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.