Buy sell insurance and taxation issues
There a number of taxation issues that need to be taken into consideration when deciding on the ownership structure of a buy/sell policy. The following lists the taxation issues surrounding each type of ownership structure:
Self ownership
Generally, there is no CGT liability on the payment of life, TPD or trauma policy proceeds. The market value substitution rule, in section 116.30(1) and (2) of the Income Tax Assessment Act 1997 (ITAA97), deems the market value of the business to have been the price of the interest received by the outgoing owner (or estate) and acquired by the continuing owners, regardless of whether the continuing owners paid less than market value for the interest and the buy/sell agreement was not an arms-length transaction. The other advantages of self-ownership are simplicity and portability (if owners leave the business, for instance, they can take their own policy with them).
Cross ownership
The insurance proceeds are paid to the purchaser (continuing owner/s), who then pays them to the estate or outgoing owner in return for the transfer of the equity in the business. The proceeds of term life and terminal illness cover are exempt from CGT if there is no change in original beneficial ownership (s 118-300 ITAA97). If the proceeds are paid as a TPD or trauma benefit, they are CGT exempt only if paid to the life insured’s spouse or a defined relative (s 118-37ITAA97).
Trust ownership
Some of the advantages of trust ownership include those for self ownership, as well as cost savings due to fewer policy fees and volume premium discounts, and comprehensiveness (a multiple-purpose trust can allow other life insurance covers – such as debt reduction, key person and personal risk cover – to be held through the same policy).
Superannuation fund trustee ownership
The obligation to pay the insurance proceeds to outgoing owner or estate (or the beneficiary of the business share) and to transfer the outgoing owner’s business interest should be contained in a buy/sell agreement. It may be unsuitable to hold TPD (particularly own occupation TPD) and trauma cover through a super fund as the trustee may not be able to release the proceeds to the member or the estate unless a condition of release is met.
There are a number of tax implications and policy considerations when looking at buy/sell insurance. Contact xLife today to see if we can help you with your buy/sell insurance or keyman insurance, we can also compare a number of competitive keyman insurance quotes.
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February 2010
