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C16/1997 BUDGET 1996/97 INITIATIVE - ENHANCE EFFECTIVENESS OF TREATMENT OF LUMP SUM COMPENSATION PAYMENTS MADE FOR LOSS OF EARNINGS
DATE OF ISSUE: 11 MARCH 1997
BUDGET 1996/97 INITIATIVE - ENHANCE EFFECTIVENESS OF TREATMENT OF LUMP SUM COMPENSATION PAYMENTS MADE FOR LOSS OF EARNINGS
The purpose of this Departmental Instruction (DI) is to advise of the implementation and effect of the Budget 1996/97 initiated changes to the
treatment of lump sum compensation payments for service pension/income support supplement purposes.
2.Currently, under the Compensation Recovery provisions of the Veterans' Entitlements Act 1986 (see Part IIIC), a lump sum compensation payment for loss of earnings results in a preclusion period during which certain pension payments are not payable (referred to as a “lump sum preclusion period”) to a pensioner under DVA pension age.
3.DVA pension age is currently:
55.5 years for a female veteran;
60 years for a male veteran;
60.5 years for the partner of a male veteran; and
65 years for the partner of a female veteran.
4.In the case of lump sum payments of compensation, the Compensation Recovery provisions only apply to persons under DVA pension age who receive a compensation payment on or after 1 January 1995 and:
- made a claim for invalidity service pension or partner service pension on or after 1 May 1987; or
- made a claim for carer service pension on or after 1 January 1993; or
- receive Income Support Supplement (no date of pension claim applies because ISS was only introduced in March 1995 ie., after introduction of the Compensation Recovery provisions)
5.The lump sum preclusion period is worked out by dividing the lump sum compensation payment element attributable loss of earnings (as prescribed by subsection 5NB(7) VEA) by Average Weekly Earnings (AWE) to calculate the number of weeks during which a pensioner is precluded from receiving the pension. Shortly after announcement of the Budget Measure, AWE stood at $563.60 (at July 1996).
6.For members of a couple, both the person who received a lump sum compensation payment and their partner are subject to the same pension preclusion period.
Issues addressed by the Budget changes
7.The changes initiated by the Budget sought to address the following two issues:
that the Average Weekly Earnings derived divisor was seen to be too generous to the pensioner because average weekly earnings was an inappropriate divisor which lacked relevance to the income test. If a person had income as high as average weekly earnings, the income test would prevent the payment of any pension at all. That is, to be a pensioner, a person's income must be considerably less than average weekly earnings; and
- that it was not appropriate that both members of a couple should be subjected to a lump sum preclusion period in respect of a lump sum of compensation received by only one member of the couple.
Changes introduced by the Budget measure
8.The Budget measure changes the preclusion period formula so that a lump sum compensation payment made for loss of earnings and received on or after 20 March 1997 is divided by the amount of income at which pension ceases to be payable under the income test (currently $790.80 per fortnight, or $395.40 per week). Because that amount is less than average weekly earnings, the formula will produce a longer pension preclusion period.
9.The Budget measure also provides that, if qualified, partners will continue to be able to claim or receive a pension during a preclusion period which has been set for the pension of the other member of the couple due to that person's receipt of a lump sum compensation payment. That is, a lump sum preclusion period will only apply to a member of a couple where that person is both eligible for a compensation affected pension and is also the recipient of a lump sum compensation payment.
Implementation date and persons affected
10.The new preclusion period formula/divisor and partner rules will only be applied to pensioners who receive a lump sum compensation payment for loss of earnings on or after 20 March 1997 and who meet the existing pension claim/receipt date provisions (see paragraph 4 above).
11.Where a lump sum compensation payment for loss of earnings is received prior to 20 March 1997:
- the lump sum recipient will continue to have their lump sum compensation preclusion period calculated using the Average Weekly Earnings divisor; and
- the partner of the lump sum recipient will continue to have their pension precluded for the same period as the lump sum compensation recipient member of the couple.
13.The legislative changes which give effect to the Budget changes are contained in the Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Act 1997, which received Royal Assent on 5 March 1997.
14.The following is a brief description of the changes made to the VEA to implement the Budget initiative:
- existing paragraph 59Q(2)(c) amended such that the whole subsection applies only to lump sum payments of compensation received before 20 March 1997;
the existing section 59Q(7) lump sum preclusion period formula renumbered as paragraph 59Q(7)(a) and retained for application to lump sum compensation payments received before 20 March 1997;
a new lump sum preclusion period formula incorporating the new divisor inserted as paragraph 59Q(7)(b) and applies to lump sum compensation payments received on or after 20 March 1997;
a new subsection 59Q(2A) inserted to ensure that the new preclusion period formula does not apply to the partner of the person receiving the lump sum compensation;
section 59R amended to ensure that the new preclusion period formulas are operable under the “recoverable amount” provisions (where a person may have to repay an amount of pension where both a lump sum and pension have been received); and
various examples in sections 59Q and 59R have been amended or added.
15.The new preclusion period formula inserted as paragraph 59Q(7)(b) is as follows:
“52 X compensation part of lump sum
OIFA + 2(MBR + RPA)”
OIFA means the “ordinary income free area” per year amount;
MBR means the “maximum basic rate” per year of service pension; and
RPA means the “rate of pharmaceutical allowance” per year.
Important: a) the formula is designed to only accept annual
amounts. Fortnightly rates of the above three
given input values are not to be used.
b) it is policy that the OIFA, MBR and RPA rates to
be applied to the formula are those rates which
were current immediately before the lump sum
payment became payable.
16.A working example (as inserted below section 59Q VEA) of application of the formula is a follows:
Facts:Jane is not a member of a couple. She has no dependant children. She is receiving an invalidity service pension when a lump sum compensation award of $11,000 is made to her on 25 March 1997. The compensation part of this lump sum is $5,500 (see subsection 5NB(7)).
Result:Jane's lump sum preclusion period is:
52 X compensation part of lump sum
OIFA + 2(MBR + RPA)
52 X 5,500= 286,000= 13.7
2548 + 2(9006.40 + 140.40) 20,841.60
The result rounded down = 13
Therefore Jane's lump sum preclusion period is 13 weeks.
17.Identical revisions to those made to the VEA and detailed in this DI have been made to the Social Security Act 1991 (SSA). The implementation date for the revised SSA lump sum compensation preclusion period divisor and formula is also 20 March 1997.
18.Please note that the amendments to the SSA also include a measure to allow compensation recovery against age pension. The revisions to the VEA do not include such an amendment.
General Orders Service Pension
19.Amendments have been prepared and submitted for inclusion in the next available release of the General Orders Service Pension (GOSP).
20.DVA pensioners will be informed of the change in the treatment of lump sum compensation payments through brief articles appearing in DVA's “Vetaffairs” publication and the DSS “Age Pension News” newsletter.
21.Any further queries in respect of this matter should be directed to Martin Dibb on telephone 06-2896751, fax. 06-2894853, LAN C-C-BA-02.