TAXATION LAWS AMENDMENT (STRUCTURED SETTLEMENTS) BILL 2002

2002

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

Presented and read a first time

Taxation Laws Amendment (Structured Settlements) Bill 2002

No. , 2002

(Treasury)

A Bill for an Act relating to structured settlements, and for related purposes

A Bill for an Act relating to structured settlements, and for related purposes

1 Short title

This Act may be cited as the Taxation Laws Amendment (Structured Settlements) Act 2002.

2 Commencement

3 Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

4 Amendment of assessments

Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment made before the commencement of this section for the purposes of giving effect to this Act.

Schedule 1—Structured settlements

Division 54—Exemption for certain payments made under structured settlements

Guide to Division 54

54-1 What this Division is about

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

Subdivision 54-A—Definitions

Operative provisions

54-5 Definitions

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

(b) 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.

structured settlement annuity means an ^*annuity that is purchased under the terms of a ^*structured settlement as mentioned in paragraph 54-10(1)(e).

structured settlement lump sum means a lump sum that is purchased under the terms of a ^*structured settlement as mentioned in paragraph 54-10(1)(e).

54-10 Meaning of structured settlement

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

(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;

(i) the person against whom the claim is made (the defendant) is not 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.

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

(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, are identified as being solely in payment of that compensation or those damages.

Subdivision 54-B—Tax exemption for structured settlement annuities

Operative provisions

54-15 Structured settlement annuity exemption for injured person

A payment of a ^*structured settlement 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, 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

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

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

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

(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

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

(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 (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, 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:

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

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

(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 total of the remaining payments (but without any further increases under subsection 54-30(3)).

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

(b) if there is more than one ^*annuity provided under the ^*structured settlement—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.

(a) for the year starting on the ^*date of the settlement—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:

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

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 in accordance with the formula:

(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:

(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, 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.

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 structured settlement lump sums

Operative provisions

54-45 Structured settlement lump sum exemption for injured person

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

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

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 ^*structured settlement lump sum had instead been paid to the ^*injured person on the ^*date of the settlement, 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

(a) identify the ^*structured settlement under which the lump sum is provided; 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 ^*structured settlement 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:

(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 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

Operative provisions

54-65 Exemption for certain payments to reversionary beneficiaries

A payment that is made to the reversionary beneficiary of a ^*structured settlement 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

(ii) if subparagraph 54-35(3)(b)(ii) applies—each of the payments making up the lump sum worked out 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 ^*structured settlement annuity or a ^*structured settlement lump sum to the trustee of a trust is exempt from income tax for the trustee if:

(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:

(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:

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 provisions):

(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 settlement 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.

Division 2A—Restriction on assignment or commutation of payments under structured settlements

203A Definitions

date of the settlement, in relation to a structured settlement, has the same meaning as it has in Division 54 of the Income Tax Assessment Act 1997.

structured settlement has the same meaning as it has in Division 54 of the Income Tax Assessment Act 1997.

203B Application of Division to tax-exempt annuities and lump sums

(ii) a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Constitution;

if, at that time, the requirements of sections 54-20 to 54-40 of the Income Tax Assessment Act 1997 are satisfied in relation to the annuity; and

(ii) a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Constitution;

if, at that time, the requirements of sections 54-45 to 54-60 of the Income Tax Assessment Act 1997 are satisfied in relation to the lump sum.

Note 1: The application of this Division to bodies that carry on State insurance is subject to section 5.

Note 2: Division 54 of the Income Tax Assessment Act 1997 provides a tax exemption for certain payments under structured settlements.

203C Assignments or commutations of tax-exempt annuities are generally not effective

(1) A purported assignment or commutation of an annuity that is, at the time of the purported assignment or commutation, a tax-exempt annuity is not effective at law (subject to subsection (2)).

(2) However, the annuity can be commuted as mentioned in section 54-35 of the Income Tax Assessment Act 1997.

203D Assignments or commutations of tax-exempt lump sums are not effective

(1) A purported assignment of the right to receive a lump sum that is, at the time of the purported assignment, a tax-exempt lump sum is not effective at law.

(2) A purported commutation, or other early cashing-out, of the right to receive a lump sum that is, at the time of the purported commutation or cashing-out, a tax-exempt lump sum is not effective at law.

230E Relationship with Division 2

After “subsection (1A)”, insert “and Division 54 of the Income Tax Assessment Act 1997”.

Note: Division 54 of the Income Tax Assessment Act 1997 provides a tax exemption for certain payments under structured settlements.

Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements.

6 Section 11-15 (after the table item headed “social security or like payments”)

structured settlements
annuities and lump sums		Subdivisions 54-B, 54-C and 54-D

7 Section 118-1 (note)

Omit “Note”, substitute “Note 1”.

8 At the end of section 118-1

Add:

Note 2: There are also exemptions in Division 54.

9 Subsection 995-1(1)

Insert:

All Groups Consumer Price Index number means the All Groups Consumer Price Index number (being the weighted average of the 8 capital cities) published by the Australian Statistician.

10 Subsection 995-1(1)

Insert:

date of the settlement, for a ^*structured settlement, has the meaning given by section 54-5.

11 Subsection 995-1(1)

Insert:

guarantee period, for an annuity provided under a ^*structured settlement, has the meaning given by subsection 54-35(2).

12 Subsection 995-1(1)

Insert:

injured person, in relation to a ^*structured settlement, has the meaning given by subparagraph 54-10(1)(a)(i).

13 Subsection 995-1(1)

Insert:

structured settlement has the meaning given by section 54-10.

14 Subsection 995-1(1)

Insert:

structured settlement annuity has the meaning given by section 54-5.

15 Subsection 995-1(1)

Insert:

structured settlement lump sum has the meaning given by section 54-5.

Part 3—Application provisions

Division 1—New Division 54 of the Income Tax Assessment Act 1997

Income Tax (Transitional Provisions) Act 1997

16 Section 53-1 (link note)

Repeal the link note, substitute:

Division 54—Exemption for certain payments made under structured settlements

Table of sections

54-1 Application of Division 54 of the Income Tax Assessment Act 1997

54-1 Application of Division 54 of the Income Tax Assessment Act 1997

(1) Division 54 of the Income Tax Assessment Act 1997 applies to assessments for the 2001-2002 income year and later income years.

(2) However, the Division does not apply unless the ^*date of the settlement is 26 September 2001 or a later date.

Division 2—New Division 2A of Part 10 of the Life Insurance Act 1995

17 Application of the Division

Division 2A of Part 10 of the Life Insurance Act 1995 applies to an annuity or lump sum that is purchased under a structured settlement if the date of the settlement (within the meaning of that Division) is the day on which that Division commences, or a later day.

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