Case study: Making super contributions from compensation payments

Generally, super contributions are of two types – concessional and non-concessional.

There are annual caps (limits) on the amount of concessional and non-concessional contributions you can make. If you exceed these limits, you’ll be liable to pay extra tax.

The concessional contributions cap is currently $27,500 per year (unless you are eligible to use the carry-forward rule)
The non-concessional cap is $110,000 per year (unless you are eligible to use the bring-forward rule).

But there is another situation where super contributions can be made outside the above-mentioned contribution caps.

If the super contribution arises from a personal injury payment or a structured settlement, you may be able to exclude all or part of it from your non-concessional contribution cap. This also means that no extra tax will apply to this type of contribution.

Another exemption is that such contributions are not included in the calculation of your total superannuation balance and transfer balance cap. We will discuss in the below case study how this can be very beneficial for the person making such a contribution.

Eligibility criteria

The Income Tax Assessment Act (ITAA) 1997 section 292–95 provides information on the eligibility criteria for a payment to be contributed to super and excluded from the non-concessional contribution cap.

There are three types of payments that are eligible:

Settlements of a claim for compensation or damages for personal injury suffered by the person and the claim is made by the person or their legal representative. Settlement must be by written agreement between the parties (whether or not a court order is required to make the agreement effective).
Settlement of a claim for personal injury suffered by you under State or Commonwealth law in relation to workers compensation.
The payment arises from a court order following a claim for compensation or damages due to personal injury, based on the commission of a wrong or right created by statute.

Once the payment satisfies the above criteria, the following three conditions must be met to make the super contribution:

Two legally qualified medical practitioners certify that, because of the personal injury, it is unlikely the member can ever be “gainfully employed in a capacity for which they are reasonably qualified because of education, experience and training”.
The member (or their legal personal representative) notifies the super fund by completing a Contribution for personal injury form NAT 71162 when (or before) making the contribution.
Making the contribution in the required time limit, usually within 90 days of whichever is the latter: receipt of payment, date of court order or agreement made by the parties.

Case Study

Patrick, aged 45, received a compensation payment of $2,000,000 arising from a car accident claim that has led to a loss of both his legs. Out of the $2,000,000, his lawyer confirms that $1,800,000 relates to personal injury and the remaining $200,000 is reimbursement of other expenses. Therefore, Patrick can contribute $1,800,000 into super as a ‘Contribution for Personal Injury’.

The payment is received by Patrick on 1 August 2022. So, he has until 30 October 2022 to make the contribution and submit the form NAT 71162 to his super fund.

Patrick’s current super account balance is $250,000. Given the $1,800,000 does not count towards his non-concessional contributions cap, he is able to contribute the remaining $200,000 of the claim by triggering the bring-forward rule allowing him to contribute the full $2,000,000 into super. His total super balance is now $2,250,000.

Due to his disability, the super fund trustee is satisfied that Patrick meets the permanent incapacity condition of release. Since the $1,800,000 is exempt from transfer balance cap, he does not need to worry about breaching the $1,700,000 transfer balance cap. He can commence an account-based pension with the full $2,250,000 and start drawing an income stream or even take a lump sum payment to fund his living expenses.

Things to consider:

Only the part of the compensation that relates to personal injury can be contributed to super. Therefore, the court order or the agreement between parties must clearly state the breakdown of the payment.
Compensation payments usually impact any Centrelink entitlements the member may be receiving.
Any super balance not related to the compensation payment will affect the member’s total super balance and transfer balance cap.
If the member will not meet a condition of release, then the above strategy may not be entirely suitable.

About the author

Aakash Mehta

Aakash Mehta is a financial adviser and has been working in the financial planning profession for more than 7 years. He has an undergraduate degree in commerce, a post-graduate degree in international finance and a diploma in financial planning. His day-to-day work exposes him to real life financial planning issues around superannuation, retirement, insurance and estate planning, and he contributes to SuperGuide by writing case studies and articles on various financial planning strategies.