188.8.131.52 Components of a Structured Settlement
This topic explains the various components that may comprise a structured settlement. These include:
- a compulsory personal injury annuity, and
- may include one or more:
- optional personal injury annuities,
- optional lump sum payments.
The annuities will be assessed under the income streams rules.
Compulsory personal injury annuity
All tax exempt structured settlements must include at least one COMPULSORY PERSONAL INJURY ANNUITY, to provide the injured person with a minimum level of monthly payments for life.
Optional personal injury annuities
In addition to purchasing a COMPULSORY PERSONAL INJURY ANNUITY, structured settlements may also include one or more OPTIONAL PERSONAL INJURY ANNUITIES. These income streams are similar to compulsory personal injury annuities but have more flexible conditions (e.g. regarding return of capital, commutability).
Optional lump sum payments
There are 2 lump sum payment options that may be paid together with the compulsory personal injury annuity. These are:
- an IMMEDIATE LUMP SUM. This component is optional. This amount can be paid to the injured person to pay costs, pay debts, or purchase equipment (together with the compulsory personal injury annuity), or
- a DEFERRED LUMP SUM or PERSONAL INJURY LUMP SUM. These lump sums are optional involving a payment of a single premium in return for a payment of a lump sum at an agreed future date or dates. These payments can be scheduled to cover expected future events such as the replacement of equipment.
Example: Chris, aged 10, was in a car accident when the car driven by his parent collided with another car. He suffered a serious head injury resulting in permanent brain damage. He was permanently confined to a wheelchair and would never be able to walk.
Chris was 15 years old at the time of the trial and had a relatively long life expectancy of another 45 years. The parties then reached an agreement on quantum, and this agreement was approved by the court. Court approval on damages was necessary because Chris was still a minor at the time of the trial. The court approved the following settlement:
- Interim payments of $380,000, which had already been paid. A contingency fund of $420,000 would be paid to the Court of Protection.
- Three annuities were purchased from a life insurance company.
- The first paid $12,500 per year for life (in equal monthly payments) increasing at the greater of All Groups CPI or 5% per annum compound.
- The second paid $30,000 per year, starting in 3 years time, increasing at 5% per annum compound.
- The third paid $30,000 per year, starting in 10 years time, increasing at 5% per year.
Assuming that the 3 annuities meet the minimum monthly level of support specified in the Income Tax Assessment Act 1997 introduced through the Taxation Laws Amendment (Structured Settlements and Structured Orders) Act 2002, and all annuities meet the eligibility criteria for tax purposes, the annuities paid under the structured settlement will be exempt from income tax.