HFI Guide · For Lawyers & Professional Advisers

A personal injury, compensation or redress payment can materially change a person’s financial circumstances.

For clients receiving Centrelink or other government support, however, the amount received is only part of the issue. The legal character of the payment, the terms of settlement, the client’s existing benefits and what they subsequently do with the money can each affect the outcome.

These issues are best considered before settlement where possible, and before significant financial decisions are made following receipt.

This guide provides a general overview of the issues lawyers and professional advisers may wish to identify when assisting a client who receives, or expects to receive, a significant lump sum.

1. Not all lump sums are treated the same way

Under the Social Security Act 1991 (Cth), the treatment of a payment depends substantially upon what the payment represents.

This distinction can be important where a client receives damages or compensation following personal injury.

A payment made wholly or partly in respect of lost earnings or lost capacity to earn may fall within the compensation provisions of the Social Security Act.

Depending upon the circumstances, this may result in:

• recovery of certain Centrelink payments previously received;
• a period during which particular income support payments are not payable; or
• other consequences for the client’s ongoing entitlement.

For a lump sum received as a compromise or settlement of a claim involving economic loss, the legislation will commonly deem 50% of the gross lump sum to be the compensation component for social security purposes.

This statutory treatment can apply even where the settlement also includes substantial amounts referable to pain and suffering, medical expenses, care or other losses.

A different calculation may apply where damages have been determined following a genuinely contested hearing and the economic loss component has been separately determined.

The settlement documentation and circumstances in which the payment is made can therefore be relevant to the eventual Centrelink position.

2. Non-economic loss, redress and other compensatory payments

A payment arising from an injury or traumatic event does not automatically engage the compensation provisions.

Payments for matters such as:

• pain and suffering;
• permanent impairment;
• trauma or emotional distress;
• loss of amenities;
• discrimination or harassment;
• abuse or breaches of human rights; and
• certain criminal injury or redress arrangements,

may receive different treatment where they do not include compensation for lost earnings or earning capacity.

There are also specific legislative exemptions applying to certain categories of compensatory and redress payments.

For example, payments made under the National Redress Scheme for people who have experienced institutional child sexual abuse are exempt from the income tests applying to government payments. Other statutory redress or reparation schemes may have their own specific treatment.

Similarly, certain payments made under Commonwealth, State or Territory criminal injury compensation legislation are specifically excluded from the Social Security Act definition of compensation.

A useful distinction

Before settlement, it can be useful to identify:

Does the payment compensate the client for an inability to earn income?

If so, the Centrelink compensation provisions require consideration.

If not, consideration should instead be given to the ordinary income rules and any specific exemption applying to that type of payment.

The description attached to a payment is relevant, but it is not necessarily determinative.

3. Settlement terms can matter

Where a client is receiving Centrelink, the social security implications should ideally be considered before settlement terms are finalised.

This does not mean settlement amounts should be artificially characterised for Centrelink purposes.

It does mean that clarity around the matters being compromised can be important.

Relevant questions may include:

• Does the claim include past or future economic loss?
• Is loss of earning capacity being claimed?
• What heads of damage are being resolved?
• Is the matter being settled by agreement or determined following a contested hearing?
• Is the payment being made under a particular statutory scheme?
• Is there a specific legislative exemption applying to the payment?
• What Centrelink or family assistance payments does the client currently receive?

For a client dependent upon income support, these questions may materially affect the financial consequences of settlement.

Early consideration also allows the client to understand those consequences before committing the settlement proceeds to other purposes.

4. What happens to the money after it is received?

A separate issue arises after the lump sum has been paid.

A payment being exempt from the income test, or being outside the compensation provisions, does not necessarily mean the money remains exempt from Centrelink assessment indefinitely.

Once received, the way the client holds or uses the money may determine its subsequent treatment.

For example:

The result is that two clients receiving the same settlement can have very different Centrelink outcomes depending upon what happens next.

5. Centrelink is usually only one part of the client’s decision

A substantial benefit commonly arrives at a difficult point in a client’s life.

The immediate questions are often practical:

• Can I pay out my debts?
• Can I buy a home?
• Should I repay my mortgage?
• Will I lose my Disability Support Pension or another Centrelink payment?
• Will this affect Family Tax Benefit or another payment assessed using adjusted taxable income?
• How much should I keep available for future expenses?
• How do I replace the income I can no longer earn?
• Should any of the money be retained in or contributed to superannuation?
• How do I make this money last?
• How do I provide some long‑term security for myself and my family?

These decisions interact.

A strategy designed only to maximise Centrelink may produce a poor financial outcome. Equally, deploying a settlement without considering Centrelink, taxation, superannuation and future cash flow can unnecessarily reduce the security the settlement was intended to provide.

Buying or paying down a home, investing capital, retaining cash, contributing to superannuation and establishing future income arrangements can each affect the client’s position differently.

6. Which government payments may be affected?

The compensation provisions apply to many income support payments, including commonly:

• Disability Support Pension;
• Age Pension;
• Carer Payment;
• JobSeeker Payment;
• Parenting Payment;
• Youth Allowance; and
• Austudy.

Other benefits may operate under different rules.

For example, Family Tax Benefit is principally affected by family adjusted taxable income rather than the pension assets test. Carer Allowance also differs from Carer Payment.

Accordingly, a client’s support arrangements should be considered individually rather than assuming that a settlement will affect every government payment in the same way.

The consequences may also extend beyond the immediate Centrelink payment. Changes to taxable income, financial assets or pension qualification can flow through to concessions and other support arrangements.

7. When specialist advice may assist

A referral for financial and Centrelink advice may be appropriate where:

• the client currently receives a Centrelink pension or allowance;
• the settlement includes, or may include, economic loss;
• the client expects to rely upon Centrelink following settlement;
• the client receives Family Tax Benefit or other income‑tested assistance;
• the client intends to purchase or repay a home;
• significant funds will remain after immediate expenses;
• the client is unable or unlikely to return to their previous employment;
• superannuation, TPD insurance or other benefits are also involved;
• the client needs to establish a sustainable future income; or
• the client or their family needs longer‑term financial security following injury or disability.

Ideally, these issues are considered before settlement where the settlement structure itself may be relevant, or shortly thereafter and before the proceeds are substantially deployed.

How Health & Finance Integrated can assist

Health & Finance Integrated works with people whose financial circumstances have changed because of injury, illness, disability, compensation or insurance benefits.

Our role is often to work alongside the client’s existing legal and professional advisers.

We can assist with understanding how a proposed or completed settlement interacts with Centrelink, superannuation and the client’s broader financial position, and then help the client make practical decisions about housing, debt, income and long-term financial security.

For many clients, the objective is not financial complexity. It is to turn a significant and often unfamiliar lump sum into a position from which they can move forward with greater certainty.

Early collaboration can be particularly valuable where settlement, Centrelink and the client’s intended use of the funds are likely to interact.