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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

 

 

 

 

 

 

 

 

 

Cross-Ownership (Overview)

 

Cross-Ownership means that a person or entity other than the Life Insured owns the Policy.

 

Diagram

Click here to see a diagram that illustrates the Cross-Ownership of Buy/Sell Cover and Debt Reduction Cover.

 

Buy/Sell Cover

In the case of Buy/Sell Cover, the Policy Owner might be the other Proprietors or Purchasers.

This method of ownership allows the Purchasers to obtain funds out of which they can pay the Purchase Price in exchange for a transfer of the Vendors' Equity in the Business.

Death Benefit

Cross-Ownership will normally obtain a CGT exemption for the Death Benefit.

Non-Death Benefits

Unfortunately, Cross-Ownership will result in a CGT liability in the case of Non-Death 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, it is no longer normal for the Purchasers to own Buy/Sell Insurance.

The normal method of ownership of all Buy/Sell Insurance is now:

  • Self-Ownership; or

  • Trust Ownership.

Cross-Ownership Agreements

Please click here to read about Cross-Ownership Agreements.

Cross-Ownership of Buy/Sell Cover

Please click here to read more about Cross-Ownership of Buy/Sell Cover

 

Debt Reduction Cover

Diagram

Click here to see a diagram that illustrates the Cross-Ownership of Debt Reduction Cover.

CGT Liability

Business Debt Reduction Cover has traditionally been owned by the Company or Business (i.e., the Debtor).

This method of ownership allows the Debtor to obtain funds out of which it can reduce the Debt owing to the Creditor.

Death Cover

Company or Cross-Ownership will normally obtain a CGT exemption for the Death Benefit.

Income Tax Liability with respect to Subsequent Dividends

Unfortunately, while the receipt of Death Benefits by a Company would be CGT-free, there is an adverse income tax implication: because no tax has been paid, there would be no franking credits attributable to the insurance proceeds.

Therefore, any subsequent dividends attributable to the insurance proceeds would be taxable at the full marginal rate of the shareholders.

In other words, you can get funds into a Company tax-free, but you can't get them out tax-free.

Non-Death Cover

Because the Life Insured is not the "beneficial owner" of the Policy, Company or Cross-Ownership will now result in a CGT liability in the case of Non-Death Benefits.

"Grossing Up" the Sum Insured

Where the CGT liability of Non-Death Benefits owned by the Business is recognised, some Advisers recommend that the Business increase or "gross-up" the sum insured to allow for the CGT liability.

For example, if the desired amount of debt reduction is $200,000, they increase the sum insured to allow for the tax payable on the insurance proceeds by the Company at the rate of 30%.

In order to pay the tax liability and end up with the correct net amount, it is necessary to gross-up the sum insured by 42.86%.

Thus, in order to repay $200,000, the sum insured must be $285,720.

The tax liability on this amount will be approximately $85,720, which will leave $200,000 available to repay the debt.

Ironically, because most Non-Death Benefits are bundled with a Death Benefit, this will increase the premium for both Benefits by 42.86%.

In addition, this solution increases the franking credit problem by 42.86% as well.

Thus, while the correct amount of debt is repaid, there is still income tax payable at marginal rates on subsequent dividends.

Bank Ownership of Debt Reduction Cover

A common variation of the Cross-Ownership of Debt Reduction Cover is Bank Ownership.

Under this variation, the Bank is the Policy Owner.

Click here for an analysis of Bank Ownership of Debt Reduction Cover.

Cross-Ownership of Debt Reduction Cover

Please click here to read more about Cross-Ownership of Debt Reduction Cover

 

Insurance Trust Solution

The adverse implications of Cross-Ownership can be avoided by the use of a Business Insurance Trust Agreement (i.e., Trust Ownership).

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

Most Advisers and Accountants are aware that Cross-Ownership can result in a capital gains tax liability with respect to Buy/Sell Cover.

However, they don't realise that it can also result in a CGT liability for Debt Reduction and Key Person Capital Cover.

Unfortunately, Self-Ownership can solve the problem for Buy/Sell Cover, but it can't solve it for Debt Reduction or Key Person Capital Cover.

See more Adviser Tips

 

 

 

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