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Contributions caps and taxation of contributions

Contributions from personal injury payments

Section: 5.18

2019 Federal Budget proposal

No work test for voluntary contributions extended to age 66: Effective 1 July 2020

The Government proposed to amend the superannuation contribution rules to allow people age 65 and 66 to make voluntary member and voluntary employer contributions to superannuation without meeting the work test.

At the time of writing, this proposal is not yet law.

Payments arising from structured settlements or orders for personal injuries that are contributed to superannuation are excluded from the non-concessional contributions cap. However, for this exclusion to apply, the payment must meet the requirements of section 292-95 of ITAA 1997, as follows:

Type of payment

  1. The payment is for the settlement of a claim for compensation or damages for, or in respect of personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by stat8ute. The settlement must take the form of a written agreement between the parties to the claim (whether or not the agreement is approved or endorsed by a court), or
  2. The payment is for the settlement of a claim in relation to a personal injury suffered by the client under a low of the Commonwealth or of a State or Territory relating to workers' compensation, or
  3. The payment is made following an order of a court for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The order cannot be one approving or endorsing an agreement as set out in point one.

A claim for compensation or damages referred to above has to be made either by the client or their legal personal representative (LPR).

Note that if a claim is both:

  • for a compensation or damages for personal injury, and
  • for some other remedy (eg compensation or damages for loss of, or damage to, property)

only the amount of the payment that relates to compensation or damages for personal injury and identified in a settlement agreement or court order as being solely in payment of that compensation or those damages, can be contributed to super as a personal injury payment.

The above definitions may result in a relatively broad interpretation of which payments are made 'for, or in respect of' personal injury and could include amounts paid for pain and suffering, for loss of future earnings, for future medical expenses, home modifications etc. However, specific legal advice should be sought to ascertain exactly which amounts paid to a particular client are eligible personal injury payments.

Administration requirements

The contributions must be made within 90 days of the later of:

  • the day the member received the personal injury payment
  • the day an agreement for settlement of the personal injury payment was entered into
  • the day on which a court order for the personal injury was made.
  • Two legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that the member can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. This effectively means that the member must be totally and permanently disabled to make a personal injury payment to super that is excluded from their non-concessional cap.
  • Either before or when the contribution is made, the member or their LPR provides a completed 'contributions for personal injury' form to their super fund.

In addition to gathering details relating to the payment, the 'contributions for personal injury' form requires a declaration by the member or their LPR that the contributions were derived from a personal injury payment received by the member or the LPR and that the contributions meet the requirements of Section 292-95 of ITAA 1997 (and as outlined above).

We would therefore suggest that, in providing advice to a member about the contribution of personal injury payments, financial advisers recommend that the member also seek legal and/or tax advice as to whether they meet the requirements of Section 292-95 of ITAA 1997.

Tip: Despite the fact that part of the eligibility criteria for personal injury contribution is that the contributor must be totally and permanently disabled, acceptance of a personal injury contribution by a superannuation fund does not mean that the contributed amount automatically forms part of a member's unrestricted non-preserved benefits. As a default rule, contributions made by anyone under age 65 are automatically preserved and can only be accessed upon the member satisfying a condition of release. For a member to meet the permanent incapacity condition of release, the trustee of a superannuation fund must be "reasonably satisfied that the member is unlikely, because of the ill-health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience". A member making a personal injury contribution will need to enquire with their superannuation provider in relation to the fund's process and requirements for release of benefits.

Last modified: Wednesday, July 24, 2019