When individuals receive compensation or damages due to a personal injury, they may have the opportunity to contribute these funds to superannuation under special rules. These personal injury contributions offer a unique way to secure long-term financial stability while benefiting from tax-free earnings within the super system. Unlike standard non-concessional contributions (NCCs), eligible personal injury contributions do not count towards the NCC cap, making them a valuable strategy for maximising retirement savings.
Why Contribute Personal Injury Payments to Super?
Contributing a personal injury payment to superannuation can provide multiple financial benefits, including:
- Tax-free earnings: Investment earnings within a retirement income stream are tax-free.
- Access to a structured income stream: Superannuation allows individuals to draw a regular income while preserving capital.
- Exemption from contribution caps: Eligible personal injury contributions are disregarded from NCC limits.
- Asset protection: Funds held in superannuation may offer additional protection against creditors.
Who Can Make a Personal Injury Contribution?
To qualify for a personal injury contribution, the payment must arise from one of the following:
- A structured settlement (a legal settlement for a personal injury claim).
- A workers’ compensation lump sum payment.
- A court order for a personal injury claim.
Eligibility Conditions for NCC Cap Exemption
To ensure the contribution does not count towards the NCC cap, the following conditions must be met:
- Qualifying Payment: The payment must meet the structured settlement, workers’ compensation, or court order requirements.
- Contribution Timeframe: Funds must be contributed to super within 90 days of receiving the payment or settlement.
- Permanent Incapacity: The individual must be permanently unable to work due to the injury, confirmed by two medical practitioners.
- ATO Notification: A Personal Injury Election Form (NAT 71162) must be submitted to the super fund before or at the time of contribution.
How Much Can Be Contributed?
The full amount of the personal injury payment can be contributed to superannuation, provided it relates solely to compensation for personal injury. If a settlement includes amounts for property damage or other claims, only the personal injury portion qualifies.
Impact on Total Superannuation Balance (TSB)
Personal injury contributions do not count towards an individual’s total superannuation balance (TSB). This means:
- Individuals can contribute personal injury payments even if their TSB is above the standard NCC cap limits.
- TSB exclusions ensure continued eligibility for NCCs in future years.
- Pre-1 July 2017 personal injury contributions are also excluded from TSB calculations.
Choosing the Right Super Fund
Deciding whether to contribute personal injury payments to an existing super fund or a separate fund is crucial. A separate super account solely for the personal injury contribution ensures the entire balance remains tax-free, making it more beneficial for estate planning and future withdrawals.
Accessing Personal Injury Contributions
Personal injury contributions are preserved within superannuation until a condition of release is met. These include:
- Permanent incapacity (as confirmed at the time of contribution).
- Retirement upon reaching preservation age.
- Reaching age 65.
- Terminal illness.
Account-Based Pensions (ABPs) and Transfer Balance Cap
Individuals who access personal injury contributions via an account-based pension (ABP) benefit from:
- Tax-free earnings on assets supporting the pension.
- No impact on the transfer balance cap, as personal injury contributions receive a debit entry to offset any credit applied.
- Flexibility in structuring income streams for long-term financial security.
Case Study: Brenda’s Personal Injury Contribution Strategy
Scenario
Brenda, 45, receives a $2 million personal injury payment following a car accident. She also has $350,000 in accumulated super.
Strategy
- Brenda contributes the full $2 million to super under the personal injury provisions.
- She commences an account-based pension (ABP), ensuring all earnings and withdrawals remain tax-free.
- Due to the transfer balance debit, her total super balance for cap purposes remains at $350,000.
Outcome
Brenda enjoys a tax-free retirement income while preserving capital for future financial needs.
Final Thoughts
For individuals receiving significant personal injury settlements, contributing these funds to superannuation can be a highly tax-effective strategy. By ensuring compliance with eligibility conditions and structuring contributions correctly, recipients can secure a stable financial future while maximising superannuation benefits. Professional advice is recommended to navigate the complexities of superannuation laws and ensure optimal financial outcomes.