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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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Commercial Debt Forgiveness
The tax implications of the Ownership of Debt Reduction Cover are discussed here. This page discusses the potential implications of the Commercial Debt Forgiveness provisions of the Income Tax Legislation for the alternative methods of ownership of Debt Reduction Cover.
What is Commercial Debt Forgiveness? Schedule 2C of the Income Tax Assessment Act 1936 contains provisions that tax the economic benefit that a Debtor (or Borrower) obtains when a Creditor (or Lender) "forgives" a Debt. The economic benefit is best illustrated by an example. Example Let's assume that a Shareholder ("the Creditor") lends $2 million to a Company ("the Debtor"). The Loan or Debt is an asset on the balance sheet of the Creditor. It represents the right to demand repayment of the Loan of $2 million. In effect, its value is $2 million. Before the Loan, the balance sheet of the Creditor included $2 million in cash. After the Loan, the balance sheet includes the Creditor's rights under the Loan of $2 million. Let's assume that, for commercial reasons, the Creditor decides to "forgive" the Loan. The 'forgiveness" will terminate the obligation of the Debtor to repay the Loan. The Creditor will cease to be entitled to receive the $2 million it was originally owed. As a result, $2 million has effectively been "stripped off" its balance sheet. Conversely, $2 million of value has been added to the balance sheet of the Debtor. The Commercial Debt Forgiveness provisions allow the ATO to tax this economic benefit or transfer of value to the Debtor.
Relevance to Insurance Arrangements The Commercial Debt Forgiveness provisions can be relevant to Debt Reduction Cover in some circumstances. The circumstances depend on how the Policy is owned and the method by which the Debt is repaid. These circumstances are discussed below in the context of the different methods of Policy Ownership.
Alternative Methods of Ownership The following pages summarise the Commercial Debt Forgiveness implications for the three alternative methods of ownership of Debt Reduction Cover:
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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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