Trauma payouts and buy sell agreements – what’s the best thing**?

One question that arises regularly in insurance funded buy sell arrangements is where there is trauma or critical illness cover and an insurable event occurs. For example, a principal meets a definition of under the policy but they are uncertain as to whether they want to remain in the business.

Broadly we see two main alternatives in this area, namely:

1. The options to force the buy out of the principal are triggered if they become eligible for an insurance payout under the trauma policy, regardless of whether they are able to return to the business; or
2. The options are only triggered if the principal becomes eligible for an insurance payout and they are unable to return to work within an agreed period of time (say, 6 months).

Best practice is normally to adopt the second approach.

If the principal returns to active involvement in the business but has received a payout of the insurance policy, our preferred position is that the principal who has suffered the trauma event can simply retain the insurance proceeds and there is no obligation to provide any of the payout to the other principals. The insurance arrangements and buy sell agreement would be updated at that point in time to reflect the changes in circumstances.

If another insurable event is then suffered by the same principal at a later time and no further insurance proceeds are received, the amendments made to the agreement after the first event would typically ensure the previously received insurance payout is offset against the purchase price.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the PJ Harvey song ‘Beautiful feeling’.

View here:

Buy-sell deeds: pricing to pay** the premium?

One issue that comes up regularly in the context of insurance funded buy-sell arrangements is who should be responsible for the payment of insurance policy premiums.

Depending on the policy ownership approach adopted and the underlying business structures, there are a range of alternatives, including:

1. Each principal pays a premium on their own policy.
2. All principals contribute a proportion of the total premiums for all policies, equal to their respective equity interests in the business.
3. Each principal pays an exactly equal proportion of the total premiums based on the number of principals (regardless of their underlying equity interest).
4. If there are only two principals, sometimes the approach will be that each principal pays premium for the other.

As previous posts have touched on, there are a myriad of tax consequences that can arise from each of the various alternatives.

Assuming that these tax consequences can be managed, generally the pragmatic approach is to apportion the total premiums payable for all policies in accordance with the equity interest of each principal.

While this will not necessarily be seen as fair by each principal in all scenarios, it does keep things relatively simple and also helps the principal's focus on what should be the overriding objective of any insurance funded buy-sell arrangement. That being, to facilitate a smooth transition of a business in a factual scenario where the prospects of a smooth transition otherwise occurring are unlikely.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Janes Addiction song ‘Price I Pay’.

View hear (sic):

 

We do not give legal advice’- Part I

Following on from a previous post All Care, No Liability, as promised, this week's post provides an example of the type of exclusion wording that most online providers of legal documents provide.

Any adviser looking to facilitate legal solutions for their clients should understand the consequences of this style of exclusion, particularly in relation to their own professional indemnity insurance arrangements.

The example exclusion wording is as follows –

By using our service agree that:

1. we cannot, and do not, give you legal advice;
2. the company that owns and operates this service is not a law firm;
3. our service provides information to help you answer the questions and to order a product and that that information is information only, not advice; 
4. we cannot and do not warrant that a product you decide to order is appropriate or suits your needs; 
5. we cannot and do not warrant that your use of our service is appropriate or suits your needs; 
6. the legal, commercial and taxation effects of a product vary and a product's suitability will, therefore, vary according to particular circumstances; 
7. only you know the purpose for which you intend to apply a product you order and that we are not responsible for the choice you make regarding the same; 
8. you must consult a lawyer for advice concerning the suitability of a product you order using our service; 
9. the documents you buy from us and the material on our website is only general; they are not prepared by us and we do not endorse them, rather we disclaim any responsibility for them; 

As there are so many exclusions generally set out on this type of service, the summary will be continued again next week.

We are excited to be presenting half and full day Estate Planning Roadshow in Brisbane, Sydney, Melbourne, Adelaide and Perth that will explore a range of planning opportunities in this space.

For your limited opportunity to access special early bird pricing for our Roadshow, download the brochure here.

Watch the promo video below.

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Trust-owned business succession insurance arrangements: Some clarity at long last

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.

Largely due to the level of intergenerational wealth transfer, there has in recent years been an increasing emphasis on all forms of succession planning and, in particular, business succession planning.

In broad terms, a buy-sell agreement is a contractual arrangement between the ultimate owners (or ‘principals’) of a business. The agreement is structured so that if certain events occur, such as the death or incapacity of a principal, the continuing principals are given the option to purchase the interest of the departing principal.

Most commonly, insurance is obtained to help fund buy-sell arrangements.

Since the withdrawal of the ATO's draft Buy Sell Discussion Paper in 2010 there has been some uncertainty about many aspects of insurance funded buy-sell arrangements, particularly those that utilise insurance trusts.

Recent changes introduced as part of the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 (now awaiting Royal Assent after having been passed by Parliament without amendment) appear to have clarified the position (the 2015 Changes).

Trust ownership

The trust ownership approach generally involves the establishment of a special purpose entity, often with an independent trustee appointed, to acquire the insurance policies and then distribute proceeds, on the exit of a principal, in accordance with the terms of the trust instrument.

If the trading entity is itself a trust or owned via a trust (for example, a discretionary trust owning shares in a trading company), then it may not be necessary to establish a separate structure.

The core benefit of an insurance trust is its ability to centralise the ownership of all insurance policies and facilitate the efficient transition of an ownership interest following a triggering event.

Historically, from a tax perspective, the level of uncertainty regarding the tax treatment of the insurance proceeds (compared with that of other ownership models such as self-owned insurance) often undermined the commercial attractiveness of the trust ownership approach.

Certainly an insurance policy taken out by a trustee (who was also the beneficiary of the policy) over one or more principals, was likely to see the proceeds paid directly to the trustee and be exempt from CGT pursuant to s 118-300 of the ITAA 1997.

However, due to a lack of guidance from the ATO, many advisers believed there was a risk CGT was triggered where a new principal joined the business and there was any change to the trustee or insurance policy or on the subsequent distribution of the insurance proceeds to the beneficiary. 

The concerns were largely driven by the ongoing uncertainty around the concept of ’absolute entitlement’, discussed later in this article.

2010 ATO ruling

The ATO released Product Ruling PR 2010/18 in relation to the CGT consequences for the beneficiary of what is generally seen as a ’standard’ insurance trust deed.

In many respects, the ruling reflects what most specialists in this area have advised for many years, namely, that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding there might be other commercial issues to consider regarding the structure.

Unfortunately, the positive aspects of the ruling were largely undermined by the fact that the outcomes are based on the stated assumption that the insurance trust deed will in fact create ’absolute entitlement’ for each beneficiary in the relevant insurance policy.

As has been widely documented, 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 (ie Draft TR 2004/D25).

In this regard, a significant concern was that the Product Ruling confirmed that, in order to ensure absolute entitlement, the relevant beneficiary must be able to call for the asset at any time.  This largely undermined one of the main commercial reasons why advisers historically recommended insurance trusts, being that the trustee will be able to control the payment of any insurance proceeds received.

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

ATO minutes

Minutes released from a National Tax Liaison Group meeting in December 2010 (item 9) provided further insight into the apparent ATO views in relation to insurance trust deeds.

In summary the minutes stated:

• the status of the taxation ruling on absolute entitlement (Draft TR 2004/D25) is unclear;


• the ATO considers the finalisation of Draft TR 2004/D25 as intricately linked to how it will deal with bare trusts, which again remains an unresolved issue;


• the ATO believes that the Product Ruling released in relation to one provider's insurance trust arrangement is based entirely on the assumption that absolute entitlement was created.  This assumption might be an unwise one to make, given the ATO's apparent attitude in this area; and


• while the ATO flags that it will further consider providing appropriate guidance, it specifically confirmed that the ATO Buy Sell Discussion Paper is not current.

Ultimately, given the complexities in this area and the uncertainty created by the ATO Buy Sell Discussion Paper, Draft TR 2004/D25, the Product Ruling and the above minutes, many advisers defaulted to recommending the obtaining of a private ruling on any proposed trust arrangement documenting an insurance funded buy-sell agreement from the ATO before implementing the approach. 

Needing to seek a private ruling on what was otherwise a relatively benign arrangement was for many business owners sufficient reason to either use a different ownership approach or, more commonly, simply decide against implementing a business succession plan.

The 2015 changes

Amongst other amendments, the 2015 changes have adjusted the way insurance payments are taxed in certain circumstances.

In particular, the 2015 changes amend the ITAA 1997 to:

1.  remove the requirement that, in order to access the exemption under s 118-300, the insurance proceeds are received by the original ’beneficial’ owner of the life insurance policy.  The amendment removes the reference to ’beneficial’ to clarify that a trustee is eligible for the exemption, where they hold the beneficial interest in the policy for a beneficiary;


2. extend the exemption for compensation for injury/illness (ie total and permanent disablement and trauma insurance proceeds) in s 118-37 to apply where the proceeds are received by the trustee of a trust or superannuation fund (subject to certain policy ownership prohibitions for superannuation funds), if the injured/ill person is a beneficiary of the trust; and


3. insert a CGT exemption where a trustee makes a payment to a beneficiary (or their legal personal representative) in respect of life, TPD or trauma insurance proceeds.  This change also ensures that where the relevant trust is a unit trust, CGT event E4 does not apply.

The 2015 changes make it likely that trust and superannuation fund ownership of life, total and permanent disablement or trauma insurance policies will be more attractive, given the new clarity regarding the tax treatment of the insurance proceeds.

Importantly, the changes also operate to reflect the intended administrative position of the ATO in this area, and therefore apply from 1 July 2005 and taxpayers adversely impacted who would otherwise be out of time are granted an extension to amend their returns.

Until next week.


Image credit: GotCredit cc

Accessing disablement proceeds via superannuation

This week’s post addresses an issue recently raised with us by an adviser, focusing on the ability to access insurance proceeds from a superannuation fund on an event of permanent incapacity.


The particular issue raised involved the fact that best practice often dictates that clients should obtain insurance protection on the basis of an inability to work in their ‘own’, as opposed to ‘any’ occupation.

The satisfaction of the ‘own’ occupation test is obviously easier than the condition of release set out under the superannuation legislation, being that a member must be incapable of working in ‘any’ occupation.

Where insurance is owned via a superannuation fund there is therefore a risk that while the fund will receive an insurance payout, it will be unable to release it to the member until some other condition of release is satisfied (for example, reaching the retirement age).


Historically therefore, the conservative view was undoubtedly that own occupation insurance should always be owned outside super.  Importantly, since 1 July 2014, own occupation insurance is no longer available via superannuation, subject to a grandfathering for arrangements already in place before that date.

For those pre-existing arrangements, there appears to be a pragmatic approach adopted, particularly by those with policies via a self-managed superannuation fund.  This approach involves assuming that a trustee (who will also be a member of the relevant fund) will adopt a liberal interpretation of the ‘any’ occupation definition under the superannuation legislation and therefore always allow the release of insurance proceeds.

 Until next week.

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Age of majority

Last week an interesting issue arose with the child of a client who was about to travel overseas on an exchange. 

The child was a part time employee and member of a superannuation fund. Under the superannuation fund, they were automatically entitled to a life insurance policy which gave a payout of $200,000 on death. The fund required that any payout be made to the legal representative of a deceased member.

The parents of the child felt that it would be prudent to ensure that on receipt of these insurance proceeds the estate would be able to administer them easily – the obvious answer in this regard was the creation of a will.

Unfortunately, in these circumstances, no will is able to be made because in order to make a will, the individual involved must be 18 years of age.

The only substantive exception to this rule is if the will maker, being under the age of 18 years, has lawfully married.

Until next week.

Buy sell deeds, family trusts and the deemed market value substitution rule

Click here for an overview of buy-sell arrangements

With thanks to co View Legal director Tara Lucke, today’s post considers an issue that has been raised with us by an adviser recently.

It is generally accepted that where a business succession plan is structured with self owned insurance policies and a buy sell deed using put and call options, the deemed market value substitution rules apply for taxation purposes.  This outcome occurs notwithstanding that the transfer has been funded (either wholly or partly) by insurance.

Given the recent changes to the rules relating to the taxation of trusts, some uncertainty has arisen in relation to the ability to effectively manage the taxation consequences of a deemed capital gain arising from a transfer under a buy sell deed.

Under the ‘interim’ taxation rules relating to trusts, there can be particular problems relating to distributions of capital gains arising under the deemed market value substitution rule.  In particular, it is generally not possible to create specific entitlement to a deemed capital gain, notwithstanding that there may be a streaming power in the trust deed. 

However, where $1 of consideration has been received (which is how we generally recommend buy sell deeds be crafted), provided a beneficiary is made specifically entitled to the $1 of consideration, the deemed gain should be distributed to that same trust beneficiary.

It will therefore be important in each case to consider the specific terms of the trust deed and the other income of the trust, and to craft the distribution minute correctly to ensure the gain can ultimately be distributed to individuals who can access the general 50% capital gains tax discount. 

Until next week.

Gap between indemnity and insurance policy

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Given the specific wording of insurance policies and the fact that the deeds of access and indemnity often use general wording, it is clear that there are some forms of liability against which a company will be required to indemnify its directors under the deed of access, insurance and indemnity where the company will not be covered by insurance.

© Dominik Michálek | Dreamstime.com

One example is when a director seeks legal advice in anticipation of a claim, which may or may not be made against the director in the future.  The D&O policy will only respond to cover legal costs once the claim is made.  A gap may also occur because the insurance policy provides cover for a maximum sum whereas the indemnity offered by the company is unlimited.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

D&O exclusions

As mentioned in the last post, a D&O policy is normally something that a company should obtain and maintain for each of its directors. 

It is important to note however that D&O policies usually exclude cover for acts or omissions of directors, before the policy period commenced, that the director reasonably knew were likely to give rise to a claim and which were not notified to the insurer. 

Fraud or dishonesty, or any wilful or deliberate breach of the law by the insured, will also be excluded.

© Flynt | Dreamstime.com

Numerous other standard exclusions are normally set out under a D&O policy.

Although these exclusions are typically 'standard', each company's D&O policy is a bespoke contract and should be checked carefully to understand the coverage limitations.

Until next week.

Deeds of access, insurance and indemnity

Following on from last weeks' post, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Under deeds of access, insurance and indemnity, the company usually agrees to:

1.    indemnify the director to the extent permitted by law;

2.    maintain, and pay the premium on a D&O policy covering the director;

3.    maintain a copy of all board papers; and

4.    give the director access to the board papers and other documents of the company.

Access to board papers and company documents is essential for a director to discharge their obligations.

Most companies and directors put in place such agreements on a uniform basis for each director. 

Where deeds are required for other executives (non directors) they may require some modification.  For example, these officers will typically not be entitled to access the board papers.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

Company owned insurance policies for business succession

We recently had an adviser seeking more detailed comments about company owned business succession insurance policies.

In particular, feedback was requested about the specific reservations with insurance policies for business succession being owned by a company. In summary, and with thanks to co View Legal director Tara Lucke, we provided the following reasons:

1   while capital gains tax (CGT) should not be payable on receipt of life insurance proceeds, it will be payable on any total and permanent disablement or trauma proceeds that are paid to a company. In contrast, no CGT should be payable on receipt of the insurance proceeds where the policies are self owned;

2   there can also be significant practical difficulties in extracting insurance proceeds from a company to the appropriate recipient. This is particularly important when the main purpose of the policy is for an equity payment, as opposed to debt cover. Again, where the policy is self owned, the exiting principal or their estate will receive the proceeds directly and none of these practical issues will arise, as long as an appropriate agreement is implemented;

3   where insurance proceeds need to be accessed by the exiting principal (or their estate) this is generally only achievable via a share buy-back or dividend. A dividend will likely be tax inefficient and generally a buy back will also have an inefficient tax outcome for the following reasons:

(a) the consideration will be split between an assessable capital gain and a dividend, which restricts access to the full benefit of the CGT 50% discount and small business CGT concessions;

(b) while a company may be able to pay the proceeds to the exiting shareholder/s as a partially or fully franked dividend, this will use franking credits that would otherwise have been available for distributing profits; and

(c) the surviving owner/s will own 100% of a company after a share buy-back, however their cost base in the shares will not have increased;

4   insurance proceeds will be under the control of the remaining director/s of a company, in contrast with a self owned or superannuation owned policy where the estate directly receives the benefit of the proceeds; and

5   finally, the legal documentation required for company ownership is comparatively complex to all other policy ownership approaches.

Until next week.

The “do nothing” approach to deed updates

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 2nd in a series of 4 posts via the following video link under the heading ‘The “do nothing” approach to deed updates’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

There are obvious advantages to ‘doing nothing’.

From a cost perspective for a client, you would intuitively think that’s probably the best outcome for them. Our only asterisk that we would put next to that is it does put enormous amount of pressure back on your practice and your team if someone needs to be sitting down and reading the deed.

Even if you've had the same provider for many years, you can almost guarantee that they will have changed their document, and they won't necessarily be able to tell you at what point at time they changed it.

Even if they could tell you, it probably doesn't absolve you under your insurance policy to say that everyone before a point in time will have this style of deed. Someone has to sit down and look at that. Which then means, according to the Tax Office, you can't just be churning out standard resolutions. You've actually got to have a tailored resolution that fits the particular deed and the particular income profile for the particular year.

So yes, the do nothing is attractive on a number of levels, but you need to be aware that it does add compliance costs.

You will see there's a common theme to all of these 3 choices.

Ultimately, our positioning is ‘don’t shoot the messenger’. This is something that has been imposed on us from Canberra. It means the cost of running a trust is more. So first one is to do nothing.

The next post will look at the second main approach we are seeing in this area.

Until next week.

Penalising the under insured

With thanks to co View Legal director Patrick Ellwood, this week’s post looks at a situation we had recently under an insurance funded buy sell arrangement where the parties were wanting to craft the agreement in order to penalise a business owner if they were under insured.

In particular there was a desire to ensure that the agreement discounted the purchase price that was otherwise payable under the agreement if the insurance payout was less than the market value of the interest in the business at the relevant date.

For a number of reasons we recommended against this approach, including:

1.   The overall aim of any business succession agreement is to achieve as smooth a transition of the business as possible.  If a party to the transaction believes that they are not getting fair value then the prospects of a smooth transmission are significantly decreased.

2.   The exiting owner (or their estate) will still be required to pay tax on the transfer of the interest at full market value (even though the price under the agreement would be less than market value) due to the way in which the market value substitution rules under the Tax Act operate.

3.   Practically, if the exiting party had sold their interest the day before the triggering event, they would have received market value.  It is arguably inequitable for an owner to be disadvantaged because of a sudden involuntary exit event, as opposed to a planned voluntary exit.

4.   Generally most agreements (ours included) cater for any shortfall in insurance funding by ensuring that the remaining owners are still required to pay the difference but have an extended period of time (for example, three years) to repay the difference.

Until next week.

Insurance premiums & FBT

As many regular readers would be aware, one particular innovation in recent times in relation to insurance funded business succession arrangements is the so-called 'debt reduction' strategy.

One aspect of the arrangement that is often raised concerns the fringe benefits tax (FBT) implications of the premium payments.

Broadly, there are a number of reasons as to why FBT will normally not apply to the payment of insurance policy premiums.

Generally the accountant for the business will always be best placed to give the guidance, however some of the reasons FBT will not apply can include –

1.    the arrangements not having anything to do with employment;

2.    in some instances, the otherwise deductible rule; or

3.    while for administrative ease the premiums might be paid by the business, the actual tax position is that the amount is included as part of other payments made (for example, a dividend).

It is important to remember that aside from FBT, there are a number of other tax issues that may also be relevant (for example division 7A or capital gains tax) so it is also best to ensure the exact circumstances are considered by the accountant for the particular client.

Until next week.

Insurance funding via superannuation

Earlier posts have mentioned the ‘debt reduction’ and ‘hybrid’ buy sell arrangements and I can forward information in this regard for those interested.

One particular issue raised with me recently in this area was the ability to use superannuation owned policies for insurance arrangements supporting a debt reduction (or asset protection) solution.

Generally the position is that the asset protection (debt reduction) component of any insurance policy should be self owned, rather than superannuation owned.

This is because a superannuation fund trustee is unlikely to be able to make the required payment directly to the other principals, as the fund can only pay a benefit to a member (in the case of disablement), or to the dependants or estate (in the case of death).

Furthermore, a superannuation fund could not be a party to the agreement as this would raise issues about compliance with the sole purpose test, and also might be construed as an assignment of a benefit, which super fund trustees are prohibited from recognising.

Given these technical limitations, there could be no certainty that insurance proceeds held in superannuation would find their way to the correct parties to enable them to pay down the external debt.

This said, it is often possible to have two policies for each principal under a hybrid buy sell deed, one being a self owned policy for asset protection (debt reduction) purposes and the other policy being owned through superannuation for equity transfer (that is, traditional ownership or buy sell) purposes.

Until next week.

ATO Discussion Paper on buy-sell agreements

Following last week’s post, we had a number of people contact us in relation to the, withdrawn, ATO Discussion Paper on business succession arrangements (i.e. buy-sell agreements).

As mentioned in last week’s post, the ATO has unequivocally stated its belief that the Discussion Paper is not current and that advisers in this area should be deterred from relying on it.

This said, the Discussion Paper remains (even 11 years after its initial circulation) the only comprehensive attempt by the ATO to articulate its view of the various business succession models.

For those interested in the issues addressed by the Discussion Paper, please email me. 

Please note the copy of the paper I have access to is shown in 'marked up' format as this was the final version released by the ATO before it was withdrawn from circulation.

Until next week.

Insurance funded buy-sell arrangements - ATO commentary

A number of earlier posts have considered various taxation aspects of insurance funded buy-sell arrangements.

Some minutes recently released from the National Tax Liaison Group meeting towards the end of last year provide an interesting insight to the latest ATO views in this area.

For those who have not seen a full copy of the minutes and would like a copy please email me.

As you will see, in summary:

1. The status of taxation ruling on absolute entitlement (TR2004/D25) remains unclear.

2. The ATO considers its finalisation intricately linked to how it will deal with bare trusts, which again remains an unresolved issue.

3. The ATO confirms that the product ruling released last year in relation to one provider’s insurance trust arrangement is based entirely on the assumption that absolute entitlement was created. As my post from last year indicated, this assumption may be an unwise one to make given the ATO’s apparent attitude in this area.

4. While the ATO is flagging that they will further consider providing appropriate guidance, they have specifically confirmed that the Discussion Paper from 2000 on business succession arrangements cannot be considered current.
Until next week.

Company owned business succession insurance

Last week, we revisited with an adviser a strategy that had been put in some years prior by a trading company.

The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.

The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.

While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.

Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:

1. Have the funds transferred to the exiting shareholder or their estate.

2. Ensure that the exiting shareholder transferred their shares.

As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.

Until next week.

Trust deed updates - Start at the start

Due to the recent decision in Bamford, we have seen a significant increase in the number of advisers recommending to their clients that a complete review of, particularly family trusts, be done for each client.

As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.

Previous posts have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.

Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.

There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.

In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.

Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.

Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.

Until next week.

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.