EXPLANATORY STATEMENT
Social Security Act 1991
Social Security (Exempt Lump Sum – Rectification Action) Determination 2022
Purpose
Paragraph 8(11)(d) of the Social Security Act 1991 (the Act) allows the Secretary of the Department of Social Services (the Department), or delegate, to determine, by legislative instrument, that an amount, or class of amounts, received by a person is an exempt lump sum for the purposes of the Act.
The Social Security (Exempt Lump Sum – Rectification Action) Determination 2022 (the Determination) ensures that an amount paid by, or on behalf of, the Commonwealth as the proportion of the settlement sum representing interest notionally accrued on monies repaid by Group Members to the Commonwealth, is an exempt lump sum under paragraph 8(11)(d) of the Act.
Background
Under the social security law, an income test is used to determine a person’s entitlement to a social security payment, and if they are qualified, the rate of a social security payment that is payable. An income amount earned, derived or received for a person’s own use or benefit is generally assessable as income (see the definitions of ‘income’ and ‘income amount’ in subsection 8(1) of the Act). However, some amounts that would otherwise be income are specifically exempted.
Paragraph 8(11)(d) of the Act allows the Secretary of the Department to determine that an amount, or class of amounts, received by a person is an ‘exempt lump sum’ for the purposes of the Act. An exempt lump sum is excluded from the subsection 8(1) definition of ‘ordinary income’, meaning the exempt lump sum amount is not taken into account under social security income tests.
The exemption of an amount received by a person from the income test does not alter the fact that any ongoing income generated by the amount is not exempt from the income test, and any assessable asset produced from the lump sum is counted under the social security assets test. This is consistent with the treatment of other amounts as exempt lump sums under paragraph 8(11)(d) of the Act.
Settlement of the Prygodicz v Commonwealth of Australia Class Action
The class action legal proceeding Prygodicz v Commonwealth of Australia (No 2) [2021] FCA 634 (Prygodicz) arose out of the Commonwealth’s use of averaged annual Australian Taxation Office (ATO) income data to review and calculate individual fortnightly social security entitlement amounts (the compliance activity) between July 2015 and November 2019. The compliance activity was designed to identify overpayments of social security payments in the period under review. If an overpayment was identified, the compliance activity would raise and seek to recover the debt.
The Commonwealth has now refunded or has undertaken to refund all amounts recovered by the Commonwealth as a result of the compliance activity where a debt was raised wholly or partially on the basis of averaged ATO income data. The refunded amounts will not be treated as income for social security purposes under subsection 8(8) of the Act, as they were refunds of amounts collected in repayment of debts based on debt decisions that were set aside. In Prygodicz the class action members sought redress for these debts that should not have been raised. Prygodicz was settled without an admission of liability by the Commonwealth.
The distribution sum in the settlement of Prygodicz includes payment by the Commonwealth of a proportion of the settlement sum based upon interest notionally accrued on monies repaid by an Eligible Group Member to the Commonwealth, where the Commonwealth relied on income averaging from ATO data in raising the debt.
The distribution sum was divided between certain categories of Group Members, as set out in the details of the distribution scheme approved by the Federal Court on 11 June 2021 in Prygodicz. The judgment for Prygodicz is freely accessible on the Federal Court’s public website at: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca0634
The Settlement Deed approved by the Federal Court in Prygodicz is freely accessible on Services Australia’s public website at:
https://www.servicesaustralia.gov.au/implementation-plan-for-settlement-distribution-scheme?context=1
The different categories of Group Members are discussed in paragraphs 50 to 56 of Prygodicz judgment. The Determination only affects Category 2 Group Members and Eligible Category 3 Group Members. This is in line with paragraph 91 of Prygodicz:
Category 1 Group Members and Ineligible Group Members (that is, Ineligible Category 3 Group Members and Category 4 Group Members) will not receive a share of the Distribution Sum.
The Determination will exempt any payment to or for the benefit of a Group member, consisting of a proportional share of the distribution sum based on simple interest notionally accrued on the repayment, from the income test, as it is not appropriate for this to be assessed as income.
Commencement
The Determination commences on the day after it is registered on the Federal Register of Legislation.
Consultation
The Department of Veterans’ Affairs and the Department of Agriculture, Water and Environment and Services Australia were consulted on the instrument. Consultation has also been undertaken with Services Australia on the changes needed to implement the Determination
Regulation Impact Statement (RIS)
The Office of Best Practice Regulation (OBPR) was consulted on 20 October 2021 and confirmed that the Determination does not require a Regulatory Impact Statement (OBPR Reference 44811). This Determination will operate in a beneficial manner. It is not regulatory in nature, will not impact business activity and will have no, or minimal, compliance cost or competition impact.
Explanation of the provisions
Section 1 provides that the Determination is named the Social Security (Exempt Lump Sum – Rectification Action) Determination 2022.
Section 2 provides that the Determination commences on the day after the instrument is registered on the Federal Register of Legislation.
Section 3 provides that the authority for making the Determination is paragraph 8(11)(d) of the Act.
Section 4 contains definitions of certain terms used in the Determination.
‘Act’ is defined as the Social Security Act 1991.
‘Category 2 Group Member’ has the meaning for this term given in the Settlement Deed approved by the Federal Court of Australia in Prygodicz.
Paragraph 51 of the Prygodicz judgment states that Category 2 Group Members:
‘…are those who have or had a debt that is alleged to be an Asserted Overpayment Debt that was determined wholly or partially based on apportioned ATO PAYG income information, part or all of which has been received or recovered by the Commonwealth.’
Paragraph 101 of the Prygodicz judgment states that Category 2 Group Members:
‘...are those whose debts were wholly or partially based on income averaging from ATO data, and who have made a repayment towards those debts…’
‘Eligible Category 3 Group Member’ also has the meaning for this term given in the Settlement Deed approved by the Federal Court of Australia in Prygodicz.
A definition of ‘Category 3 Group Member’ is provided at paragraph 52 of the Prygodicz judgment. Category 3 Group Members:
‘…are those who have or had a debt that is alleged to be an Asserted Overpayment Debt, part or all of which has been received or recovered by the Commonwealth, that was initially determined based on apportioned ATO PAYG income information, part or all of which was paid to or recovered by the Commonwealth, but which was later recalculated by the Commonwealth in the context of a subsequent review under s 126 of the SSAA based on information provided by or on behalf of the group member (such as payslips and/or bank statements) and not based on apportioned ATO PAYG income information.
An example of a ‘Category 3 Group Member’ is provided at paragraph 53 of the Prygodicz judgment:
A practical example of a Category 3 Group Member is a person who first received an Asserted Overpayment Debt determined based on income averaging from ATO data, and then provided income information which the Commonwealth used to assert a validly determined debt. The applicants alleged that the circumstance of the group member providing information which the Commonwealth then used against the group member “tainted” the subsequent debt with illegality, such that it is not recoverable by the Commonwealth, notwithstanding that the ultimate debt when viewed in isolation was lawfully raised.
Paragraph 90 of the Prygodicz judgment explains the two subcategories of Category 3 Group Members - Eligible Category 3 Group Members and Ineligible Category 3 Group Members, with ‘Eligible Category 3 Group Members’ defined as:
…those for whom the validly recalculated debt (not being based on income averaging from ATO data) is an amount less [emphasis added] than the amount recovered or received from them by the Commonwealth…
For the purposes of comparison, the latter half of paragraph 90 of the Prygodicz judgment defines ‘Ineligible Category 3 Group members’ as:
…those for whom the validly recalculated debt is equal to or more than [emphasis added] the amount recovered or received from them in relation to the initial debt.
‘Eligible Group Member’ in the Determination means a Category 2 Group Member or an Eligible Category 3 Group Member. See the explanation of these defined terms above. This is a different definition to that used for Group Member in the Settlement Deed.
‘Settlement Payment’ means a payment by the Commonwealth of a proportion of the settlement sum based upon interest notionally accrued on monies repaid by an Eligible Group Member to the Commonwealth, pursuant to the Settlement Deed approved by the Federal Court of Australia on 11 June 2021 in Prygodicz. The definition of Eligible Group Member for the purposes of the Determination is explained above.
Section 5 specifies that, if an Eligible Group Member receives a Settlement Payment (as defined), the amount of the payment is an exempt lump sum for the purposes of paragraph 8(11)(d) of the Act.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Social Security Act 1991
Social Security (Exempt Lump Sum – Rectification Action) Determination 2022
The Determination is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the legislative instrument
The effect of the Determination is that an individual who receives a payment of a proportion of the settlement sum based on interest notionally accrued on certain amounts paid and then subsequently refunded in relation to debts calculated through income averaging of data from the Australian Taxation Office will not have that payment assessed as income under the social security law.
Human rights implications
The Determination engages the right to social security under Article 9 of the International Covenant on Economic, Social and Cultural Rights (ICESCR). The right to social security requires that a system be established under domestic law, and that public authorities must take responsibility for the effective administration of the system. The social security scheme must provide a minimum essential level of benefits to all individuals and families that will enable them to acquire at least essential health care, basic shelter and housing, water and sanitation, foodstuffs, and the most basic forms of education.
The Determination will operate beneficially, as payments for interest notionally accrued will not be taken into account when assessing a person’s rate of social security entitlements under the social security income test. If the payments were not exempted, a person in receipt of that payment may not be eligible for a social security payment or, if they are eligible, their rate of payment might be reduced. The Determination is therefore consistent with the promotion of the right to social security.
The exemption of the payments from the income test on receipt does not alter the fact that any ongoing income generated by the lump sum is not exempt from the income test, and any assessable asset produced from the lump sum is counted under the social security assets test. This is consistent with the treatment of other lump sum payments as exempt lump sums for the purposes of paragraph 8(11)(d) of the Act.
Conclusion
The Determination is compatible with human rights as it supports a person’s right to social security.
Caitlin Delaney, Acting Group Manager of the Pensions Housing and Homelessness Group in the Department of Social Services