18.104.22.168 Background to Social Security Treatment of Structured Settlements
This topic covers:
- definition of a structured settlement,
- legislative background, and
- requirements for a structured settlement.
Definition of a structured settlement
A STRUCTURED SETTLEMENT is a way of settling a claim for personal injury compensation where at least part of the injured person's or claimant's compensation is received in the form of an income stream (called 'PERSONAL INJURY ANNUITY'), instead of receiving only a lump sum settlement. These claims may arise out of motor vehicle accidents, medical negligence, public liability, product liability and similar situations where negligence has resulted in personal injury. Structured settlements are not possible where the injured person has died, cases that have been settled, or for workers compensation type claims.
A structured settlement can only be arranged where the defendant or its insurer use the settlement money to DIRECTLY purchase an income stream for the claimant or injured person. It is not a structured settlement where the defendant or its insurer, pay the claimant or injured person a lump sum settlement, and then the claimant or injured person uses the money to purchase an income stream.
Example: David settles a claim against Anne for a personal injury he has sustained. Under the terms of the settlement, Anne is obliged to pay David a lump sum amount. David uses the lump sum to purchase an annuity from a life insurance company. The annuity in this example is not an annuity that is provided under a structured settlement and therefore will not qualify for tax exemption. If Anne or Anne's insurer had paid the lump sum to a life insurance company to purchase an annuity, the arrangement would be a structured settlement.
STRUCTURED SETTLEMENTS are the result of an agreement mutually reached between all parties to a case. A STRUCTURED ORDER will have the same outcome as a structured settlement, but is the result of an order that has been imposed by a court without the agreement of all parties. Structured settlements are expected to be more common than structured orders.
On 13 December 2002 the Australian Government passed the Taxation Laws Amendment (Structured Settlements and Structured Orders) Act 2002 making income stream payments provided under structured settlements tax exempt or tax free, including any interest and indexation component that may make up part of each income stream payment. This means that large personal injury cases that would ordinarily be settled for a lump sum can be settled in such a way as to deliver tax free income stream payments to an injured person. However, because the legislation specifies a minimum level of monthly payments, only cases of certain sizes (currently a minimum of $750,000 or more) can be structured. There must be sufficient compensation funds available to fund the purchase of an income stream that will provide the injured person with lifetime monthly payments commencing at least at the level of the current Age and increasing at least in line with the CPI.
Requirements for a structured settlement
To qualify for the tax exemption, income streams or lump sums must be paid under a structured settlement. A structured settlement is a settlement that meets the following conditions in respect of a claim:
- the settlement agreement must involve the injured person receiving all or part of their compensation in the form of an income stream (called PERSONAL INJURY ANNUITY), which may be combined with one or more 'PERSONAL INJURY LUMP SUMS' or 'DEFERRED LUMP SUMS', and
- the claim must be for compensation for personal injury and must not be a work-related or workers compensation type claim.