periodic compensation they receive assessed as ordinary income.

If they are the partner of someone receiving a CAP, any periodic compensation that reduces their partner’s Centrelink payment on a dollar for dollar basis (including any excess compensation) will not be counted as ordinary income or reduce their payment.

Treatment of periodic payments not considered to be compensation

Where periodic personal injury payments are received that are not in respect of a client’s lost earnings or capacity to earn, they are treated as ordinary income for Centrelink purposes instead of being assessed under the compensation rules.

These payments often include compensation for pain and suffering, and compensation where no personal injury has occurred (eg, compensation for financial loss only).

Where periodic compensation is received as a lump sum

If a client is entitled to periodic compensation payments over a set timeframe but receives these payments as a lump sum that is calculated based on a set amount over the period of compensation, Centrelink will treat the lump sum as if it had been paid periodically throughout that period.

This could occur where a lump sum representing arrears of past periodic compensation is received (even though future periodic compensation may continue), or where a lump sum representing a fixed number of periodic compensation payments is received.

For example, Laura was entitled to eight weeks compensation at $500 per week. Centrelink will assess these payments periodically over the eight-week period, even if Laura receives the entire $4,000 during the first week.

In contrast, where an entitlement to periodic compensation is commuted to a lump sum without reference to a fixed payment amount and period of compensation, Centrelink will assess the amount received under the lump sum compensation provisions.

This is commonly the case where a client receives a lump sum to compensate them for periodic payments that are due to continue indefinitely.

Tim Sanderson is senior technical service manager at Colonial First State.