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Taxation Implications:

Taxation Implications of Policy Ownership

Income Tax

Capital Gains Tax

 

CGT Exemptions:

CGT Exemptions for Insurance

2015 Amendments

Death Benefits

Non-Death Benefits

Terminal Illness

 

Methods of Policy Ownership:

Ownership Implications

Cross Ownership

Self Ownership

Trust Ownership

Super Buy/Sell

 

Buy/Sell Cover:

Implications for Buy/Sell Cover

Cross Ownership

Self Ownership

Related Party Vendors

Deemed Dividends

Risks If No Agreement

Trust Ownership

Super Buy/Sell

Origins of Self-Ownership

 

Debt Reduction Cover:

Implications for Debt Reduction Cover

Cross Ownership

Self Ownership

Trust Ownership

Bank Ownership

 

Third Party Payments:

Implications for Promises to Distribute Insurance Proceeds to Third Parties

 

Commercial Debt Forgiveness:

Commercial Debt Forgiveness

Cross Ownership

Self Ownership

Trust Ownership

 

Super Fund Ownership:

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

 

Aggregation onto One Policy:

Methods of Aggregation

 

 

 

 

 

 

 

 

 

Capital Gains Tax Exemptions

 

Sources of CGT Exemptions

The CGT exemptions for Insurance Proceeds are contained in sections 118-300 and 118-37 of the 1997 Act.

These sections were amended on 19 March, 2015. The amendments confirm the exemptions that were previously available to the trust structure used by the IGS Complete Succesion Agreement. However, the reasons for the exemptions have changed slightly. These changes are discussed here.

 

Source of Exemption for Death Benefits (Section 118-300)

Section 118-300 deals with Death Benefits.

 

Source of Exemption for Non-Death Benefits (Section 118-37)

Section 118-37 deals with Non-Death Benefits (such as Total and Permanent Disablement and Trauma Benefits).

 

Different Treatment of Death and Non-Death Benefits

There is no logical public policy reason to treat the two types of Benefit differently.

However, unfortunately, the two sections set out two quite different conditions of exemption.

Because Death and Non-Death Benefits are often bundled together on the one Policy, the challenge is to find solutions that obtain an exemption for both Benefits.

This challenge does not just affect the ownership of Buy/Sell Cover.

It also affects the ownership of Debt Reduction or Key Person Cover.

IGS originally developed Trust Ownership, in order to achieve one method of Ownership that:

  • obtained a CGT exemption with respect to all Benefits; and

  • resulted in the Insurance Proceeds being paid to the appropriate Recipient.

 

Consolidated Effect of Exemptions

When the effect of the two exemptions is consolidated, the underlying Capital Gains Tax problem is that Insurance Proceeds are taxed differently according to:

  • the Insured Event that gives rise to the claim; and

  • the Owner of the Policy.

The analysis on the Complete Succession website examines the issues from the point of view of both the Insured Event and the method of Ownership.

See the sub-headings under the Headings "CGT Exemptions for Insurance" and "Methods of Policy Ownership" in the column on the left.

It also examines the implications for different types of Insurance Cover, such as Buy/Sell and Debt Reduction Cover.

 

Categories of Insured Event

The Insured Events fall into two categories:

  • Death Benefits; and

  • Non-Death Benefits (such as Total and Permanent Disablement, Trauma and Terminal Illness Benefits).

Care must be taken to ensure that the method of ownership does not incur an unnecessary Capital Gains Tax liability.

It is submitted that the distinction between the Benefits has no public policy justification and that ultimately the industry should lobby to have section 118-300 amended to apply to all Death and Non-Death Benefits.

 

Exemptions for Death Benefits

Please click here to read about the CGT exemptions wityh respect to Death Benefits.

 

Exemptions for Non-Death Benefits

Please click here to read about the CGT exemptions wityh respect to Non-Death Benefits.

 

Terminal Illness Benefits

Please click here to see the analysis of Terminal Illness Benefits, which discusses the ATO view that a Terminal Illness Benefit will be treated as a Death Benefit, even though it will be paid before the death of the Life Insured.

 

Overviews of Alternative Methods of Ownership

The following pages summarise the tax implications for the three alternative methods of ownership of Business Insurance Cover:

As mentioned above, IGS originally developed Trust Ownership, in order to achieve one method of Ownership that:

  • obtained a CGT exemption with respect to all Benefits; and

  • resulted in the Insurance Proceeds being paid to the appropriate Recipient.

 

Implications for Contractual Promises to Distribute Insurance Proceeds

Most Business Succession Lawyers and Advisers are conscious of the potential CGT liability with respect to the payment of the Insurance Proceeds by the Insurer.

In most cases, they avoid this liability by Self-Ownership.

However, this strategy might not always "get the right money to the right person at the right time".

There are many circumstances in which the ultimate intended Recipient of the Insurance Proceeds is actually a Third Party.

Some Business Succession Lawyers insert contractual obligations into the Business Succession Agreement that compel the Policy Owner (usually the Life Insured) to pay the Insurance Proceeds to a Third Party.

Click here to read about the CGT implications with respect to these provisions.

 

More Detailed Analysis

The following pages analyse the Tax Implications with respect to Succession Planning Strategies in more detail:

 

 

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

 

Current Marketing Schedule

Current Marketing Schedule

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