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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

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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

 

 

 

 

 

 

 

 

 

Trust Ownership and Commercial Debt Forgiveness

 

The IGS form of Trust Ownership means that a Trustee owns the Policy on behalf of the Life Insured.

Because the Life Insured is the Beneficial Owner of the Debt Reduction Cover, Trust Ownership obtains all available exemptions from CGT.

In addition, it can distribute the Debt Reduction Cover directly to the Creditor both securely and tax-effectively.

 

Payment to Third Party

The IGS Business Insurance Trust Agreement is designed to enable payments to Third Parties tax-effectively.

The ATO Ruling with respect to the IGS Business Insurance Trust Agreement states that:

"the payment of an amount by the trustee to a nominated recipient in accordance with a nominated beneficiary's direction, will not be the discharge or satisfaction of an asset under CGT event C2."

The Trust Structure avoids the problems of Self-Ownership of Debt Reduction Cover discussed here.

This means that the repayment of the Debt owing to the Creditor can be achieved by a payment by the Trustee to:

  • the Creditor directly;

  • the Business (or Debtor); or

  • the Continuing Proprietors.

 

Accounting Structure of Payments

The Trustee physically pays the Creditor directly.

However, for the reasons set out below, the standard Agreement uses a Substitute Loan Account Structure to channel the Insurance Proceeds from the Continuing Proprietors to the Business to the actual Creditor.

The journal entries could show a payment to either the Business or the Continuing Proprietors.

However, the journal entries required by the standard Agreement show a payment of the Insurance Proceeds to the Continuing Proprietors.

Whether the Insurance Proceeds are paid to the Business or the Continuing Proprietors, they are paid to them absolutely and not by way of a loan.

 

No New Loan Account Payable to Life Insured or Their Estate

Under the Trust Structure, no new Loan Account owing to the Life Insured or their Estate is created or required.

The Insurance Proceeds are paid to the Continuing Proprietors absolutely and not by way of a loan.

The Life Insured (or their Estate) does not repay the Creditor directly.

No Right of Contribution or consequential Loan Account ever comes into existence.

Equally, the Life Insured (or their Estate) does not expressly lend the Insurance Proceeds to the Debtor.

As a result, the payment does not create any Right of Contribution or Loan Account as between the Life Insured (or their Estate) (on the one hand) and the Business or the Continuing Proprietors (on the other hand).

Because no new Loan Account owing to an Outgoing Proprietor is created, there is no Debt which is required to be "forgiven".

Thus, the structure is not subject to the Commercial Debt Forgiveness provisions.

 

Substitute Loan Accounts

One of the unique features of a Business Insurance Trust Agreement is that it establishes Loan Accounts pursuant to which the Business repays the Debt to the Creditor.

The journal entries required by the standard Agreement show a payment of the Insurance Proceeds to the Continuing Proprietors (who now own 100% of the Business between them).

The Continuing Proprietors (i.e., not the Life Insured or their Estate) then lend the Insurance Proceeds to the Business, which in turn repays the Creditor.

In effect, the Agreement creates new Loan Accounts owing to the Continuing Proprietors in substitution for the external Debt.

The Continuing Proprietors are referred to as "Substitute Lenders".

Under the IGS Trust Structure, the initial payment of the Insurance Proceeds to the Substitute Lenders does not create any Loan Account or other obligation owing by them to the Life Insured or their Estate.

The new Loan Accounts are not intended or required to be "forgiven" .

Instead, the existence of the new Loan Accounts in favour of the Substitute Lenders allows future cash flow of the Company to be paid to the Substitute Lenders as tax-free repayments of principal (rather than as assessable dividends).

This structure avoids one of the adverse tax implications of Company ownership of Debt Reduction Cover.

 

Insurance Trust Solution

In summary , the problems of both Cross-Ownership and Self-Ownership can be avoided by the use of a Business Insurance Trust Agreement (i.e., Trust Ownership).

 

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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