4.13.2.10 Treatment of specific lump sums
This topic
This topic contains general information on the following:
- treatment of court approved compromises
- treatment of structured settlements
- treatment of ex gratia payments
- treatment of loans paid against a future compensation settlement
- treatment of joint claims
- treatment of Victorian Worker's Compensation settlements under Division 3A of Part 4
- Queensland case appraisal, and
- New South Wales Claims Assessment and Resolution Service (CARS).
For information on how lump sum compensation is assessed when determining qualification for the LIC refer to 3.9.1.70.
Treatment of court approved compromises
Court approved compromises may occur in situations where a person is under legal age or has a severe disability. The role of the Court is to either agree or disagree to the terms of the settlement, it is not a disputed hearing and there is no determination of heads of damages.
The 50% rule 17(3)(a) is to be used when a compensation payment is made under a compromise of claim. The AAT in Welch and Secretary, Department of Family and Community Services (2003) AATA 905 decided that an Order 70 made by the Supreme Court of Western Australia should be treated in this way.
Act reference: SSAct section 17(3) Compensation part of a lump sum
Policy reference: SS Guide 4.13.2.30 Compensation part of lump sum - 50% rule
Treatment of structured settlements
On 13 December 2002 the Australian Federal Parliament passed legislation making tax free structured settlements available in Australia. Structured settlements are not possible for workers' compensation type claims as they are targeted at seriously injured people who may not otherwise have access to periodic compensation payments. As these can only be entered into by the injured person or their legal representative, it is not possible to have a structured settlement where the injured person has died. It is also not possible to enter into a structured settlement after the parties have settled the case or a court has awarded damages.
A structured settlement is a way of settling a claim for personal injury compensation so that instead of the injured person (claimant) receiving a lump sum settlement they receive at least part of their compensation in the form of periodic payments. These claims may arise out of motor vehicle accidents, sporting accidents, medical negligence, public liability, product liability and similar situations where negligence has resulted in personal injury.
Instead of a defendant (or their insurer) paying the entire final settlement sum to the claimant in the form of a single lump sum, the settlement money will be paid in the form of 2 components.
The first component will involve the defendant paying the claimant an immediate lump sum. This immediate lump sum may comprise, for example, half or one-third of the total settlement money.
The second component will involve the defendant using the rest of the settlement money to purchase for the injured person a personal injury annuity or annuities, and possibly also financial products called personal injury lump sums. These products will provide the injured person with an income stream for life.
A structured settlement is the result of an agreement mutually reached between the parties to a case (whether or not this agreement is later used as the basis of a court order).
More information regarding what constitutes a tax free structured settlement is available from the ATO Internet site.
In order to calculate the lump sum preclusion period, the compensation part of a lump sum payment must be determined. Where structured settlements are settled the 50% rule is used to deem half of the total cost the structured settlement as being the compensation part of a lump sum. Where structured settlements are finalised after a contested hearing, the compensation part of the lump sum is made up of the amounts awarded specifically for economic loss.
After the compensation payment has been assessed under SSAct Part 3.14 any income derived from the payment will be assessed as income under the income and assets test. If the person has a partner, the partner of the injured person is not subject to the lump sum compensation rules but the total amount will be assessed against the partner under the income and assets test.
For further information see Personal injury compensation structured settlements.
Act reference: SSAct section 9(1)-'income stream', section 9A(1) Meaning of asset-test exempt income stream-lifetime income streams, section 9A(2) Requirements of contract/governing rules for provision of income stream, section 9B(1) Meaning of asset-test exempt income stream-life expectancy income streams, section 9B(2) Requirements of contract/governing rules for provision of income stream, section 17(3) Compensation part of a lump sum
Policy reference: SS Guide 4.9.8.30 History of the treatment of income streams, 4.9.2.10 Characteristics of pre-20/9/2004 asset-test exempt income streams, 4.9.7.30 Income & Assets Test Assessment of Payments Arising from a Structured Settlement, 4.13.2 Lump Sum Compensation
Treatment of ex gratia payments
An ex gratia payment is a payment that is made without liability being either established or admitted. It is treated the same as other lump sums, that are compensatory in nature, however, recovery is sought from the recipient because there is no person actually liable to pay compensation. This is not to be confused with settlements made under a statutory scheme or as a result of a common law claim where liability is commonly denied in the release document.
Act reference: SSAct section 17 Compensation recovery definitions, Part 3.14 Compensation recovery
Policy reference: SS Guide 4.13.1.20 Assessment of compensatory type payments
Treatment of loans paid against a future compensation settlement
Some companies are providing loans or advances through schemes such as Litigation Loan Funding by the company Impact Funding. As this is a third party, and not a compensation payer, these are not compensation payments in the terms of the SSAct.
Prior to the compensation settlement being made these payments would be considered income unless there is an intention for the advance to be repaid (bona fide borrowing) see 4.3.1.20.
When the compensation settlement is made the gross rather than net lump sum is used when calculating the impact on income support entitlements. Even though these 'advances' would need to be repaid the preclusion period will be calculated on the gross compensation lump sum.
Act reference: SSAct section 1168 to section 1172 Receipt of compensation
Policy reference: SS Guide 4.3.1.20 Determining the rate of income for pensioners of age pension age from 20/09/2009
Treatment of joint claims
Where claims have been made in joint names and both parties are claiming personal injury (no evidence is provided regarding the splitting of the claim) any compensation paid is to be apportioned to each person on a 50/50 basis.
Example: When both parents make a claim for personal injury in a wrongful birth suit.
Treatment of Victorian Worker's Compensation settlements under Division 3A of Part 4
The Victorian Accident Compensation Act 1985 has been amended to allow workers who satisfy certain legislative criteria under Division 3A of Part 4, subdivisions 1, 2 and 3 to be able to take a lump sum settlement. These settlements are to be regarded as lump sum compensation payments and preclusion periods calculated in accordance with the SSAct sections 1168 to 1172. If a non-economic loss payment has also been paid for the same event, aggregation of these lump sums will need to occur.
Act reference: SSAct section 1168 to section 1172 Receipt of compensation
Policy reference: SS Guide 4.13.2.60 Lump Sum Preclusion Period - General, 4.13.2.50 Aggregation of Multiple Lump Sums
Queensland case appraisal system
Common law disputes in Queensland may be finalised within the court system by case appraisal or mediation. A case appraisal decision is based on the appraiser's independent assessment, not on agreement between the parties.
The following table shows how to determine the compensation part of a lump sum that has been finalised by case appraisal.
| If … | then … |
|---|---|
| the case is finalised by case appraisal | the finalisation is treated as a judgement rather than a settlement and the compensation part of the lump sum is based on the specific amounts awarded for economic loss (see above). |
| the case appraisal is not ratified and it is subsequently supplanted by an agreement between the parties | the finalisation is treated as a settlement and the 50% rule applies. |
Act reference: SSAct section 17(3) Compensation part of a lump sum
Policy reference: SS Guide 4.13.2.60 Lump Sum Preclusion Period - General, 4.13.2.70 Commencement of Lump Sum Preclusion Period, 4.13.2.30 Compensation part of lump sum - 50% rule
New South Wales Claims Assessment & Resolution Service (CARS)
The Motor Accident Authority (MAA) of New South Wales uses CARS to determine personal injury claims resulting from motor vehicle accidents occurring on or after 5 October 1999. Under section 94 of the New South Wales Motor Accidents Compensation Act 1999 a CARS assessor determines all claims finalised under CARS.
However, depending on the process to reach that determination, the final decision by the assessor may be a settlement or it may be a judgement for social security purposes. The following table shows how to determine the compensation part of a lump sum that has been finalised under CARS.
| If … | then … |
|---|---|
| the assessor has to make an independent assessment because one or both of the parties have contested the proceedings | the determination is treated as a judgement rather than a settlement. This is because the CARS assessor must make an independent judgement about the heads of damage. The compensation part of the lump sum is then based on the specific amounts awarded for economic loss (see above). |
| the parties have negotiated and presented an agreement to the CARS assessor for ratification | the determination is treated as a settlement and the 50% rule applies. This is because, unlike the situation above where the CARS assessor makes an independent judgement, the CARS assessor is only ratifying the agreement already struck between the parties. Although heads of damage may be specified in the agreement, the 50% rule applies because there has NOT been an independent judgement made as to the basis of the agreement. |