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  • Structured settlements – information for injured people

    Here you will find information for injured people about the tax treatment of structured settlements and structured orders. The components of a structured settlement and structured order are outlined below. As structured settlements are expected to be far more common than structured orders, they are the primary focus of this document.

    You can download a copy of the factsheet Structured settlements – information for injured people (NAT 8629 PDF, 48.1KB)This link will download a file

    In this section

    Consider a structured settlement

    If you have a severe personal injury because of the fault of someone else, you may be able to make a claim against that person or their insurer for compensation. A lawyer can advise you whether or not you have a valid claim.

    You may be entitled to receive your compensation in the form of a lump sum or a structured settlement.

    You can arrange to receive your compensation in the form of a structured settlement only in certain types of cases and only if your compensation is sufficiently large.

    You can only enter into a structured settlement if the lump sum compensation payment that you would be awarded if your case was decided by a court would be a tax-free capital payment.

    Also note, structured settlements are not available for workers' compensation type claims.

    Structured settlement

    A structured settlement is the result of an agreement between the parties to a personal injury case. A personal injury case may arise from medical negligence, sporting accidents, motor vehicle accidents, and public liability or product liability. The parties to the case will generally be you or your legal personal representative (for example a trustee or person with your general power of attorney), the defendant (who is the person or organisation you are seeking compensation from), and in most cases, the defendant's insurer.

    A structured settlement will enable you to take all or part of your personal injury compensation in the form of tax exempt or tax-free periodic payments, rather than a single immediate lump sum payment. Once a structured settlement has been arranged, you can't change it or cash it out for a lump sum. The components of a structured settlement are outlined in this document.

    Structured order

    A structured order is made by a court, often without the agreement of the parties. The outcome is similar to a structured settlement, as compensation will be paid to you in the form of tax-free periodic payments. A structured order must satisfy the same conditions that structured settlements require to be tax- free.

    When can I get a structured settlement?

    You can only arrange a structured settlement before your personal injury case has settled. It is not possible to arrange a structured settlement after you have settled your case or if a court has given final judgment for a lump sum.

    Other conditions

    You can get a structured settlement if the following conditions are met:

    • the compensation or damages are for your personal injury. The claim for compensation can't arise out of the death of another person
    • the claim is made by you or your legal personal representative
    • your claim is based on a wrong done to you or a right that you have under law (for example, medical negligence, sporting accidents, motor accidents, public liability and product liability)
    • the claim is not a workers' compensation type claim
    • the settlement is a written agreement
    • some or all of the compensation or damages is used by the defendant or their insurer to purchase one or more annuities to be paid to you or your legal personal representative.

    Components of a structured settlement

    There can be several components of a structured settlement. These components must satisfy certain conditions to be eligible for the tax exemption.

    Compulsory component

    A structured settlement must include one or more personal injury annuities that together will provide you with a minimum level of monthly payments for as long as you live. An annuity is a financial product that is usually provided by life insurance companies and will provide regular payments to a person. Personal injury annuities must satisfy certain conditions. For more information on these conditions, refer to Structured settlements – information for lawyers or speak to your lawyer. The personal injury annuity component is compulsory for all tax-exempt structured settlements.

    If you have a structured settlement, the defendant or their insurer must buy you a personal injury annuity that will provide you with tax-free monthly payments for as long as you live. You can't buy the annuity yourself. These annuity payments must increase each year in line with inflation and be at least equal to the amount of the basic age pension. You can contact Centrelink on 13 23 00 to find out the current level of the age pension.

    Optional components

    Immediate cash component

    A structured settlement will often include a cash component that is paid to the injured person immediately after the settlement has been arranged. This means that part of your compensation money will be paid to you as an immediate lump sum that you can use to pay your costs, pay any debts, purchase equipment, invest and so on. This component is optional, but most people will need some cash immediately after the settlement of their case.

    Other optional components

    A structured settlement that includes the compulsory personal injury annuity providing the minimum necessary periodic payments (the compulsory component) can also have:

    • other personal injury annuities (which have more flexible conditions than the compulsory minimum annuity)
    • personal injury lump sums (which can provide tax-free lump sums at pre-agreed future dates).

    Personal injury lump sums can be combined with a personal injury annuity or annuities. Under a settlement agreement you can arrange to have a single lump sum paid at a future date or a series of lump sums at future dates.

    Personal injury lump sums could be scheduled to cover future known expenses, for example, the replacement of a wheelchair every five years. These dates must be determined at the time of settlement.

    These two components are optional.

    A structured settlement will give you certainty that you will continue to receive a tax-free monthly income for the rest of your life. The amount of your periodic payments will be guaranteed and won't vary depending on what happens in the economy or on the financial markets.

    A typical structured settlement

    Joe was severely injured. The party responsible for Joe's injury is insured. An agreement has been reached resulting in a structured settlement. The insurance company pays an amount to a life assurance company, which will ensure that Joe receives the following payments:

    • a personal injury annuity providing payments for the remainder of Joe's lifetime which is equal to or greater than the basic age pension (compulsory component)
    • an immediate lump sum to pay for debts incurred before the settlement such as legal fees and alterations to Joe's house (optional component)
    • an indexed personal injury lump sum amount every three years to purchase a new wheelchair or other equipment (optional component).

    How much money is enough for a structured settlement?

    The minimum level of the personal injury annuity or annuities is equal to the basic age pension. Many severely injured people will need substantially more than this. It is expected that only the most severely injured persons will have a sufficiently large claim for compensation or damages to be able to obtain a structured settlement.

    A lawyer will help you work out the total compensation money you are likely to receive and whether this is enough for a structured settlement.

    The cost of an annuity providing the minimum level of payments will depend on how long you are expected to live. Less money will be required to provide the minimum amount to an older person with a shorter life expectancy than a young person with a longer life expectancy. The cost will also vary depending on other factors that affect the cost of annuities, such as interest rates.

    How long will I receive payments?

    The periodic payments from a structured settlement are designed to provide you with the maximum amount of compensation money while you are alive. If you live longer than expected, the payments will continue to be made for as long as you live. However, the periodic payments will stop when you die, unless you have arranged a guarantee period as outlined below.

    When you set up your structured settlement, you can arrange to have your personal injury annuity payments guaranteed for up to 10 years. If you choose to have a guarantee period of 10 years, for example, this will mean that if you die within 10 years from the date of settlement, then the remaining payments (that would have been paid if you had lived out the 10 years) can be paid tax-free to your dependants.

    If your dependants wish to, they can take the remaining payments as a single lump sum. If the remaining payments are to be paid to your estate, they must be paid as a lump sum.

    If the personal injury annuity starts after the date of the settlement, the guarantee period will be less than 10 years. It will not be possible to have a guarantee period if the personal injury annuity is to commence later than 10 years after the date of settlement. The guarantee period only applies to personal injury annuities.

    How are structured settlement payments taxed?

    The personal injury annuity and personal injury lump sum payments that you receive from a structured settlement are tax exempt or tax-free.

    You can take part of your compensation in the form of an immediate lump sum. This money will be tax-free at the time that you receive it. But if you invest that money for future use and receive dividends or interest on that investment, these earnings will be taxed as income.

    If you only receive tax-exempt personal injury annuity and personal injury lump sum payments, you will not be required to lodge a tax return. However, if you have other sources of income or receive interest or dividends, you may need to lodge a tax return. If you are required to lodge a tax return, don't include payments made to you under a tax-free structured settlement in your tax return.

    Who should I talk to about structured settlements?

    A financial adviser can look at your whole financial situation and advise you and your lawyer about the options for receiving your compensation money. For example, a financial adviser can help you work out how much of your compensation money should be paid as an immediate lump sum and how much should be used to pay for the income stream of annuities.

    How you design your structured settlement using the money and products available will be up to you.

    If you want to receive your compensation in the form of a structured settlement, you need to start by talking to your lawyer. You need to do this before your claim for compensation is finalised.

      Last modified: 09 Jun 2022QC 17073