Taxation Laws Amendment (Structured Settlements and Structured Orders) Act 2002 (139 of 2002)

Schedule 1  

Part 1   Main amendments

Income Tax Assessment Act 1997

1   Section 53-25 (link note)

Repeal the link note, substitute:

Division 54 - Exemption for certain payments made under structured settlements and structured orders

Table of Subdivisions

Guide to Division 54

54-A Definitions

54-B Tax exemption for personal injury annuities

54-C Tax exemption for personal injury lump sums

54-D Miscellaneous

Guide to Division 54

54-1 What this Division is about

Certain annuities and lump sums provided under structured settlements and structured orders are exempt from income tax. This Division tells you what a structured settlement is and what a structured order is, and when such an annuity or lump sum is exempt.

Subdivision 54-A - Definitions

Table of sections

Operative provisions

54-5 Definitions

54-10 Meaning of structured settlement and structured order

Operative provisions

54-5 Definitions

In this Division:

date of the settlement or order :

(a) for a *structured settlement, means:

(i) the date on which the agreement that is the structured settlement was entered into; or

(ii) if that agreement depends, for its effectiveness, on being approved (however described) by an order of a court, or on being embodied in a consent order made by a court, the date on which that order was made; and

(b) for a *structured order, means the date on which the order was made.

personal injury annuity means an *annuity:

(a) that is purchased under the terms of a *structured settlement as mentioned in paragraph 54-10(1)(e); or

(b) that is purchased under the terms of a *structured order as mentioned in paragraph 54-10(1A)(e).

personal injury lump sum means a lump sum:

(a) that is purchased under the terms of a *structured settlement as mentioned in paragraph 54-10(1)(e); or

(b) that is purchased under the terms of a *structured order as mentioned in paragraph 54-10(1A)(e).

54-10 Meaning of structured settlement and structured order

(1) A structured settlement is a settlement of a claim that satisfies the following conditions:

(a) the claim:

(i) is for compensation or damages for, or in respect of, personal injury suffered by a person (the injured person ); and

(ii) is made by the injured person or by his or her *legal personal representative;

(b) the claim is based on the commission of a wrong, or on a right created by statute;

(c) the claim is made against a person (the defendant ) and satisfies the following conditions:

(i) the claim is not made against the defendant in his or her capacity as an employer, or *associate of an employer, of the injured person;

(ii) the claim is not made under a *workers' compensation law, and is not made as an alternative to a claim under such a law;

(d) the settlement takes the form of a written agreement between the parties to the claim (whether or not that agreement is approved by an order of a court, or is embodied in a consent order made by a court);

(e) under the terms of the settlement, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more *life insurance companies or State insurers:

(i) an *annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or

(ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person.

(1A) A structured order is an order of a court that satisfies the following conditions:

(a) the order is made in respect of a claim that:

(i) is for compensation or damages for, or in respect of, personal injury suffered by a person (the injured person ); and

(ii) is made by the injured person or by his or her *legal personal representative;

(b) the order is not an order approving or endorsing an agreement as mentioned in paragraph (1)(d);

(c) the claim is based on the commission of a wrong, or on a right created by statute;

(d) the claim is made against a person (the defendant ) and satisfies the following conditions:

(i) the claim is not made against the defendant in his or her capacity as an *employer, or *associate of an employer, of the injured person;

(ii) the claim is not made under a *workers' compensation law, and is not made as an alternative to a claim under such a law;

(e) under the terms of the order, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more *life insurance companies or State insurers:

(i) an *annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or

(ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person.

(2) For the purposes of paragraphs (1)(e) and (1A)(e), a State insurer is a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Constitution.

(3) If a claim is both:

(a) for compensation or damages for personal injury suffered by a person; and

(b) for some other remedy (for example, compensation or damages for loss of, or damage to, property);

this section applies to the claim, but only to the extent that it relates to the compensation or damages referred to in paragraph (a), and only to annuities or lump sums that, in the settlement agreement, or in the order, are identified as being solely in payment of that compensation or those damages.

Subdivision 54-B - Tax exemption for personal injury annuities

Table of sections

Operative provisions

54-15 Personal injury annuity exemption for injured person

54-20 Lump sum compensation etc. would not have been assessable

54-25 Requirements of the annuity instrument

54-30 Requirements for payments of the annuity

54-35 Payments during the guarantee period on the death of the injured person

54-40 Requirement for minimum monthly level of support

Operative provisions

54-15 Personal injury annuity exemption for injured person

A payment of a *personal injury annuity that is made to the *injured person is exempt from income tax if the conditions in this Subdivision are satisfied.

Note: Section 54-70 provides a tax exemption if the payment is instead made to the trustee of a trust.

54-20 Lump sum compensation etc. would not have been assessable

If the compensation or damages that were used to purchase the *annuity had instead been paid to the *injured person in a single lump sum on the *date of the settlement or order, the compensation or damages would not have been assessable income.

Note: Paragraph 118-37(1)(b) disregards a capital gain or capital loss that arises from compensation or damages the injured person receives for any wrong he or she suffers personally.

54-25 Requirements of the annuity instrument

The *annuity instrument must:

(a) identify the *structured settlement or *structured order under which the *annuity is provided; and

(b) only allow for payments of the annuity to be made to:

(i) the injured person; or

(ii) a trustee of a trust of which the injured person is the beneficiary; or

(iii) a reversionary beneficiary, or the injured person's estate, in accordance with section 54-35; and

(c) contain a statement to the effect that the annuity cannot be assigned, and cannot be commuted except as mentioned in section 54-35.

Note: Division 2A of Part 10 of the Life Insurance Act 1995 makes a purported assignment or commutation that is contrary to paragraph (c) ineffective.

54-30 Requirements for payments of the annuity

(1) The *annuity instrument must provide that payments of the *annuity are to be made at least annually:

(a) over a period of at least 10 years during the life of the *injured person; or

(b) for the life of the injured person.

(2) The *annuity instrument must specify:

(a) the date of the first payment of the *annuity; and

(b) if the annuity instrument specifies a period of years - the date of the last payment in that period; and

(c) the amount of each periodic payment of the annuity.

(3) The *annuity instrument may only allow the amount of a payment to be varied by increasing the amount:

(a) in order to maintain its real value:

(i) by indexation by reference to increases in the *All Groups Consumer Price Index number; or

(ii) by indexation by reference to increases in the full-time adult average weekly ordinary time earnings, published by the Australian Statistician; or

(b) by a percentage specified in the annuity instrument.

(4) The *annuity instrument may only allow the amount of a particular payment to be varied:

(a) by only one of the methods referred to in subsection (3); or

(b) by whichever of 2 or more of those methods would result in the biggest or smallest increase.

(5) A reference in this section to specifying a date or percentage requires an actual date or figure to be specified, not merely a method of determining a date or figure.

Example: Under subsection (2), "13 September 2002" would be allowed, but "The date on which the annuitant finishes university" would not be allowed.

54-35 Payments during the guarantee period on the death of the injured person

(1) This section applies if the *annuity instrument provides for payments to be made to the *injured person during any part of the period ending 10 years after the *date of the settlement or order (whether the *annuity is expressed to be for the life of the person or for a period of years).

(2) The *annuity instrument may specify a period (the guarantee period ) of up to 10 years after the *date of the settlement or order, during which, if the *injured person dies, the payments (the remaining payments) for the remainder of the guarantee period that would have been paid to the injured person are to be paid instead to:

(a) the injured person's estate; or

(b) a reversionary beneficiary.

Note: For tax exemptions in this situation, see sections 54-65 and 54-70.

(3) If the *annuity instrument provides for the remaining payments to be made to a reversionary beneficiary, the instrument must:

(a) name the beneficiary; and

(b) allow the beneficiary to choose either:

(i) to be paid the amounts of the remaining payments when the injured person would have received them; or

(ii) to commute those payments into a lump sum worked out under subsection (5).

(4) The *injured person's estate may only be paid the lump sum worked out under subsection (5) (and not the periodic payments).

(5) The amount of the lump sum under subparagraph (3)(b)(ii) or subsection (4) is the *policy termination value of the *life insurance policy that is the *annuity instrument, as calculated by an *actuary as at the date of the injured person's death. In making this calculation, the following are to be disregarded:

(a) any payments of the annuity due to be made after the end of the guarantee period;

(b) any *structured settlement lump sums that are also provided for by that policy.

(6) In this section:

pay to a person includes pay to the trustee of a trust of which the person is the beneficiary.

pay to the injured person's estate includes pay to the trustee of a trust established by the *injured person's will.

54-40 Requirement for minimum monthly level of support

(1) Either:

(a) the *annuity instrument must provide; or

(b) if there is more than one *annuity provided under the *structured settlement or *structured order - the annuity instruments for all of those annuities that satisfy the other conditions in this Subdivision, taken as a whole, must provide;

that at least once a month for the life of the *injured person, he or she is to be paid an amount that equals or exceeds the minimum monthly level of support.

(2) The minimum monthly level of support means:

(a) for the year starting on the *date of the settlement or order - one twelfth of the amount that is, on that date, the sum of:

(i) the maximum basic rate of age pension payable to a person in accordance with item 1 of Table B in point 1064-B1 of Pension Rate Calculator A in section 1064 of the Social Security Act 1991; and

(ii) the amount of a person's pension supplement, worked out (using that maximum basic rate) in accordance with Module BA of that Pension Rate Calculator; and

(b) for any subsequent year starting on an anniversary of the date of the settlement or order:

(i) if the indexation factor for the year (see subsection (3)) is greater than 1 - the amount worked out under subsection (4); or

(ii) otherwise - the minimum monthly level of support for the previous year.

Note: In working out the rate and amount that count for the purposes of paragraph (a), the effect of the indexation provisions in sections 1191 to 1195 of the Social Security Act 1991 must be taken into account. The indexed figures are available from Centrelink.

(3) The indexation factor for a year is to be worked out on the anniversary of the *date of the settlement or order in accordance with the formula:

Formula

where:

base year means:

(a) if there have been one or more previous years for which the indexation factor was greater than 1 - the year ending immediately before the most recent year for which the indexation factor was greater than 1; or

(b) otherwise - the year ending immediately before the *date of the settlement or order.

Note: This has effect subject to subsection (6).

(4) If the indexation factor for a year is greater than 1, then the minimum monthly level of support for the year is the amount worked out in accordance with the following formula:

Formula2

(5) The results under subsections (3) and (4) must be rounded to 3 decimal places (rounding up if the fourth decimal place is 5 or more).

(6) The indexation factor for a year must be worked out by reference to figures for the same *quarter (for example, the March quarter) as has been used in previous years, even if, on the anniversary of the *date of the settlement or order, the *All Groups Consumer Price Index number for that quarter has not yet been published. If this happens, the calculation must be made as soon as practicable after the number for that quarter is published.

(7) In this section:

pay to a person includes pay to the trustee of a trust of which the person is the beneficiary.

Subdivision 54-C - Tax exemption for personal injury lump sums

Table of sections

Operative provisions

54-45 Personal injury lump sum exemption for injured person

54-50 Lump sum compensation would not have been assessable

54-55 Requirements of the instrument under which the lump sum is paid

54-60 Requirements for payments of the lump sum

Operative provisions

54-45 Personal injury lump sum exemption for injured person

A payment of a *personal injury lump sum that is made to the *injured person is exempt from income tax if:

(a) there is at least one *personal injury annuity (provided under the same *structured settlement or *structured order) that satisfies the conditions in Subdivision 54-B; and

(b) the other conditions in this Subdivision are satisfied.

Note: Section 54-70 provides a tax exemption if the payment is instead made to the trustee of a trust.

54-50 Lump sum compensation would not have been assessable

If the compensation or damages that were used to purchase the *personal injury lump sum had instead been paid to the *injured person on the *date of the settlement or order, the compensation or damages would not have been assessable income.

Note: Paragraph 118-37(1)(b) disregards a capital gain or capital loss that arises from compensation or damages the injured person receives for any wrong he or she suffers personally.

54-55 Requirements of the instrument under which the lump sum is paid

The instrument under which the *personal injury lump sum is paid must:

(a) identify the *structured settlement or *structured order under which the lump sum is provided; and

(b) only allow for the payment of the lump sum to be made to:

(i) the *injured person; or

(ii) a trustee of a trust of which the injured person is the beneficiary; and

(c) contain a statement to the effect that the right to receive the lump sum cannot be assigned, and cannot be commuted or otherwise cashed-out early.

Note: Division 2A of Part 10 of the Life Insurance Act 1995 makes a purported assignment or commutation (or cashing-out) that is contrary to paragraph (c) ineffective.

54-60 Requirements for payments of the lump sum

(1) The instrument under which the *personal injury lump sum is paid must specify the date and amount of the payment of the lump sum.

(2) The instrument may only allow the amount of the payment to be varied by increasing the amount:

(a) in order to maintain its real value:

(i) by indexation by reference to increases in the *All Groups Consumer Price Index number; or

(ii) by indexation by reference to increases in the full-time adult average weekly ordinary time earnings, published by the Australian Statistician; or

(b) by a percentage specified in the instrument.

(3) The instrument may only allow the amount of the payment to be varied:

(a) by only one of the methods referred to in subsection (2); or

(b) by whichever of 2 or more of those methods would result in the biggest or smallest increase.

(4) A reference in this section to specifying a date or percentage requires an actual date or figure to be specified, not merely a method of determining a date or figure.

Example: Under subsection (1), "13 September 2002" would be allowed, but "The date on which the annuitant finishes university" would not be allowed.

Subdivision 54-D - Miscellaneous

Table of sections

Operative provisions

54-65 Exemption for certain payments to reversionary beneficiaries

54-70 Special provisions about trusts

54-75 Minister to arrange for review and report

Operative provisions

54-65 Exemption for certain payments to reversionary beneficiaries

A payment that is made to the reversionary beneficiary of a *personal injury annuity for which there is a *guarantee period is exempt from income tax if:

(a) the payment is a periodic or lump sum payment made in accordance with subsection 54-35(3); and

(b) either:

(i) if subparagraph 54-35(3)(b)(i) applies - the payment; or

(ii) if subparagraph 54-35(3)(b)(ii) applies - each of the payments taken into account in working out the amount of the lump sum under subsection 54-35(5);

would be exempt from income tax under this Division if the *injured person were still alive and the payment, or each of the payments, were instead made to the injured person.

54-70 Special provisions about trusts

(1) A payment of a *personal injury annuity or a *personal injury lump sum to the trustee of a trust is exempt from income tax for the trustee if:

(a) the beneficiary of the trust is the *injured person; and

(b) because of Subdivision 54-B or 54-C, the payment would have been exempt from income tax if it had been made directly to the beneficiary.

(2) A payment made in accordance with paragraph 54-35(3)(b) to the trustee of a trust is exempt from income tax for the trustee if:

(a) the beneficiary of the trust is the reversionary beneficiary; and

(b) because of section 54-65, the payment would have been exempt from income tax if it had been made directly to the beneficiary.

(3) A payment of a lump sum in accordance with subsection 54-35(4) to the trustee of a trust is exempt from income tax for the trustee.

(4) If a payment is exempt from income tax for a trustee because of this section, the payment is also exempt from income tax for a beneficiary, or the beneficiary, of the trust, even if the trustee:

(a) pays all or part of the payment to the beneficiary; or

(b) applies all or part of the payment for the benefit of the beneficiary.

54-75 Minister to arrange for review and report

(1) The Minister must cause a person to review, and to report to the Minister in writing about, the operation of the following provisions (the structured settlements and orders provisions ):

(a) the other provisions of this Division;

(b) Division 2A of Part 10 of the Life Insurance Act 1995.

(2) The person must be someone who, in the Minister's opinion, is suitably qualified and appropriate to conduct the review.

(3) The review and report must relate to the period beginning when this Division commences and ending after 4 years and 6 months.

(4) The person must give the report to the Minister as soon as practicable, and in any event within 6 months, after the end of that period.

(5) The report may include suggestions for changes to the structured settlements and orders provisions that, in the person's opinion, are needed to overcome, or would help overcome, problems identified during the review and set out in the report.

(6) The person must provide a reasonable opportunity for members of the public to make submissions to him or her about matters to which the review relates.

(7) The Minister must cause a copy of the report to be laid before each House of the Parliament within 15 sitting days of that House after the Minister receives the report.