Self-Ownership Agreement

A Self-Ownership Agreement legitimately avoids CGT on the Insurance Proceeds (not the Sale Price of the Equity) in all of the events that might give rise to a claim under the Policy.

Please click here to read about the CGT implications of Self-Ownership.

What if You Don't Sign An Agreement?

Please click here to read about the potential adverse CGT implications of not having a contemporaneous Buy/Sell Agreement.

The Need for a "Crediting Provision"

The Insurance Company must pay the Insurance Proceeds attributable to the Purchase Price directly to the Life Insured or their Estate, even before any transfer of the Equity in the Business is supplied to the Purchasers.

This places the Estate in a position of control.

A traditional contract of sale requires an exchange of the Purchase Price for a transfer of the Equity at completion.

Because the Estate will have both the Equity and the cash, the Purchasers are vulnerable, particularly if there is no Business Succession Agreement.

A modern Self-Ownership Agreement doesn't provide for a traditional "exchange".

Instead, it contains a "Crediting Provision" that:

gives the Purchasers "credit" for the funds paid to the Vendor by the Insurance Company; and
therefore requires the Vendor to transfer the Equity without any additional payment by the Purchasers.

Consequences of Not Having An Agreement

If you haven't signed a Business Succession Agreement, then there is no "Crediting Provision" and the Estate can ask for payment (even though it has already received the Insurance Proceeds).

Self-Ownership without a Business Succession Agreement is the most dangerous outcome for the Purchasers.

Please click here to read about the potential adverse CGT implications of not having a contemporaneous Buy/Sell Agreement.

Deemed Sale Price and Cost Base

Because the Purchasers obtain the benefit of the Insurance Proceeds through the operation of the "Crediting Provision", they will not usually have to pay any Purchase Price for the Equity, unless the Purchase Price exceeds the Insurance Proceeds.

As a result, it could be argued that they will not have a substantive Cost Base for CGT purposes.

This could increase the amount of their Capital Gain in the case of a subsequent sale.

However, the ATO will apply the Market Value Substitution Rules under section 116-30, so that:

the Purchasers will be deemed to have paid market value for the Equity; and
the Vendors will be deemed to have received the market value.

Thus, the Purchasers will have a substantive Cost Base, but the Vendors will incur a CGT liability with respect to the sale, as if they had received the market value.

Valuation Disputes

The need to establish the market value of the Equity at the time of a claim creates scope for dispute with respect to the valuation of the Business.

While the statutory duty of the ATO would be to establish the true market value of the Equity, it would benefit from determining a value on the high side of market parameters.

Similarly, assuming that the whole of the eventual Sale Price has been funded by the Insurance Proceeds, the Continuing Proprietors or Purchasers would benefit from a relatively high valuation.

This would increase the amount of their Cost Base for the purposes of determining their Capital Gain in the case of a subsequent sale.

In contrast, the Vendors would prefer to establish a lower market value or Sale Price, because this would reduce the amount of any Capital Gains Tax liability payable at the time of the claim.

As a result, the application of the Market Value Substitution Rules creates scope for dispute, delay and expense, not only in relation to the ATO, but also between the Vendors and the Purchasers.

Related Party Vendors

By definition, Self-Ownership must pay the Insurance Proceeds to the Life Insured or their Estate.

Care should be taken to determine whether this is the right destination for the Insurance Proceeds from a commercial and family point of view.

In many cases, the Equity in the Business might be owned by a third party such as a Company or Family Trust (a Related Party Vendor).

Because Self-Ownership requires the Life Insured to own the Policy, the Insurance Proceeds attributable to the Purchase Price must be paid to the Life Insured or their Estate, even if the Equity in the Business is owned by a Related Party Vendor.

Thus, Self-Ownership can result in the Purchase Price being paid to the wrong party, in order to obtain a CGT exemption with respect to the Insurance Proceeds.

CGT Liability of Related Party Vendor

Click here to read a discussion of the significant administrative, commercial and tax problems that can arise if the Owner or Vendor is not the Life Insured (e.g., a Company or a Discretionary or Family Trust).

Insurance Trust Solution

These problems can be avoided by the use of a Business Insurance Trust Agreement.

Other Needs

It is normal for a Self-Ownership Buy/Sell Policy to fund only the Purchase Price of your Equity in the Business.

If other Business or Personal Insurance is required:

this cover would normally be included on separate Policies for each Life Insured (“the Multiple Policy Strategy”); and
the Self-Ownership Agreement would not normally deal with the commercial, legal and tax implications of this cover (including Key Person Insurance).

As a result, there is a risk that the CGT implications of the ownership and other arrangements with respect to this cover might not be adequately addressed by a Legal Agreement.

Debt Reduction Cover

It is not normal for Debt Reduction Cover for the Business to be owned by the Life Insured.

Please click here to read about some of the adverse implications of attempts to self-own Debt Reduction Cover.

Appropriateness of Self-Ownership Business Succession Agreement

Self-Ownership of the Buy/Sell Cover is an adequate strategy for a Simple Succession Plan.

It focuses on the Sale Price of the Life Insured's Equity in the Business (the Asset Need).

It also requires the Insurance Proceeds to be paid to the Life Insured (or their Estate), whether or not they are the actual owner of the Equity in the Business.

Ultimately, a Simple Succession Plan (documented by a Self-Ownership Buy/Sell Agreement) is most suited to a Business with the following characteristics:

each Life Insured's Equity in the Business is owned by the Life Insured (not a Related Party);
it is unlikely that there will be any growth in the value of the Equity over time that might require additional Buy/Sell Cover (which could be funded by the re-allocation of surplus Personal Cover);
there are no Debt Reduction or other Key Person Needs with respect to any of the Lives Insured; and
none of the Lives Insured require additional Personal Cover (that could be re-allocated to Buy/Sell Cover as required).

A Business Insurance Trust Agreement can document both a Simple Succession Plan and a Complete Succession Plan.

Client Summary of Agreement

Click here to see a brief Summary of the purpose and effect of the Agreement.

Comparison of Clover Law Self-Ownership Business Succession Agreement with Traditional Self-Ownership Buy/Sell Agreements

The standard version of the Clover Law Agreement gives Business Proprietors a number of additional benefits that are not provided by traditional Self-Ownership Buy/Sell Agreements within the standard Legal Fee:

It includes provisions for Death, TPD and Trauma Buy/Sell arrangements within the standard Legal Fee;
It includes provisions for Retirement and other Uninsured Events within the standard Legal Fee;
It pre-agrees the Purchase Price, unless the parties wish to rely on a valuation at the time of a sale;
It includes Vendor Finance Provisions with respect to any shortfall in the Insured Purchase Price within the standard Legal Fee;
It includes Super Buy/Sell Provisions, if required by the Adviser and Clients
The Legal Fees with respect to the Initial Agreement and any future Variation Agreements are fixed.

Click here to read a comparison of the benefits under the Clover Law and traditional Self-Ownership Buy/Sell Agreements.

One, Two and Three Policy Succession Plan Worksheets

Click on the following links to see a Risk Analysis Worksheet completed for:

a Simple Succession Plan held on One Policy pursuant to the terms of a Self-Ownership Business Succession Agreement;
a Complete Succession Plan held on One Policy pursuant to the terms of a Business Insurance Trust Agreement; and
a Complete Succession Plan held on Two or Three Policies pursuant to the terms of a Hybrid Business Insurance Trust Agreement.

Legal Fees

Click here to read about the Legal Fees charged by Clover Law.

Adviser Tip

Self-Ownership must pay the insurance proceeds to the Life Insured or their Estate.

It cannot pay them to a Related Party that owns some of the Equity in the Business (e.g., a Family Trust or Company) nor can it pay them to a Creditor without adverse tax implications.

See more Adviser Tips

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