by Kurt Purkiss
The law and regulations around personal injury compensation claims are intricate. The fine print can make an enormous difference to the amount of compensation our clients receive and how it is taxed throughout their lives.
One crucial part of the existing legislation is section 292-95 of the Income Tax Assessments Act 1997, which deals with superannuation contributions from structured settlements or orders for personal injury.
At Lambourne Partners, we have found that when a personal injury claim is settled or awarded, our clients are often able to make a unique contribution to superannuation which exists outside of any of the current superannuation contribution caps.
A Life-Long Tax-Free Income Stream
The money from the settlement can be contributed tax-free into a superannuation fund in the claimant’s name and not breach any of the existing caps. Of course, it is crucial to first ensure that the client can unpreserve their superannuation and gain access to the contributed funds. If they can, they may commence an income stream where the financial benefit is significant – a life-long tax-free income stream with tax-free withdrawals.
In other words, our client does not have to pay tax on the investment income earned from the settlement amount. Moreover, there are no capital gains consequences once funds are moved into this entirely tax-free pension environment.
When people come to us looking for wealth management advice, having already received their compensation payout, we are finding some are eligible to benefit from these arrangements and others not.
This means clients with similar circumstances and settlement amounts can be facing significantly different financial futures, due to tax implications which can be substantial over time. The reasons for this are to do with the wording of the settlement as viewed in the context of section 292-95 of the ITAA 1997.
The critical part of the fine print here is the act states the funds have to be defined explicitly as compensation for “personal injury” in order to qualify for this unique contribution.
Furthermore, when the award or settlement breaks the payment down into compensation for personal injury and other losses (such as personal loss, or damage to property), only the amount specifically apportioned to “personal injury” can be contributed to superannuation in this way. When there is no breakdown of a settlement into these components, none of the amounts are deemed eligible.
Achieving the Best Outcome
In order to achieve the best possible settlement for a client from a wealth management perspective, it is vital to:
- Directly mention personal injury in the settlement
- Maximise the part of the total sum awarded that is defined as for personal injury. In some cases, this can be 100%.
Compensation cases can move slowly, but eligibility for making these unique superannuation contributions is subject to time limits. The superannuation fund must receive the contribution within 90 days of the latest of:
- The day the client received the payment for personal injury
- The day the agreement is entered into
- The day in which the court order for personal injury is made.
Some clients who could have qualified for the unique superannuation contribution have missed out because they have come to us too late.
How We Can Help
The fact that the wording of settlements under one piece of legislation can make an enormous difference to taxation is something we feel compelled to share. Unfortunately, we have seen quite a few settlements, where this has not been taken into account.
When we take new personal injury compensation clients, we are beginning a relationship which is likely to last for decades. We want to start client relationships, which emerge out of trauma, on the best possible footing.
If you are currently engaged in a personal injury compensation process or you’re a lawyer and your client is, and there is a potential to benefit from the assistance of an wealth advisor who specialises in this field and is passionate about doing the best for clients, we would be pleased to discuss how we can assist.