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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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The Tax Treatment of Self-Ownership Buy/Sell Agreements
Self-Ownership is a solution to one particular tax issue: the different CGT treatment of Death and Non-Death Benefits in the context of Buy/Sell Cover.
Historical ATO View Since 1994, the ATO has recognised that Lawyers and Advisers use Self-Ownership as a method of avoiding the CGT on Non-Death Benefits that would have applied if the Buy/Sell Cover was owned by the Continuing Proprietors (or Purchasers). Until now , it has allowed the practice to continue, on the basis set out in a non-binding Statement of Principles issued in 2001.
Change of ATO View The ATO has recently indicated that it does not regard the Statement of Principles as a correct statement of the law. This has serious consequences for the use of Self-Ownership and Self-Ownership Buy/Sell Agreements.
Origins of Self-Ownership Click here to read a previous update about the Origins of Self-Ownership of Buy/Sell Policies. This update explains why Self-Ownership was adopted with respect to Buy/Sell Policies.
Current ATO View On 14 March, 2011, the National Tax Liaison Group (NTLG) issued draft Minutes of its Meeting on 14 December, 2010. The draft Minute makes the following comments about the Statement of Principles issued in 2001:
This is a clear and unambiguous signal that the ATO does not currently endorse the Self-Ownership of Buy/Sell Insurance. It is possible that the ATO will prepare and issue a Public Ruling with respect to the issue. However, this is unlikely to occur in the foreseeable future.
Implications for Lawyers In the meantime, Advisers and Clients are entitled to ask Lawyers to justify the basis of their use of Self-Ownership.
Implications for Advisers Advisers should also justify the basis upon which they recommend Self-Ownership of Buy/Sell Insurance to Clients.
Clover Law Views Clover Law has always had concerns about Self-Ownership. However, Clover Law was prepared to document Business Succession Agreements (both Business Insurance Trust Agreements and Self-Ownership Business Succession Agreements) within the framework established by the ATO in 2001. The new approach of the ATO is not good for anyone. When it becomes more widely known, it will cause chaos in the Insurance and Buy/Sell markets. It is important that all parties make submissions to attempt to obtain a sensible outcome.
Sections 118-300 and 118-37 Clover Law has always advocated the abolition of the differential treatment of Death and Non-Death Benefits under sections 118-300 and 118-37. The differential treatment was the reason for the adoption of Self-Ownership. It remains the underlying problem. It can only be solved by lobbying to treat Non-Death Benefits in the same manner as Death Benefits under section 118-300. This would require an amendment of the Tax Legislation. The problem cannot be solved internally within the ATO. Extension of Section 118-300 to Non-Death Benefits Section 118-300 relies on the "original beneficial ownership" of the Policy and is not concerned with who the Beneficial Owner is. If Non-Death Benefits were dealt with by section 118-300 (rather than section 118-37), the Beneficial Owner of the Policy would not need to be the "Injured Person" (or a Relative), in order to obtain an exemption. The identity of the "Original Beneficial Owner" would be irrelevant to the exemption. Non-Death Benefits under Policies Held by Superannuation Funds This amendment would also solve any remaining problems with respect to the CGT treatment of Non-Death Benefits owned by Superannuation Funds.
Need for Cooperation A change of the Legislation will require cooperation between Insurance Companies, Lawyers, Accountants and Advisers. This cooperation is more important now than ever before.
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