Why personal injury recipients may be exempt for life from Div 296

There has been a lot of media coverage about this new tax, but there is one important exemption that has received very little attention - and it is directly relevant to anyone who has received, or may in the future receive, a personal injury settlement or court-ordered compensation payment.

In short: if you have ever made a structured settlement contribution into your superannuation, or you make one in the future, you may be exempt from Division 296 tax for life.

What is Division 296?

Division 296 is a new personal tax that applies to individuals whose total superannuation balance exceeds $3 million. It imposes an additional 15% tax on superannuation earnings attributable to the portion of the balance above $3 million, and a higher rate of 25% for balances above $10 million. This is on top of the existing 15% tax already paid by superannuation funds on their earnings.

The tax is assessed to the individual, not the superannuation fund itself - though you can elect to have the tax paid from your superannuation fund. The first assessments will be issued by the Australian Taxation Office (ATO) after 30 June 2027.

For most Australians, this tax will not apply - it is estimated to affect around 80,000 to 90,000 people. However, for those with larger superannuation balances, or those whose balances may grow above $3 million over time, it is an important consideration.

The structured settlement exemption: A lifetime carve-out

The Division 296 legislation specifically exempts individuals who have received a structured settlement contribution into their superannuation - at any time. The language in the legislation is clear: if a structured settlement contribution has been made in the current income year, or in any earlier income year, the individual is not liable for Division 296 tax.

This means the exemption is not a one-off. It is permanent. If you made a qualifying structured settlement contribution ten years ago, you are exempt. If you make one next year, you are exempt from that point forward. It is a lifetime exemption from Division 296 tax, regardless of how large your superannuation balance grows in the future.

This is an incredibly valuable carve-out for people who have suffered a personal injury and had their compensation contributed to superannuation under the structured settlement rules.