Editors --- "Compensation preclusion period: cost of pursuing compensation settlement; special circumstances" [2010] SocSecRpr 4; (2010) 12(1) Social Security Reporter, Article 4

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Compensation preclusion period: cost of pursuing compensation settlement; special circumstances

PANETTA and SECRETARY TO THE DFHCSIA

(2009/996)

Decided: 24th December 2009 by F. O’Loughlin

Background

Panetta was injured in a motor vehicle accident on 10 August 2004. She was paid periodic compensation payments until 9 August 2007. From 10 August 2007 to 8 August 2008 she received disability support pension (DSP). On 25 July 2008, Panetta settled her compensation claim by consent for $230,000. On 12 August 2008 Centrelink advised Panetta that she must repay $14,313.19 for DSP she had received; that she would be subject to a compensation preclusion period from 10 August 2007 to 8 July 2010; that her DSP had been cancelled; and that she could not get a pension until after 8 July 2010.

From Panetta’s compensation settlement of $230,000, $24,000 was withheld for legal costs and $14,313.19 for Centrelink repayment of the DSP received from 10 August 2007. Panetta received approximately $190,000. Centrelink calculated her compensation preclusion period using the lump sum compensation amount which included the legal costs.

As a result of the accident, Panetta was still suffering from ongoing physical and mental pain, and was seeing a psychologist. At the time of the accident Panetta was living in a three bedroom house. She sold the house and used the settlement moneys to buy a small unit in a more affordable suburb, paying stamp duty of $7000. However she found herself feeling very isolated, so only stayed six to nine months before selling the unit and moving back to the area she had lived in at the time of the accident, paying stamp duty of about $10,000. She also used her settlement payment to pay off all her debts as she believed this was the right thing to do.

The issue

The AAT considered whether there were special circumstances that would justify disregarding all or part of Panetta’s lump sum payment. The AAT specifically considered whether the treatment of her costs inclusive compensation payment, which was different to the treatment that would have been afforded if she had received a settlement plus costs, could be regarded as a hardship and an injustice.

The law

The scheme of the legislation is aimed at preventing those receiving lump sum compensation payments for loss of income from also receiving Centrelink benefits. Where the lump sum settlement includes a component of economic loss, Part 3.14 of the Social Security Act 1991 (the Act) has the effect that 50% of the lump sum is taken to be for lost earnings or lost capacity to earn. The amount is the ‘compensation part of the lump sum’ and is then used, by application of a statutory formula, to calculate a period of time when a person will not be eligible to receive Centrelink payments (the preclusion period). If, during the preclusion period, the person has received Centrelink payments, then the Act creates a statutory charge over the settlement funds totalling the amount of payments made. The licensed insurer is obliged to pay the amount of the charge to Centrelink.

The Act provides potential relief from the strict application of the compensation provisions, by allowing discretion to disregard the whole or part of the compensation payment in ‘special circumstances’ (s.1184K(1)).

Discussion

The AAT examined the impact of the costs Panetta incurred in achieving a settlement, and considered previous decisions, noting that the treatment afforded to settlements where costs was inclusive and plus costs settlements had been varied.

The AAT found the decisions in Eggleton and Secretary, Department of Social Security (1998) 50 ALD 1018 and Hotzl and Secretary, Department of Family and Community Services [2002] AATA 378 of limited assistance, since they did not consider legal costs in the context of the differential treatment afforded to those who receive a settlement plus costs compensation payment as opposed to a cost inclusive payment.

Even though the decision in Secretary, Department of Social Security and Robert Anderson [1997] AATA 142 specifically asserted that payment of legal expenses did not constitute a special circumstance, the AAT also found this decision to be of limited assistance for the same reason.

The AAT preferred the reasoning in Fuller and Secretary, Department of Family and Community Services [2004] AATA 615 and Deacon and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2009] AATA 88 where the view was expressed that unequal treatment could be a hardship. The AAT explained that a reduction of the compensation amount by the costs paid would simply recognise that the compensation receipt would not have been received without outlaying the cost of professional services to secure it.

The AAT noted that the Departmental policy would treat two recipients of compensation who receive equivalent amounts in respect of earnings and equivalent amounts in respect of costs differently, and that such an approach to treatment of a social security claimant who receives a costs inclusive compensation payment can be described as unreasonable, unjust or inappropriate.

Findings

The AAT found that unequal treatment of itself, on a stand alone basis, is unjust and that injustice constitutes a special circumstance warranting exercise of the discretion in s.1184K of the Act.

The AAT also found that in the whole of the circumstances of Panetta’s personal situation, to treat the amount paid in pursuit of her compensation settlement as part of the amount received, and to calculate a longer preclusion period than what would be calculated if the costs were ignored, produced an unjust result which was inconsistent with the objects of the legislation which are to prevent double dipping.

The AAT also found the unexpected costs that Panetta incurred or expended when she changed her residence arrangements the second time to be reasonable, since the move was associated with heightened emotional stress and produced an unexpected outgoing which led to her straitened financial circumstances. The AAT excluded a further $17,500 (being half the combined agents’ costs $15,000 and the second stamp duty impost of $10,000) from her compensation preclusion period calculation.

Formal decision

The decision under review was set aside and substituted with a decision that special circumstances warranting the exercise of the discretion under s.1184K of the Act did exist and that the applicable compensation preclusion period was 124 weeks.

[L.H.]