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Centrelink preclusion provisions

Feature Articles

Cite as: (2003) 77(10) LIJ, p.28

Solicitors must ensure their clients understand social security implications when compensation payments are settled.

By Marie Booth

The compensation recovery provisions contained in Part 3.14 of the Social Security Act 1991 (Cth) (the Act) are designed to prevent claimants from receiving double compensation and to prevent cost shifting by employers, insurers and state and territory authorities to the Commonwealth.[1]

Part 3.14 provides for Centrelink to reduce and, where appropriate, recover certain social security benefits payable under the Act to a person who receives personal injury compensation, which includes payment for loss of earnings or earning capacity.

The relevant provisions operate to prevent “double payment” by depriving a person of an entitlement to social security benefits payable under the Act during the relevant period (the preclusion period).[2]

Preclusion periods can be lengthy and must be considered when evaluating settlement offers or deciding how to best use settlement proceeds. For this reason, it is important that solicitors ensure that their clients fully understand and appreciate the social security implications before settling.

Unfortunately, it does not appear to be uncommon for plaintiffs to allege that they were never correctly advised by their solicitors about the social security implications before settlement. The Tasmanian Supreme Court examined this issue in Hutt v Pigott Wood and Baker[3] and concluded that solicitors handling personal injury claims have a duty of care to correctly advise their clients about the social security implications. In that case, Mrs Hutt had spent her settlement money within four months of receipt, acting on the mistaken belief that no preclusion period applied and that she could then turn to social security as a source of income. The Court found that Mrs Hutt’s solicitor had breached his duty of care to the plaintiff by failing to advise her at or around the time of settlement about the preclusion period, and damages were awarded.

Similarly, in Re Secretary, Department of Social Security and VXY,[4] the Administrative Appeals Tribunal (AAT) said:

“In these days of severe limits on the availability of legal aid, it may be unrealistic to expect applicants for disability support pensions or similar payments from the Department to commence proceedings against their solicitors. Perhaps it might be a good idea if more did so. That might encourage those practising in the compensation and personal injury area to ensure that they keep up with amendments to the social security legislation”.

The lessons that might be learned from Hutt and VXY are that practitioners ought to advise their clients as to Centrelink preclusion periods. Furthermore, obtaining estimates of social security charge and preclusion, and conveying those estimates to their clients throughout the course of the conduct of a claim, decreases the risk of overlooking the provision of such advice at the time of settlement.[5]

The statutory framework

What is compensation?
Compensation is defined in s17(2) of the Act as payment (whether it is made within or outside Australia) that is made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury. Compensation includes:

  • a payment of damages;
  • a payment made under a scheme of insurance or compensation under a commonwealth, state or territory law;
  • a payment (with or without admission of liability) in settlement of a claim for damages or a claim under such an insurance scheme;
  • any other compensation or damages payment; or
  • a payment under a sickness or accident policy where the payment is reduced because the claimant has received social security payments from Centrelink.[6]

The definition of compensation is broad and catches payments at common law as well as under statutory compensation schemes.

Periodic compensation payments
Continuing periodic payments of compensation made for lost earnings or lost capacity to earn, such as weekly workers’ compensation, reduce the amount of the compensation recipient’s social security payment by a dollar for every dollar of compensation received.

Therefore, if a compensation claimant receives an arrears payment representing periodic compensation payments for a past period, and the person has also received social security payments for some or all of the same period, Centrelink will recover any payments received.

Lump sum compensation payments
A lump sum payment of compensation may preclude a person from receiving social security payments. In addition, past payments made by Centrelink may be recovered from the lump sum payment.

Structured settlements
The Victorian Parliament has recently passed the Wrongs and Other Acts (Public Liability Insurance Reform) Act 2002, which makes provision for the use of structured settlements. A “structured” settlement is defined as an agreement that provides for the payment of all or part of an award of damages in the form of periodic payments funded by the purchase of an annuity or by other agreed means. It remains to be seen how Centrelink will approach the imposition of a preclusion period in circumstances where a structured settlement is adopted.

How is the preclusion period calculated?
If a lump sum settlement is made wholly or partly in respect of lost earnings or lost capacity to earn, 50 per cent of the gross lump sum payment is deemed to be the compensation part for the purposes of calculating the relevant preclusion period.

The adjustment of 50 per cent was arbitrarily prescribed by Parliament to prevent parties adjusting their settlement calculations to understate the amount of the settlement sum attributable to loss of earning capacity and thereby minimising the loss of a claimant’s social security benefits.[7]

If personal injury compensation is awarded by court order after a contested hearing, the 50 per cent adjustment does not apply. Instead, Centrelink is required to form an opinion as to the extent to which the award applies to lost earnings or lost capacity to earn and, in doing so, is expected to have regard to the characterisation given by the court to the award.

The number of weeks in the lump sum preclusion period is calculated by dividing the compensation part of the lump sum by the single pension income cut-off amount (divisor) applying at the time the compensation is received. The resulting amount is then rounded down to a whole number of weeks. At 1 July 2001, the divisor was $565.75, although it is likely to have increased since then.[8]

Commencement date of preclusion period
The preclusion period generally begins on the day after the last day periodic compensation payments were paid or if no periodic compensation payments were received, the day the lost earnings capacity began (usually the date of injury).

Centrelink will recover most social security payments made to the compensation recipient in the preclusion period. This means, in effect, that any relevant payment received from the date of injury (if the claimant had no entitlement to periodic compensation) until the date of judgment or settlement of the personal injury action (assuming the preclusion period extends into the future following settlement) is immediately repayable to Centrelink out of the settlement funds.

If the preclusion period extends into the future, the compensation recipient will not be paid most social security payments until such time as the preclusion period is served.

Recovery

Repayment to Centrelink is guaranteed by s1172 of the Act which empowers it to serve a recovery notice on the compensation payer to secure its charge over the money owed. It is an offence for the compensation payer to release the settlement money to the compensation recipient before discharging the debt owed to the Commonwealth.

Centrelink’s discretion to waive or to reduce the preclusion period

Centrelink has a discretion under s1184 of the Act to treat all or part of the compensation money as not having been received (thereby reducing or removing the preclusion period) in situations where there are deemed to be “special circumstances”. The “special circumstances” provision is generally intended to be applied to alleviate the harshness of imposing a preclusion period in circumstances where to do so would cause the claimant severe financial hardship, or would give rise to an unreasonable or unjust result.

“Special circumstances” are not defined in the Act, but in Re Green and Secretary Department of Social Security,[9] the AAT nominated a framework against which claim for special circumstances could be considered:

  • “hardship is a relevant consideration” but regard must be had to the way in which the hardship arose;
  • there must exist “factors which justify the making of an exception in whole or in part to the principle of liability which the Act otherwise establishes”;
  • the decision-maker must have regard to whether, by exercising the discretion in the particular case he or she will be achieving or frustrating the ends or objects which are conformable with the scope and purpose of the Social Security Act; and
  • the decision-maker must be prepared to respond to special circumstances of any particular case by reason of which strict enforcement of the liability created by the section would be unjust, unreasonable or otherwise inappropriate.[10]

It has been held that neither ignorance of the existence or duration of a preclusion period, nor the premature expenditure of settlement money warrants a reduction of a preclusion period.[11]

“Non-earners” under the Transport Accident Act 1986

Section 93(10) of the Transport Accident Act 1986 (the TAA), precludes transport accident claimants from being awarded damages in respect of pecuniary loss during the first 18-month period post accident. Further, the TAA precludes those persons who are determined as “non-earners” at the date of accident from receiving weekly payments for loss of earnings. This usually leaves transport accident victims who are non-earners at the date of accident in a position where they must, by necessity, rely on social security benefits as a source of income until resolution of their common law claim for damages.

Until recently, when calculating the preclusion period, Centrelink applied a policy of commencing the preclusion period on the date of injury (usually the date of the transport accident) and would seek to recover any social security benefits received by transport accident victims during the first 18-month period post accident.

Rather than preventing “double dipping”, the imposition of a preclusion period in such circumstances actually had the reverse effect to that intended under the Social Security Act. In effect, Centrelink was actually depriving “non-earners” of what was paid to them by virtue of their rightful entitlement to social security benefits on the basis that they were taken to have been compensated for it in their common law award of damages, when in actual fact they were not.

This anomaly was recognised by Merkel J in Kertland v Secretary, Department of Family and Community Services,[12] where his Honour found that the fact that the applicant was a “non-earner” at the time of her transport accident, and was therefore not entitled to receive loss of earnings benefits under the TAA for a period of 18 months post accident, was sufficient for a finding that there were “special circumstances” under the Social Security Act. The outcome of Kertland was that Centrelink was unable to recover any social security benefits received by Ms Kertland during that first 18-month period post accident, on the basis that the Court found “special circumstances”.

The significant passage from his Honour’s judgment follows:

“As has been explained, the purpose (of the preclusion period) is to avoid ‘double payment’ of social security benefits and compensation for loss of earnings or loss of earning capacity ...”.

Contrary to the respondent’s contention, absence of double payment has not arisen solely by reason of the operation of the TAA. Rather, it has arisen solely by reason of the operation of the TAA in the context of the particular circumstances of the applicant. Relevantly, those circumstances were that she was not an “earner” for the purposes of the TAA in the period before her accident. The consequence was that, for the period of 18 months following the accident, her personal circumstances were such that she was not entitled under TAA to weekly payment in lieu of lost earnings, or to any other compensation as a result of loss of earnings or loss of earning capacity.

It was open to the AAT to find that no part of the compensation the applicant received related to a period during which social security payments were payable with the consequence that, as there has been no “double payment”, there were special circumstances for the purposes of s1184 of the Social Security Act.

Kertland has significant ramifications for other transport accident claimants who had no entitlement to loss of earnings/loss of earning capacity benefits under the TAA. Following that decision, Centrelink usually now agrees to waive recovery of any social security benefits paid to transport accident claimants during the first 18-month period post accident provided they were a “non-earner” and did not receive loss of earnings benefits from the Transport Accident Commission (TAC). In some instances, this can result in a saving to the claimant of many thousands of dollars.

It is important for practitioners to be aware of the Kertland decision and to check any recovery notice received from Centrelink thoroughly. There are still instances where Centrelink does not appear to have been advised that the compensation recipient did not receive loss of earnings benefits from the TAC, and where it attempts to recover social security benefits received by the claimant during the first 18-month period post accident. If this occurs, the claimant or their practitioner should immediately contact Centrelink’s compensation recovery team and query the recovery amount. If the matter is not resolved, it should then be referred to an authorised review officer and, if necessary, to the Social Security Appeals Tribunal.


MARIE BOOTH, who is an associate with Michael D Ruse Solicitors, practises in personal injury litigation. She is also a member of the Australian Plaintiff Lawyers Association.


[1] M Meager, Compensation and Social Security Payments, Centrelink’s Rescue and Recovery Services, paper presented to the APLA state conference, 14-16 May 1999.

[2] Merkel J, Kertland v Secretary, Department of Family and Community Services [1999] FCA 1596.

[3] Unreported judgment no B20/1993.

[4] (1995) 40 ALD 745.

[5] M Meager and L Hanby D’Wynn, “Centrelink preclusion and recovery provisions”, 43 Plaintiff, 36.

[6] Centrelink Compensation Kit 2001/02.

[7] See Secretary, Department of Social Security v Banks (1990) 23 FCR 416 at 420-422.

[8] Note 6 above.

[9] (1990) 21 ALD 772.

[10] Note 5 above.

[11] Department of Family and Community Services v Johnson (AAT No T2000/042).

[12] Note 2 above.

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