Supplementary Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
General outline and financial impact
Taxation Laws Amendment (Structured Settlements) Bill 2002 inserts Division 54 into the Income Tax Assessment Act 1997 (ITAA 1997) which provides a tax exemption for certain annuities and deferred lump sums made under structured settlements in relation to persons who have suffered a serious personal injury.
- clarify the exclusion of employment-related worker's compensation claims from the tax exemption; and
- provide a tax exemption for life insurance companies on income derived from assets that support structured settlement annuities and lump sums.
Date of effect : The amendments apply for the 2001-2002 income year and later income years where the date of settlement is on or after 26 September 2001.
Proposal announced : These amendments have not been previously announced.
Financial impact : The cost to revenue is estimated to be between $0.5 million and $1 million each year.
Compliance cost impact : There is no compliance cost impact.
Chapter 1 - Taxation Laws Amendment (Structured Settlements) Bill 2002
1.1 Amendment 1 replaces paragraph 54-10(1)(c) in item 1 of Schedule 1. The new paragraph provides that a structured settlement that arises from claims against a defendant, in their capacity as an employer or associate of an employer of an injured person, is not eligible for the tax exemption.
1.2 The new paragraph clarifies that the tax exemption is available for structured settlements which relate to claims made by a person against their employer in a non-work-related context. For example, where a traffic accident occurs between an employee and the employer outside of the work environment and the employee takes an action against his or her employer, any amount paid under a resulting structured settlement would not be excluded from the tax exemption merely because the defendant is the injured person's employer.
1.3 Amendment 2 inserts item 1A into Part 1 of Schedule 1 to amend the definition of 'exempt life insurance policy' contained in subsection 995-1(1) of the ITAA 1997. The amendment includes as an 'exempt life insurance policy' those policies that provide structured settlement annuities and structured settlement lump sums which are exempt from income tax under Division 54 of the ITAA 1997.
1.4 Amendment 3 inserts item 12A into Part 1 of Schedule 2 to amend the definition of 'life insurance premium' contained in subsection 995-1(1) of the ITAA 1997 so that it includes consideration received by a life insurance company in respect of structured settlement lump sums.
1.5 Life insurance companies are exempt from income tax under Division 320 of the ITAA 1997 on income derived from assets that support exempt life insurance policy liabilities. Amendments 2 and 3 ensure that life insurance companies are also exempt from income tax on assets that fund tax exempt structured settlement annuities and structured settlement lump sums.
1.6 Amendment 4 provides that amendments 2 and 3 apply for the 2001-2002 income year and later income years where the date of settlement is on or after 26 September 2001.