Contributions, SMSF, Tax

Settlement contributions given tax relief

$3 million tax exemption structured settlement contribution

SMSF trustees who receive a structured settlement contribution can take advantage of the fact that proposed $3 million soft cap will exempt these from its tax calculations.

Superannuants who have had a structured settlement contribution made to them as a payment for a personal injury compensation claim will be exempted from paying the proposed additional tax on total superannuation balances over $3 million due to a carve-out in draft legislation for the measure, according to an SMSF legal expert.

DBA Lawyers principal Dan Butler made reference to section 1.59 of the explanatory materials of the draft legislation for the proposed superannuation earnings tax, now known as the Division 296 tax, which stipulates: “Individuals who have had a structured settlement contribution made in respect to them are exempt, recognising that these contributions are usually large payments that can provide the funds for ongoing medical and care expenses resulting from serious injury and income loss.”

Butler told attendees of a recent DBA Lawyers SMSF update webinar: “If your [client has] ever had a compensation claim for personal injury, you must pursue that claim if your [client] has more than $3 million because that will save you a lot of Division 296 tax.

“[For example], Robyn has $4.5 million in superannuation and she is injured. She receives $1 for personal injury compensation under the structured settlement contribution provision. There’s no limit on the amount you put in, it’s section 292-295, [which is] very generous if you can get at least $1 of personal injury.

“So what happens if she contributes to super? Let’s say she contributes $10 million, will [Robyn] be subject to the 296 tax?

“You would definitely think so, but there has been a very good carve-out [in that] you are not liable to the tax if you have ever received a structured settlement contribution in that year or in any earlier year. So the language is retroactive in that you’re out of the Division 296 tax forever.”

To that end, he encouraged SMSF practitioners who have clients who have received a structured settlement contribution to strongly consider the exemption as a way of managing the impact of the proposed tax.

“This is quite an important carve-out [and] structured settlements can be very valuable. If your client does have a legal claim, and they are likely to go over their $3 million TSB (total superannuation balance), I’d be chasing that legal claim if I was you,” he said.

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