BUY/SELL AGREEMENT SMSF INSURANCE ATO RULING
We refer to our previous articles parts 1, 2 , 3 and 4 on Buy/Sell agreements, which are also called Business Wills and specifically the options available to obtain life insurance pursuant to a Buy/Sell agreement. The proceeds of the insurance are used as a deemed payment for the purchase of the share of a business to an outgoing business partner or his/her estate when they die.
One of the options available for this type of cover was for the life insurance policies to be owned by the partners/shareholders self managed super funds (SMSF’s). It would also assist the remaining business partner to carry on without having to find a large amount of money to pay out the estate and deal with the interruption of losing a business partner. This option was quite a favourite amongst accountants and estate planning lawyers because it was a very tax effective and structured way to make provision for a deceased partner’s share of a business to be paid out from insurance and assist the remaining partner in the business to carry on without having to find a large amount of money to pay out the estate and deal with the interruption of losing a business partner.
The ATO was requested to provide clarity on the use of Buy/Sell agreements and the sole purpose test of the Superannuation Industry (Supervision) Act 1993 (SISA). Subsequently, on 1 May 2015 the ATO issued an Interpretive Decision (ID 2015/10) where the following question was considered:
“Does a self managed super fund contravene section 62 and paragraph 65 (1) (b) of the Superannuation Industry (Supervision) Act 1993 (SISA) by purchasing a life insurance policy over the life of a member of the SMSF where the purchase is a condition and consequence of a Buy Sell agreement the member has entered into with the co-owner of their business?”
The ATO’s answer to this was as follows: “Yes. The Trustee will contravene section 62 and paragraph 65(1)(b) of the SISA by purchasing a life insurance policy over the life of a member of the SMSF where the purchase of the policy is a condition and consequence of Buy-Sell agreement the member has entered into with a co-owner of their business.”
The following link will take you directly to the decision: ATOID 2015/10
As a result of this decision it will require many insurance arrangements and buy sell agreements through SMSF’s to be terminated in order to avoid any ongoing contravention of superannuation law. The ownership of the policies will need to be considered carefully and appropriate changes made to the insurance and the agreements. You should urgently consult your accountants, insurance agents and lawyers in order to review your buy sell agreements, insurance arrangements and any other partnership agreements you have.
Accountants, Financial advisors and Insurance Agents should review all clients and businesses that this decision may impact upon.
The ramifications of this decision could be quite severe in that:-
1. There is a question mark over whether the proceeds of the insurance policy will be paid to the designated beneficiary in accordance with the agreement; and
2. It is possible the estate of the deceased partner could argue the payment is not properly in accordance with the buy sell agreement and seek a further payment.
We urge all businesses and advisors to urgently consider your current structure and please do not hesitate to contact us should you require any assistance in this area or any business issues.
You can contact our Department manager Holly Gilholme on 07 5506 8202 or email hgilhol[email protected] to arrange a meeting to discuss your buy sell arrangements.
You can download our Business Succession Guide here or click on the relevant links below on our previous articles on Buy/Sell agreements.