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Simplifying the Valuation Issue Simple or Complete Succession?
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Adviser UpdatesThis page contains all of the formal Adviser Updates. The most recent Updates are printed at the top of this page. Individual Updates can also be accessed through the Menu Bar at the left of this page. ********************************************************************************************************************* 2 May, 2010 The Henry Report: "Don't Ya Tell Henry" The Henry Report was intended to be, and did end up being, a high level review of the tax system. However, when you ascend to this height, you inevitably confront the ideological foundations of the tax system. Thus, the driving force of the Henry recommendations is issues like fairness and efficiency. Click here to read about the implications of the Henry Report and the Government's responses to Business Succession Planning. ********************************************************************************************************************* 27 April, 2010 Deemed Dividends under Self-Owned Buy/Sell Cover Many Businesses are not simply owned by the Lives Insured. Many Business People avoid owning business assets in their own name, so that they can:
In these cases, some or all of the Equity in the Business might be owned by a Third Party such as a Spouse, Company or Family Trust. This situation will arise if:
In the case of Businesses where the Equity is owned by a Company, Self-Ownership of the Buy/Sell Cover could give rise to a deemed dividend that is subject to income tax in the hands of the Life Insured (over and above any CGT liability that would be payable by the Vendor). Click here to read about this potential liability. ********************************************************************************************************************* 22 April, 2010 ATO's Views on Super Buy/Sell Cover There is considerable uncertainty with respect to the legitimacy and tax-effectiveness of Super Buy/Sell Cover. On 21 April, 2010, the ATO released SMSFD 2010/1, which clarifies the position with respect to Trauma Cover held by a Self-Managed Superannuation Fund. The Determination contains a Compendium of Comments, one of which casts doubt on whether a Super Buy/Sell Strategy would comply with the Sole Purpose Test. Click here to read about the Compendium.
********************************************************************************************************************* 22 April, 2010 Trauma Cover in Super The ATO has released SMSFD 2010/1, which clarifies the position with respect to Trauma Cover held by a Self-Managed Superannuation Fund. The Determination is discussed in the Update dated 16 November, 2009 on the original Draft (see below). ********************************************************************************************************************* 12 March, 2010 and 1 April, 2010 Bamford in the High Court The appeal in the case of Commisssioner of Taxation v. Bamford was heard in the High Court on 2 and 3 March, 2010. This Case will have major implications for the manner in which the income and capital gains of Trust Estates are taxed in the hands of presently entitled Beneficiaries. The Case has been the subject of much commentary as it has progressed through the judicial system, some of it unduely alarmist. Click here to read some informal views about the arguments in the Case. This Update has now been amended to comment on the Judgment issued on 30 March, barely four weeks after the oral arguments concluded. The Case does not have any implications for the tax treatment of the Business Insurance Trust Agreement, because the Insurance Proceeds gain an exemption and are not assessable in the hands of the Trustee or the Beneficiaries.
********************************************************************************************************************* 16 November, 2009 Trauma Cover in Super It seems that the ATO is moving towards acceptance of Trauma Cover in Super from a Sole Purpose test point of view. Click here to read about the implications of SMSFD 2009/D.
********************************************************************************************************************* 24 July, 2009 Origins of Self-Ownership of Buy/Sell Cover Self-Ownership is and always has been an appropriate method of holding Personal Cover. However, most Advisers believe that Self-Ownership is and always has been the only way to hold Buy/Sell Cover as well. They don't realise that Self-Ownership was a remedy for CGT issues that first arose in 1985. Click here to read about how and why Self-Ownership replaced Cross-Ownership as the predominant method of ownership of Buy/Sell Cover.
********************************************************************************************************************* 14 July, 2009 Business Insurance Fact-Finding No issue gives the average Adviser greater grief than Business Insurance Fact-Finding. However, if Advisers are to rise above the average, service Business Clients better and achieve the potential of the Business Succession market, then they must achieve a competency in Fact-Finding. You cannot give competent Business Insurance advice, unless you have first completed a competent Fact-Finding process. Click here to read more about the Fact-Finding process.
********************************************************************************************************************* 13 May, 2009 Post 2009 Budget Update: Paying Insurance Premiums Out of Super Contributions The desire to obtain maximum advantage out of Concessional Contributions should be greater as a result of the reduced caps on Concessional Contributions introduced in the 2009 Budget. The reduced caps are a limit on the accumulation potential of the Super Fund. Subject to the investment return within the Fund, it will now be harder to achieve a targeted capital amount by the date of the Member's retirement. Obviously, if investment returns suffer (because of events like the Global Financial Crisis), it might be necessary to increase both the total amount and the percentage of Concessional Contributions used for investment purposes. If a Premium is paid out of Super, it will now represent a greater percentage of the Concessional Contribution that will not be available for the Fund's investment strategy. If stepped Premiums are used, the percentage will increase over time. Less and less of the Concessional Contribution will be available for investment. Ironically, this will occur as the Member is getting closer to retirement age, when Investment Contributions should be increasing. In the Personal context, this might not be a problem if the need for Personal Insurance has decreased. However, it might be a problem if the Member:
Click here to read more about the issues affecting Super Fund Ownership of Insurance Cover.
********************************************************************************************************************* 24 March, 2009 Alternative Methods of Aggregation: Trust Ownership or Self-Ownership? One of the commercial justifications of Trust Ownership is its suitability as a vehicle for aggregation of Cover onto One Policy (i.e., the One Page, One Policy Strategy). This Strategy aggregates Cover for multiple purposes onto One Policy instead of holding the Cover on multiple Policies owned by multiple Policy Owners. Many lawyers who question or oppose the use of Business Insurance Trusts either don't understand them or are simply trying to justify their own historical preference for Self-Ownership. On the other hand, there have been attempts to use Self-Ownership to mimic this functionality of Trust Ownership (sometimes called a "Hybrid Business Succession Strategy"). These attempts aggregate different Cover onto one policy held by the Life Insured, on the basis that the Life Insured (or their Executor) has a legal obligation to distribute the Insurance Proceeds to the different recipients. This page examines some of the implications of using Self-Ownership as a method of aggregation.
********************************************************************************************************************* 20 January, 2009 Misunderstanding the Valuation of the Business In many cases, Business Proprietors have an inflated view of the value of their Equity in the Business. This impacts on the expectations of their Spouses and Beneficiaries if they die and can cause disputes with the Continuing Proprietors. While the Life Insured is alive, the income from the Business effectively derives from two sources:
Continued here.
********************************************************************************************************************* 13 January, 2009 Financial Adviser's Duty to Advise with respect to the Tax Implications of an Insurance Policy Some Advisers and Industry Consultants believe that it is not the role of Financial Advisers to consider or give advice with respect to the tax implications of a Financial Product (such as an Insurance Policy) that they are recommending. This extends to the method of ownership of the Policy and the tax implications of the method of ownership. By implication, they are trying to pass responsibility for these decisions on to the Client. ASIC regards an adequate knowledge of the normal tax implications of a Financial Product (such as an Insurance Policy) as a condition of PS146 compliance. The method of ownership of a Policy and the tax implications of its ownership are relevant in every case and therefore must be viewed as normal and fundamental aspects of the advice given by a Financial Adviser. Continued here.
********************************************************************************************************************* 12 January, 2009 Equity vs Loan Capital Many Clients and Advisers misunderstand the difference between Equity Capital and Loan Capital when they design a Succession Plan. If a Proprietor has both Equity and a Loan Account, it is important that their Succession Plan facilitates both:
A proper understanding of the difference is required in order to structure an effective Succession Plan. Continued here.
********************************************************************************************************************* 22 September, 2008 "Horses for Courses" Many Insurance Companies, Advisers and Industry Consultants question whether the IGS Business Insurance Trust Agreement is suitable for all Businesses. They justify and advocate alternative strategies and structures on the basis of a "Horses for Courses" argument. One of the most important characteristics of an IGS Business Insurance Trust Agreement is that it is a Facility Agreement. It is a roof or umbrella over the legal, commercial and insurance arrangements between the Proprietors of a Business. It recognises that the Proprietors might only have some of the relevant needs at any point in time. However, it also recognises that these needs might change over time and that the insurance arrangements might need to change as the underlying needs change. A Succession Plan is a dynamic and ever-changing strategy. It is not a "set and forget strategy". Continued here.
********************************************************************************************************************* 22 September, 2008 Commercial Debt Forgiveness Issues Insurance Companies, Advisers and Industry Consultants are starting to recognise the tax issues that affect Debt Reduction Cover. They have paid a lot of attention to the tax issues that affect Buy/Sell Cover in the past. These issues have been addressed by Self-Ownership and the IGS Business Insurance Trust Agreement. However, now it is becoming more obvious to the Insurance Industry that new solutions are required for Debt Reduction Cover as well. One of the issues is the application of the Commercial Debt Forgiveness provisions to the different methods of ownership of Debt Reduction Cover. The need to solve these tax issues was a significant motivation in the development of the IGS Business Insurance Trust Agreement. If the Agreement could solve the issues, then the Adviser and Business could be insulated from the problems. The IGS Business Insurance Trust structure addresses the CGT and Commercial Debt Forgiveness issues in a commercial and tax-effective manner. It provides substantial benefits to Businesses that are not available if other methods of ownership or Buy/Sell Agreements are used (for the very reason that they do not recognise or make any attempt to address the issues). Click here to read more about how the Commercial Debt Forgiveness provisions affect the ownership of Debt Reduction Cover and how they are addressed in the IGS Business Insurance Trust Agreement.
********************************************************************************************************************* 21 July, 2008 Choice of Trustee As from 18 July, 2008, IGS has discontinued the use of an institutional Trustee Company as the recommended Trustee under Business Insurance Trust Agreements. This change will avoid the need to involve an institution in a Business Succession Plan and the costs associated with it. Click here to read more about this change.
********************************************************************************************************************* 21 April, 2008 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. Click here to read more about this Strategy.
********************************************************************************************************************* 10 April, 2008 Who Controls the Insurance Proceeds Under a "Hybrid Business Succession Strategy"? Many lawyers who question or oppose the use of Business Insurance Trusts either don't understand them or are simply trying to justify their own historical preference for Self-Ownership. On the other hand, there are also lawyers who recognise the functionality of an Insurance Trust and try to mimic it under the guise of Self-Ownership or a "Hybrid Business Succession Strategy". Using Trusts to Aggregate In other areas of practice, these lawyers probably embrace trusts as "aggregators". After all, trusts are a perfect vehicle to aggregate investors, investors' funds and investment opportunities. And how many of them advocate Testamentary Trusts? But when it comes to Insurance Trusts, they sing a different song. The impetus behind a "Hybrid Business Succession Strategy" is two-fold:
Security Concerns However, it doesn't take long to realise that the Hybrid Strategy not only mimics Trust Ownership, it will ultimately constitute a trust in its own right. Only it is less secure than Trust Ownership. The trust (and therefore the Insurance Proceeds) is controlled by the Life Insured or someone on their behalf. The practical concern is that, if you control the trust, you control the Insurance Proceeds. You only have to look at what would happen in the case of a Death or TPD to understand the practical implications of a Hybrid Strategy. Click here to read more about the practical concerns with respect to this Strategy.
********************************************************************************************************************* 17 August, 2007 "Hedge and Wedge Strategy" A "Hedge and Wedge Strategy" is a variation of a Buy/Sell Insurance Strategy. On the one hand, it is a Business Succession Planning Strategy that uses insurance to "hedge" against the risk that the Purchasers might not be prepared (or able to afford) to pay the Purchase Price of your Equity. On the other hand, it "pre-agrees" the Purchase Price so that the Owner of the Equity will receive a guaranteed minimum Purchase Price. In effect, over time, you are "wedging" the Purchase Price of the Equity at a fixed position on the growth curve that represents its value over time. Click here to read more about how this Strategy works.
********************************************************************************************************************* 17 August, 2007 Sole Proprietors and Family Businesses The primary focus of Complete Succession is the needs of Businesses that have Multiple Owners. However, many Businesses owned by one Proprietor, a Husband and Wife Team, or a Family require a Succession Plan as well. This is particularly applicable to rural businesses (or Agri-Businesses). Click here to see an overview of how some of the Complete Succession strategies can be adapted to the needs of these Businesses which make an enormous contribution to the economy.
********************************************************************************************************************* 27 June, 2007 Free 20 Minute Teleconference If a Client is uncertain whether to attend a Client Meeting or use the IGS Documentation Service, IGS offers a free teleconference (of up to 20 minutes) with the Client to explain the purpose and benefits of a Complete Succession Plan and the "One Page, One Policy Strategy".
********************************************************************************************************************* 27 June, 2007 Simple Succession or Complete Succession? IGS offers a number of alternative Business Succession Agreements on a Fixed Fee basis. There are two main alternative types of Agreement:
These alternatives give the Business a choice of Agreement, depending on whether it requires a Simple Succession Plan or a Complete Succession Plan. Click here to read more about the difference between the two types of Succession Plan.
************************************************************************************************* 11 May, 2007 Self-Ownership without a Contemporaneous Buy/Sell Agreement: The Effect on "Original Beneficial Ownership" The concept of "original beneficial ownership" is fundamental to the CGT exemption for Death Benefits. Most Advisers assume that the exemption will be available for Buy/Sell Cover if the Life Insured is the Policy Owner, whether or not the parties sign a Buy/Sell Agreement. As a result, some insurance companies estimate that 90% of Buy/Sell Cover is not backed up by a Buy/Sell Agreement. The High Court has analysed the concept of "beneficial ownership" in a number of land tax cases in recent years. While these cases are not immediately relevant to the taxation of Insurance Policies, they do contain views that could raise doubts about whether the Life Insured is the "beneficial owner" of the Policy where a Buy/Sell Agreement has not been signed. Please click here to read about the potential adverse CGT implications of not having a contemporaneous Buy/Sell Agreement.
************************************************************************************************** 26 April, 2007 "Geared Premium Funding" It may be possible to obtain most of the benefits of Super Fund Ownership of Personal Cover by owning the Cover outside the Superannuation environment, borrowing the Premiums and repaying them out of the Member's retirement benefit ("Geared Premium Funding). This avoids the Premium being paid out of "after-tax dollars". However, equally importantly, it ensures that there is no tax payable with respect to the Insurance Proceeds (whether or not they are paid to a Dependant). More information can be found here.
********************************************************************************************************************* 26 April, 2007 Super Fund Ownership The discussion of Super Fund Ownership will be constantly updated as IGS develops strategies that take advantage of Super Fund Ownership and/or minimise the disadvantages of Super Fund Ownership that are not widely understood by Advisers and Clients. More information can be found here.
********************************************************************************************************************* 12 April, 2007 A "Business Family Will" Many people describe a Buy/Sell Agreement as a "Business Will". In the case of Self-Ownership Buy/Sell Agreements, the person in control of the Insurance Proceeds (and therefore the implementation of the "Business Will") will be the Executor of the Life Insured's Estate (or the Life Insured personally in the case of a Non-Death Benefit). The Executor is a Trustee appointed by the Life Insured. This means that an appointee of the Life Insured (or the Life Insured personally in the case of a Non-Death Benefit) will have physical control of the Insurance Proceeds. In the case of a Business Insurance Trust Agreement, the person in control of the Insurance Proceeds will be the Trustee appointed by all of the parties to the business relationship. This means that physical control of the Insurance Proceeds (and therefore the implementation of the "Business Will") is in the hands of a custodian that has a contractual and fiduciary obligation to comply with the obligations contained in the Trust Agreement. The Trust Agreement is a "Business Family Will", not just a "Business Will". More information about the "Business Family Will" can be found here. |
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.
Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings. Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth. Please contact us to arrange an appointment or teleconference.
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