When cross owned insurance policies are Glorious

In business succession arrangements, cross owned insurance policies are rarely, if ever, utilised. Avoiding the use of cross owned policies is driven by a range of commercial reasons and the fact that invariably adverse tax consequences are unnecessarily triggered as the desired commercial outcomes can normally be achieved utilising self owned policies that almost always deliver favourable tax outcomes.

One scenario where cross owned insurance arrangements historically provided significant potential benefit however related to where a self-managed superannuation fund (SMSF) borrows funds via an instalment trust arrangement to acquire an asset which forms a substantial part of the total value of the fund.

An example of how this approach (which was given in principle support by the Tax Office historically) worked is as follows:

1. The SMSF establishes an instalment trust and borrows funds from a third party to acquire an asset.
2. The (say) only two members of an SMSF are concerned that on the death of one of them, the ability to pay out the member’s entitlement may be impossible to achieve without selling the underlying asset (i.e. neither member’s account balance is large enough to represent the entire value of the acquired asset).
3. If the members took out self-owned insurance policies, this would obviously not assist, given that the exiting member would effectively be entitled to an even greater share of the total assets of the fund.
4. In contrast, if permissible under the trust deed for the SMSF, if cross owned policies were implemented, then the remaining member’s balance would be the one that increases and the cash from the insurance policy could be used to pay the death benefit, while the continuing member would effectively have their member balance represented entirely by the asset originally acquired via the instalment trust.

Despite the above, since 1 July 2014, the view of the Tax Office has been that the superannuation rules do not allow SMSFs to provide insurance for a member, unless the insured event is consistent with one of the following conditions of release:

1. death;
2. terminal medical condition;
3. permanent incapacity; and
4. temporary incapacity.

The Explanatory Memorandum associated with the amended rules made it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy.

This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted. 

** for the trainspotters, the title today is riffed from the Breeders song ‘Glorious’. 

View hear (sic):

No debate** - Can shares be owned as tenants in common?

Recent posts have considered various aspects of the rules in relation to assets owned as joint tenants.

Another aspect of the rules in this area that continues to cause debate relates to the manner in which shares in a company may be owned.

Often a constitution of a company will mandate that shares registered as owned by 2 or more people may only be owned as joint tenants. Often the constitution will also state that the name first listed on the share register will have all voting rights in relation to the shares.

Where a constitution of a company does not set out that joint share owners must own as joint tenants the issues are more complex if a will does not distribute a discrete number of shares to separate people. That is, instead of (say) giving 100 shares to A and B, giving 50 shares to A and 50 shares to B.

Despite there being a number of conflicting cases, it appears as though the long standing decision in McKerrell [1912] 2 Ch 648 continues to apply. In that case it was held that despite a will stating that the recipients of the gift of shares were to take as tenants in common – ‘That is not possible. At least, it is not possible that a chose in action, such as shares, can be held as tenants in common at common law’.

In other words, the only assets that can be owned as tenants in common at law are real property and chattels. This means, as one example, bank accounts in joint names are deemed to be owned as joint tenants. This is because there is essentially a chose in action, being the contractual right of the account holders against the bank, for recovery of a ‘debt’ (being the balance from time to time in the bank account).

Another example in this regard is the well known case of Equititrust Ltd & Anor v Franks [2009] NSWCA 128, where it was held in relation to a debt (and related mortgage), that the common law presumption of a joint tenancy applied despite the deeming provisions under legalisation that would have otherwise seen the parties hold as tenants in common.

As usual, if you would like copies of any of the abovementioned cases please contact me.

** for the trainspotters, the title today is riffed from the Breeders song ‘Lord of the thighs’. View hear (sic):