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6.4.3 Redemption of small amounts of weekly compensation
Section 138 of the MRCA provides for redemption (conversion) of small amounts of incapacity payments in certain circumstances. The intention of the redemption provisions is to reduce the cost to the Commonwealth of administering small weekly payments and to provide the injured employee with the benefit of access to a lump sum rather than a relatively small weekly benefit.
The redemption 'ceiling' amount is indexed annually with effect from 1 July in accordance with subsection 404(1) by reference to the Consumer Price Index. Updated rates are published via Businessline and can be accessed via the following link.
A redemption has the effect of 'buying out' liability to make future weekly compensation payments. It does not affect liability to pay any other compensation benefits.
The delegation for Section 138 redemptions is at the APS6 level.
Subsection 138 (1)(d) requires that a person advises the Commission that he or she wishes to receive a lump sum redemption rather than incapacity payments. If the delegate is satisfied that the employee's degree of incapacity is unlikely to change (that is will not deteriorate or improve) and the person:
is engaged in work; or
is receiving a pension under a Commonwealth superannuation scheme; or
has received a lump sum under a Commonwealth superannuation scheme;
then future incapacity payments may be redeemed.
Redemptions are only available after the first 45 weeks of incapacity. Any weekly compensation benefits for 'partial' incapacity for duty which might be payable to serving members (for example, for loss of salary caused by a medically necessitated redeployment) are NOT to be redeemed since their level of incapacity for duty can be considered to be likely to change in the future.
18.104.22.168 Investigation of Conversion of Small Amounts of Compensation Issues
Delegates are to investigate the possibility of redemptions where incapacity payments fall below the ceiling prescribed by subsection 138(1).
In assessing whether the employee has an entitlement to a lump sum redemption, delegates should consider the following issues:
· whether the degree of incapacity is likely to increase, thereby reducing the amount the employee is able to earn and resulting in the employee’s weekly compensation benefits increasing to more than the prescribed redemption ceiling;
· whether the degree of incapacity is likely to decrease, thereby increasing the amount the employee may be able to earn and resulting in a reduction or cessation of the weekly compensation benefit;
· the length of time which the employee has been receiving the same level of weekly payments which could provide an indication as to whether the degree of incapacity is relatively stable. A period of stability of less than 6 months would generally indicate that a redemption would not be appropriate;
· any historical record of intermittent periods of incapacity which suggests that the level of incapacity may change;
· an assessment of the goals (or proposed outcomes) of any rehabilitation plan the employee may be undertaking and particularly whether any potential change in level of incapacity is likely once the rehabilitation program is completed;
· whether a referral for rehabilitation is appropriate, to determine whether the employee is capable of undertaking a rehabilitation program with the aim of reducing the level of incapacity and subsequent effect on the employee’s ability to earn;
· contemporary medical evidence as to whether the level of incapacity is likely to change;
· if the period of incapacity is within the first 45 weeks then no redemption should be calculated because the level of incapacity is likely to change; and
· if the employee is still serving, then no redemption is payable as redemption is only applicable to former members.
22.214.171.124 Calculating the lump sum
The amount of any lump sum is calculated in accordance with the following formula:
52 X Weekly Amount x [(Specified number + 1)n -1]
Specified Number x [(Specified number + 1)n]
where n is the number of years (including fractions) between the date the delegate was advised of the person’s decision and the date on which the person turns 65 or, if over 63, the date at which the person is no longer entitled to receive incapacity payments, the weekly amount is the weekly compensation payable and Specified number is a number specified by the MRCC (0.03).
Redemptions must be calculated using the MRCA Incapacity Calculator and selecting reason for assessment as ‘Redemption’.
Payment of a lump sum redemption is in effect the ‘bringing forward’ of the payment of incapacity payments. The advice from the Australian Taxation Office (ATO) regarding sections 138 is that, a lump sum received in substitution of weekly payments does not alter the character of the compensation as ‘income replacement’ and that such payments are subject to taxation in accordance with subsection 25(1) of the Income Tax Assessment Act 1936.
The appropriate rate of tax to be deducted is determined by:
· dividing the lump sum amount, (after deducting any amount as advised by Centrelink), by 52 to get a figure representing the weekly amount of income to be converted, then
· the person’s marginal rate of tax applicable to this amount is multiplied by 52 to give the final amount of tax applicable to the lump sum.
This method accords with the principle that the employee is assessed on his or her total income in the year of receipt.
As the redemption lump sum should (normally) appear on the individual’s ‘Payment Summary’ (Group Certificate), payments must not be made through DOLARS but should be processed through PMKeyS using earnings code M11 for section 138 redemptions.
Lump sum redemptions are only made with the person’s written consent. However, it is recommended that the following paragraphs be used when advising claimants about their entitlement to lump sum redemptions and the need for each individual to seek tax advice:
"It is the aim of this office to pay the above lump sum conversion entitlement to you promptly. Since receipt by you of the lump sum is likely to have taxation implications, we suggest that you consult a taxation expert or your local Australian Taxation Office concerning your likely taxation liability as a consequence of receiving this payment.
Once you have done so and are confident that you understand the taxation implications of proceeding with your conversion entitlement, if you wish to receive the above payment, please notify this office as soon as possible so that arrangements can be made for the lump sum to be deposited into a bank account nominated by you.
You should note that the MRCA makes no provision for reimbursement of any costs associated with consulting a tax expert for these purposes. In addition, please note that because conversion payments are based on the amount of weekly compensation payable at the date the lump sum conversion is determined, any delays in receiving your response to this letter may affect the amount of your lump sum conversion entitlement under the MRCA. Your early response to the above is therefore advisable."
126.96.36.199 Part-Time Reservists
Weekly incapacity benefits which are paid for loss of part-time Reserve income are not considered taxable income because they are considered to retain the original nature of the payment. In other words, part-time Reserve earnings are not taxable so compensation for loss of ability to earn in the part-time Reserves is also considered not taxable.
Non-taxable lump sum conversions must not be made through DOLARS but should also be processed through PMKeyS using earnings code M61 for section 138.
The formula used in calculating the conversion amount under subsection 138(2) applies the number of days to age 65. This may seem anomalous given that part-time Reserves would not normally serve beyond age 55 (indeed some categories of full-time employees e.g. Pilots may not normally serve beyond age 45). However, the MRCA provides no discretion to vary the formula used and the conversion in such cases is calculated to age 65.
188.8.131.52 Effect on other/future compensation entitlement
Payment of a lump sum under section 138 of the MRCA does not affect any entitlements (other than for incapacity for work) which the injured person may have under the MRCA.
Section 139 of the MRCA allows for the resumption of weekly incapacity benefits, where at any time after a lump sum redemption is paid, the condition results in the person becoming incapacitated for work to the extent that they are not able to engage in work, or the person stops receiving the pension under the Commonwealth superannuation scheme and the incapacity is likely to continue indefinitely. In such circumstances, there is liability to pay compensation for the period of incapacity at the rate that would have been payable under section 118 less the amount per week that was previously redeemed.
weekly payments which are recommenced under section 139 cannot be later redeemed.