ATO ID 2003/1065: Structured Settlement: annuity purchased from a foreign life insurance company
Date of decision: 18 October 2003
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

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
Summary: 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: (paragraph 54-10(1)(e) of the ITAA 1997) 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. 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.

Legislative references: Income Tax Assessment Act 1997 subsection 54-10(1) subsection 995-1(1)
Subject references: Annuities Exempt Income Foreign Life Insurance Companies Life Insurance Policies Structured Settlements