Edited version of administratively binding advice

Authorisation Number: 1011855136672

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Advice

Subject: Non-concessional contributions - structured settlement or order for personal injury

Questions

1. Is the payment a structured settlement or order for personal injury for the purposes of section 292-95 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Will the amount to be contributed to a complying superannuation fund be a non-concessional contribution for the 2011-12 income year under section 292-90 of the ITAA 1997?

Advices

1. Yes

2. No

This advice applies for the following period:

30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on Tax Office advice.

Your advice is based on the following facts.

1. Your client was born in overseas. Your client is currently under 65 years of age.

2. Your client entered Australia a number of years ago.

3. Your client was employed by an employer from September 2002 to May 2004.

4. In 2004 your client was arrested, detained by the Commonwealth of Australia (the defendant) and then held at the Detention Centre and subsequently deported to overseas.

5. Prior to the detention, your client's health was good. Your client's health deteriorated immediately upon detention.

6. In detention, your client's condition gave rise to the need for personal care.

7. In 2008, the defendant wrote to your client, acknowledging that it had unlawfully detained and deported him and that he was entitled to compensation accordingly.

8. In 2009, your client was granted a Special Humanitarian visa and he returned to Australia and has remained in the care of friends and family since.

9. Your client remains unfit to work. Your client continues with considerable disability in respect of his personal care and cannot live independently.

10. Your client commenced action against the defendant for compensation.

11. In 2010, a Court delivered a consent judgment in favour of your client adjusted for items such as costs, interest and amounts that had been pre-paid.

12. In March 2011, a company was appointed financial manager (the legal representative) to the estate of your client under the state Trustee and Guardian Act 2009. The legal representative is seeking to place part of the proceeds of the settlement with a superannuation fund (the Fund) on behalf of your client.

13. In April 2011, your client received a final settlement payment in respect of his legal action against the defendant.

14. Certification by two legally qualified medical practitioners states that because of the ill-health (whether physical or mental), your client is unlikely to ever be able to be gainfully employed in a capacity for which he is reasonably qualified because of education, experience or training.

15. Your client's legal representative intends to make the contribution within the 90 day period.

16. Your client's legal representative intends to provide a notice in the approved form to the trustee of the Fund at the time of making the contribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-80.

Income Tax Assessment Act 1997 Section 292-85.

Income Tax Assessment Act 1997 Section 292-90.

Income Tax Assessment Act 1997 Subsection 292-90(2).

Income Tax Assessment Act 1997 Paragraph 292-90(2)(c).

Income Tax Assessment Act 1997 Section 292-95.

Income Tax Assessment Act 1997 Subsection 292-95(1).

Income Tax Assessment Act 1997 Paragraph 292-95(1)(b).

Income Tax Assessment Act 1997 Subsection 292-95(2).

Income Tax Assessment Act 1997 Subsection 292-95(3).

Income Tax Assessment Act 1997 Subsection 292-95(4).

Income Tax Assessment Act 1997 Subsection 292-95(5).

Reasons for decision

Summary

Provided all the necessary conditions are satisfied, the contribution that has arisen because of a consent judgment for personal injury to your client will not be a non-concessional contribution for the 2011-12 income year. Consequently, the contribution will not be counted towards your client's non-concessional contribution cap for the 2011-12 income year.

Detail reasoning

From 1 July 2007, non-concessional contributions made to superannuation funds are subject to an annual cap in accordance with subsection 292-85(2) of the Income Tax Assessment Act 1997 (ITAA 1997). For the 2011-12 financial year, the non-concessional contributions cap is $150,000.

A person will be liable to pay excess non-concessional contributions tax at the rate of 46.5% on non-concessional contributions over the cap (sections 292-80 and 292-85 of the ITAA 1997).

Non-concessional contributions for a financial year are defined under section 292-90 of the ITAA 1997 and include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to their superannuation fund account;

· transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income) and

· excess concessional contributions (if any) for the financial year.

Exclusions from the non-concessional contributions cap

Under subsection 292-90(2) of the ITAA 1997 a number of contribution types are excluded from being non-concessional contributions for a financial year. In particular, subparagraph 292-90(2)(c)(ii) excludes a contribution covered under section 292-95.

Section 292-95 of the ITAA 1997 deals with contributions arising from settlements or orders for personal injuries. The contribution in this case has arisen because of a consent judgment in respect of compensation personal injury to your client. We will need to determine if the contribution to be made to the superannuation fund falls under this section.

Conditions to be satisfied

Section 292-95 of the ITAA 1997 states:

(1) A contribution is covered under this section if:

(a) the contribution arises from:

(i) the settlement of a claim that satisfies the conditions in subsection (3); or

(ii) the settlement of a claim in relation to a personal injury suffered by you under a law of the Commonwealth or of a State or Territory relating to workers compensation; or

(iii) the order of a court that satisfies the conditions in subsection (4); and

(b) the contribution is made within 90 days after the later of the following:

(i) the day of receipt of the payment from which the contribution is made; or

(ii) in relation to subparagraph (a)(i) or (iii) - the day mentioned in subsection (2); and

(c) 2 legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that you can ever be *gainfully employed in a capacity for which you are reasonably qualified because of education, experience or training; and

(d) no later than the time the contribution is made to a *superannuation plan, you or your *legal personal representative notify the *superannuation provider in relation to the plan, in the *approved form, that this section is to apply to the contribution.

(2) For the purposes of subparagraph (1)(b)(ii), the day is:

(a) for a settlement mentioned in subparagraph (a)(i):

(i) the day on which the agreement mentioned in paragraph (3)(c) 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 day on which that order was made; or

(b) for an order mentioned in subparagraph (1)(a)(iii) - the day on which the order was made.

(3) For the purposes of subparagraph (1)(a)(i), the conditions are as follows:

(a) the claim:

(i) is for compensation or damages for, or in respect of, personal injury suffered by you; and

(ii) is made by you or your *legal personal representative;

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

(c) 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).

(4) For the purposes of subparagraph (1)(a)(iii), the conditions are as follows:

(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 you; and

(ii) is made by you or your *legal personal representative;

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

(c) the order is not an order approving or endorsing an agreement as mentioned in paragraph (3)(c).

(5) If a claim is both:

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

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

Subsections (3) and (4) apply to the claim, but only to the extent that it relates to the compensation or damages referred to in paragraph (a), and only to amounts that, in the settlement agreement, or in the order, are identified as being solely in payment of that compensation or those damages.

As this contribution arises from a settlement in terms of subparagraph 292-95(1)(a)(i), subsection 292-95(3) outlines the conditions that must be satisfied:-

§ the claim is for compensation or damages for a personal injury suffered by the contributor and has been made by the person or their legal representative; and

§ the claim is based on the commission of a wrong or on a right created by statute; and

§ the settlement is in the form of a written agreement between the parties.

In addition, for a contribution to fall under this section the following conditions must also be satisfied:-

· the contribution arises from an order or settlement for compensation in relation to a personal injury or a settlement in relation to a personal injury relating to workers compensation;

· the contribution is made within 90 days of the later of the payment being received or the order coming into effect;

· two legally qualified medical practitioners have certified that as a result of the injury the injured person is unlikely to ever be able to be gainfully employed in a capacity for which they were reasonably qualified because of education, experience or training; and

· a notice in the approved form is provided to the trustee of the superannuation fund no later than the time the contribution is made stating that section 292-95 of the ITAA 1997 applies to the contribution.

We will consider each of the conditions in turn.

Claim is for compensation or damages for a personal injury

In the facts provided your client's legal representative commenced action against the defendant in respect of your client's compensation claim for personal injury from his unlawful detention and deportation. Therefore, the contribution arose from a settlement of a claim for, or in respect of, personal injury.

Claim is based on the commission of a wrong or on a right created by statute

Your client claim was based on the commission of a wrong being his unlawful detention and deportation.

The settlement is in the form of a written agreement between the parties

The contribution arose from an agreement embodied in a consent judgment made by a Court.

Payment for personal injury arising from a structured settlement

Prior to the detention, your client's health was good. Your client health deteriorated immediately upon detention. As mentioned previously, your client's legal representative commenced action against the defendant in respect of your client's compensation claim for personal injury from his unlawful detention and deportation in a Court. As a result, the Court delivered a consent judgment in favour of your client. The compensation payment arose from the personal injuries your client suffered due to the unlawful detention and deportation.

As the contribution to be made to a superannuation fund (the Fund) comes from the payment which was a result of a consent judgment made by the court for personal injury, this condition will be satisfied.

The contribution being made within the 90 day period

To exclude a contribution made from the proceeds of a consent judgment by the Court, subsection 292-95(1)(b) of the ITAA 1997 requires the contribution to be made to a complying superannuation fund within 90 days of the later of:

· the day of receipt of the payment from which the contribution is made, or

· the day on which the consent judgment was made.

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which inserted the provision, described this requirement as follows at paragraph 1.96:

The contribution must be made to a superannuation fund within 90 days of the payment being received or the structured settlement or order coming in effect, whichever is later. [Schedule 1, item 1, paragraph 292-95(1)(b)]

In this case, the date of effect of the structured settlement embodied in the Consent Judgment was in November 2010. However, the amount was not received by your client until April 2011. Therefore, the 90 day period commences in April 2011.

Your client intends to contribute majority of the structured settlement payment to the Fund prior to the expiration of the 90 day period. Provided the contribution is made to the Fund no later than the 90 day period, this condition will be satisfied.

Certification from two legally qualified medical practitioners that because of the personal injury your client will never be able to be gainfully employed

This condition has been satisfied as you have provided certificates from two medical practitioners certifying that your client, as a result of the personal injury, is unlikely to ever be able to be gainfully employed in a capacity for which he is reasonably qualified because of education, experience or training.

Provision of a notice to the trustee of the Fund

You have advised that when the proposed contribution is made, your client's legal representative will provide a notice in the approved form to the trustee of the Fund at the time of making the contributions. If this is the case, this condition will also be satisfied.

Conclusion

Provided all the necessary conditions are satisfied, the contribution that has arisen because of a consent judgment for personal injury to your client will not be a non-concessional contribution for the 2011-12 income year. Consequently, the contribution will not be counted towards your client's non-concessional contribution cap for the 2011-12 income year.