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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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Implications for Ownership of Business Insurance (Overview)
Different Treatment of Death and Non-Death Benefits The CGT exemptions for Insurance Proceeds are discussed here. Unfortunately, sections 118-300 and 118-37 set out two quite different conditions of exemption for Death and Non-Death Benefits . Because Death and Non-Death Benefits are often bundled together on the one Policy, the challenge is to find solutions that obtain an exemption for both Benefits. This challenge does not just affect the ownership of Buy/Sell Cover. It also affects the ownership of Debt Reduction or Key Person Cover. Clover Law originally developed Trust Ownership, in order to achieve one method of Ownership that obtained a CGT exemption with respect to all Benefits and resulted in the Insurance Proceeds being paid to the appropriate Recipient.
Implications for Buy/Sell Cover Traditionally, each Life Insured's Buy/Sell Cover has been owned by the Purchasers (i.e., the Proprietors other than the Life Insured). This method of ownership is commonly called "Cross-Ownership" (because someone other than the Life Insured owns the Policy). 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, there is a risk that Cross-Ownership of a Policy will result in a CGT liability. Normal Methods of Ownership As a result, the normal method of ownership of all Buy/Sell Insurance is now: It is no longer normal for the Business or the Purchasers to own Buy/Sell Insurance (Cross-Ownership), because of the CGT liability with respect to Non-Death Benefits. Tax Implications of Buy/Sell Cover Please click here to read more about the Tax Implications of Buy/Sell Cover
Implications for Debt Reduction Cover Debt Reduction Cover has traditionally been owned by the Company or Business (Cross-Ownership). This method of ownership allows the Debtor to obtain funds out of which it can reduce the Debt owing to the Creditor. Death Benefit Company or Cross-Ownership will normally obtain a CGT exemption for the Death Benefit. Non-Death Benefits Unfortunately, this method of ownership will now result in a CGT liability in the case of Non-Death Benefits. Adverse Tax Implications of Company Ownership of Death Benefits While the Company Ownership of a Death Benefit will obtain a CGT exemption, the eligibility for the exemption actually creates another income tax problem. The shareholders of Companies normally obtain a "franking credit" for any dividend paid out of funds upon which the Company has already paid income tax (at the rate of 30%). Instead of paying income tax on the dividend at their marginal tax rate, the shareholder's tax rate will be reduced by 30%. 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 by the Company, 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 summary, you can get insurance proceeds into a Company tax-free. However, you cannot get them out tax-free. Insurance Trust Solution The CGT liability of the Non-Death Benefits and the income tax liability of subsequent dividends attributable to the Death Benefits can both be avoided by the use of a Business Insurance Trust Agreement. Businesses can use this component of a Business Insurance Trust Agreement, even if no Buy/Sell Cover is required. Please see here for a more detailed analysis of the tax treatment of Debt Reduction Cover. Tax Implications of Debt Reduction Cover Please click here to read more about the Tax Implications of Debt Reduction Cover
Implications for Contractual Promises to Distribute Insurance Proceeds Most Business Succession Lawyers and Advisers are conscious of the potential CGT liability with respect to the payment of the Insurance Proceeds by the Insurer. In most cases, they avoid this liability by Self-Ownership. However, this strategy might not always "get the right money to the right person at the right time". As mentioned above, there are many circumstances in which the ultimate intended Recipient of the Insurance Proceeds is actually a Third Party. Some Business Succession Lawyers insert contractual obligations into the Business Succession Agreement that compel the Policy Owner (usually the Life Insured) to pay the Insurance Proceeds to a Third Party. Click here to read about the CGT implications with respect to these provisions.
More Detailed Analysis The following pages analyse the Tax Implications with respect to Succession Planning Strategies in more detail:
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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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