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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

 

 

 

 

 

 

 

 

Self-Ownership of Buy/Sell Cover

 

Self-Ownership means that the Life Insured owns the Policy.

 

N.B. 16 March, 2011:

The ATO has recently indicated that it does not regard its 2001 Statement of Principles with respect to Self-Ownership as a correct statement of the law.

IGS will follow developments with respect to this issue and provide updates here.

 

Diagram

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

 

CGT Exemptions for Death and Non-Death Benefits

This method of ownership obtains a CGT exemption for both Death and Non-Death Benefits.

 

Payment to Appropriate Vendor

By definition, Self-Ownership must pay the Insurance Proceeds to the Life Insured or their Estate.

Care should be taken to determine whether this is the right destination for the Insurance Proceeds from a commercial and family point of view.

In many cases, the Equity in the Business might be owned by a Third Party such as a Company or Family Trust.

Unlike Trust Ownership , Self-Ownership cannot pay the Purchase Price to the correct Vendor in cases where the Owner of the Equity is not the Life Insured.

Because Self-Ownership requires the Life Insured to own the Policy, the Insurance Proceeds attributable to the Purchase Price must be paid to the Life Insured or their Estate, even if the Equity in the Business is owned by a third party (such as a Company or Family Trust).

Thus, Self-Ownership can result in the Purchase Price being paid to the wrong party, in order to obtain a CGT exemption with respect to the Insurance Proceeds.

Failure to Receive Sale Price

The Vendor's failure to receive value for the Equity can create significant legal and commercial problems, especially where it must use the Sale Proceeds to:

  • release a mortgage with respect to the asset; or

  • pay a Capital Gains Tax liability with respect to its disposal.

In addition, the inappropriate payment of the Insurance Proceeds to the Estate means that they have to be distributed in accordance with the Life Insured's Will (rather than the terms of the Trust Deed).

The Life Insured might not always wish to treat the assets of their Family Trust in the same way as the assets of their Estate in the event of their death.

The Insurance Proceeds would also be subject to disputes with respect to the distribution of the Estate by disgruntled Beneficiaries.

Click here to read a discussion of the significant administrative, commercial and tax problems that can arise if the Owner or Vendor is not the Life Insured (e.g., a Company or a Discretionary or Family Trust).

Insurance Trust Solution

These problems can be avoided by the use of a Business Insurance Trust Agreement.

 

Self-Ownership Buy/Sell Agreements

Most Lawyers (other than IGS) use Self-Ownership Buy/Sell Agreements and recommend that the Buy/Sell Cover be owned by the relevant Life Insured personally.

Click here to read more about Self-Ownership Buy/Sell or Business Succession Agreements.

IGS will use a Self-Ownership Business Succession Agreement (or a Hybrid Business Insurance Trust Agreement), if the Business and Adviser prefer this method of Policy Ownership.

 

Standard IGS Self-Ownership Business Succession Agreement

Click here to learn more about the standard IGS Self-Ownership Business Succession Agreement used for a Simple Succession Plan.

This is a more traditional Buy/Sell Agreement which deals only with the Buy/Sell or Equity Insurance Cover.

However, unlike most other Buy/Sell Agreements, it includes succession strategies for retirement and events other than Insurable Events.

IGS usually prepares this type of Agreement where:

  • a Complete Succession Plan is not required or relevant; or

  • it is preferred by the Business or its Advisers.

IGS normally uses a Business Insurance Trust Agreement, if any of the Equity is owned by a party other than the Life Insured (i.e., a Related Party Vendor such as a spouse, Family Company or Family Trust).

 

Need for Contemporaneous Buy/Sell Agreement

Please click here to read about the potential adverse CGT implications of not having a contemporaneous Buy/Sell Agreement.

 

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

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.