On Friday 14 October 2016, Treasury released the third tranche of draft legislation to implement the announcements in the Federal Budget. The principal component of this tranche was the new non-concessional contribution rules.
Hidden in the legislation is a very important concession. I envisage that advisers will only need to apply it a handful of times in their careers. However, when they do apply it, it will be some of the most important and helpful advice that can be provided.
(Note that this article must be read subject to the discussion regarding the AFSL regime at the end.)
Structured settlement contributions
This hidden gem relates to structured settlement contributions. More specially, it relates to contributions covered by s 292‑95 of the Income Tax Assessment Act 1997 (Cth). In this article, when I refer to a ‘structured settlement contribution’, I will refer to a contribution covered by s 292‑95. The full official version of s 292‑95 is currently available at https://www.legislation.gov.au/Details/C2016C00916. However, for the purposes of this article, it is suffice to say that s 292‑95 covers the following contributions (however, I stress that there are other types of contributions that it covers too):
- the contribution arises from the settlement of a claim that is for compensation or damages for personal injury suffered by the fund member
- the contribution is made by the fund member
- the claim is based on the commission of a wrong, or on a right created by statute
- the settlement takes the form of a written agreement between the parties to the claim (whether or not that agreement is approved by an order of a court, or is embodied in a consent order made by a court)
- two legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that the fund member can ever be gainfully employed in a capacity for which the member is reasonably qualified because of education, experience or training
- no later than the time the contribution is made to a superannuation plan, the member notifies the trustee, in the approved form, that s 292‑95 is to apply to the contribution and
- the contribution is made within 90 days of the day of receipt of the payment from which the contribution is made.
I want to stress two aspects: Firstly, the above is not the only combination of facts that can be covered by s 292‑95 (ie, be a structured settlement contribution). Again, advisers should read s 292‑95 in full. Secondly, the clock ticks very quickly. To be covered by s 292‑95 — and thus to get the benefit of the ‘hidden gems’ that I will discuss in this article — broadly the contribution must be made within 90 days of receipt of the payment. Clients might not tell advisers promptly when they receive a compensation payment. Accordingly, advisers should be pro-active about this and upon the first ‘whiff’ that a client might receive a compensation or similar payment, should start alerting clients to these rules.
What are the concessions for structured settlement contributions?
There are two key concessions for structured settlement contributions.
The first is contained in the proposed s 307‑230(2). Broadly, this provides that, when determining how much money a person has in superannuation (ie, their ‘total superannuation balance’), ignore any money that came from a structured settlement contribution.
Naturally, this important because, under the new non-concessional contribution rules contained in the third tranche of draft legislation, if immediately before the start of the year, a person’s ‘total superannuation balance equals or exceeds the general transfer balance cap for the year’ (which will start at $1.6 million on 1 July 2017), then the person has a nil non-concessional contributions cap for the year.
In short, a person will be able to make structured settlement contributions to superannuation regardless of how large the contribution is or how much money the person already has in superannuation.
(For legal completeness, I note that structured settlement contributions do not constitute non-concessional contributions and so are irrelevant to the non-concessional contributions cap, however, it was a relief to see that the third tranche of legislation did not impact upon this and indeed expressly retained this position.)
The second key concession is contained in the second tranche of legislation that was released in late September. At the risk of oversimplification, it provides that a structured settlement contribution is a debit to a person’s transfer balance account (see item 2 in the table in the proposed s 294‑70). Effectively, this means that the $1.6 million cap on how much can be used to commence a pension (and thus how much can be covered by the pension income tax exemption) does not apply to pensions funded by structured settlement contributions.
Consider the following example from the draft explanatory memorandum that accompanied the third tranche:
Masayo is self-employed and has been making contributions to her account in her self-managed superannuation fund Couture Super, which is her only superannuation interest. At 30 June 2017 Masayo had not yet commenced any superannuation income streams and the total of her accumulation phase value is $1 million.
In the 2017-18 financial year Masayo is involved in an accident that results in her receiving a structured settlement of $2 million which she contributes to Couture Super on 15 May 2018.
To determine whether she is eligible to make non-concessional contributions in the 2018-19 financial year, Masayo calculates her total superannuation balance at 30 June 2018 as; accumulation phase value ($3 million) less the structured settlement contribution in accumulation ($2 million), equalling $1 million. As Masayo’s total superannuation balance is below $1.6 million Masayo is eligible to make non-concessional contributions in the 2018-19 financial year.
In the above example, Masayo could also then:
- make a further $600,000 of non-concessional contributions and
- commence a pension funded by a total of $3.6 million of capital (assuming of course she had satisfied a relevant condition of release, which she almost certainly would have).
The new draft rules contain very important concessions for those who are able to make structured settlement contributions. Accordingly, advisers need to be very proactive when there is a possibility to make a structured settlement contribution, especially given that there is generally only a narrow 90 day window when such a contribution can be made.
A final word of warning: the AFSL regime
Naturally, advisers must remember all of the usual requirements when advising on contributions, pensions and the like. One very timely aspect is the AFSL regime. Naturally, I will not discuss this aspect ‘chapter and verse’, however, those advisers who have entered the AFSL regime, may well need to provide a statement of advice and those who have not entered the regime need to think very carefully about how appropriate information can be provided to their client while complying with all relevant laws. For accountants in the second category, they might consider something along the lines of a letter to their client setting out certain objectively ascertainable facts (eg, the structured settlement contribution rules detailed in this article) along with a recommendation to seek advice from an appropriately licensed adviser and the appropriate disclaimers.
For more information regarding AFSL issues, you might consider:
- various articles on our website: http://www.dbalawyers.com.au/?s=afsl&post_type%5B%5D=post&submit=Search
- our recorded webinar on this topic (Accountants and the new AFSL regime): http://www.dbanetwork.com.au/dbalawyers/seminars3/6106/Special-SMSF-Training.html
- the Non-Licensed (AFSL) SMSF Advisers Kit: http://www.dbalawyers.com.au/strategy-compliance-kits/
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.