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Thursday, 5 December 2002
Page: 7307

Senator MURRAY (4:50 PM) —Before I begin, I ask that Senator Ridgeway's speech in the second reading debate be incorporated. The alternative is that he will make the speech and take up more time.

The ACTING DEPUTY PRESIDENT (Senator Sandy Macdonald)—I think senators would like to have a look at it.

Senator MURRAY —You have 20 minutes. There is no issue with that but if leave is denied Senator Ridgeway will come down and take up the time. I too wish to speak on the Taxation Laws Amendment (Structured Settlements) Bill 2002. In starting I would like to try and summarise the issues. Two important considerations must be borne in mind in matters of compensation for a seriously injured person: will they get sufficient regular disposable income to cover their living and health needs, and will any dependents be able to receive continuing support, particularly in the event of an early death?

Compensation in Australia is presently paid either as a lump sum or as a periodic measured amount, otherwise known as a structured settlement. Structured settlements were adopted by the United States and Canada in the 1970s and the United Kingdom in 1987. Structured settlements are seen as an attractive public policy instrument as an alternative to lump sum damages. The danger with a lump sum payment is that the unwise, the foolish, the unsophisticated or even the unlucky can waste it and leave the injured person in dire circumstances and on welfare.

The take-up of structured settlements in Australia has been low because of tax disadvantages. This bill removes some of the tax impediments. However, the recipient of a damages award may prefer to make their own investment decisions if they receive a lump sum. In this way, the bill does create further tax inequality, since income from an annuity will now be tax exempt while income from the investment of a lump sum will still be taxed. It is plainly the policy intent of the government to push persons who are in this situation towards structured settlements rather than lump sums, and overall it is a policy intention with which we agree.

The bill covers an area of taxation reform that is long overdue. The reform will mean that structured settlements may become more commonly used in Australia as a mechanism for seriously injured people to plan for their future. I have been long concerned about the fact that there might be many cases where lump sum payments have been made and these moneys have been exhausted quickly, leaving victims with no future financial security. It is my understanding that this legislation is designed to ensure that people who are disabled, for example, have income flows that allow for meeting their medical and other costs, as well as providing a steady income stream. This offers the government the ability to potentially save moneys by ensuring, as much as possible, that they do not have to pay income support for these individuals through the welfare system.

With respect to the speeches given on this bill, a large number of the speakers, especially government members in the lower house, saw structured settlements as being part of the solution to the liability insurance industry troubles. Although my colleague Senator Ridgeway will address this in more detail in the second reading debate, let me make it clear that the Australian Democrats do not agree with this notion. The public liability and professional indemnity insurance issues require substantial and coordinated effort from all levels of government, but tax concessions on structured settlements are not at all a significant part of this solution.

Until the existing legislation, there was no real incentive for the widespread use of structured settlements in cases of personal injury claims. A major impediment to structured settlements was that of their taxation treatment, and, gladly, with this legislation this impediment will be removed. I anticipate there will be some, or perhaps much, discussion about allowing tax concessions for annuities arising not only at the time of settlement but also after a lump sum is sought initially and then invested under an annuity arrangement. I understand that ALP amendments proposed this in the other place, but, while I saw some merit in the notion of allowing for this, one of the important factors in encouraging people to take up the new arrangements was for there to be some incentive for compliance.

In another way, if a tax-free annuity could be purchased with the proceeds of a lump sum then plaintiff lawyers would not be obliged to raise the issue of a structured settlement before settlement or at all. They could consider the matter to be one of financial planning on which a plaintiff could obtain financial advice at a later date. Plaintiff lawyers could therefore continue to seek lump sum damages only. I do not believe we would be able to support amendments that would have effected change to the timing arrangements at this stage.

If structured settlements were an issue of financial planning, this could be dealt with after the matter was closed and the plaintiff lawyers would not be obliged to arrange for a plaintiff to have the benefit of financial advice before the case settles. The incentive would simply be lost. If the Labor Party amendments put forward in the other place were to have been put forward here and were to have been successful, I question whether or not anyone would have taken up a structured settlement on the basis of that, as their amendment had stood. This is not seen in any other part of the world that offers structured settlements. I am glad to see that the Labor senators have prevailed and that they will be moving a different amendment to that of their House colleagues.

The Corporations Law, strictly speaking, provides that lawyers must not give financial advice. Lawyers are therefore appropriately loath to get involved with financial matters, even to the extent of recommending a financial adviser. Compensation is calculated and negotiated on the basis that it is all needed and will be invested wisely. That is an assumption. It is important to ensure good investment of compensation funds from day one if a plaintiff is to have any hope of ensuring that they are adequate. As I understand it, under the existing bill, lawyers from both sides will be overseeing the purchase of the annuity to ensure that it is in strict accordance with the terms of the settlement agreement. If financial advice is left up to the plaintiff after settlement, they might leave it too late. They might have spent a fair proportion of their compensation money before they receive advice, if they receive that advice at all. If the plaintiff could purchase the annuity directly, additional care would be needed to ensure that the right type of annuity—non--commutable, non-assignable and so on—is purchased with the settlement funds and not any other funds, and is purchased within a specified time after settlement and in a manner approved by the Taxation Office.

Taking this into consideration, I will be moving an amendment in the committee stage that makes it compulsory for there to be independent financial advice at the discussions on structuring a settlement. While I recognise that there are provisions within the financial services and regulations acts that could possibly cater for this, I believe that it has value and that having provided for it within the legislation adds to the bill. One of the issues that must be considered is that of ensuring that the plaintiff is satisfied and looked after through this process. We would not want to go through this process and have arrangements that do not effectively meet the needs of those who will fall within the arrangements.

The Democrats are very supportive of the whole notion of providing an incentive to structured settlements, and we wish to see this legislation pass through the Senate. That is all I have to say in my opening remarks. I seek leave to incorporate Senator Ridgeway's remarks.

Leave granted.

The speech read as follows—

The Australian Democrats welcome the passage of the Taxation Laws Amendment (Structured Settlements) Bill 2002 with few changes to assist in ensuring people are best looked after through the process. We appreciate that lobbying for this Bill began in the mid 1990's and with the establishment of the Structured Settlements Group.

While we support this Bill, as my colleague Senator Murray has touched upon, the Australian Democrats believe that the following issues should be addressed, some by amendment now and others by a review of Structured Settlements or future legislation1.

First, this Bill encourages structured settlements over lump sum payments. The recipient of a damages award may prefer to make their own investment decisions if they receive a lump sum. In this way, the Bill creates a tax inequality since income from an annuity will be tax exempt while income from the investment of a lump sum will still be taxed. One solution is to treat all compensation and damages payments equally under the tax system. I understand this Bill is concerned with out-of-court settlements only and, as such, moves to tax exempt all compensations and damages payouts might be better resolved in separate legislation after a review of these initial arrangements.

Second, an amendment should be considered to continue annuity payments to the beneficiary of the victim in the event of the victim's early death. The current Bill allows for payment to continue up to a maximum of 10 years. Rather than the annuity issuer benefiting from the early death of the victim, payments to a named beneficiary should be maintained until the time when payments to the victim were estimated to cease.

Finally, an amendment should also be considered in relation to the decision by the victim to agree to take up the option of a structured settlement, it should be considered compulsory for the victim to seek independent financial advice to ensure the victim has all available information at their disposal before making a decision.

Generally, however, by removing the disincentive to receive a structured settlement for monies received for personal injury claims this creates a small bonus for accident victims in a situation where there may be many obstacles to a path of financial security, good health and rehabilitation. The knowledge that periodic payments will be tax exempt is a win for those who wish to make agreement about a structured settlement.

However, while on the topic of `wins'—I think it is unlikely that the `win-win' situation the Assistant Treasurer alluded to in her media release on structured settlements will eventuate2. The `win' that this Bill was promoted to achieve was a reduction in insurance premiums and this goal is optimistic to say the least. I would also challenge as misleading, Mr Don Randall's assertion in his second reading speech, that this Bill is an effective tool to tackling the problem of public liability3.

While I commend the Government on its willingness to create tax incentives for personal injury victims, this aim should be considered as an entirely separate issue to the problem of rising insurance premiums.

Once again, we find the federal government providing so called solutions to rising insurance costs through focusing on measures that excuse the insurance industry from any reform.

As we have already seen, despite this lack of data on claims numbers all Governments have been prepared to endorse tort law reform as the solution to the public liability crisis on the assumption that it is the cause of the problem4.

The absence of hard data means that not only is it impossible to be sure that tort law is the cause of the current crisis but it will also be difficult to assess the effectiveness of the reform process. The absence of empirical evidence is a point that was acknowledged by The Ipp Report on Negligence, who justified its recommendations as based on a `collective sense of fairness'.

It is high time that government focus shifted from the legal system and tort reform, plaintiff lawyers and damages awards to more far reaching solutions to this issue.

What a `collective sense of fairness' would require at this point is for reforms to offer advantages to members of the community who aren't connected to the insurance industry. While individual rights are being eroded through tort law reform, the community has been guaranteed nothing in return.

If the Government cannot guarantee the reduction of insurance premiums then at the very least, the community deserves a greater sense of surety and commitment from the government that their safety is a main concern and that the insurance industry is acting in good faith and with their social obligations to the community in mind.

While this Bill goes some way to ensuring that long term care for the injured is available, the government should, as a priority, turn its attention to solutions that reduce the number of accidents that occur in the course of peoples professions and in public places. As well as this, tighter and more effective prudential controls over the insurance industry by APRA is another matter that needs to be addressed if the government is serious about providing long term solutions. Another matter that I believe has yet to be highlighted is the need to encourage the control and management of risk, which not only makes good sense from an insurance point of view, but also from a community welfare point of view.

Now, I come back to my earlier point about what the community should expect from the insurance industry in light of the concessions that have been granted to it by the government and the limits that have been placed on individual rights.

Of all of the so-called solutions to the public liability crisis, this Bill is the only measure that at least provides the community and accident victims some kind of guarantee. That is not to say that this Bill will provide any comfort to those experiencing massive insurance hikes but it is a measure nonetheless that differs from the others in that there are at least some advantages to the individual.

Notwithstanding that the Government's measures to cure the crisis in public liability are misdirected, as I have stated, the measures are primarily devoid of any insurance industry involvement. The government now owes it to the community to provide concrete guarantees that their giving up of their individual rights will not be in vain.

I urge the Government to commit to including the insurance industry in their solutions to the current insurance crisis:

· Extend APRA's monitoring powers to include other types of insurers such as professional indemnity groups;

· The Government must increase its commitment to ensuring APRA use their monitoring and enforcing powers with respect to the insurance industry;

· Provide the community with greater confidence in insurance industry practices through ensuring transparent and independent auditing and accounting functions. In line with CLERP 95 recommendations, this should include restrictions on the length of time a single auditor could provide services to an insurer without rotation;

· The industry is currently undertaking harmonisation of the various industry complaints mechanisms and the government must ensure that this is in place within the next 12 months6; and finally,

· A stringent insurance industry code of practice should be applied to the industry to ensure that its application is equal in strength to the Code applying to the banking industry where adoption of the Code contractually binds the bank and the consumer.

To conclude, I would like to stress that it is my hope that the Government can build on the achievements of this Bill by considering the points I have raised earlier about its shortcomings and by being more realistic about the goals that this legislation was intended to achieve.

This Bill is not part of a solution to the rising cost of insurance and by seeing it as such, further detracts from the Government's focus on solutions that will benefit the community in the long term. One-sided solutions to an insurance problem that do not involve the insurance industry are becoming increasingly inappropriate.

Accident victims, regardless of whether they choose structured settlements or not are now severely limited in the level of damages that they could receive; yet at the same time, executives of failing insurance companies receive salaries and bonuses of amounts that the vast majority of accident victims can only dream of7.

Insurance industry involvement is well overdue and the Government must now shift its focus to restore some balance in a series of solutions that have severely diminished the rights of accident victims and the community as a whole.

1 According to the Bill and Schedule 1 Part 3 Application provisions 54-75, the Minister is to arrange a review of the operation of the proposed amendments after 4 years and 6 months.

2 Media Release from Assistant Treasurer Helen Coonan dated 28 March 2002 “Structured Settlements a Win-Win”.

3 Randall, Don, MP (Canning, LP, Government), Second Reading Speech, Hansard 18 September 2002 (11.21) am.

4 The 30 May Ministerial Communiqué on public liability stated that:

“Ministers agreed that the lack of comprehensive data on claims costs was a significant constraint in the appropriate pricing of premiums by the insurance industry for not-for-profit, adventure tourism and sporting groups. The paucity of data is also inhibiting the development of insurance products suitable for these sectors.

The Commonwealth has agreed to use the Financial Sector (Collection of Data) Act 2001 and require all authorised insurers operating in Australia to submit claims data to the Australian Prudential Regulation Authority (APRA) for analysis and publication. Consultations to develop a consistent methodology will begin shortly.

The States and Territories also agreed to contribute similar claims data from State insurers and local government insurance mutuals to assist in the understanding of public liability insurance. Ministers also agreed on the need for a nationally consistent methodology for courts statistics and asked the Standing Committee of Attorneys-General to consider this as a high priority.”

5 Corporate Law Economic Reform Program Paper No. 9 “Corporate Disclosure— Strengthening the Financial Reporting Framework”. CLERP 9 is just a set of proposals for public comment at the moment. Draft Bills will be released for comment in November/December. Legislation will not be introduced until 2003. For an outline of the proposals visit downloads/clerp9.pdf.

6 In June 2002 the ABIO, IEC and FICS announced the establishment of a common toll free number through which consumers would be directed to the appropriate complaint resolution service. The three bodies have established a harmonisation project with the ultimate object being the full integration of the services into one body. I understand from speaking to FICS that full integration is at least 12 months away.

7 Ray Williams, former HIH CEO, received a $5 million payout from the Board when he resigned 5 months before its collapse.