188.8.131.52 Income from personal injury insurance schemes
This topic provides information on the following matters:
- sickness and accident policy payments treated as compensation (1.1.C.240)
- sickness and accident policy payments treated as ordinary income (1.1.O.30)
- salary continuance payments
- trauma payments
- disability benefits paid from superannuation funds, and
- payments made by an approved friendly society.
Sickness & accident policy payments treated as compensation
Periodic and/or lump sum payments made under an income protection or sickness and accident policy, including payments in respect of a sporting injury, ARE compensation for the purposes of the SSAct if they are made in respect of lost earnings or lost capacity to earn. The exceptions to this rule are outlined below.
Act reference: SSAct section 17(2) Compensation
Sickness & accident policy payments treated as ordinary income
Payments from an income protection or sickness and accident policy, including payments in respect of a sporting injury, made in respect of lost earnings or lost capacity to earn ARE treated as ordinary income when:
- the compensable event occurred AFTER the CAP (1.1.C.250) was granted, OR
- the compensable event occurred BEFORE the CAP was granted, AND
- the person has made contributions to the policy, AND
- the payments are NOT reduced by any amount of social security payment otherwise payable (i.e. the policy does not contain an offset clause, or the policy does contain an offset clause but it has not been invoked).
Explanations: If a lump sum is received instead of future periodical payments and the lump sum is calculated at a set weekly, fortnightly or monthly rate over a specific prospective period, the payment is treated as if periodical payments were being made throughout the relevant period. Otherwise, if a lump sum is received from a sickness and accident policy that is to be assessed as ordinary income, the lump sum is assessed under SSAct section 1073, whereby the amount is assessed for 12 months commencing on the day on which the person becomes entitled to receive that amount.
Act reference: SSAct section 17(2A) Paragraph (2)(d) does not apply to a compensation payment if …, section 23(1)-'social security payment', section 1073 Certain amounts taken to be received over 12 months
Policy reference: SS Guide 184.108.40.206 Determining the rate of income for benefits, 220.127.116.11 Determining the rate of income for pensioners of age pension age from 20/09/2009, 18.104.22.168 Determining the rate of income for PP
Salary continuance payments
Some employers provide salary continuance payments to staff who are unable to work because of illness or injury. These payments may be 'purchased' by staff through salary deductions or be part of their salary package.
Salary continuance schemes are essentially a form of self-insurance undertaken by the firm and when certain conditions are met, payments are made to the employee.
When payments are made with respect to lost earnings or lost capacity to earn, they may be assessed as either compensation or ordinary income, dependent on who has made the contributions for the policy AND whether the payments are reduced by social security payments in the same manner as payments from income protection policies (offset clause).
For an exemption from the compensation provisions to occur the person has to make contributions to the policy, AND the payments from the policy are NOT reduced by any amount of social security payment otherwise payable (i.e. the policy does not contain an offset clause, or the policy does contain an offset clause but it has not been invoked).
It is sometimes unclear who has made contributions to salary continuance payments. Differing circumstances were discussed in 2 AAT cases Macri and Secretary, Department of Family and Community Services (2005) AATA 175 and Oprea and Secretary, Department of Family and Community Services (2005) AATA 678. In Macri they would not have got a pay increase if they opted out of the scheme but in Oprea they would have received a pay rise if they had opted out of the scheme.
The following table gives a guide to the treatment of salary continuance payments in circumstances where it is not clear who has made contributions and assumes there is no offset clause or it has not been invoked.
|If the employee opted out of the continuance or other scheme and this …||then the payments from the continuance or other scheme would be treated as …|
|resulted in a pay rise||ordinary unearned income.|
|did not result in a pay rise||compensation.|
When the payments are not based on lost earnings or lost capacity to earn, they are treated as trauma payments - see below.
Act reference: SSAct section 17(2A) Paragraph (2)(d) does not apply to a compensation payment if …
Some insurance companies provide payments in respect of specified medical trauma or event. The quantum of the payment is NOT related to the person's lost income or lost capacity to earn.
Lump sum payments are not assessed as ordinary income BUT the continuing assets and income tests treatment will be determined by how a person makes use of the funds.
Explanation: Some lump sums are NOT treated as income for social security purposes. These lump sums are defined by their characteristics rather than by nominated lump sum types. These characteristics are:
- unlikely to be repeated, and
- cannot be reasonably expected to be received or necessarily anticipated, and
- do not represent receipt of money for services rendered directly or indirectly.
If the trauma payments are made by periodic payment, they are assessed as ongoing ordinary income as they are not specifically exempt from the definition of income.
Act reference: SSAct section 8(1)-'income'
Policy reference: SS Guide 22.214.171.124 Income exempt from assessment - legislated
Disability benefits paid from superannuation funds
A regular/periodic disability benefit paid from a superannuation fund where the payment is based on a person's entitlement from an insurance policy, is to be treated as ordinary income. This includes regular, ongoing payments made under a sickness and accident policy, income protection policy (IPP), total and permanent disability/incapacity (TPD/TPI) policy or total and temporary disability policy (TTD), when paid from a superannuation fund, whether funded by the person, or another party (e.g. their union or employer).
Where an income protection payment is offset, the amount to be assessed as ordinary income is the 'gross amount, including tax but less any offset/s, payable to the person'.
A lump sum disability benefit paid from a superannuation fund is not assessed as income. Depending on what the income support recipient uses the lump sum amount for, further assessment may be necessary.
Payments made by an approved friendly society
Act reference: SSAct section 1067G-H3 Friendly society amounts (YA), section 1068-G4 Friendly society amounts (JSP)