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Publications and Documents:
Adviser Tips:
Adviser Updates:
Individual Updates (Most Recent First): Adverse ATO Advice on Super Buy/Sell Cover Partnership and Trust Loan Accounts Effect of Debt Reduction Cover on Buy/Sell Cover Tax Treatment of Self-Ownership Agreements Vested and Indefeasible Interest Simplifying the Valuation Issue Simple or Complete Succession?
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Simplifying the Valuation Issue
Many business people do not know the value of their Business or find it difficult to reach agreement on the value of their Equity in the Business for insurance purposes. You can imagine that if it is difficult to reach agreement now, it would be even worse after one Proprietor has died or become disabled. The One Policy Strategy can help simplify the valuation issue.
Example Assume that three Proprietors don't know whether their Equity is worth $300K or $500K. A $200K difference at the time of a death could be quite an emotive and expensive dispute. However, when a Proprietor is trying to fund a capital sum of $1 million (so that, invested at 5% per annum, it generates living expenses of $50,00 per annum), the issue becomes a choice between:
Either way, the total Sum Insured is $1 million. There would be no difference in Premium cost if one option was chosen over the other.
Capital Gains Tax In practice, there is a difference in the tax treatment of the Purchase Price and the Personal Cover. The Purchase Price might be subject to capital gains tax (up to 25% of the capital gain), while the Personal Cover will be tax-free. Thus, most Proprietors minimise the Purchase Price and maximise the Personal Cover. In the above example, they might chose the option of a $300K Purchase Price and $700K Personal Cover.
Market Value It is important that the Purchase Price still be within market parameters acceptable to the ATO. If the Price is unrealistically low, the ATO might seek to apply the "market value substitution rules". The rules enable the ATO to impose CGT on the basis of the market value, regardless of whether the Vendor received this amount of money. If the ATO commissioned a valuation, it is likely that both the Vendors and the Purchasers would also want to obtain independent valuations to protect their interests. Thus, there would end up being a three-way valuation dispute. Pre-agreement of the Purchase Price results in a sensible value that is not too inflated to concern an underwriter or too low to concern the ATO.
The Type of Valuation One implication of this strategy is that the Business need not obtain an expensive valuation in order to determine the value of the Equity in the Business. If a valuation is desired, it need only be a simple valuation necessary to satisfy the requirements of the insurance company's underwriter. This reduces the upfront cost of the Succession Plan and prioritises the affordability of the Premium.
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Adviser Tip The One Page Strategy is designed to help you simplify Succession Planning. It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.
Please contact us to arrange a meeting or teleconference.
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