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Anforth, Allan --- "The law on recovery and preclusion: Compensation recovery under the Social Security Act" [2022] PrecedentAULA 21; (2022) 169 Precedent 42

THE LAW ON RECOVERY AND PRECLUSION

COMPENSATION RECOVERY UNDER THE SOCIAL SECURITY ACT

By Adjunct Professor Allan Anforth AM

The application of compensation recovery provisions to social security payments has been the subject of a large volume of case law for actions in debt in the common law courts, administrative review in the Administrative Appeals Tribunal (AAT) and judicial review in the Federal Court.

This article is an overview only: it is not practicable to review all of this case law in an article of this length, and the reader should consult other sources for more details.^[1] However, it provides guidance for legal practitioners on applying compensation recovery provisions, alerting them of the need to:

• be aware of the compensation preclusion periods;

• ensure clients are made aware that they will not be allowed to resort to social security for the duration of the preclusion period;

• ensure clients are warned against the danger of dissipating the compensation funds rather than managing them;

• challenge the inclusion of legal costs and medical treatment costs in the preclusion lump sum;

• make ‘special circumstances’ hardship claims and not just accept the Secretary’s decision; and

• make those claims within the statutory time frames.

THE COMPENSATION RECOVERY PROVISIONS

The compensation recovery provisions apply to all social security payments that are defined to be ‘compensation affected payments’ in the Social Security Act 1991 (Cth) (SSA), s17.

These provisions bind state/territory and federal government agencies, and all companies, insurers or persons that pay compensation for personal injuries under common law or statutory schemes.^[2] The substantive provisions are located in pt 3.14 of the SSA, ss1160–1185, and the relevant definitions are located in s17.

The compensation recovery provisions are an alternative to the ordinary income test in pt 3.10 of the SSA. Compensation payments that fall within pt 3.14 are assessed under that part and not under the ordinary income test. Some forms of payment are excluded from both pt 3.14 and from the ordinary income test, being those excluded incomes under s8(8) or s8(11) of the SSA. Generally, the compensation recovery test operates more harshly than does the income test. This is partly because there are allowances in the income test that do not exist in the compensation recovery test and the reduction rate in the income test is only 50c in the dollar, whereas the reduction rate for the compensation recovery provisions is $1 for $1. The income test has an income test-free amount that a person can earn before the income test applies. There is no allowance in the compensation recovery provisions.

Once compensation monies are received, they constitute an asset for asset test purposes, and any income from those monies constitutes income for the income test.

DEFINING COMPENSATION

‘Compensation’ is defined in s17(2) to be:

• any payment or damages;

• made either in lump sum or in periodic form;

• made wholly or partly for lost earnings or lost earning capacity (past and future economic loss); and

• made for personal injuries (physical or mental).

All four criteria must be satisfied before the payment is treated as ‘compensation’ for the purposes of pt 3.14.

The above definition is subject to the caveat that s17(2A) excludes from the operation of pt 3.14 any insurance or other payment made under an arrangement for which the applicant has contributed (that is, paid premiums). This exclusion is subject to the further caveat that the insurance payment will not be exempt from pt 3.14 if the terms of the payment include a claw back under which the insurance payment is reduced by the amount of any social security payment made. This kind of claw-back clause is seen to be an attempt to cost shift onto the Commonwealth. The claw-back clause is not invalidated, that is, it is still legal; however, the insurance payment as a whole is then caught by pt 3.14 – that is, it loses its exempt status.

The definition of compensation is widely drawn. The term ‘payment’ is wide enough to catch all manner of payments irrespective of the name or title given to the payment. It is the substance of the payment that is critical and not the nomenclature used. The Secretary has power to go behind any award to examine its true nature, including looking to the pleadings and other correspondence passing between an applicant and the third-party defendant. For details of the Secretary’s role, see s23(1).

APPLICATION OF COURT DECISIONS

If an award is made by a court after hearing the evidence and the court provides a dissection of the award into economic and non-economic loss, s17(3) provides that the Secretary must accept and apply this dissection. If an award by a court is by consent or does not provide the relevant dissection, the Secretary is empowered to look behind the award to ascertain its true content.

The Secretary also has the power to compel an applicant/recipient of social security to take reasonable steps to pursue a claim for compensation against any third party (s1166), although the Secretary rarely exercises this power.

Not all awards of damages or insurance payments are for personal injuries (physical or mental). This issue is particularly acute in various forms of human rights claims for embarrassment and other psychological reactions that fall short of a recognised psychiatric condition – for example, discrimination claims. The distinction is also relevant to payments for loss of career prospects for unfair or unlawful dismissals. There is a growing body of case law on these issues arising from the various state and territory equivalents of the Civil Law (Wrongs) Act 2002 (ACT) or the Civil Liability Act 2002 (NSW). There is no Commonwealth legislative equivalent and the relevant law for Commonwealth purposes is that of the state/territory in which the cause of action arises. Death claims and compensation to relatives claims are not claims for personal injuries to the social security recipient.

Not all awards for personal injuries include claims for lost earnings or lost earning capacity. It is often the case that tort or insurance claims for people who are already receiving social security payments will not contain any element of past or future economic loss.

It is important to note that, even if only a small part of the award is for economic loss, the whole of the award, including all the non-economic loss components and costs, is caught in the 50 per cent deeming rule of pt 3.14 discussed below.

Some legal practitioners do, however, think it useful to make a claim for nominal past and future economic loss as a means of obtaining a small increase in payments. These practitioners will need to ensure that the small nominal payment for economic loss at least covers the consequential loss of social security payments that will follow from the inclusion of the whole of the award in the 50 per cent deeming rule described below.

The SSA requires an applicant to notify the Secretary of the existence of a compensation claim. The Secretary then has the power to serve a notice on the defendant to those proceedings or the insurer, which prevents the defendant or insurer from paying out any compensation until the Secretary’s prior claim for recovery of social security payments is satisfied.^[3]

Once the Secretary has determined that a recovery is due from the compensation payment, an applicant can seek internal review of that decision. If not satisfied with the internal review, the applicant can seek first-tier review in the AAT. If still not satisfied, the applicant or the Secretary can seek second-tier review in the General Division of the AAT.

TYPES OF PAYMENT

Part 3.14 of the SSA contains a range of provisions that deal with the various permutations of periodic and lump sum payments, including:

1. lump sum redemptions of periodic payments;^[4]

2. multiple lump sum payments, including separate awards for damages and for costs; and

3. lump sums superimposed on periodic payments.

Again, it is not practicable in an article of this size to address the various permutations. Other publications supply more details.^[5]

Periodic payments

Periodic payments do not have to be temporally periodic. ‘Periodic’ means that the payment concerned is not a final lump sum payment.

The compensation preclusion period for periodic payments begins on the day of the first periodic payment. During the period of the payments, the applicant’s fortnightly entitlement to social security payments is reduced dollar for dollar against the fortnightly compensation payment received.^[6]

Lump sum payments

In the case of a lump sum award in which the court did not provide any relevant dissection of the components, the whole of the award, inclusive of costs and past and future medical costs, are included. The legislation then deems that 50 per cent of this total amount is for economic loss. That 50 per cent sum is then divided by a prescribed figure called the ‘income cut-out amount’ to arrive at a fixed number of weeks. The income cut-out amount is the amount above which no pension is payable to a single person under the ordinary income test in the Pension Rate Calculator in s1064 of the SSA, currently at about $1000 per week. This is an indexed amount and so changes over time. For example, if an applicant received a total of $1 million in compensation, then the 50 per cent amount is $500,000. This is divided by $1000 to 500 weeks.

Services Australia has a website which provides a calculator for the above purposes.^[7]

The lump sum compensation preclusion period starts from the date of loss of earning capacity that is being compensated (that is, usually the date of the injury) and continues for the duration of the weeks determined under the 50 per cent rule. In this period no social security payments are made.^[8]

Special circumstances – hardship

The 50 per cent deeming rule can often operate unfairly for applicants. For this reason, the legislation contains a power for the Secretary to disregard some parts of the compensation payment so as to produce a reduction in the preclusion period.^[9]

There is a large volume of cases on these special circumstances that recognise all kinds of special circumstances which are neither a defined nor a closed class.^[10]

For example, one common issue arises when the recipient of the compensation uses that money to buy a house or pay off an existing mortgage, to alleviate the burden of payment rent while living on social security payments. Some AAT members have taken the view that this is profligate behaviour and have denied special circumstances. Other members have found special circumstances. They have taken the view that to buy a modest house was prudent behaviour and that it is not the purpose of the legislation to drive social security recipients further into poverty by forcing them to exhaust their compensation on rent.

The main grounds for a finding of special circumstances are:

(a) The inclusion in the lump sum of disproportionate legal costs awards.

(b) The inclusion in the lump sum of medical treatment costs.

(c) The failure of legal practitioners to advise applicants of the existence of the preclusion period and the need to deal conservatively with their compensation money, including not wasting it, making large gifts to family members, or buying expensive cars or houses.

(d) Unanticipated medical or social costs.

(e) Loss of the compensation funds for reasons beyond the applicant’s control.

The main grounds for denying special circumstances involve the unreasonable or even reckless expenditure of the compensation money by the applicant, family and friends. But even then there are differences of opinion reflected by different AAT members on this issue.

The AAT has jurisdiction to hear and determine special circumstances claims and often does so favourably for applicants. There are statutory time limits for lodging appeals to the AAT, but there is no lodgement fee and no legal costs are awarded either way irrespective of the outcome.

Adjunct Professor Allan Anforth AM is a barrister and Adjunct Professor of Law at the University of Canberra.

^[1] For a detailed review of the legislative provisions and case law, see P Sutherland and A Anforth, 4th ed, Social Security and Family Assistance Law, The Federation Press, 2022.

^[2] Social Security Act 1991 (Cth) (SSA), s1162.

^[3] Ibid, s1184.

^[4] Ibid, s1164.

^[5] See for example Sutherland and Anforth, above note 1.

^[6] SSA, s1173.

^[7] See Services Australia, Online estimators, 2021

<https://www.servicesaustralia.gov.au/online-estimators#a2>.

^[8] SSA, ss1169–1170.

^[9] Ibid, s1184K.

^[10] Cases of this kind are reviewed at some length in Sutherland and Anforth, above note 1.