Private ruling: Non-concessional contributions arising from structured settlements or orders for personal injuries
Published: October 2014
Date scheme commenced: 1 July 2014

Ruling: Q1: For the purposes of subparagraph 292-95(1)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997), does the 90 day period commence when the quarantined payment (the Quarantined Sum) is released to the possession and management of the Public Trustee? Should the interest earned on the Quarantined Sum be treated in the same way as the Quarantined Sum? | A1: Yes. Yes. This review applies for the following period Year ending 30 June 2015 The scheme commenced on 1 July 2014

Relevant facts and circumstances: During the 2004-05 income year, a taxpayer (the Taxpayer) sustained personal injuries in a car accident. Consequently, a Court (the Court) issued a Court Order (the Order) with a specified settlement amount to the Taxpayer and appointed the Public Trustee as the manager of the Taxpayer's estate. The Order refers to the balance of the settlement sum and states, as far as relevant: An amount of not less than [a specific amount] ("the quarantined sum") is to be retained by the PUBLIC TRUSTEE for a period of [a specific number of years] from the date of this Order ("the said period"); If at any time within the said period the plaintiff dies, it is agreed that the quarantined sum plus any interest accrued thereon less any drawings made as provided for in [a specific paragraph] hereof, is to be repaid by PUBLIC TRUSTEE to [an entity] forthwith following the death of the plaintiff; During the said period the PUBLIC TRUSTEE is entitled to draw down on any accrued interest of the quarantined sum and thereafter any part of the quarantined sum (if the accrued interest is insufficient) at a rate of [a specific amount] per week; UPON the expiration of the said period and the plaintiff still living, the quarantined sum (and/or any amount remaining including any interest accrued) be wholly released to the possession and management of PUBLIC TRUSTEE. You have advised that the said period expired on a specified date during the 2014-15 income year (the Specified Date). The balance of the quarantined amount (the Quarantined Amount) includes the additional earnings on the Quarantined Sum less drawings over the said period. The Public Trustee intends to contribute the Quarantined Amount as a non-concessional superannuation contribution to a superannuation fund that was previously established for the Taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 292-80 | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Subsection 292-90(2) | Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(ii) | Income Tax Assessment Act 1997 Section 292-95 | Income Tax Assessment Act 1997 Subsection 292-95(1) | Income Tax Assessment Act 1997 Paragraph 292-95(1)(b) | Income Tax Assessment Act 1997 Subparagraph 292-95(1)(b)(i) | Income Tax Assessment Act 1997 Subsection 292-95(2) | Income Tax Assessment Act 1997 Subsection 292-95(3) | Income Tax Assessment Act 1997 Subsection 292-95(4) | Income Tax Assessment Act 1997 Subsection 292-95(5) Summary | For the purposes of subparagraph 292-95(1)(b)(i) of the ITAA 1997, the day of receipt of the Quarantined Amount is the Specified Date when the full possession and control of the Quarantined Amount passed to the Public Trustee. | Therefore, any contribution arising from the Quarantined Amount made to a complying superannuation fund within 90 days from the Specified Date will be excluded from being a non-concessional contribution for the purposes of non-concessional contributions tax. | Detailed reasoning | Non-concessional contributions | In accordance with section 292-80 of the ITAA 1997, non-concessional contributions for a financial year made to a complying superannuation fund are subject to the non-concessional contributions tax if the amount of non-concessional contributions for the year exceeds the relevant non-concessional contributions cap for the year. | Non-concessional contributions are defined in section 292-90 of the ITAA 1997. However, under subsection 292-90(2) of the ITAA 1997, a number of contribution types are specifically excluded from being non-concessional contributions for a financial year. In particular, contributions covered under section 292-95 of the ITAA 1997. | A contribution is covered under section 292-95 of the ITAA 1997 if it arises from: | i. the settlement of a claim that satisfies the conditions in subsection 292-95(3) of the ITAA 1997; or | ii. the settlement of a claim in relation to a personal injury suffered by the taxpayer under a law of the Commonwealth or of a state or territory relating to workers compensation, or | iii. the order of a court that satisfies the conditions in subsection 292-95(4) of the ITAA 1997. | A settlement satisfies the conditions in subsection 292-95(3) of the ITAA 1997 if the claim is: | i. for compensation or damages for, or in respect of, personal injury suffered by the taxpayer; | ii. made by the taxpayer or his or her legal personal representative, and | iii. based on the commission of a wrong, or on a right created by statute. | A settlement satisfies the conditions in subsection 292-95(4) of the ITAA 1997 if: | i. the order is made for a claim that is for compensation or damages for, or in respect of, personal injury suffered by the taxpayer; | ii. the claim is made by the taxpayer or his or her legal personal representative; | iii. the claim is based on the commission of a wrong, or on a right created by statute; and | iv. the order is not an order approving or endorsing a settlement by written agreement (as noted above). | However, in order for a personal injury related contribution to be excluded from non-concessional contributions, the following additional conditions must also be satisfied: | i. the contribution must be made within 90 days after the later of the day of receipt of the payment from which the contribution is made and: | • if the personal injury settlement is under a written agreement between the parties, the day the agreement was entered into or approved/embodied in a court order (if the agreement depends on a court order for its effectiveness), or | • if the personal injury settlement is under a court order that does not approve a written agreement between the parties, the day the order was made (subsections 292-95(1)(b) and (2) of the ITAA 1997); and | ii. two legally qualified medical practitioners must have certified that, because of the personal injury, it is unlikely that the taxpayer can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training (paragraph 292-95(1)(c) of the ITAA 1997), and | iii. no later than the time the contribution is made to a superannuation plan, the taxpayer, or their legal personal representative, must notify the superannuation provider in relation to the plan, in the approved form, that the contribution is being made under the personal injury exemption in section 292-95 of the ITAA 1997 (paragraph 292-95(1)(d) of the ITAA 1997). | The combined effect of subparagraph 292-90(2)(c)(ii) and paragraph 292-95(1)(b) of the ITAA 1997 is to ensure that a contribution made from a person's personal injury damages is excluded from the person's non-concessional contributions. This means that a person can contribute the proceeds of a personal injuries settlement or court order to superannuation without breaching the non-concessional contributions cap. However, to exclude a contribution made from the proceeds of a court ordered damages payment, the contribution must be made within the time specified in paragraph 292-95(1)(b) of the ITAA 1997. | The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which inserted the provision, described this requirement as follows at paragraph 1.96: | The contribution must be made to a superannuation fund within 90 days of the payment being received or the structured settlement or order coming in effect, whichever is later. [Schedule 1, item 1, paragraph 292-95(1)(b)] | In this case, the Order was made during the 2009-10 income year. The superannuation contribution arising from the balance of the settlement amount will not be made within 90 days of the Order; and the contribution will not be made within 90 days of the amount being paid to the Public Trustee. | However, while the intent of paragraph 292-95(1)(b) of the ITAA 1997 is to limit the time between the court order or receipt of the payment , and the making of the contribution, the 'day of receipt of the payment ' is not necessarily limited to the day on which the money is originally paid into court. This is because often money is required to be paid into court before being paid out to persons such as the Public Trustee or the Protective Commissioner as manager of a person's estate. | Therefore, it is considered that the day of receipt of the payment referred to in subparagraph 292-95(1)(b)(i) of the ITAA 1997 is the day upon which the person who is entitled to the payment under the court order or settlement receives the payment. This includes a person's legal personal representative. | When is the Quarantined Sum received by the Taxpayer? | Generally, a payment is received by a person when the person (or their legal personal representative) obtains an absolute indefeasible entitlement to the payment so that the person would have a legal right to the payment if they asked for it, and there is no question of the payment passing other than to the person. | In the current case, in accordance with the Order, the Quarantined Sum was to be retained by the Public Trustee for a specified number of years from the date of the Order. However, if within this period the Taxpayer died, it was agreed that the Quarantined Sum (plus any interest) was to be repaid to a specified entity following the Taxpayer's death. | Therefore, the Order restricts the Public Trustee's control and ownership of the Quarantined Sum during the quarantine period. Furthermore, under another clause of the Order, receiving and obtaining full possession of the Quarantined Sum is contingent on the Taxpayer still living after the quarantine period. | The fact that the Public Trustee was entitled to draw a specified amount per week from the accrued interest of the Quarantined Sum and any part of the Quarantined Sum (but only if the accrued interest is insufficient) is insufficient to conclude that the Public Trustee had full possession and control of the Quarantined Sum or the accrued interest. | Therefore, even though the Quarantined Sum was paid to the Public Trustee in the 2009-10 income year, the Public Trustee did not have an indefeasible interest in the Quarantined Sum until the Specified Date when the quarantined period expired. | Similarly, as the weekly draw amount was set by the Order and the Public Trustee did not have any control over the draw amount or frequency, full possession and control of any remaining amount of accrued interest on the Quarantined Sum is only passed to the Public Trustee when the quarantined period expired. | In conclusion, the 90-day period specified in paragraph 292-95(1)(b) of the ITAA 1997 should commence from the Specified Date when the full possession and control of the Quarantined Sum and any remaining accrued interest on the Quarantined Sum passed on to the Public Trustee. | Provided all the other relevant conditions of section 292-95 of the ITAA 1997 are satisfied, the contributions made within 90 days from the Specified Date from the Quarantined Sum and the accrued interest will be excluded from being a non-concessional contribution for the purposes of excess non-concessional contributions tax.