Editors --- "Compensation recovery: aggregation of two lump sums where only one is 'compensation'; inclusion of legal costs" [2008] SocSecRpr 27; (2008) 10(2) Social Security Reporter, Article 9

• ALAVANJA and SECRETARY TO THE DFHCSIA and SECRETARY TO THE DEEWR
• Background
• The issues
• Legislation
• Discussion
• Formal decision

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Compensation recovery: aggregation of two lump sums where only one is ‘compensation’; inclusion of legal costs

ALAVANJA and SECRETARY TO THE DFHCSIA and SECRETARY TO THE DEEWR

(2008/286)

Decided: 10th April 2008 by J. Handley

Background

Alavanja was the widower of the late Vera Alavanja who attempted suicide when she was an involuntary patient of the Dandenong Psychiatric Centre. She was subsequently placed on life support which was withdrawn on 17 November 2002.

Alavanja instituted proceedings in the County Court of Victoria claiming damages on his own behalf with respect to injuries and economic loss suffered by him, and damages on behalf of the Estate of Mrs Alavanja pursuant to the Victorian Wrongs Act 1958(‘the Wrongs Act’).

Both proceedings were settled by a Deed of Release in the total sum of $200,000 inclusive of legal costs apportioned as follows:

- Alavanja’s claim in his own right for personal injuries and economic loss at $60,000 and $20,000 for costs and disbursements

- The Estate’s claim pursuant to the Wrongs Act at $100,000 and $20,000 for costs and disbursements.

Prior to the resolution of the County Court claims, Alavanja was paid newstart allowance and carer allowance. After the proceedings were settled Centrelink imposed a preclusion period based on the formula at s.17(3) of the Social Security Act, 1991(‘the Act’). As a result Centrelink imposed a recoverable compensation charge with respect to the benefits paid in the period 3 November 2002 to 30 July 2005being a total of $25,134.83.

The issues

The AAT considered whether both payments should be included in the lump sum compensation payment used to determine the preclusion period; and whether the sum of $40,000 representing legal costs, should be included in the lump sum compensation payment.

Legislation

Section 17(2) of the Act defines compensation to include a payment in settlement of a claim for damage that is made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury. If a person receives a lump sum compensation payment, under s.1169(1), that person is not entitled to receive compensation affected social security payments for a period known as the lump sum preclusion period.

In assessing the preclusion period, the compensation part of a lump sum is determined by s.17(3). This relevantly defines the compensation part of a lump sum compensation payment as 50% of the payment that was made in settlement of a claim that was, in whole or in part, related to disease, injury or condition.

Section 1171 provides what happens when a person receives two or more lump sum payments in relation to the same event.

1171.(1) If:

(a) a person receives 2 or more lump sum payments in relation to the same event that gave rise to an entitlement of the person to compensation (the multiple payments); and

(b) at least one of the multiple payments is made wholly or partly in respect of lost earnings or lost capacity to earn;

the following paragraphs have effect for the purposes of this Act and the Administration Act:

(c) the person is taken to have received one lump sum compensation payment (the single payment) of an amount equal to the sum of the multiple payments;

(d) the single payment is taken to have been received by the person:

(i)on the day on which he or she received the last of the multiple payments; or

(ii) if the multiple payments were all received on the same day, on that day.

Discussion

The AAT held that the payment of damages under the Wrongs Act proceedings was not compensation as defined under s.17(2), and was not the compensation part of a lump sum compensation payment (s.17(3)). It was a payment in respect of lost dependency by reason of the death of the person upon whom a plaintiff was economically dependent. It was not in respect of a claim arising out of a disease, injury or condition.

The AAT considered that but for s.1171, s.1169 would not have been invoked if Alavanja had recovered compensation only with respect to the Wrongs Act claim, as it was not a lump sum compensation payment. However s.1171provides that where a person receives two or more lump sum payments arising out of the same event which gave rise to the entitlement to compensation and at least one of the payments is made wholly or partly in respect of loss capacity to earn or lost earnings, the person is deemed to have received one lump sum compensation payment, being the sum of both payments. The provisions ofs.17(3)are thus attracted and a lump sum preclusion period imposed.

Alavanja conceded that the payment of $60,000 was with respect to a claim made for pain and suffering and lost capacity to earn and would be subject to the preclusion period. The AAT held that both that payment and the payment under the Wrongs Act arose from the same event, being the death of Alavanja’s wife. Due to s.1171 both payments must be aggregated and the combined sum subject to the preclusion period formula.

The AAT considered that the result in this case was not what Parliament would have intended, if it had been considered. It remitted the matter to Centrelink to reconsider the basis for determining the preclusion period and to consider whether, as an Act of Grace payment or by some other mechanism, it would continue to calculate the lump sum preclusion period by regard to the sum paid to Alavanja in the Wrongs Act proceedings.

The AAT then turned to consider the issue of legal costs. From the total of $200,000 paid in settlement of both proceedings, $40,000 was paid with respect to legal costs and disbursements, yet the total of $200,000 was used to calculate the preclusion period. The AAT referred to comments by Downes J, President of the AAT, in Fuller and Secretary, Department of Family &Community Services (2004) AATA 615. In Fuller Downes J noted that an application may be settled either for an award of damages plus a specific amount of costs or, for an amount of damages inclusive of costs or, for an amount of damages plus costs to be determined. In the latter case, the Department excludes costs when calculating the lump sum preclusion period. Downes J discussed the apparent unfairness in the different treatment:

I do not see any reason why in a case in which an agreed sum of costs is a genuine assessment of those costs, the applicant should not be treated in the same way as an applicant who is a party to a settlement where costs are to be subsequently agreed or assessed.

(Reasons, para. 27)

The AAT noted that in Fuller, rather than making a decision excluding the payment of costs, the Tribunal remitted the matter to the respondent for reconsideration.

The AAT adopted and agreed with Downes J’s sentiments and conclusions. It remitted the matter to Centrelink to reconsider their decision to have regard to the sum of $40,000 paid with respect to Alavanja’s costs in both proceedings when calculating the amount over which the preclusion period should be determined.

Formal decision

The AAT affirmed the decision under review and remitted it to Centrelink for reconsideration in accordance with its reasons.

[J.F.]