Structured settlements, i.e. period payments to meet future medical and living costs of accident victims, have been a part of compensation settlements overseas for many years. In Australia, until the recent announced tax changes, lump sum settlements were more tax efficient. This is now likely to change at least for larger settlements.

Certain conditions must be met before both the capital and income components of the annuity payments are exempt from income tax. These are:

• workers compensation cases are excluded

• the period payments must be a settlement for an injury or illness (physical or mental) that the plaintiff suffers personally as a result of a wrong or statutory liability

• not available for payments to dependants (even in the case of death)

• if settlement had been via lump sum then this would have been tax free

• the annuity must be purchased from an institution authorised by APRA to underwrite life based annuity products

• the annuity must be purchased at the time of the settlement, not later

• at the time of the purchase of the annuity it must provide a level of income at least that of the age pension, indexed for subsequent increases in the Consumer Price Index

• must be paid at least monthly

• the annuity must not be market linked, commutable or assignable. This ensures that plaintiff can not dissipate their compensation

• can be guaranteed up to 10 years

• the annuity must have no residual value

• the legislation will provide for a review of these terms in 5 years

For assistance with structuring these payments and with negotiations of the actuarial aspects of the annuity purchase please contact Geoff Morley on 1800 203 123 or via email at geoff@bendzulla.com  

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