Private ruling: Structured settlement
Date of advice: 8 December 2015
Published: February 2016
Ruling period: Final payment from annuities purchased under the terms of structured settlement during your lifetime.
Date scheme commenced: 01 July 20XX

Ruling: Notice of private ruling | This private ruling replaces the private ruling issued to you in late September 20XX with relevant authorisation number. The earlier ruling no longer applies to you. | Question and Answer | Are payments from an annuity which was purchased under the terms of a structured settlement included in your assessable income? | No | Is the payment of a structured settlement lump sum or lump sums made to you or to the trustee of a trust of which you are the beneficiary included in your assessable income? | No

Relevant facts and circumstances: You are claiming compensation in respect of your injuries. Your claim is not being made under a workers' compensation law. You have engaged professionals and through them you are negotiating with the relevant insurer towards a structured settlement. The claim is being based on the commission of a tort. The terms of settlement have not been reached. The settlement will be by way of written agreement. You advise your terms of agreement will clearly state that the payment will be related to injury. Annuity When the claim is settled, the insurer of the defendant will purchase an annuity. The annuity will be purchased under the terms of a structured settlement which at this point has not been determined. The annuity will be purchased from a company registered under section 21 of the Life Insurance Act 1995 , is documented and; • Identifies the structured settlement under which the annuity is provided; • Only allows for the payments to be made to yourself or your estate or reversionary beneficiary; • Contains a statement to the effect that the annuity cannot be assigned and cannot be commuted. The annuity will specify the date of the first payment and the amount of each periodic payment. The annuity will allow for the amount of the payments to be varied by one of the following methods: • CPI; or • AWOTE; or • a percentage specified in the annuity The annuity will be at least for the minimum monthly level of support as specified in Section 54-40 of the Income Tax Assessment Act 1997. Lump Sum The lump sum(s) will be paid on specified dates under an instrument which identifies the structured settlement under which the lump sum(s) will be provided. The instrument will only allow for the payment of the lump sum or lump sums to be made to you or a trustee of a trust of which you are the beneficiary. The instrument will contain a statement to the effect that the right to receive the lump sum or lump sums cannot be assigned and cannot be commuted or otherwise cashed out early. The instrument will allow for the amount of the payments to be varied by the lowest increase of: • CPI; or • AWOTE; or • a percentage specified in the annuity The amounts of the annuity or lump sum(s) have not been settled.

Relevant legislative provisions: Section 54-15 of the Income Tax Administration Act 1997 | Section 54-20 of the Income Tax Administration Act 1997 | Section 54-25 of the Income Tax Administration Act 1997 | Section 54-30 of the Income Tax Administration Act 1997 | Section 54-35 of the Income Tax Administration Act 1997 | Section 54-40 of the Income Tax Administration Act 1997 | Section 54-45 of the Income Tax Administration Act 1997 | Section 54-50 of the Income Tax Administration Act 1997 | Section 54-55 of the Income Tax Administration Act 1997 | Section 54-60 of the Income Tax Administration Act 1997 | Section 21 of the Life Insurance Act 1995 | Section 359-25 of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision: Detailed Reasoning - Structured settlements: A `structured settlement' is a settlement agreement between a plaintiff and a defendant pursuant to which the defendant is required to pay at least part of the agreed damages periodically rather than in a single lump sum. Unlike periodical payments (such as are provided under the social security system), which are assessed from time to time, a structured settlement is based on the lump sum to which the plaintiff is entitled according to the ordinary rules for assessment of damages. Some or all of that lump sum is used to buy an annuity which generates income out of which payments are made to the plaintiff from time to time according to an agreed schedule. | Detailed Reasoning - Division 54 exemption for structured settlements and orders: Division 54 of the Income Tax Assessment Act 1997 provides an exemption for certain annuities and lump sums provided to personal injury victims under structured settlements or structured orders. A structured settlement is one that meets all of the following five conditions: (1) The claim must be for compensation or damages for personal injury suffered by a person and the claim must be made by the injured person or by his/her legal personal representative. (2) The claim must be based on the commission of a wrong or on a right created by statute. (3) The claim cannot be an action against a defendant in his/her capacity as an employer, or an associate of an employer, or a claim made under workers compensation law, or a claim that could instead be made under workers compensation law. (4) The settlement must be in a written agreement between the parties to the claim. This applies whether or not the agreement is approved by an order of a court or is in a consent order made by a court. (5) 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 defendant's insurer to purchase from one or more life insurance companies or state insurers: • an annuity or group of annuities to be paid to the injured person (or his/her trustee), or • an annuity or group of annuities combined with one or more deferred lump sums to be paid to the injured person (or his/her trustee). | Detailed Reasoning - Exempt personal injury annuities: A personal injury annuity is an annuity purchased under the terms of a structured settlement or structured order. A personal injury annuity will be eligible for exemption if (broadly) the following conditions are met: • The compensation payment or damages, if paid in the form of a lump sum at the date of settlement or order, would not have to be included in the assessable income of the injured person (eg it is not compensation for lost earnings) • The annuity instrument only allows for payments of the annuity to be made to the injured person, his/her trustee, a reversionary beneficiary or the injured person's estate and contains a statement to the effect that the annuity cannot be assigned and cannot be commuted except by a reversionary beneficiary. • The annuity instrument provides that the payments of the annuity are to be made at least annually over a period of at least 10 years during the life of the injured person or for the life of the injured person. Annuity payments may be guaranteed up to 10 years after the date of settlement. In the event the injured person dies during the guarantee period, the remaining payments may be made to either the injured person's estate or a reversionary beneficiary • The annuity or annuities in total provide a minimum monthly level of support over the annuitant's life. | Detailed Reasoning - Exempt personal annuity lump sums: Structured settlements and structured orders may include non-annual lump sum payments that are made to claimants at regular intervals to fund expected purchases. A personal injury lump sum is a lump sum that is purchased under the terms of a structured settlement or structured order. Personal injury lump sums will be exempt from income tax if all of the following conditions are met: • There is at least one personal injury annuity provided under the same structured settlement or structured order that satisfies the eligibility conditions described above. • The lump sum would not have been taxable if it had been paid as a lump sum at the time of settlement. • The annuity instrument identifies the structured settlement or structured order under which the personal injury lump sum is provided and only allows for payments of the annuity to be made to the injured person or his/her trustee, or contains a statement to the effect that the right to receive the lump sum cannot be assigned or commuted/cashed out. • The contract specifies the date and amount of the payment of the lump sum. The lump sum can only be increased through appropriate indexation or by a specified percentage.