Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
General outline and financial impact
This bill amends the ITAA 1997:
- to provide an income tax exemption for annuities and certain deferred lump sums paid under structured settlements to seriously injured persons. The exemption will only be available where certain eligibility criteria are met; and
- to ensure that life companies are exempt from income tax on income derived from assets that support structured settlement annuities and lump sums.
This bill also amends the LIA 1995 to provide that any commutation or assignment of a tax-exempt structured settlement annuity or lump sum will be ineffective.
Date of effect: The amendments to the ITAA 1997 apply for the 2001-2002 income year and later years in relation to structured settlements entered into after 26 September 2001. The amendments to the LIA 1995 apply from Royal Assent.
Proposal announced: The proposal was announced in former Assistant Treasurer's Press Release No. 46 of 26 September 2001.
The amendment to the ITAA 1997 relating to the tax exemption provided to life companies has not been previously announced.
Financial impact: The estimated cost to revenue of providing an income tax exemption for structured settlement annuities and structured settlement deferred lump sums paid to seriously injured persons is set out in the following table:
|$1.4 million||$2.5 million||$3.6 million||$4.6 million|
This revenue cost is expected to increase to $20 million per annum after roughly 20 years and to stabilise at that level.
The cost to revenue of providing an income tax exemption to life companies on income derived from assets that support structured settlement annuities and structured settlement lump sums is estimated to be between $0.5 million and $1 million each year.
Compliance cost impact: The measure relating to the income tax exemption for annuities and deferred lump sums made under structured settlements to injured persons is expected to result in a reduction in compliance costs for seriously injured persons. This is because they will not be required to lodge a tax return if their assessable income is below the tax-free threshold.
The measure providing an income tax exemption to life companies on income derived from assets that support structured settlement annuities and structured settlement lump sums will not have a compliance cost impact.