Last amended: 12 August 2022

Income protection and sickness/accident policy payments treated as compensation

As a general rule, all payments made under an income protection or sickness and accident policy, including lump sum payments, are compensation for the purposes of the VEA if they are made in respect of lost earnings or lost capacity to earn. In some cases, payments from income protection or sickness and accident policies may be treated as ordinary income.    


Income protection and sickness/accident policy payments treated as ordinary income

Payments made from an income protection or sickness and accident policy are treated as ordinary income when:

  • the person has made contributions to the policy. (A person is still regarded as making contributions to a policy where the payments are administered by the employer, provided the funds originate from the person's own entitlements), and
  • the payments are not reduced by any amount of social security payment otherwise payable (i.e. the policy does not contain an 'offset' clause, or if the policy does contain an 'offset' clause it has not been invoked).

If a lump sum is received instead of periodical payments and the lump sum is calculated at a set weekly, fortnightly or monthly rate over a specific period, the payment is treated as if periodical payments were being made throughout the relevant period.

If the policy does not make provision for the timing or apportionment of the payment, any payment is treated as income for twelve months commencing on the day on which the person becomes entitled to receive the amount.


Income protection payments for accepted war-caused incapacity

Income protection payments for an incapacity which has already been accepted as being war-caused are assessed in the same way (as either compensation or income, as outlined above) as for non-war-related payments.

Excluded income amounts under the VEA include payments in respect of incapacity or death resulting from employment in connection with a war or warlike operations in which the Crown has been engaged.     


This exclusion from the income test covers payments of war-caused disability pension by foreign governments which are similar to Disability Compensation Payment paid under Part II and Part IV of the VEA. This test requires that the payments represent compensation for loss arising directly out of war service. The exclusion does not extend to payments under an industrial income protection agreement in respect of the same claimed was-caused condition, where the payments are based on the loss of earnings rather than compensation for loss of function or capacity.

Payments received in respect of a condition already accepted as war-caused are assessable under the compensation recovery rules, except where the conditions permitting assessment of the amounts as income (outlined above) are met.

Salary continuance payments

Some employers provide salary continuance payments to staff who are unable to work because of illness or injury. These payments may be 'purchased' by staff through salary deductions or form part of their salary package. Salary continuance schemes are essentially a form of self-insurance undertaken by the firm and when certain conditions are met, payments are made to the employee.

When salary continuance payments are made with respect to lost earnings or lost capacity to earn, they may be assessed as either compensation or ordinary income, in the same manner as payments from income protection or sickness and accident policies. When the payments are not based on lost earnings or lost capacity to earn, they are treated as trauma payments.

Trauma payments

Some insurance companies provide payments in respect of specified medical traumas or events. These payments are not related to the pensioner's lost income or lost capacity to earn. Lump sum payments are not assessed as ordinary income. Periodic payments are assessed as ongoing ordinary income.

Invalidity payments from superannuation funds

An invalidity payment from a superannuation fund, whether or not there is an 'offset' clause, is not a compensation payment. This includes payments made under an income protection policy or a sickness and accident policy when paid from a superannuation fund, whether funded by the person, or another party (for example, their union or employer).

Superannuation pensions are assessed as under the income streams assessment rules.