ATO Interpretative Decision
ATO ID 2003/1065
Income Tax
Structured Settlement: annuity purchased from a foreign life insurance companyFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the income received under a structured settlement exempt income under Division 54 of the Income Tax Assessment Act 1997 (ITAA 1997) where the structured settlement annuity is purchased from a foreign Life Insurance Company?
Decision
No. The income received under this structured settlement will not be exempt income under Division 54 of the ITAA1997 where the structured settlement annuity is purchased from a foreign Life Insurance Company.
Facts
A child was born with severe disabilities and has associated learning difficulties.
An overseas court awarded damages to the child.
The parents decided to emigrate to Australia. The overseas court order was made to enable transfer of the damages to Australia. The court order specifies an amount of damages to be awarded by way of a structured settlement.
Under the structured settlement, the defendant proposes to purchase an annuity from a life Insurance company operating only in the country of the court award.
Reasons for Decision
Under paragraph 54-10(1)(e) of the ITAA1997, the terms of the settlement must provide for some or all of a lump sum award of compensation or damages to be used by the defendant or the defendants insurer to be paid to, or for the benefit of, the injured person (or to a trustee) in the form of:
- •
- an annuity or group of annuities purchased from a life insurance company or State insurers; or
- •
- an annuity or group of annuities combined with one or more deferred lump sums purchased from a life insurance company or State insurers.
(paragraph 54-10(1)(e) of the ITAA 1997)
Life Insurance Company
The term life insurance company is defined in subsection 995-1(1) of the ITAA 1997 to mean a life insurance company registered under the Life Insurance Act 1995 (LIA). For a company to be registered under the LIA, the Australian Prudential Regulation Authority (APRA) must issue a certificate to the company stating that the company is registered and specifying the date on which it was registered (subsection 21(5) of the LIA). Where a foreign insurer conducts life insurance business in Australia, an Australian subsidiary may be registered under the LIA.
State insurer
Section 5 of the LIA reads
This Act does not apply with respect to State insurance that does not extend beyond the limits of the State concerned.
A State insurer is defined in subsection 54-10(2) of the ITAA 1997 as a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Australian Constitution. Paragraph 51(xiv) provides the Federal Parliament with power to make laws with respect to 'insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned'.
The effect of these provisions is that life insurance business is governed by the LIA except where State insurance is carried on within the territorial boundaries of the State concerned. Such insurance is governed by the provisions of the relevant State act or regulations.
As a foreign life insurance company conducting business outside Australia is neither registered under the LIA nor a State insurer, an annuity taken out with a foreign life insurance company does not qualify for exemption under Division 54 of the ITAA1997.
Date of decision: 18 October 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 54-10(1)
subsection 995-1(1)
section 5 Commonwealth of Australia Constitution Act
paragraph 51(xiv)
Keywords
Annuities
Exempt Income
Foreign Life Insurance Companies
Life Insurance Policies
Structured Settlements
ISSN: 1445-2782