Taxation Implications:

Taxation Implications of Policy Ownership

Income Tax

Capital Gains Tax


CGT Exemptions:

CGT Exemptions for Insurance

2015 Amendments

Death Benefits

Non-Death Benefits

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










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.


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:


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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Current Marketing Schedule

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