How does receiving a lump sum compensation payment affect my social security benefits?

In Plain English

If you receive a lump sum compensation payment, it can affect your social security benefits. Generally, a portion of your social security payments may not be payable for a certain period, known as the "lump sum preclusion period". This period is calculated based on the amount of the lump sum and how it relates to lost earnings or earning capacity. However, some lump sum payments are exempt and won't affect your social security benefits, such as payments under the Disability Support Pension Compensation Grant Program or certain payments to Stolen Generations survivors. It's important to understand what kind of compensation you've received to determine how it impacts your specific situation.

Detailed Explanation

Receiving a lump sum compensation payment can have implications for social security benefits under the Social Security Act 1991. Here's a breakdown of how it works:

  1. Compensation Definition: Compensation, as defined in the Social Security Act 1991, includes payments for damages, insurance schemes, or settlements related to lost earnings or lost capacity to earn due to personal injury (Chunk 82).

  2. Lump Sum Preclusion Period: If a person receives a "compensation affected payment" (i.e. a social security payment) and then receives a lump sum compensation payment, the compensation affected payment may not be payable during a "lump sum preclusion period" (Social Security Act 1991, section 1169).

  3. Calculating the Preclusion Period: The length of this preclusion period depends on a formula that takes into account the amount of the lump sum and the maximum basic rate of pension (Social Security Act 1991, section 1170).

  4. Deemed Lump Sum Payment: If multiple lump sum payments are received for the same event related to lost earnings or earning capacity, they may be treated as a single lump sum payment (Social Security Act 1991, section 1171).

  5. Compensation Part of a Lump Sum: The "compensation part" of a lump sum is often considered to be 50% of the payment if it relates to the settlement of a claim related to a disease, injury or condition. Otherwise, it is so much of the payment as is, in the Secretary’s opinion, in respect of lost earnings or lost capacity to earn, or both (Social Security Act 1991, section 1167(3)).

  6. Exempt Lump Sums: Certain lump sum payments are specifically exempt from being considered as income for social security purposes. These are determined under paragraph 8(11)(d) of the Social Security Act 1991. Examples include:

  7. Periodic Payments: If a person receives periodic compensation payments, it can reduce the rate of their compensation affected payment (Social Security Act 1991, section 1173).

It is important to note that while a lump sum payment might not be counted as ordinary income, any ongoing income generated from that lump sum may still affect social security entitlements (Social Security (Exempt Lump Sum - Compensation Payments in respect of certain War related Internments) Determination 2017).