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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

 

 

 

 

 

 

 

 

 

Terminal Illness Benefits

 

The ATO has traditionally considered a Terminal Illness Benefit as a Non-Death Benefit that must be dealt with under section 118-37 rather than section 118-300.

However, this practice has now been reversed by a Tax Determination.

 

Tax Determination 2007/4

On 28 March, 2007, the ATO issued Tax Determination 2007/4, which expresses the view that a Terminal Illness Benefit will be dealt with under section 118-300.

This means that the Policy does not need to be owned by the Life Insured in order to obtain an exemption.

Instead, the Insurance Proceeds will be exempt if they are paid to the original beneficial owner of the Policy (or a subsequent owner who gave no consideration).

This interpretation creates scope to use Cross-Ownership for Business Insurance.

However, Cross-Ownership would not obtain an exemption if there was a Non-Death Benefit paid under the Policy.

 

Limitations of Tax Determination

The Tax Determination does not have any foundation in the wording of the legislation.

It assumes that, because there would normally be a "professionally diagnosed expectation of death within a fairly brief defined period (rather than the diagnosis of the illness itself)", a death will actually occur.

The Determination does not consider the possibility that a death might not occur within 12 months or what the tax implications of survival beyond 12 months would be.

It is therefore recommended that Cross Ownership not be used, even if the only benefits of the Policy are Death and Terminal Illness Benefits.

 

Implications for Policies that Bundle Death and Non-Death Benefits

Because Non-Death Benefits are usually bundled with a Death Benefit under the one Policy, there is a risk that Cross-Ownership of a Policy will result in a CGT liability.

Cross-Ownership should therefore be avoided where the Policy includes Non-Death Benefits.

 

Prospect of Change of Beneficial Owner

Cross Ownership is occasionally used in a business context where the Purchasers or the Business own the Policy.

Often, when the need for the Business Insurance Cover has ceased, it is desirable for the benefit of the Cover to be assigned to the Life Insured (e.g., for Personal Cover).

For example, the Business might need Debt Reduction Cover for the temporary duration of a Loan, after which the Life Insured might wish to obtain the benefit of the Cover.

A change of beneficial ownership could also occur at the time of a change of ownership of the Business (e.g., the Life Insured might retire and sell their Equity), when it is likely that there will be "consideration" for the change of ownership of the Policy.

Thus, there is a risk that the Life Insured or assignee would have to pay Capital Gains Tax on the Insurance Proceeds at the time of a claim.

Cross Ownership should therefore be avoided if there is a prospect that the benefit of the Policy might subsequently be assigned to another party (e.g., the Life Insured).

 

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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