by Kurt Purkiss
As an advisor specialising in personal injury compensation payments management, I have seen firsthand the significant financial impact a settlement can have on a person’s life.
One of the key considerations is how to best manage, preserve and optimise the settlement proceeds to ensure they can provide for and meet the claimant’s needs now and into the future.
Utilising Your Superannuation Fund & The Non-Concessional Contributions Cap
One option that many people may need to be aware of is the ability to contribute these payments to their superannuation fund and then transfer the funds into a retirement phase pension where they can retain full access to their settlement proceeds but also be eligible for tax-free earnings.
Generally speaking, funds that are contributed to superannuation without claiming a tax deduction are classed as non-concessional contributions. As of 1 July 2022, the annual non-concessional contributions cap is $110,000 per financial year; in saying this, individuals under the age of 65 may also be eligible to make a bring-forward contribution, allowing them to contribute up to three years’ worth of non-concessional contributions in a single financial year, up to a total of $330,000.
There is, however, an often overlooked provision in the legislation that permits large sums relating to personal injury claims to be contributed into superannuation tax-free without counting towards this Non-Concessional Contributions Cap.
Tax Treatment of Personal Injury Compensation Payments
Section 292-95 of the Income Tax Assessment Act (ITAA) 1997 outlines the tax treatment of personal injury compensation payments received by individuals. This section states that if a person receives a personal injury compensation payment, they may be eligible to contribute all or part of that payment to their superannuation fund without incurring contributions tax, regardless of how large the amount may be. If the settlement is a lump sum, the contribution must be made within 90 days of receiving the payment, whereas if the payment is made as a structured settlement, the contribution must be made within 180 days of receiving the first payment. There are also certain specific wordings required to be written into the settlement agreement in order to qualify.
If the contributed funds are transferred into a retirement phase pension, the earnings on the funds do not incur any earnings or capital gains tax moving forward, which can have significant financial benefits.
It’s important to note that there are specific rules and regulations around these provisions, and individuals should seek professional advice to ensure compliance with these regulations. Hence, it’s essential to work with an expert in this area.
It’s also important to note that while this strategy can benefit some individuals, there may be better options for some. Other investment or tax strategies may be more appropriate for your situation, depending on your circumstances.
Example: $2,500,000 Settlement
To illustrate the potential benefits, here’s an example based on a $2,500,000 settlement invested in one’s personal name versus the structures discussed above:
| Invested in own name | Invested via pension | |
| Invested | $2,500,000 | $2,500,000 |
| Earnings @ 6% | $150,000 | $150,000 |
| Tax | $41,167 | $0 |
| Net return | $108,833 | $150,000 |
| Tax savings yr 1 | $41,167 |
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Note: PICPC do not count towards the transfer balance cap.
How We Can Help
If you are currently engaged in a personal injury compensation matter, or you’re a lawyer and your client is, we would be pleased to discuss how we can assist. To get in touch, just enter your details below or call us on 02 4969 6600.
