This topic contains information on the following:
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 188.8.131.52 What is Compensation
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:
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
Policy reference: SS Guide 184.108.40.206 Compensation & Payability, 220.127.116.11 Income Exempt from Assessment - s8(11) Exempt Lump Sums, 18.104.22.168 How Income from DVA is Assessed, 22.214.171.124 Overview of Periodic Compensation Payments, 126.96.36.199 Income from Personal Injury Insurance Schemes
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 188.8.131.52 Specific Provisions for Assessing Income Streams
The following table shows how payments that are compensatory in nature are assessed as ordinary unearned income for allowances/benefit and pensions:
Compensation that is paid...
Is assessed as ordinary unearned income for...
as a lump sum*,
- allowances/benefit in the fortnight it is received, BUT
- ignored as income for pensions.
- allowances/benefit, AND
* 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 184.108.40.206 Income from Personal Injury Insurance Schemes
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:
Act reference: SSAct section 8(8) Excluded amounts - general (see (c), (k), (n))
Policy reference: SS Guide 220.127.116.11 Income Exempt from Assessment - Legislated, 18.104.22.168 Holocaust Restitution Payments - Germany & Austria, 22.214.171.124 Holocaust Restitution Payments - Other Countries, 126.96.36.199 Restitution Payments - Netherlands
Last reviewed: 1 July 2011