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Taxation Implications:

Taxation Implications of Policy Ownership

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Taxation Implications of Policy Ownership

 

About This Page

This page is a guide to the pages on the Complete Succession website that deal with the Taxation of the Insurance Proceeds used to fund a Business Succession Plan.

The other tabs in the grey menu bar above can take you to the guides to other aspects of a Business Succession Plan (such as Commercial Issues, Agreements and Legal Fees).

 

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Income Tax vs. Capital Gains Tax

Whenever Insurance Proceeds are paid under a Policy, it is necessary to consider the Income Tax implications of the payment.

This requires an analysis of two issues:

  • the Income Tax liability; and

  • the Capital Gains Tax liability.

Capital Gains Tax is a category of Income Tax that includes taxable capital gains in the assessable income of the taxpayer.

Normal Income Tax is then payable with respect to the taxable capital gain.

However, it is common for the tax to be referred to as a tax additional or different to Income Tax.

Unfortunately, even if a payment or receipt is not subject to Income Tax on normal principles, there is still a risk that it might be subject to Capital Gains Tax.

This is a particular problem for Insurance Proceeds.

 

Income Tax

Click here to read about the Income Tax treatment of Insurance Proceeds.

 

Capital Gains Tax

Click here to read about the CGT treatment of Insurance Proceeds.

 

Financial Adviser's Duty to Advise with respect to the Tax Implications of an Insurance Policy

Some Advisers and Industry Consultants believe that it is not the role of Financial Advisers to consider or give advice with respect to the tax implications of a Financial Product (such as an Insurance Policy) that they are recommending.

This extends to the method of ownership of the Policy and the tax implications of the method of ownership.

By implication, they are trying to pass responsibility for these decisions on to the Client.

ASIC's View (QFS 153)

ASIC's view is set out in QFS 153:

"The competency requirements do not require you, as a financial planner, to have an expert knowledge of every aspect of tax law.

"However, they do require you to have adequate knowledge of the tax implications normally applicable to the products on which you advise or that need to be considered in providing your advice.

"You must also have a general knowledge of tax law and practice sufficient to enable you to identify any other material tax issues on which your client may require further advice.

"This is so that you avoid making a recommendation about financial products that is not based on the advice of a person competent to provide advice on those issues.

...

"[PS 175] includes guidance on the level of client inquiries and the level of consideration to be given to the subject matter of the advice, and what constitutes ‘appropriate’ advice.

"If you are a providing entity, you generally must consider and investigate the financial products, classes of financial product and strategies upon which advice is provided.

"This will include consideration of any material tax implications of the advice.

"The client’s tax position may be relevant to assessment of the client’s relevant personal circumstances.

"Complex advice involving complex tax strategies is likely to involve more inquiry about the client’s tax position than relatively simple advice.

"We consider that there are two possible ways that a providing entity can give appropriate advice when there are material tax implications that the client should consider that go beyond the licensee’s competency:

• the advice can be based on competent tax advice given to the client by someone else; or

• the advice can be limited to those matters on which the licensee is competent to advise.

If you are a providing entity providing advice in these circumstances, you must be aware of the limitations on your competency.

If you are a licensee you must, however, in all cases ensure that you and your authorised representatives maintain the degree of competency required by [PS 146]."

Normal Tax Implications of Financial Product Advice

ASIC differentiates between:

  • the tax implications that would normally apply to a Financial Product; and

  • more complex tax strategies and implications.

It regards an adequate knowledge of the normal tax implications of a Financial Product (such as an Insurance Policy) as a condition of PS146 compliance.

The method of ownership of a Policy and the tax implications of its ownership are relevant in every case and therefore must be viewed as normal and fundamental aspects of the advice given by a Financial Adviser.

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

Trust ownership is an indirect form of self-ownership.

The Life Insured is the "beneficial owner" for legal and tax purposes under the roof of the Trust.

See more Adviser Tips

 

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