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Taxation Implications: Taxation Implications of Policy Ownership
CGT Exemptions:
Methods of Policy Ownership:
Buy/Sell Cover: Implications for Buy/Sell Cover
Debt Reduction Cover: Implications for Debt Reduction Cover
Third Party Payments: Implications for Promises to Distribute Insurance Proceeds to Third Parties
Commercial Debt Forgiveness:
Super Fund Ownership:
Aggregation onto One Policy:
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Income Tax
Assessability of Insurance Proceeds Normally, the income tax liability of Insurance Proceeds will depend on the purpose of the Insurance Cover.
Deductibility of Insurance Premiums Similarly, the deductibility of the Premium will also depend on the purpose of the Cover.
Application of Normal Income Tax Principles Based on normal income tax principles, the income tax treatment of a payment or receipt will normally depend on whether its nature or purpose is:
Income (or Revenue) Purpose Compensation for Loss of Income If the purpose of the Cover is to compensate the Business for a loss of income or revenue, the Insurance Proceeds will be assessable on normal income tax principles. This type of Cover is usually called Key Person Income or Revenue Cover. In a sense, if the Insurance Proceeds replace income that would have been assessable, then the Insurance Proceeds will be assessable as well. In return, the Premium for this type of Cover will be deductible to the Business. Funding Cost of Replacement Employee The same analysis applies if the purpose of the Cover is to fund the salary and other costs of a replacement employee for, say, 12 months. The Premium will be deductible, but the Insurance Proceeds will be assessable. On the other hand, when the employer then spends the Insurance Proceeds on the salary or other costs, it will obtain a deduction for the expenditure in the financial year during which it is spent (assuming it is of an income or revenue nature). No Double Taxation If the Insurance Proceeds are assessable, they will not also be subject to Capital Gains Tax. There is no double taxation.
Capital Purpose If the purpose of the Cover is to fund the payment of a capital amount (such as a loan) or to compensate the Business for a loss of capital (such as goodwill), the Insurance Proceeds will not be assessable on normal income tax principles. This type of Cover is usually called Debt Reduction Cover or Key Person Capital Cover. In return, the Premium for this type of Cover will be not be deductible to the Business. Buy/Sell and Personal Cover The same analysis applies to Buy/Sell Cover and Personal Cover. The Insurance Proceeds are not assessable. However, the Premium is not deductible.
Capital Gains Tax Unfortunately, if the Insurance Proceeds are not assessable on normal income tax principles, there is still a risk that they will be subject to Capital Gains Tax. This is a particular problem for the Proceeds of Business Insurance Policies. Click here to read about the CGT treatment of Insurance Proceeds.
Debt Reduction and Key Person Cover Click here to read more about the commercial purpose of Debt Reduction and Key Person Cover.
Insurance Cover Held in the Superannuation Environment In some cases, the Premum with respect to a Policy held in the Superannuation environment will be deductible. The deductibility results partly from the fact that the Premium might have been paid out of a deductible or Concessional Contibution to the Superannuation Fund. In some cases, the Insurance Proceeds will be tax-free. However, in other cases, the Insurance Proceeds might be subject to income tax, even though they might have been tax-free if they had been paid directly to the Life Insured (or their Estate). The superannuation option creates scope to obtain a deduction for the Premiums, provided that the Life Insured understands the risk of assessability of the Insurance Proceeds. This risk is often not understood or appreciated by Clients, Accountants or Advisers who are primarily motivated by the deductibility of the Premium. Click here to read more about the advantages and disadvantages of Insurance Cover held in the Superannuation environment.
Complete Succession Plan Click here to see a summary of the apportionment and deductibility of the Premiums payable with respect to a Complete Succession Plan.
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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.
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