Wednesday, September 8, 2010

ATO ruling on insurance trusts

Last week the ATO released a Product Ruling (PR2010/18) in relation to the capital gains tax consequences for the beneficiary of an insurance trust deed.

In many respects the ruling reflects what most specialists in this area (including View Legal) have been saying for many years. That is that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding that there may be other commercial issues to consider regarding the structure.

Unfortunately the positive aspects of the ruling are largely undermined by the fact that the outcomes are based on the assumption that the insurance trust deed will create absolute entitlement for each beneficiary in the relevant insurance policy. As many advisers who work in this area will know, the expressed views of the ATO concerning absolute entitlement are somewhat contentious and the ATO continues to refer to a draft ruling that has never been finalised - despite being issued in 2004.

One practical issue is that the ruling released last week confirms that in order to ensure absolute entitlement the relevant beneficiary must be able to call for the asset at any time. This largely undermines one of the main reasons advisers had historically recommended insurance trusts - that is that the trustee will have the ability to ultimately control the payment of any insurance proceeds received.

A further practical issue, given the way in which many providers have traditionally structured trust arrangements is that the product ruling only relates to insurance trust deeds where the company acting as trustee is an entity owned and controlled by the principals involved in the business entity and the relevant insurer is not be a party to the arrangements.

For those interested in reading a full copy of the ruling please email me.

Until next week.