Lump sum compensation is one of the entitlements that injured employees can claim under the different workers’ compensation schemes in Australia. It is compensation for a work-related injury suffered by an employee, which has led to a permanent loss of function or movement. This permanent impairment can be physical as well as psychological.
In order to show a permanent impairment has been sustained, an assessment of the employee’s injuries by an approved medical specialist is required. This assessment will only occur after the injuries have stabilised, which means they have reached a maximum level of improvement and are unlikely to deteriorate in the future. Each injury will be assessed as a percentage of permanent impairment.
Whether an injury qualifies for lump sum compensation will depend on the state or territory where the employee’s work is connected and the nature of the work performed. Each state and territory has its own unique laws that set out the thresholds to meet before lump sum compensation is payable, the specific amount that is payable and any limits to the payout.
The Workers’ Compensation & Rehabilitation Act 2003 (QLD) requires injured workers to be assessed as having up to a 20% degree of permanent impairment (DPI) to either accept a lump sum payment or to pursue common law damages. If they are assessed as having more than a 20% DPI, then they are not obliged to make decision and are entitled to both options.
The Workers Compensation and Rehabilitation Regulation 2014 (QLD) sets the maximum statutory compensation. This is currently $314,920 (after indexation) and a claimant’s specific lump sum entitlement is calculated by multiplying the assessed DPI with the maximum statutory compensation.
New South Wales
Lump sum payments are governed by the Workers Compensation Act 1987 (NSW) and the Workers Compensation Legislation Amendment Act 2012 (NSW). Under these laws and for claims made on or after 19 June 2012, employees must be assessed at a minimum of 11% whole person impairment (WPI) for physical injuries or 15% WPI for psychiatric injuries before lump sum compensation is payable.
The compensation to be paid is calculated using various formulas under section 66 of the Workers Compensation Act 1987 but is capped at the maximum amount of $577,050. The exception to this maximum is in cases of permanent back injury, which attracts a further 5% of the total compensation payable to an injured worker.
The Workplace Injury Rehabilitation and Compensation Act 2013 (VIC) applies to injuries sustained on or after 1 July 2014. Under the Act, lump sum compensation is only payable for physical injuries that are assessed at more than 10% whole person impairment (WPI) and 30% WPI or more for psychiatric injuries.
The amount of compensation payable will depend on the nature of the claimant’s injuries and the WPI attached to them. The maximum lump sum compensation that can be awarded in Victoria (after indexation) is $578,760.
The Workers’ Compensation & Injury Management Act 1981 (WA) sets out a list of compensable injuries under its Schedule 2. Lump sum compensation is calculated as a percentage ratio of the prescribed amount and is currently capped at $217,970 after indexation.
Under the Workers Rehabilitation and Compensation Act 1988 (TAS), a lump sum payout can be made for physical injuries that have resulted in a minimum of 5% whole person impairment (WPI) and psychological injuries with at least 10% WPI.
Section 71 of the Workers Rehabilitation and Compensation Act 1988 (TAS) outlines the formulas to calculate the entitlements to lump sum compensation in Tasmania. However, the maximum payout is limited to $343,009 after indexation.
Under the Return to Work Act 2014 (SA), injured employees are entitled to claim lump sum compensation for economic loss and non-economic loss. Compensation for economic loss is awarded on the basis of a loss of future earning capacity while compensation for non-economic loss is for factors including the claimant’s pain and suffering as well as loss of amenities of life.
In both types of lump sum claims, lump sum compensation is payable only if the employee’s physical injuries are assessed at 5% whole person impairment (WPI) or greater. Psychiatric injuries are not compensable in SA.
Entitlements for economic loss are calculated by taking into account the claimant’s WPI, age and hours worked as a percentage of a full-time workload. Lump sum compensation for economic loss in SA is limited to $357,426 (after indexation).
Compensation for non-economic loss is calculated by reference to the claimant’s WPI and is capped at $482,014, after indexation.
The Return to Work Act grants lump sum compensation entitlements to claimants with a 5% whole person impairment (WPI) or more. For injuries that are assessed between 5% and 14% WPI, lump sum compensation is calculated on a sliding scale.
For injuries that are assessed at more than 15% WPI, compensation is calculated by multiplying the WPI percentage by 208 with the average weekly earnings in the Territory. The maximum amount that can be awarded is capped to $314,808 after indexation in the NT.
Australian Capital Territory
The Workers Compensation Act 1951 (ACT) lists compensable injuries under Schedule 1 and allocates a percentage of the statutory maximum. For a single loss, the statutory maximum is $100,000, which is consumer price indexed (CPI).
The maximum entitlement to lump sum compensation in the ACT overall is $150,000 (CPI).
Tax on lump sum compensation
Lump sum compensation is taxable only when there is a distinct and quantifiable sum that is assigned to compensate for any loss of income. In such an event, tax will be payable only for that sum and not for any balance of the payout (which would be payments for non-economic loss).
However, when there is an undifferentiated lump sum (you cannot distinguish between economic and non-economic loss payments), they are generally not taken into consideration by the Australian Tax Office for the purposes of income tax.