Bills Digest No. 185  1998-99 Compensation for Non-Economic Loss (Social Security and Veterans' Entitlements Legislation Amendment) Bill 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

Compensation for Non-Economic Loss (Social Security and Veterans' Entitlements Legislation Amendment) Bill 1999

Date Introduced: 25 March 1999

House: House of Representatives

Portfolio: Family and Community Services and Veterans' Affairs

Commencement: Amendments to the Social Security Act 1991 (Schedule 1) and to the Veterans' Entitlements Act 1986 (Schedule 2) are to be declared by Proclamation after receipt of Royal Assent. If Schedules 1 and 2 have not commenced within 12 months of Royal Assent, they commence one year and one day after Royal Assent.

 

Purpose

To make the use of periodic payments for compensation for non-economic loss more attractive to social security recipients than the use of lump sum payments. Non-economic loss lump sum compensation payments, which until now have been disregarded in setting the rate of income support payments, will be treated in such a way as to affect the rate of those payments.

 

Background

Introduction

The proposal is to no longer disregard non-economic loss compensation as income for income support payments paid under both the Social Security Act 1991 and the Veterans' Entitlements Act 1986. It was announced in the 1998-99 Budget.(1)

Estimated savings

The projected savings as outlined in the 1998-99 Budget papers are $9.080 million in 1999-2000, $19.519 million in 2000-2001 and $20.009 million in 2001-2002.

The Budget Papers project savings of about $20 million a year by 2001-2002. This will be mainly achieved by the income testing of non-economic loss lump sum payments, but actual savings will depend on the size of lump sum payments made and the reaction of the compensation and insurance industry to the changes. The savings do not factor in the cost involved for those who elect to take the benefit of the concessions offered for periodic payments of non-economic loss. This means the savings refer only to that which will be achieved by treating as income non-economic loss payments received as a lump sum.(2)

An estimated cost saving per State was provided to a question taken on notice at Senate Estimates on 2 June 1998.

 

($m)

($m)

($m)

1999-00

2000-01

2001-02

NSW

43%

-6.651

-13.301

13.301

VIC

22%

-1.465

-2.931

-2.931

Others

35%

-1.693

-3.386

-3.386

(There was insufficient data to provide a breakdown for the States other than for NSW and Vic)(3)

 

Income support payments are means tested to target assistance to those in need

The Social Security Act 1991 (SSA) and the Veterans' Entitlements Act 1986 (VEA) provide income support payments for persons in need, where they are unable, or cannot be expected to, provide for their own livelihood. This may be due to reasons of age, illness/disability, unemployment, caring for another person, being a sole parent and so on.

Almost all income support payments paid under the SSA and the VEA are means tested, to ensure payment is directed to those most in need and not to persons who can otherwise provide for themselves. The means test comprises the income and assets tests.

The most common form of self-support for those of working age is income from employment, but self-support may also be obtained from income from savings and investments, or overseas pensions, or provided from other sources, to replace lost earnings from employment such as compensation.

What is compensation?

Under subsection 17(2) of the SSA compensation means:

(a) a payment of damages; or

(b) a payment under a scheme of insurance or compensation under a Commonwealth, State or Territory law, including a payment under a contract entered into under such a scheme; or

(c) a payment (with or without admission of liability) in settlement of a claim for damages or a claim under such an insurance scheme; or

(d) any other compensation or damages payment;

(whether the payment is in the form of a lump sum or in the form of a series of periodic payments) that is:

(e) made wholly or partly in respect of lost earnings or lost capacity to earn; and

(f) made either within or outside Australia.

Compensation may be received in regular payments or as a lump sum. Compensation payments are commonly provided as replacement wages or lost earnings, as the person is no longer able to work due to their illness/injury. This is commonly called economic loss compensation and is also known as pecuniary loss.

What are non-economic loss compensation payments?

There are dangers in definitively categorising what constitutes non-economic loss compensation, as definitions vary between jurisdictions. Non-economic loss compensation commonly refers to payments:

  • under a Table of Maims Schedule, ie. a pre-set amount for a specified loss, such as loss of limb
  • for an impairment
  • for pain and suffering
  • for loss of enjoyment of life, and
  • for medical expenses (this can be categorised as economic loss payment in some jurisdictions).

Rationale for special rules in the SSA and the VEA for the treatment of compensation for loss of earnings

There are special rules in the SSA and the VEA for the treatment of compensation provided as replacement earnings. These special provisions are to ensure that persons, who are able to access income support from compensation, cannot at the same time access assistance from government-provided income support. It has been a long-standing view of successive governments that the compensation system has the first responsibility for the provision of income support to those with a compensable illness or injury, not the taxpayer by way of government support.

The foremost concern of governments has been that there should not be any double dipping, that is receiving compensation for lost earnings from a compensation payer or insurer while at the same time receiving government income support.

Overview of current treatment of compensation against income support entitlements provided under the SSA and the VEA

Periodic payments of compensation for economic loss, such as lost earnings from employment, reduce a person's entitlement to income support payments, paid under the SSA or VEA, on a dollar-for-dollar basis. These payments, being payments for lost salaries/wages, therefore provide income support.

Lump sum compensation payments are examined to identify the component that has been paid for lost salary or wages, being the part for lost earning capacity. Where a court or tribunal ascribes the part for economic loss within a lump sum payment, this is usually accepted.

Where there is no court or tribunal attribution for economic loss (commonly in out of court settlements), the SSA or VEA ascribes 50 per cent of the sum as being for economic loss. The residual 50 per cent is then ascribed for other non-economic loss items such as pain and suffering and loss of enjoyment of life.

To then determine the impact of the 50 per cent ascribed for lost salaries/wages, there is a statutory formula within the SSA and the VEA. Under the formula, the 50 per cent is divided by the single pension cut-off figure under the pensions income test (ie. currently $833.60 per fortnight), to set a number of weeks for which the sum provides replacement earnings. This number of weeks is then taken to have commenced either from the date periodic compensation payments stopped or the day the loss of earnings began. This is often the date of injury or illness. This period is known as the lump sum preclusion period for income support payments. It does not apply to the entitlement of the recipient's partner to payments. The length of the lump sum preclusion period is largely determined by the size of the lump sum payment, as under the statutory formula, the amount of the lump sum is divided by the single pension cut-off figure, to arrive at a number of weeks for the period. Therefore, the larger the amount, the longer the preclusion period.

Payments for lost earnings, ie. for economic loss can reduce the rate of income support otherwise payable on a dollar-for-dollar basis, or a 50 cents in the dollar basis. A dollar-for-dollar deduction is applied where the compensation recipient is either single, or, if partnered, his or her partner is not in receipt of a compensation affected payment paid under the SSA or VEA. The 50 cents in the dollar deduction applies to each payment, where the compensation recipient and his or her partner are both in receipt of a compensation affected payment, paid under the SSA or the VEA. This 50 cents in the dollar application is the same as the normal income test rules, in which the incomes of both members of a couple are combined and then halved, to equally affect the rate of both payments.

Features of and problems with lump sum compensation settlements

Lump sum payments in out-of-court settlements of compensation claims are far more common than court or tribunal awards and there are several reasons for this:

  • the insurer has more control over the pay-out amount
  • the insurer avoids the setting of legal precedents on both decisions and award amounts by the courts
  • the payment can be kept confidential and it avoids the settlement becoming public information
  • where the insured is of limited financial means, his or her legal representative is far more likely to recover full legal costs immediately, rather than waiting for full or part payment over time
  • the insurer avoids the extra cost and effort involved with administering on-going payments and also for on-going medical expenses that are commonly met while payments are continuing, and
  • there can be a significant cost saving to the insurer, especially in cases where the insured is young, has a long period before reaching retirement age, and therefore there is a long-term liability for income support, eg. 20 to 40 years.

Large lump sums look attractive but invariably do not provide the equivalent, in monetary terms, as ongoing long-term payments. Otherwise insurers would not prefer and encourage lump sum settlements.

Incidence of non-economic lump sum payments compared to periodic payments

Senator Belinda Neal requested the following information at Senate Estimates on 2 June 1998:

Provide a breakdown on a State-by-State basis of what proportion of non-economic loss payments are paid as a lump sum and what proportion are paid periodically.(4)

The question was taken on notice and a response provided in August 1998(5). A summation of the main points in the response provided by the Department of Social Security is:

  • Victoria, through the Victorian Traffic Accident Commission (VTAC), is the only jurisdiction that currently offers periodic payments for non-economic loss compensation
  • the VTAC advise that the large majority of accident survivors elect for lump sums
  • for all other States, 100 per cent of compensation recipients take lump sums, and
  • the Victorian WorkCover Authority is yet to commence periodic payments under its new statutory scheme

Clearly, payments of non-economic loss compensation are currently almost wholly paid in the form of lumps sums, meaning the proposal to treat such payments as income will have a very significant impact on those recipients also seeking income support assistance under the SSA and the VEA.

Estimated numbers affected - by size of lump sum payment

Estimated impact on compensation recipients - by size of lump sum payment

(Based on 1995-96 Victorian WorkCover statistical data)

Ranges of non-economic loss payments

(initial instalment or lump sum)

Average size of non-economic loss payment (ie. mid-point)

Amount to annualise

(ie. in excess of $10,000)

Income per fortnight from annualising this excess

Potential number of recipients affected

Actual numbers of clients affected by this initiative

 

 

 

 

 

Winners

Reduced

Cancelled

Total

$1 - $10,000

5,000

0

$0

3,611

1,750

0

0

1,750

$10,000 - $13,000

11,500

1,500

$57.69

1,083

461

142

0

603

$13,000 - $26,000

19,500

9,500

$365.38

3,132

0

2,544

184

2,728

$26,000 - $50,000

38,000

28,000

$1,076.92

1,235

0

246

950

1,196

$50,000 - $75,000

67,500

52,500

$2,019.23

287

0

0

279

279

$75,000+

100,000

90,000

$3,461.54

252

0

0

244

244

Totals                                                                                      9,600

Percentage

2,211

(33%)

2,932

(43%)

1,657

(24%)

6,800

Notes:

  • This data is extrapolated from 1995-96 WorkCover and other statistical data
  • It shows Australia wide, some 60,000 non-economic loss lump sums were paid in 1995-96, from which, only 16 per cent could potentially be SSA customers at that time, when non-economic loss lump sum is paid.
  • This means for that the other 84 per cent of those who receive their lump sum have either returned to work or are receiving long-term periodic lump sum payments.(6)

The notes to this Table provided by the Department of Social Security (DSS), highlights that 84 per cent of those persons paid a non-economic loss lump sum did not approach the DSS for income support assistance. The notes also claim that this was for reasons that the person was either receiving long-term economic loss payments or had returned to work. The other reasons not mentioned as to why DSS may not have been approached would be due to partner's income or the person approached DVA.

Misuse and misconceptions about compensation settlements

The primary purpose of compensation is to provide an injured person with a means of support, as the person can no longer do so for themself (either partially or wholly), having been injured or become ill.

However, it is a commonly held belief in the community that lump sum compensation settlements are a 'reward' and can be used as such. Consequently, there are problems and issues arising from compensation settlements being provided in the form of lump sums.

Recipients tend to spend the money on items for which the compensation was not intended, such as paying of debts, for example, residential mortgages, making significant house/residential upgrading, gambling, paying other family debts, holidays, and consumer items such as cars and boats. This is use of the compensation monies not for the purpose of the compensation payment, which often leaves them with little or no other means of support.

This issue of the dissipation of awards was noted by Harold Luntz, in an academic study on the assessment of damages for personal injury and death. He noted that there had been few proper studies to identify what plaintiffs actually do with damages awarded. Such studies as there have been revealed that lumps sums are usually quickly spent in discharging debts accumulated between the accident and the payment, in buying furniture, household appliances or motor vehicles and occasionally in paying off the mortgage of the house. Given the view of compensation in the community, this is economically rational behaviour.

Luntz noted there had been discussions about whether the law would be justified in adopting a paternalistic attitude towards plaintiffs to protect them against their own prodigality and taxpayers against their becoming burdens on social security. However, it is arguable that since the funds for damages are mostly made through compulsory insurance, the State has an obligation to see that the funds are used to meet the needs for which they were created.(7)

Payment preferences of the insured

In discussing the payment preferences of the insured, Luntz referred to surveys in Australia showing that support for periodic payments is not strong and little use had been made of the periodic payment options available in Western and South Australia. Luntz further noted that until recently lump sum payments could be used to pay for a house and other assets and still allow the insured access to social security payments, whereas periodic payments would preclude such access.(8) In short, for some time the treatment of compensation payments under the SSA actually encouraged lump sum payments and discouraged periodic payments.

Payment preferences of insurance industry

Luntz provided some views about the attitudes of the insurance industry to the lump sum versus periodic payments debate. Objections to periodic payments feature insurance companies anxious to 'close their books', to 'know where they stand' on particular claims. Luntz viewed this as somewhat strange, coming from an industry built on the twin bases of pooling of losses and actuarial prediction.(9)

Benefits of periodic payments

The main benefit of periodic payments over lump sum payouts is that it provides the insured person with an ongoing means of support and certainty about their income. It also allows them time to make any lifestyle adjustments required for their injury/illness and any changes in the level of their income.

Purpose and aims of the proposed changes to the treatment of non-economic loss compensation payments

The proposed changes to the treatment of non-economic loss compensation payments are aimed at encouraging periodic payments, and discouraging lump sum payments, for non-economic loss. To achieve this there is a 'carrot and stick' approach for both recipients and insurers.

The 'stick'

Currently, any lump sum amount paid for compensation for non-economic loss is disregarded for the lump sum preclusion provisions and also for the ordinary income test. There are two elements to the 'stick' in the proposed provisions. First, any lump sum amounts paid for non-economic loss that are in excess of $10,000 will have that part in excess of $10,000, treated as ordinary income spread over the ensuing 26 weeks. The second part of the 'stick' is that any subsequent lump sum payments in excess of $2,000, paid within a 28 days period, will have the whole amount of the second and subsequent payment(s) treated as income under the income test. This 'stick' element of the provisions is designed to discourage large and one-off lump sum payments for non-economic loss.

The 'carrot'

The 'carrot' element of the proposal has three parts. The first element is the $10,000 disregard for the first lump sum payment for non-economic loss, clearly designed to encourage smaller payments. The second element of the 'carrot' is the disregard of payments of up to $2,000 for second and subsequent payments made within a 28 day period and is also clearly designed to encourage regular small payments.

The third element to the 'carrot' refers to the proposed insertion of concessional arrangements to be applied where non-economic payments are paid by way of an 'income stream' product, as defined in subsection 9(1) of the SSA:

income stream means:

(a) an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993, or

(b) an income stream arising under a public sector scheme (within the meaning of that Act), or

(c) an income stream arising under a retirement savings account, or

(d) an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995), or

(e) an income stream provided by a friendly society (within the meaning of the Income Tax Assessment Act), or

(f) an income stream designated in writing by the Secretary for the purposes of this definition, having regard to the guidelines determined under subsection (1E),

but does not include any of the following:

(g) available money,

(h) deposit money,

(i) a managed investment,

(j) a listed security,

(k) a loan that has not been repaid in full,

(l) an unlisted public security, and

  1. gold, silver or platinum bullion.

An income stream product is one where a regular series of payments are made directly from an accumulated account generated from either superannuation contributions or from purchasing an account with a lump sum. Common examples of where an income stream product is purchased are:

  • a roll-over amount from another superannuation fund
  • ordinary savings, or
  • a superannuation payout on which lump sum tax has been paid.

The Explanatory Memorandum attached to the Bill does not set out or describe in what circumstances the proposed concessional arrangements will be applied to income stream products; with the Bill merely allowing for regulations to be applied.

This move to applying concessions to life stream products is somewhat at odds with the removal of the assets test exemption for superannuation, for persons aged 55 or more and receiving income support for nine months or more, which commenced as of September 1997. This change was effected by the Social Security Legislation Amendment (Further Budget and Other Measures) Act 1996(10).

The 'carrot' and 'stick' provide only indirect encouragement and coercion

The 'carrot' and 'stick' elements in this proposal provide only indirect encouragement and coercion to insurance companies and legal advisers to opt for periodic payments, rather than lump sum payments. There is no real immediate benefit for insurers, and as discussed in Features of and problems with lump sum compensation settlements, above, there are still significant incentives for insurers to shy away from periodic payments. This especially applies in regards to the on-going cost of administering and providing periodic payments.

Likewise, the proposal does not directly and immediately impact on legal advisers, and there is still an incentive for legal advisers to press for lump sum pay outs, thereby gaining greater surety in receiving their legal fees.

Previous attempt to regard non-economic loss compensation payments as income

In the 1993-94 Budget, the then government announced a proposal to apply the compensation provisions of the SSA to all lump sum compensation payments, regardless of whether there was any component for economic loss (lost wages/earnings).

At the time of the proposal, there had to be an identifiable element of economic loss in the lump sum, for the SSA compensation provisions to be applied.(11) Under the proposal, where a lump sum had been given and no apportionment had been made for economic loss, the compensation provisions of the SSA would be applied.

The proposed amendments to the SSA for the compensation measures were presented in the Social Security (Budget and Other Measures) Legislation Amendment Bill 1993.(12) Due to concerns about the potential impact of the compensation changes, raised by the non-government parties in the Senate, the then government agreed to the withdrawal of the compensation provisions presented in the 1993 Bill.(13)

 

Main Provisions

Social Security Act 1991

Schedule 1 amends the Social Security Act 1991 (SSA). Item 2 of Schedule 1 repeals the definition of 'compensation payer' and substitutes a definition that includes a reference to a person or an authority of a State or Territory that makes a payment solely to compensate for non-economic loss.

Item 3 amends the definition of compensation in the SSA, so that provisions that refer to payments made solely to compensate for non-economic loss are not included in the definition. It appears that as a matter of policy, certain compensation payments, including criminal injuries compensation, compensation for sexual harassment or racial discrimination are disregarded under the SSA.

Item 5 amends subsection 17(6) so that certain references to an 'insurer' include insurers who are liable for a claim for a payment made solely to compensate for non-economic loss.

Item 6 inserts new section 17B, which provides that for the purposes of the SSA, some payments will be taken to be made solely to compensate for non-economic loss. Payments will be taken to be made for such loss if they are a payment of damages, or a payment under a scheme of insurance or compensation, or a payment in settlement of a claim for damages, or are made to compensate the person for an injury or disease, and no part of the payment is in respect of lost earnings or lost capacity to earn (new subsection 17B(1)).

Payments of a disability pension under the VEA are not to be taken as made solely to compensate for non-economic loss (new subsection 17B(2)). Nor are payments to which subsection 17(2B) applies, that is, where a person receives more than one lump sum payment from injuries arising from the same event, and at least one of the payments is made wholly or partly in respect of lost earnings or lost capacity to earn.

Proposed subsection 17B(4) provides that subsection 17B(1) will not apply to certain payments. These are payments made to an injured or diseased person where the payment arises out of a circumstance or event that caused or contributed to the injury or disease, or is the result of the injury or disease, and that payment is made to a third party for a specific purpose that is for the benefit of the injured or diseased person. The injured or diseased person will be taken not to have received the payment for the purposes of determining under new subsection 17B(1) whether the payment was made solely to compensate for non-economic loss. The effect of this proposed amendment is that payments made to a third party at the direction of a compensation payer or an insurer, such as payments to a physiotherapist, will not be treated as made solely to compensate for non-economic loss.

Item 10 inserts new subsection 1073(3) into section 1073. Subsection 1073(1) currently provides that in certain circumstances, if a person receives an amount that is not deemed income from financial assets, or income from income streams, and is not in the form of periodic payments, nor ordinary income from the person's work, nor an exempt lump sum, then they are taken to receive one fifty-second of that amount as ordinary income of the person during each week in the twelve months commencing on the day on which the person becomes entitled to receive that amount. New subsection 1073(3) provides that this deemed apportioning of the amount over the fifty-two weeks of a year will not occur in relation to an amount of a payment made solely to compensate for non-economic loss where the payment is received after the new subsection commences. Payments made solely to compensate for non-economic loss after Schedule 1 commences are instead subject to new section 1073A.

Item 11 inserts new section 1073A, which applies to payment or payments made solely to compensate for non-economic loss where payment is received on or after the section commences. This is the 'carrot' and 'stick' provision. It does not apply where the payment has been, or will be taken into account in determining the amount of a disability pension under the Veterans' Entitlements Act 1986 (proposed subsection 1073A(9)).

Proposed subsections 1073A(2)-(3): the 'stick'

Proposed subsections 1073A(2)-(3) contain the 'stick' aspect of the proposal, that is, treating payments solely for non-economic loss and in excess of $10,000 as income.

Proposed subsection 1073A(2) provides that if a payment of more than $10,000 is made, which is a one-off payment, or the first in a series of periodic payments, then that part of the payment which exceeds $10,000 is taken to be ordinary income for the purposes of the SSA. Where the payment is up to or exactly $10,000, it is not treated as ordinary income. Where it is more than $10,000, the first $10,000 (which is not treated as ordinary income) is deducted and the remainder of the payment is apportioned as ordinary income over 26 fortnights, beginning on the day the person received payment.

If a person receives a series of two or more periodic payments, and the amount of the only payment received in a 28 day period, or the sum of the amounts received by the person in a 28 day period is more than $10,000, the payment will be apportioned as ordinary income spread over 26 fortnightly payments, beginning on the day the person received payment (proposed subsection 1073A(3)).

Proposed subsections 1073A(4)-(5): the 'income streams' carrot

Subsections 1073A(2) and 1073A(3) are subject to an exception set out in proposed subsections 1073A(4) and 1073A(5).

New subsection 1073A(4) provides that where a person who received payment for non-economic loss exchanges part or all of the payment for an income stream, and the payment is a one-off payment, or is the first in a series, or is subject to subsection (3), then the SSA provisions apply in respect of the amount exchanged for an income stream and the payments which constitute the income stream, with any modifications made by regulation. The SSA defines 'income stream' in subsection 9(1) to include, amongst other things, an income stream arising under arrangements regulated by the Superannuation Industry (Supervision) Act 1993 or an income stream provided by a life insurance business (see above). An income stream may be one designated in writing by the Secretary of the Department of Family and Community Services under guidelines determined under subsection 9(1E), which provides that a determination is a disallowable instrument.

New subsection 1073A(5) provides that regulations made to modify the income stream provisions may make different provisions for different circumstances. Clearly, it is not possible to comment on this without seeing a draft of any proposed regulations.

Proposed subsection 1073A(7): the 'carrot'

Subsection 1073A(7) contains the 'carrot', that is, amounts of compensation for non-economic loss of up to $2,000, paid over a 28-day period, will be disregarded under the income test. This will apply where a series of two or more periodic payments are received by a person, other than the first payment and payments to which subsection (3) applies (proposed subsection 1073A(6)). Subsection (7) is a significant change from the current law. Under section 1168 of the SSA, the whole amount of periodic compensation payments is treated as ordinary income under the income test, with a consequent reduction in certain payments affected by compensation.

The 'carrot' will not apply if the amount of the only payment, or the sum of the amounts of the payments received in a 28 days period is more than $2,000. In that case, proposed subsection 1073A(8) provides that the amount or each of the amounts is treated as ordinary income under the SSA.

Veterans' Entitlements Act 1986

Schedule 2 amends the Veterans' Entitlements Act 1986.

Item 2 of Schedule 2 inserts proposed subsections 5H(12)-(15). Proposed subsection 5H(12) provides that for the purposes of the Veterans' Entitlements Act 1986 (VEA), certain payments are taken to be made solely to compensate for non-economic loss. Payments will be taken to be made for such loss if they are a payment of damages, or a payment under a scheme of insurance or compensation, or a payment in settlement of a claim for damages or a claim under a scheme of insurance or compensation, or are made to compensate the person for an injury or disease, and no part of the payment is in respect of lost earnings or lost capacity to earn.

Subsection 5H(13) provides that payments will not be taken as solely to compensate for non-economic loss where proposed subsection 5NB(6A) applies. That is, where a person receives more than one lump sum payment for injuries arising from the same event and at least one of those payments is made wholly or partly in respect of lost earnings or lost capacity to earn. In those circumstances, the person is taken to receive one lump sum compensation payment of an amount equal to the sum of those lump sum payments.

Proposed subsection 5H(15) provides that subsection 5H(12) will not apply to certain payments. These are payments made to an injured or diseased person where the payment arises out of a circumstance or event that caused or contributed to the injury or disease, or is the result of the injury or disease, and that payment is made to a third party for a specific purpose that is for the benefit of the injured or diseased person. The injured or diseased person will be taken not to have received the payment for the purposes of determining under new subsection 5H(12) whether the payment was made solely to compensate for non-economic loss. The effect of this proposed amendment is that payments made to a third party at the direction of a compensation payer or an insurer, such as payments to a physiotherapist, will not be treated as made solely to compensate for non-economic loss.

Item 3 repeals the definition of 'compensation payer' and substitutes it with a definition that includes a reference to a person or an authority of a State or Territory that is liable to make a payment solely to compensate for non-economic loss.

Item 4 inserts new subsection 5NB(6A) into section 5NB of the VEA, which defines compensation. The new subsection provides that where a person receives more than one lump sum payment from injuries arising from the same event and at least one of those payments is made wholly or partly in respect of lost earnings or lost capacity to earn, the person is taken to receive one lump sum compensation payment of an amount equal to the sum of those lump sum payments.

Item 7 inserts new subsection 46A(2) into section 46A. Proposed subsection 46A(2) may be problematic as it refers to subsection (1), which at present does not appear to exist. Presumably an amendment will be made inserting it. Subsection 46A currently provides that if a person receives an amount that is not income within the meaning of Division 3 or 4 of Part IIIB of the VEA (that is, income from deemed financial assets, or from income streams), and is not in the form of periodic payments, nor ordinary income from the person's work, then they are taken to receive one fifty-second of that amount as ordinary income of the person during each week in the twelve months commencing on the day on which the person becomes entitled to receive that amount.

New subsection 46A(2) provides that this deemed apportioning of the amount over the fifty-two weeks of a year will not occur in relation to an amount of a payment made solely to compensate for non-economic loss where the payment is received after the new subsection commences. Payments made solely to compensate for non-economic loss after Schedule 2 commences are instead subject to proposed Division 8 of Part IIIB of the Act (Item 8). Proposed section 49 provides that the new Division will only apply to payment or payments made solely to compensate for non-economic loss where payment is received on or after the Division commences.

Proposed section 49A is the 'carrot and stick' provision. Proposed paragraph 49A(1)(a) provides that payments of less than $10,000, which are not one of a series of two or more periodic payments, or are the first in a series of periodic payments, are not ordinary income for the purposes of the VEA.

Proposed subsections 49A(1)-(2): the 'stick'

Proposed subsection 49A(1) provides that if a payment of more than $10,000 which is a one-off payment, or the first in a series of periodic payments, then that part of the payment which exceeds $10,000 is taken to be ordinary income for the purposes of the VEA. Where the payment is up to or exactly $10,000, it is not treated as ordinary income and so does not affect social security payments. Where it is more than $10,000, the first $10,000 (which is not treated as ordinary income) is deducted and the remainder of the payment is apportioned as ordinary income over 26 fortnights, beginning on the day the person received payment.

If a person receives a series of two or more periodic payments, and the amount of the only payment received in a 28 day period, or the sum of the amounts received by the person in a 28 day period is more than $10,000, the payment will be apportioned as ordinary income spread over 26 fortnightly payments, beginning on the day the person received payment (proposed subsection 49A(2)).

Proposed subsections 49A(3)-(4): the 'income streams' carrot

Proposed subsection 49A(3) provides that where a person who received payment for non-economic loss exchanges part or all of the payment for an income stream, and the payment is a one-off payment, or is the first in a series, or a payment that is subject to subsection (2), and the person exchanges the whole or part of the payment for an income stream, then the VEA provisions apply in respect of the amount exchanged for an income stream and the payments which constitute the income stream, with any modifications made by regulations. Section 5J of the VEA defines 'income stream' to include, amongst other things, an income stream arising under arrangements regulated by the Superannuation Industry (Supervision) Act 1993 or an income stream provided by a life insurance business. The definition of 'income stream' is the same in substance as under the SSA. An income stream may be one designated in writing by the Repatriation Commission under guidelines determined under subsection 5J(1F), which provides that a determination is a disallowable instrument.

Proposed subsection 49A(4) provides that regulations made to modify the income stream provisions may make different provisions for different circumstances. It is not possible to comment on the proposed amendments in relation to income streams without seeing a draft of the regulations.

Proposed subsection 49A(6): the 'carrot'

Proposed subsection 49A(6) contains the 'carrot', that is, amounts of compensation for non-economic loss of up to $2,000, paid over a 28-day period, will be disregarded under the income test. This will apply where a series of two or more periodic payments are received by a person, other than the first payment and payments to which subsection (2) applies (proposed subsection 49A(5)). Proposed subsection (6) is a significant change from the current law. Under section 59T of the VEA, the whole amount of periodic compensation payments is treated as ordinary income under the income test, with a consequent reduction in the rate of certain pensions.

The 'carrot' will not apply if the amount of the only payment, or the sum of the amounts of the payments received in a 28 day period is more than $2,000. In that case, proposed subsection 49A(7) provides that the amount or each of the amounts is treated as ordinary income under the SSA.

Item 9 repeals subsection 59Q(5), which provides that where a person receives a first lump sum of compensation in relation to an injury, disease or condition, then receives a further lump sum as compensation in relation to the same injury, disease or condition, the lump sum preclusion period for the second lump sum begins on the day after the last day of the lump sum preclusion period for the first lump sum and ends after a number of weeks calculated by a formula. This provision has been replaced by new subsection 5NB(6A), which is discussed above.

 

Concluding Comments

The Bill as proposed will, for the first time, treat as income non-economic loss compensation payments paid as a lump sum. While this proposal will provide for unprecedented arrangements, the proposal itself is not unique, having been previously proposed by the then government in the 1993-94 Budget. The proposal was then to apply the compensation provisions of the SSA to all lump sum compensation payments, regardless of whether there was any component for economic loss, ie. lost wages/earnings. See above: Previous attempt to regard non-economic loss compensation payments as income.

The proposal does have the potential to encourage more prudent use of compensation payments by recipients. However, the approach adopted is somewhat indirect and its effect on the main and most powerful stakeholders in the compensation industry, that is, the insurance companies and legal advisers, is unknown. This may be the rationale for the introductory process for the legislation, being one of legislating first and then spending some period undertaking consultations with these stakeholders.

As presented, by offering 'carrots' and 'sticks' to the least powerful stakeholder in the compensation insurance area, that is the insured, this appears to be a somewhat blunt instrument. There is no direct reward or requirement for the two other major and most powerful stakeholders to change their methods and behaviour, in an industry that has developed a very strong culture of lump sum pay outs.

Finally, there is the disincentive for insurance companies of the potential additional administrative costs associated with periodic payments. This may lead to increased costs for State and Territory compensation schemes, which currently rely very heavily on lump sum payments. Any additional costs would, presumably, be passed on in the form of increased insurance premiums.

Endnotes

 

  1. Portfolio Budget Statements 1998-99 Budget, Social Security Portfolio, Budget Related Paper No. 1.14, pp. 65-66.

  2. Community Affairs Legislation Committee, Examination of Budget Estimates 1998-99, Social Security Portfolio, Additional Information Received, August 1998, Volume 1 (Cross Program, Programs 1 - 6), Program 1 Question No. 6, pp. 93-94.

  3. Ibid.

  4. Community Affairs Legislation Committee, Examination of Budget Estimates 1998-99, Social Security Portfolio, 2 June 1998, pp. 87-11.

  5. Community Affairs Legislation Committee, Examination of Budget Estimates 1998-99, Social Security Portfolio, Additional Information Received, August 1998, op. cit., Question No. 5, p. 92.

  6. Community Affairs Legislation Committee, Examination of Budget Estimates 1998-99, Social Security Portfolio, Additional Information Received, August 1998, op. cit., p. 25.

  7. Harold Luntz, Assessment of Damages for Personal Injury and Death, Third Edition, Butterworths, 1990, pp. 20-21.

  8. Ibid., pp. 24-25.

  9. Ibid., p. 26.

  10. Bills Digest No. 52, Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996.

  11. Portfolio Budget Statements 1993-94 Budget, Social Security Portfolio, Budget Related Paper No. 7.14, pp. 13 and 105.

  12. Social Security (Budget and Other Measures) Legislation Amendment Bill 1993, Division 8 - Compensation.

  13. Senate Committee Hansard, 17 December 1993, p. 4995.

 

Contact Officer and Copyright Details

Peter Yeend and Fiona Walker
24 June 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

Back to top


Facebook LinkedIn Twitter Add | Email Print