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10.4 Lump sum arrears of incapacity payments and recovery of VEA/Centrelink/internal debt
Some arrears of incapacity payments will involve recoveries in respect of pensions paid by Centrelink under the Social Security Act 1991 (SSA) or under the Veterans' Entitlements Act 1986 (VEA) or an internal debt recovery. Taxation should be withheld from the payment before processing any recoveries.
10.4.1 VEA recoveries
For arrears payments involving recovery of a VEA pension, taxation is applied before the amount of VEA pension is deducted. However, where the incapacity payment is tax exempt then no taxation is applied to the gross amount. Delegates should note that this is based on new advice from the ATO and should be applied to incapacity payments made after 1 July 2010.
10.4.2 Centrelink recoveries
For arrears payments involving recovery of a Centrelink payment, taxation is applied before the amount of pension is deducted.
If there is insufficient funds after taxation is withheld, the amount of VEA recovery should be processed first. The remainder should be allocated to the Centrelink recovery, with any outstanding debt, being a debt to Centrelink for Centrelink to recover.
10.4.3 Internal debts
An internal debt may be a debt to the Department of previously overpaid compensation. Taxation should be withheld before any debt is recovered.
Example 1 – Recovery from lump sum arrears
A person is entitled to arrears of incapacity of $85,000. However that person has already received $20,000 from Centrelink and $15,000 under the VEA.
The whole amount of $85,000 is subject to PAYG Withholding. The arrears relates to entitlements over three financial years. The amount of taxation calculated is $16,000. The payment is processed as follows:
Gross Amount = $85,000
Less Tax to be withheld = $16,000
Less VEA recovery = $15,000
Less Centrelink recovery = $20,000
Net arrears payment = $34,000
10.4.4 CSC Recoveries
If a person has an overpayment as a result of receiving incapacity payments and having an entitlement to superannuation for the same period, the overpaid incapacity amount can be recovered from the Commonwealth Superannuation Corporation (CSC). In this scenario the gross amount of the overpayment is recovered from the gross amount of the superannuation arrears payment owing to the person. The CSC only recover tax from the arrears owing to the person after the overpaid incapacity payment has been recovered.