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Thursday, 5 December 2002
Page: 7303

Senator SHERRY (4:34 PM) —The Taxation Laws Amendment (Structured Settlements) Bill 2002 is a positive reform and the Labor Party strongly supports it. The explanatory memorandum states:

A structured settlement is basically a settlement in which part or all of a damages award is paid in the form of an annuity or annuities and may include a deferred lump sum.

The current bill proposes tax changes to encourage the use of structured settlements as agreed at a meeting of Commonwealth, state and territory ministers and the President of the Local Government Association on 27 March 2002. Encouraging structured settlements will help to ensure that injured patients have adequate regular payments for the rest of their lives. It will also make a contribution towards tackling the problem of rising insurance premiums for public liability insurance.

It is because of these clear benefits of structured settlements that Labor has been calling for this reform for a long time. In fact, as far back as June 2000 my colleague Mr Kelvin Thomson in the other place announced Labor's policy that the tax treatment of structured settlements for injury compensation claims should be changed to make it more comparable to the tax treatment of lump sum payments. In July last year Labor committed itself, when in government, to promoting structured settlements by changing the tax treatment of periodic payments. This was to ensure that injured patients have adequate regular payments to cover their health care costs for the rest of their lives. Labor made this commitment because it recognised the need to break the cycle which is driving up the costs of medical indemnity insurance and similar public liability insurance.

Labor has a long commitment to encouraging the greater use of structured settlements, which, as I said earlier, goes back to at least June 2000. By contrast, the Liberal government has been slow to recognise the benefits of structured settlements. In 1999 the Structured Settlements Group began lobbying the government on the benefits of structured settlements. The group were hopeful that the budget in 2000 would recommend changes to the tax laws to encourage the use of structured settlements. However, the budget that year contained no such changes. Around that time, a spokesperson for the then Assistant Treasurer is reported to have said:

This is a complicated issue. It is a difficult one and needs to be looked at very carefully.

In August 2000, in reply to a question on notice from Labor about changing the tax treatment of periodic payments for injury compensation claims, the Treasurer said that the government was thinking about it.

Finally, in September 2001, the then Assistant Treasurer announced the government would introduce legislative amendments designed to encourage the use of structured settlements for personal injury compensation. The press release issued by the then Assistant Treasurer was quite comprehensive. It acknowledged that a major advantage of a structured settlement over a lump sum compensation payment is that many people are unable to properly manage the investment of their lump sum. The press release proceeded to say:

... where they are not able to meet the on-going medical and other costs associated with their injury.

The press release contained a number of detailed eligibility conditions for tax exemption for structured settlement annuities. Alas, no legislation was introduced before the election, and the government remained silent on the issue of structured settlement until March this year. The Liberal government then announced as part of the communique to the national summit on public liability insurance that it would introduce legislation to make tax changes to encourage the use of structured settlements for personal injury compensation.

I applaud the government for finally taking up Labor's suggestions but must note my disappointment that it took so long—and a crisis in the insurance industry—before we finally saw the legislation we are considering today. Let me be unequivocal about Labor's position on this bill. We support it and we will not hold up its passage. However, we still have some remaining concerns regarding details, which I will touch on later, and I foreshadow that we will be moving an amendment to address these concerns.

My opening remarks indicated there is substantial common ground between us and the Liberal government on this issue. I will not then dwell on this common ground in detail, apart from emphasising again that it constitutes the great majority of the bill. The new bill proposes to amend the income tax law to provide a tax exemption for certain annuities and deferred lump sums awarded as part of personal injury compensation under a structured settlement. Labor agrees that this taxation reform is desirable, as, in practice, annuities have been tax-disadvantaged relative to equivalent lump sums because they have been deemed to be more closely identifiable as compensation for lost earnings.

I note that the revenue forgone to the Commonwealth due to the tax that would otherwise have been payable on these annuities is estimated to be $12.1 million over the four-year forward estimate period. The annual cost will then rise to approximately $20 million after 20 years, stabilising at that level. We agree with the Liberal government that this is a reasonable price to pay for the policy benefits brought about by this reform. We also note that, in practice, this cost may be offset to some extent by indirect savings from reduced payments in welfare payments in the longer term. We also agree with the general principles underlying the eligibility criteria for income tax exemption. It is desirable that they restrict the tax-exempt status to genuine cases of personal compensation payments, ensure that the revenue is protected by preventing any other movement of income into this tax-advantaged vehicle and ensure that the annuities are purchased from a source that is subject to proper financial supervision.

The extent of this common ground is considerable. However, as foreshadowed in the House debate on this issue, Labor remains concerned to ensure appropriate flexibility of structured settlement arrangements. The issue at stake is whether the eligibility conditions as they stand in the bill unnecessarily constrain the financial interests of the injured person. The bill currently requires that the annuities are purchased by the defendant or their insurer directly. This would exclude the injured person or their financial manager from purchasing an annuity with the same tax concessions. Court-appointed financial managers such as trustee corporations are compulsory for minors and the intellectually disabled. In addition, victims with intellectual capacity also choose to utilise financial managers where this is appropriate. The Trustees Corporation of Australia argued that the current arrangements in the bill give the defendant insurer veto over the injured person's access to tax concessions. The Labor opposition considers that this is a legitimate concern. We moved an amendment in the other place to attempt to address this concern and will also be doing so in this chamber, although in a slightly modified form.

As a result of a further round of consultations undertaken since the debate in the other place, Labor has decided to modify the amendment to restrict the buying of the annuities to before the time of the settlement. As previously, the amendment will maintain safeguards to ensure that these arrangements are not misused for tax planning purposes and to preserve the requirement that annuities be purchased from a life insurance company or state insurer. Let me emphasise again that this is a matter of detail in the implementation of the bill. It is an important detail, but it is only a detail. Although we believe the bill would be substantially improved by it, even if it does not pass we will not change our strong support for the underlying principles of this bill.

Given our continued willingness to offer bipartisan support for the bill, I would have thought the government might have been willing to reciprocate and take a constructive approach to resolving such details. As I stated previously, the Labor Party has been a strong and consistent supporter of structured settlement reform. However, we believe that the fundamental principle should be to encourage uptake of structured settlements on their own merits. For this reason we consider that the fundamental feature of the reform in this bill is the provision of a tax concession to strengthen the economic advantage of structured settlements. Once this economic advantage has been bestowed, we believe the bargaining process should be made as fair as possible.

The proposed amendment will make the choice of structured settlements fairer by providing the injured person with some legitimate bargaining power in the negotiations. We consider that this would strike a more responsible balance between the competing legitimate interests in this matter. After all, there is a legitimate public interest in safeguarding the interests of the defendants and insurers to help ensure that continued downward pressure is placed on insurance premiums. But this must be balanced responsibly against the safeguarding of the interests of the injured person to ensure that they receive adequate compensation for the rest of their lives. At present, if the offer put forward by the defendant's insurer is unreasonably low, the lawyer of the injured person or plaintiff is left only with the options of pursuing a lump sum settlement or proceeding to court for a lump sum award. Labor's amendment would strengthen the bargaining power of the injured person or plaintiff lawyer by allowing them to present a counteroffer of a tax concessional structured settlement.

Senator Coonan is fond of coming into this place and lecturing us about so-called choice. We had another example of a grossly misleading lecture about so-called choice in question time today. But when it comes down to making sure that this choice is informed, fair and strongly protected, she seems to go very silent. She will have an opportunity to speak on this matter and on this important area of principle in concluding this debate.

In the time remaining to me I wish to urge the Liberal government to do more to resolve the difficulties faced by many small business operators and community groups in obtaining public liability insurance. The same difficulties are now also evident in relation to professional indemnity insurance. Small business and community groups make a significant contribution to the economy and to the fabric of Australian society, and I acknowledge their contribution.

Labor supports the thrust of the reforms to the law that have now been made by a number of the state governments. As stated in March this year, Labor recognises that appropriate rights for the victims of negligence are essential in our society. The community has had an expectation that those who suffer an injury as a result of someone else's culpability will be compensated for that injury. But there must be a balance to the system. We must have a system of tort law which appropriately reflects the community's expectations regarding realistic standards of responsibility, culpability and informed voluntary assumption of risk.

However, we must also ensure that the benefits of these reforms are reflected in insurance premiums, for that is what we want to achieve. Labor wants small businesses and community groups to be able to obtain insurance at affordable prices. The insurance industry has warned that reform of public liability may not lead to cheaper premiums. This could mean that without proper supervision the benefits of the law reforms will end up in the pockets of the insurance companies, and the public liability insurance crisis will continue unabated.

The Howard Liberal government have consistently refused to act on this issue even though it is their constitutional responsibility. Further, the Australian Competition and Consumer Commission has said on the public record that it does not have the power to ensure that the savings from the law reforms are passed on by the insurance companies to the consumers. To ensure that this is the case we require Commonwealth legislation. Labor has introduced a private member's bill which grants the ACCC the necessary powers to protect consumers and ensure savings are passed on. It allows the ACCC to take action against insurance companies which exploit the savings from the law reforms and do not charge premiums for public liability insurance which reflect the effects of the law reform. Such legislation is necessary to realise the benefits of the law reforms undertaken by the states, and I hope that the Liberal government will consider Labor's private member's bill.

Justice Ipp, in his report on negligence law, has also indicated that there are other areas of law and other matters that the Commonwealth is responsible for. I hope that the minister is considering, as a matter of priority, the recommendations of Justice Ipp and other people on the panel. I hope that the minister will be acting as quickly as possible to take forward and implement any appropriate recommendations. Other organisations have also indicated a need to immediately improve the availability and accuracy of data on claims, premiums and other relevant data. The statistics collected in the past by APRA have been subject to many criticisms. I understand from my questioning of APRA that they are in the process of improving their data collection. This data collection should have the full support of the government. I was recently questioning APRA about the collection of superannuation fees, charges and commissions. They appear to be under some new leadership in their data research area and they are making a much more determined effort to collect accurate and independent data across a wide range of areas. The government should also immediately be looking at what other data is necessary and how it should be collected. This may include data from court records.

The supervision of the insurance industry by APRA and the pace of reforms by the Liberal government have also been questioned—and rightly so. We used to hear time and time again from this government about how APRA was the world's greatest regulator. APRA failed in its supervision of HIH. I think we will hear a lot more about the failures of APRA as the regulator when the royal commission hands down its report. The government failed in reforming the regulation of insurance companies. The pace of reform adopted by the Liberal government was too slow, and a quicker pace may have prevented much of the damage we have now seen. The oversight of APRA by the government must be improved, and the performance of APRA itself must be improved. Before I conclude I reiterate Labor's strong support for the reforms in the Taxation Laws Amendment (Structured Settlements) Bill 2002. This is overdue. It should not have required an insurance crisis to bring it on. Nevertheless, the reform is very welcome.