C29/2002 CHANGES TO COMPENSATION RECOVERY - VETERANS' AFFAIRS LEGISLATION AMENDMENT (FURTHER BUDGET 2000 AND OTHER MEASURES) ACT 2002

Purpose

The purpose of this Departmental Instruction is to inform States about changes to the compensation recovery provisions contained in Part IIIC of the Veterans' Entitlements Act 1986 (the VEA).

Legislation

The amendments are contained in Schedule 1 of the Veterans' Affairs Legislation Amendment (Further Budget 2000 and Other Measures) Act 2002, which received Royal Assent on 4 April 2002.  The legislation can be found at: http://scaleplus.law.gov.au/html/c — o — mact/11/6469/top.htm

Start date

The changes commenced on 20 September 2001.

Reason for start date

These amendments were originally contained in the Veterans' Affairs Legislation Amendment (Further Budget 2000 and Other Measures) Bill 2001. This Bill was not passed by the Parliament and lapsed when Parliament was prorogued upon the announcement of the 2001 election.  This necessitated the introduction of a further Bill hence the delay in passage of the relevant legislation.

The commencement date corresponds with the commencement of similar amendments to the Social Security Act 1991.

Authorised by

Roger Winzenberg

Branch Head

Income Support

12 July 2002

What are the changes?

Amendments to the Compensation recovery provisions involve:

1. Changes to the treatment of periodic compensation payments in the case of partners of compensation recipients.

2. The extension of the power to recover compensation debts directly from compensation payers and insurers to permit recovery from compensation payers and insurers where compensation is treated as ordinary income.

3. Minor changes to the legislation.

Rationale

These amendments flow on from similar changes to the Social Security Act 1991 (SSA) made as part of the simplification initiative to develop a simpler and more coherent social security system

Old rules

Prior to 20 September 2001, if:

• a person received periodic compensation payments;
• the person was not receiving a “compensation affected pension”(CAP)
  [9]

  A CAP is invalidity service pension (ISP); partner service pension (PSP) and income support supplement (ISS). Cases will also arise where the partner is in receipt of compensation affected payments under the Social Security Act 1991.

  [9] (go back)
  at the time of the event that gave rise to the right to compensation; and
• the couple were both eligible for a CAP or a compensation affected payment under the Social Security Act 1991 (the SSA);

the couple's combined pensions were reduced by attributing one half of the amount of the periodic compensation payment to each person's CAP and each CAP reduced by an equivalent amount, dollar for dollar

Overview of new rules

Under the new rules, which commenced on 20 September 2001, the dollar for dollar reduction will apply only to the pension of the person who receives the compensation

If the CAP of the person who receives the compensation payments is fully limited solely because of the operation of Part IIIC (and not for some other reason as well) then the excess will be treated as the ordinary income of the partner

Where are the new rules?

The new rules are contained in the following provisions:

• Impact on the CAP of the person who received the periodic compensation payments – new subsection 59T(2) applies – the person's daily rate of CAP is reduced on a dollar for dollar basis.

• Impact on the CAP of the partner of the person who received the periodic compensation payments – new subsection 59TA(1) applies - if the compensation recipient's CAP is fully limited then any excess is to be treated as ordinary income for the person's partner. If not fully limited, there is no impact on the partner's pension.

Impact of change

The change will in most cases result in either no change to, or an overall increase in, the couple's income, even though the compensation recipient may lose payment of the CAP altogether. In some cases, the couple will benefit overall from the change (see example below).

Example

The example below illustrates the beneficial nature of the changes in the case of a couple to whose section 59TA applies:

Pension received

Veteran

Partner

Maximum basic rate

$ 322.70

$ 322.70

Pension supplement

   $ 12.80

$ 12.80

Pharmaceutical allowance

$ 2.90

$ 2.90

Total

$ 338.40

$ 338.40

Question

1. What is the impact of the periodic compensation payments on the above pensions?

2. Will the new rules, which take effect on 20 September 2001, change the amount of pension payable to the couple?

Answer

ISP and PSP are compensation affected pensions for the purposes of Part IIIC and both the veteran and spouse have not reached their relevant pension age.  Part IIIC therefore applies.

The veteran is receiving periodic compensation payments covered by Part IIIC.

Section 59T (and on and from 20/9/01, new ss.59T and 59TA) apply because the person was not receiving a CAP at the time of the event that gave rise to the compensation.

The tables below compares the application of the pre and post 20 September  2001 rules to the example above:

Pre 20 September 2001 rules

Pension received by:

Veteran

Spouse

Service pension

$ 338.40

$ 338.40

Compensation payment to:

$ 600.00

-

Amount of periodic payments assessed as ordinary income

N/A

N/A

Less income free area

N/A

N/A

Amount of periodic payments in excess of income free area

N/A

N/A

Reduction in pension due to assessment of excess as ordinary income

N/A

N/A

Amount of pension received after limitation

$38.00

$38.00

Total pension received

$ 38.00

$ 38.00

Total pension received (combined) after application of Part IIIC

$ 76.00

Post 20 September 2001

Pension received by:

Veteran

Spouse

Service pension

$ 338.40

$ 338.40

Compensation payment to:

$ 600.00

-

Amount of periodic payments assessed as ordinary income

N/A

$ 261.60

Less income free area

N/A

$100.00

Amount of periodic payments in excess of income free area

N/A

$161.60

Reduction in pension due to assessment of excess as ordinary income

N/A

$ 64.64

Amount of pension received after limitation

NIL

$ 273.76

Total pension received

NIL

$ 273.76

Total pension received (combined) after application of Part IIIC

$ 273.76

Old rules

The old rules did not enable the direct recovery of compensation payments from compensation payers and insurers in circumstances where the periodic compensation is treated as ordinary income. This occurs for example, if the person was in receipt of a CAP at the time of the event that gave rise to the entitlement to compensation.

New rules

The new rules are contained in amendments to the following sections:

•         Section 59ZA – recovery notice to compensation payers; and
•         Section 59ZG – recovery notice to insurers.

A number of minor changes (primarily to reflect the fact that pensions are no paid on a daily basis and the existence of new sections 59T and 59TA) were also made to:

•     Section 59W – recovery direct from the person;
•     Section 59Y – preliminary notice to compensation payers; and
•     Section 59ZE – preliminary notice to insurers.

Advantages of new rules

The new rules applying on and after 20 September 2001:

• will enable debts to be recovered up front from the compensation payer/insurer preventing payment of the compensation to the recipient;
• are advantageous for the Commonwealth as it will reduce the level of bad debts and will allow quicker recovery of the full amount of the debt before the compensation recipient receives the payment;

• benefit compensation recipients as up-front recovery from the compensation arrears is less likely to cause hardship than an ongoing impost on the compensation recipient's income support payment.

What are the minor changes?

Other minor changes to the legislation are summarised below:

What is considered compensation?

Subsection 5NB(4) provides that a payment will not be compensation for the purposes of Part IIIC in certain circumstances.

The circumstances include those where the recipient has made a contribution towards the payment (eg by paying insurance premiums) and those where the agreement provides for a reduction in payments where the contributor is eligible for or receives a CAP.

The amended paragraph (5NB(4)(b)) clarifies the position where the agreement provides for a reduction but the payments have been calculated without reference to that provision in the agreement.  In these cases, the payment will not be regarded as compensation.

Criminal injuries compensation

New subsections 5NB(6A) and (6B) have been added to clarify that payments made to compensate a person for a criminal injury does not constitute compensation for the purposes of the Act.

Delegations

The existing delegation of 18 October 2000 has been reviewed and already provides for delegation of the relevant powers where amended.

Review of cases

Any cases affected by the changes to the above rules should be reviewed and any adjustments backdated to 20 September 2001, the commencement of the relevant changes.