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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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Terminal Illness Benefits
The ATO has traditionally considered a Terminal Illness Benefit as a Non-Death Benefit that must be dealt with under section 118-37 rather than section 118-300. However, this practice has now been reversed by a Tax Determination.
Tax Determination 2007/4 On 28 March, 2007, the ATO issued Tax Determination 2007/4, which expresses the view that a Terminal Illness Benefit will be dealt with under section 118-300. This means that the Policy does not need to be owned by the Life Insured in order to obtain an exemption. Instead, the Insurance Proceeds will be exempt if they are paid to the original beneficial owner of the Policy (or a subsequent owner who gave no consideration). This interpretation creates scope to use Cross-Ownership for Business Insurance. However, Cross-Ownership would not obtain an exemption if there was a Non-Death Benefit paid under the Policy.
Limitations of Tax Determination The Tax Determination does not have any foundation in the wording of the legislation. It assumes that, because there would normally be a "professionally diagnosed expectation of death within a fairly brief defined period (rather than the diagnosis of the illness itself)", a death will actually occur. The Determination does not consider the possibility that a death might not occur within 12 months or what the tax implications of survival beyond 12 months would be. It is therefore recommended that Cross Ownership not be used, even if the only benefits of the Policy are Death and Terminal Illness 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. Cross-Ownership should therefore be avoided where the Policy includes Non-Death Benefits.
Prospect of Change of Beneficial Owner Cross Ownership is occasionally used in a business context where the Purchasers or the Business own the Policy. Often, when the need for the Business Insurance Cover has ceased, it is desirable for the benefit of the Cover to be assigned to the Life Insured (e.g., for Personal Cover). For example, the Business might need Debt Reduction Cover for the temporary duration of a Loan, after which the Life Insured might wish to obtain the benefit of the Cover. A change of beneficial ownership could also occur at the time of a change of ownership of the Business (e.g., the Life Insured might retire and sell their Equity), when it is likely that there will be "consideration" for the change of ownership of the Policy. Thus, there is a risk that the Life Insured or assignee would have to pay Capital Gains Tax on the Insurance Proceeds at the time of a claim. Cross Ownership should therefore be avoided if there is a prospect that the benefit of the Policy might subsequently be assigned to another party (e.g., the Life Insured).
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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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