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Site Map

Adviser Updates:

Adviser Updates

Publications and Documents:

Publications and Documents

 

Business Succession Planning:

Business Succession Planning

Need for Succession Plan

Need for Asset or Buy/Sell Strategy

Need for Liability or Key Person Strategy

Negotiating a Succession Plan

 

Simple Succession Plan:

Simple Succession Plan

 

Complete Succession Plan:

Complete Succession Plan

Strategy

Financial Needs

Insurance Funding

Retirement Funding

 

One Page Strategy:

One Page Strategy

Asset Needs

Liability Needs

Personal Needs

Who Pays the Premiums?

Valuing the Business

Simplifying the Valuation Issue

Equity vs. Loan Capital

 

One Policy Strategy:

One Policy Strategy

Flexibility

Dual Role of Personal Cover

Dual Role of Debt Red'n Cover

Security & Tax-Effectiveness

Cost Savings

Pre-Agreed Purchase Price

Apportionment of Premiums

Methods of Aggregation

 

Multiple Policy Approach:

Multiple Policy Approach

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

Super Buy/Sell

 

One Page, Two Policy Strategy:

One Page, Two Policy Strategy

 

Other Issues:

Tax Deductibility

Inadequate Insurance Proceeds

Vendor Finance

Changing Needs

Future Growth of Equity

Trauma Buy/Sell Strategy

 

Sole Proprietors and Families:

Sole Proprietors and Families

Overview

Family Ownership

Sale Strategies

Third Party Buy/Sell Strategies

Estate Equalisation Strategies

Family Buy/Sell Strategies

Second Generation Strategies

Debt Reduction Strategies

 

 

Super Fund Ownership

 

The Premium with respect to most Business and Personal Cover is not tax-deductible (apart from Key Person Income or Revenue Cover).

In effect, the Premium is paid out of "after tax dollars".

In return, the Insurance Proceeds are not assessable.

However, one important exception is Cover owned by a Superannuation Fund.

It is not appropriate to hold Key Person or Debt Reduction Cover in the Superannuation environment.

Therefore, Super Fund Ownership is more likely to be relevant to Personal and Buy/Sell Cover.

Click here to read about Super Fund Ownership of Buy/Sell Cover.

 

Deductibility of Premium

Where the Premium is paid out of a Contribution to the Super Fund that was deductible (i.e., a Concessional Contribution as opposed to a Non-Concessional or Un-deducted Contribution), the Premium is indirectly deductible to the Life Insured or Member of the Fund.

Alternatively, if the Premium is paid out of accumulated funds (which results in a reduction of the value of the investments in the Fund), it might be paid out of funds that have already been taxed at 15% in a previous year.

However, the Premium will be deductible to the Fund in the year in which it is paid.

(Obviously, the appeal of deductibility might not be as great if the Life Insured is already making the maximum Concessional Contributions to the Super Fund for investment purposes and the Premium will effectively be paid out of Non-Concessional Contributions.)

The deduction effectively allows the Premium to be paid with "pre-tax dollars" (rather than "after-tax dollars").

This strategy can make less demand on the Life Insured's cash flow.

As a result, it is common for Personal Cover to be owned by Super Funds, in order to obtain a deduction.

 

Weighing Up the Advantages and Disadvantages of Super Fund Ownership

Many Advisers and Clients choose Super Fund Ownership without any knowledge or consideration of the tax implications and other disadvantages of Super Fund Ownership.

It is important that the Adviser and Proprietors consider and weigh up these disadvantages.

Putting Deductibility into Context

IGS keeps informal statistics with respect to the Premiums paid by Businesses that use its Business Insurance Trust Agreement.

The average premium cost of cover held under these Agreements is approximately 0.3% of the Sum Insured.

This average represents an average over a period of time during which stepped premiums might be lower than 0.3% at the beginning, but grow over time to higher than 0.3%.

If this average is used as the average cost of the Personal Cover, then the Adviser and Proprietors need to make a decision whether the deductibility of an average premium of 0.3% of the Sum Insured outweighs the potential tax liability imposed on as much as 100% of the Insurance Proceeds at the relevant tax rate (discussed here).

In other words, if the Sum Insured was $1 million, would the deduction for the Premium of $3,000 warrant the potential tax liability with respect to the $1 million Insurance Proceeds?

The "Geared Premium Funding" Alternative

The Super Cover Strategy can make less demand on the Life Insured's cash flow.

However, it can come at the risk of assessability of the Insurance Proceeds.

Please see here for an alternative cash flow strategy ("Geared Premium Funding"), which is designed to overcome most (if not all) of the disadvantages of Super Fund Ownership (in particular, the potential taxation of the Insurance Proceeds in the hands of the Super Fund or the Beneficiaries).

 

One Policy Strategy

The One Policy Strategy is designed to obtain savings in Policy Fees and Premiums, even though the Policy might be held outside the Superannuation environment and the Premium might not be deductible.

In a sense, it doesn't matter whether the savings arose from the deductibility of the Premium or the reduction of the Premiums and fees, as long as there is an adequate net saving.

 

One Policy Strategy for SMSF's

A Business Insurance Trust Agreement allows the One Policy to be beneficially owned by different entities, as well as allowing different components of the Insurance Procees to be paid to different Recipients.

If the Life Insured has a Self-Managed Superannuation Fund, the Trustee under a Business Insurance Trust Agreement may hold:

  • some of the Cover on behalf of the Life Insured (i.e., outside the Superannuation environment); and

  • some of the Personal Cover on behalf of the Trustee of the Self-Managed Superannuation Fund (i.e., the Trustee of the SMSF will be the "original beneficial owner" of the relevant interest in the one Policy).

This enables the Client to:

  • utilise the One Policy Strategy;

  • save Policy Fees;

  • obtain volume discounts with respect to the aggregate Premium; and

  • take advantage of deductibility of some of the Premium where appropriate.

Under the Agreement, the Super Fund would be responsible for payment of its proportionate share of the aggregate Premium.

Possible Future Self-Managed Super Fund

It is likely that many Business People will establish Self-Managed Super Funds in order to both obtain the tax benefits of Super Funds and retain an element of control of the Fund's investment strategy.

If it is likely that the Life Insured will establish a SMSF within the foreseeable future, it might be appropriate to adopt a One Policy Strategy now and change the beneficial ownership of the Policy upon the establishment of the Super Fund.

Section 66(1) of the SIS Act will prevent an assignment of a beneficial interest in the Policy from the Life Insured to the Trustee of the SMSF.

However, it would be appropriate to cancel the Policy and issue a substitute Policy with the desired split of beneficial ownership.

 

Multiple Policy Strategy

If a Client does not have a Self-Managed Superannuation Fund, it might have to consider the use of a Public Offer Superannuation Fund in order to obtain a tax deduction for any Cover which it is appropriate to hold inside the Super environment.

The desire to obtain a tax deduction for the Premium for the Personal Cover is a reason why some Clients utilise a Multiple Policy Strategy.

In effect, the desire to obtain a deduction for the Premium for one component of the total Need requires the Life Insured to obtain at least two separate Policies for the different Needs.

For example, the Life Insured might have:

  • one Policy owned by a Trustee for the Business Cover; and

  • one Policy owned by a Public Offer Super Fund for the Personal Cover.

 

Hybrid or Multiple Policy Owner Agreement

The Multiple Policy Strategy can be achieved by the use of a Hybrid or Multiple Policy Owner Agreement.

IGS will document a Multiple Policy Strategy, if the Business and its Advisers consider that this is the best option for the Business and its Proprietors.

However, the Business and Adviser should consider the issues and disadvantages raised on this page and the links on it.

See Super Fund Ownership of Buy/Sell Coverwith respect to the appropriateness of holding Buy/Sell Cover in the Superannuation environment.

 

Disadvantages of Super Fund Ownership

Tax Issues

Click here for an analysis of some of the Tax Issues with respect to Insurance Cover held in the Superannuation environment.

Cost Issues

Click here for an analysis of some of the cost implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

Other Issues

Click here for an analysis of some of the commercial, personal, family and other implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

 

One Page Summary of Issues

Clients should also consider the attached summary of issues with respect to Super Fund Ownership.

 

The "Geared Premium Funding" Alternative

Please see here for an alternative cash flow strategy ("Geared Premium Funding"), which is designed to overcome most (if not all) of the disadvantages of Super Fund Ownership (in particular, the potential taxation of the Insurance Proceeds in the hands of the Super Fund or the Beneficiaries).

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

A Volume Discount on 100% of the total Sum Insured held by the Insurance Trust might be worth more than a tax deduction for 50% of the Sum Insured, even though none of the Cover held by the Insurance Trust might be held in the superannuation environment.

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See more Adviser Tips

 

 

 

Current Marketing Schedule

Current Marketing Schedule

 

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.