38.4 Redemptions

Lump sum redemptions made in accordance with sections 30 or 137 of the SRCA are taxable.  However that component of a lump sum redemption to a former employee under section 137 that is made in substitution of incapacity payments beyond [glossary::469] is exempt from income tax.  See 20.28.3 of this manual for further information.

 

 

 

20.23 No payment if entitlement Redeemed

Sections 30 of the SRCA and 49 of the 1971 Act both provide that, when an entitlement to weekly compensation falls below a certain amount and this appears likely to continue indefinitely, the weekly entitlement should be 'redeemed' by payment of a lump sum. Where these qualifying conditions are met, redemption is voluntary under the 1971 Act but mandatory under the SRCA. The amount of the lump sum is determined by formulae that take into account the clients age, expectation of life and previous entitlement. Payment of that lump sum is in lieu of further weekly payments.

20.28.3 Taxation on Lump Sum Redemptions

Payment of a lump sum redemption is in effect the 'bringing forward' of the payment of weekly compensation as income replacement. The advice from the Australian Taxation Office (ATO) regarding Sections 30 and 137 (please see the exceptions 21 below) is that, 'a capital sum received in substitution of weekly payments does not alter the character of the compensation for 'income replacement' and that such payments are subject to taxation in accordance with Subsection 25(1) of the Income Tax Assessment Act 1936.

20.17.2 Those who fail to seek employment are deemed AE, not incapacitated

Furthermore, Section 19(4)(e) says:

19(4) In determining, for the purposes of Subsections (2) and (3), the amount per week that an employee is able to earn in suitable employment, Comcare shall have regard to:

a)to d)..........

e)where, after becoming incapacitated for work, the employee has failed to seek suitable employment – the amount per week that, having regard to the state of the labour market at the relevant time, the employee could reasonably be expected to earn in such employment if he or she were engaged in that employment;

30.6.3 Advice to client

Before approving an interim payment under S19, a Delegate must write to the client in the following terms:

  • advising the client that the rate of his or her weekly compensation entitlement is subject to the amount of any superannuation pension or superannuation lump-sum benefit received by the client, however details of any such superannuation entitlements are not yet known, and
  • advising the client that he/she has two options:

1.deferral of determination and payment of weekly compensation until the superannuation information is known, or

44.1.2 Implications of being a former employee

Division 3 of Part X of the SRC Act (ss 131 - 137), which sets out transitional and savings provisions, provides incapacity compensation benefits for former employees which are generally more favourable than the incapacity benefits available to current employees. In particular, former employees continue to receive weekly incapacity compensation after [glossary:Age Pension age:469], a benefit which is not available to current employees because of the age bar in s 23(1) in Part II of the Act.

 

44.2 Compensation Entitlement immediately before 1/12/1988

The client's compensation entitlement immediately before 1/12/1988 is relevant to calculation of the amount of weekly incapacity compensation paid to former employees under the transitional provisions in Division 3, Part X of the SRC Act. Specifically, this amount is the "1971 amount" as defined in s 123 of the Act:

"1971 amount", in relation to a former employee, means the amount of compensation that was, immediately before the commencing day, payable per week to the former employee under the 1971 Act.