Review for Accountants & Financial Planners
February, 2016

Business Succession Planning & Tax

Two minute scenarios...

As an adviser do you need to worry about tax when helping clients put a business succession plan together? Yes! Note: This edition focuses on the cover required to replace equity value (not business debt - that will be covered another time).

Scenario One... Julia, Daniel and David

Scenario: These clients have agreed to consider a plan designed to protect their individual investments in the business in the event one of them is forced to leave the partnership due, to death or TPD.

What's the issue? They have agreed on the business value, so the next step is for the adviser to consider what tax may be payable. There are two possible tax events to consider. The first one is whether tax will be payable on the insurance proceeds. The cover has a capital purpose so income tax is not applicable. CGT might be.

Solutions: If the policies are set up correctly, CGT will not be payable on the insurance proceeds. CGT is never payable on life proceeds but may be payable on TPD or trauma. In this case, if the adviser sets up self-owned policies, there will not be any CGT payable if a claim is paid.

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Scenario Two... and the second possible tax event?

Scenario: Julia, Daniel and David are pleased there won't be any CGT payable on the proceeds of their self-owned policies. They want to know where else tax may be applicable.

What's the issue? The underlying rationale for this plan is that with a buy sell agreement in place, when an insurance claim is paid out, that partner's shares will transfer to the remaining partners. If the value of that partner's business share has increased over time, they (or their estate) may be liable for CGT on that increase.

Solutions: Talk to the client's accountant to see if CGT may be payable. If it is, add it on to the proposed insurance cover. At most, it will be 30% of the equity value.

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Scenario Three... can we claim a tax deduction?

Scenario: The three partners have agreed to proceed. The insurance policies are established and they have paid their premiums (see Sept 2015 issue for more on this topic).

What's the issue? They want to claim a tax deduction.

Solutions: These policies have a capital purpose i.e. to replace equity value. The premiums are not deductible regardless of who or what owns them.

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More information for clients

Please feel free to forward this insight on Buy Sell Agreements to your clients. Or if they would like to discuss how we can help them please call 03 8621 9000 or email with their details and we will contact them, obligation free.

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