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11.5 Conversion of small amounts of compensation to a lump sum payment/redemptions
Small amounts of incapacity payments may be converted to a lump sum payment. This is referred to as a ‘redemption’ under the DRCA and may be referred to as a redemption or commutation under the MRCA (though those terms are not referenced in the legislation). Redemption of payments is a practical alternative to continuing to make long term payments, where a person's incapacity status is stable and unlikely to change. This reduces the cost to the Commonwealth of administering small weekly payments, and provides clients with the benefits of receiving incapacity payments early, and as a lump sum.
A redemption is a lump sum payment made in lieu of future weekly compensation payments. It does not affect liability to pay any other compensation under the same Act.
The redemption eligibility ceiling amount (DRCA) or incapacity commutation limit (MRCA) is adjusted annually with effect from 1 July. The rates are published in CLIK.
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 the member’s level of incapacity for duty can be considered to be likely to change in the future.
Sections 30 and 137 allow for a determination to be made redeeming further weekly incapacity payments by way of a lump sum.
Subsection 30(1) of the DRCA requires that a determination shall be made redeeming further weekly payments by the payment of a lump sum, where:
there is liability to make weekly compensation payments under Section 19, 20, 21 or 21A; and
if the person's degree of incapacity is unlikely to change i.e. will not deteriorate or improve.
Subsection 137(1) of the DRCA requires that a determination must, on written request by a 'former employee', be made redeeming further weekly payments by the payment of a lump sum, where there is liability to make weekly payments if the Delegate is satisfied that the employee's degree of incapacity for work is unlikely to change (i.e. will not deteriorate or improve).
A lump sum payment under Section 30 is mandatory (although it is strongly recommended that Section 30 redemptions be paid only after prior consultation with the person) once the criteria of Section 30 (1)(a), (b) and (c) are met. Usually an informal offer would be made to the person before a determination is made. A lump sum payment under Section 137 is made once the criteria of Section 137 (1) (a), (b) and (c) are met AND after a written request for the redemption is made by the former employee.
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.
Lump sum redemptions are only made with the person’s written consent.
11.5.2 Investigation of redemption issues
Delegates should investigate the possibility of a redemption/commutation where the incapacity payments fall below the prescribed rate.
In assessing whether the employee has an entitlement to a lump sum, delegates should consider the following issues:
whether the degree of incapacity is likely to increase, potentially reducing the amount the person is able to earn and resulting in the person’s weekly compensation benefits increasing to more than the prescribed redemption ceiling;
whether the degree of incapacity is likely to decrease, potentially increasing the amount the person 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. This 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, suggesting that the level of incapacity may change;
an assessment of the goals (or proposed outcomes) of any rehabilitation plan the person may be undertaking, 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 person 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 on 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 person is still serving, then no lump sum is payable as redemption is only applicable to discharged members.
DRCA only – Investigation includes advising 'former employees' if they have a Section 137 entitlement and advising them of their right to request the payment of the redemption lump sum. 'Former employees' should also be advised that payment of a lump sum may affect any entitlement they may have to the benefits which are available from Centrelink. They should be advised to seek information from Centrelink or Income Support before requesting a lump sum redemption under Section 137.
11.5.3 Calculating the lump sum amount
The calculation of the redemption amount payable is not made by multiplying the number of weeks left until pension age by the weekly amount of the incapacity payment. The amount of any lump sum is calculated in accordance with the formula contained in the relevant legislation. ‘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 reaches age pension age, 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. The Specified number is a number specified by the MRCC (0.03).
This has the effect of calculating a redemption amount payable that is substantially less than what would have been payable to the person if they had continued to receive payments until pension age.
11.5.4 Resumption of payments after a lump sum has been paid
Payment of a lump sum under section 30 or Section 137 of the DRCA or section 138 of the MRCA does not affect any entitlements (other than for incapacity for work) which the injured person may have under the same Act.
DRCA – Section 31 allows for the resumption of weekly incapacity benefits, where at any time after a lump sum redemption is paid under Section 30, the injury results in the employee's becoming incapacitated for work to the extent that the employee is not able to engage in suitable employment, and the incapacity is likely to continue indefinitely i.e. is permanent.
The person does not need to be totally incapacitated to resume payments.
In such circumstances, there is liability to pay compensation for the period of incapacity at the rate that would have been payable under Section 19, 20, 21 or 21A less the amount per week that was redeemed at the date of the determination. Delegates should note that:
weekly payments which are recommenced under Section 31 cannot be redeemed.
a 'former employee' whose weekly incapacity benefits are redeemed under Section 137 cannot be entitled to a resumption of weekly incapacity benefits in the event of a worsening of the degree of his/her incapacity for work
a client who received in effect a redemption under the 1930 or 1971 Acts, who is not a 'former employee' can resume payments under the terms of S31 (S125(2) refers).
MRCA - Section 139 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 no longer 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.
The person does not need to be totally incapacitated to resume payments.
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.
11.5.5 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) of the DRCA and section 137 of the MRCA is that a lump 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 the Income Tax Assessment Act 1936.
DRCA only - Advice from the ATO (following a decision in an AAT case (Coward and Commissioner of Taxation No ST97/87)) is that a redemption made under Section 137 in respect of the portion of incapacity beyond age 65 will be characterised as a 'capital receipt' and will therefore not be subject to either income or capital gains tax. In other words, that part of a lump sum redemption which relates to incapacity for work after the injured employee turns 65 cannot be considered to be 'income replacement' and is not therefore considered to be taxable.
In cases where a 'former employee' is under 65 years old at the time a Section 137 lump sum redemption is to be paid, it will be necessary to identify that part of the redemption which is taxable (for incapacity before the employee is to turn 65) and the portion which will not be taxable (after the employee is to turn 65).
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.
11.5.6 Lump sums for Reservists
A redemption or commutation is based on the Reservist’s total incapacity payment amount (taxable and non-taxable components) and cannot be paid for only one aspect of the payment. A person cannot receive a redemption or conversion without considering the likelihood of a change to the level of incapacity in both the employee's Reserve and civilian employment. The portion of the lump-sum attributable to loss of Reserve earnings is non-taxable.