Succession Planning Changes Regarding Involuntary Exits

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Succession Planning Changes Regarding Involuntary Exits


As highlighted in our July article, a common challenge for any business, big or small, is planning for changes in management and/or ownership.  While planned exits have complications, unplanned exits bring an additional set of challenges including funding of business partner interests.



Historically, when considering options for succession planning the structure needed careful consideration with the resultant position often being a self insurance approach to avoid a number of technical issues.  Whilst this approach had in itself a number of red flags, it was still acknowledged as being the best practical solution in a number of circumstances.  It was also widely acknowledged that the legislation in respect of a number of alternate potential solutions had created uncertainty.



Recent changes have been enacted seeking to clarify how the CGT exemption for compensation or damages is taxed and provide greater certainty.  Importantly, the change in law clarified the position of a taxpayer (other than a trustee of a complying superannuation entity) in respect of a policy of insurance on the life of an individual or an annuity instrument, if the taxpayer is the original owner of the policy or instrument.


The new law provides that a capital gain or loss made from a life insurance policy is disregarded by the original owner of the policy or instrument.  This represents a change in that the reference to "original beneficial owner" has been removed.  This means that trustees can claim the CGT exemption where they hold the legal interest but not the beneficial ownership interest in the relevant insurance policy.


In addition clarification has been provided to confirm that where a trustee then makes a payment to a beneficiary in respect of the policy or instrument, any capital gain or capital loss made by the beneficiary is also disregarded.


As a result of the change in law, the associated increase in clarity means an increased range of options can now be considered when looking to plan for succession.


If you are unsure of how these changes may affect you or succession planning in general, please contact your ESV Engagement Partner on 9283 1666.


Article by David Prichard