BALDWINS • FoodLegal

Australian Lawyers and Consultants

Partnership and Australian Capital Gains Issues

April 1997 (Last reviewed February 1998)

A major financial exposure for anyone with a substantial capital investment in a business, is the risk that if one of the business principals dies the security of the capital investment of the other principals and/or the security of capital of the family of the deceased principal is at risk.

Arrangements should be planned so that each proprietor or his estate can get the full value of his or her equity in the business at the time of departure or to facilitate the continuing proprietors financing a buy-out of the interest of the outgoing principal. It is counter-productive to engage in a dispute between (say) the estate of the deceased principal and the surviving principals, and capital gains tax liabilities in relation to a buy-out need to be considered also.

An Equity Insurance Trust might be a more tax effective way in which succession planning can be undertaken. Under this type of arrangement, a trustee holds life insurance policies over the lives of the principals and has the responsibility to disburse proceeds of a policy, on behalf of the continuing proprietors, to pay out the estate of a deceased principal, or his or her associated equity holder in the shared business entity. One advantage of an Equity Insurance Trust is that as any new principal joins the business, he or she or their associated entity can automatically qualify for participation in the arrangement at any time without necessarily triggering a potential capital gains tax problem under Section 160ZZI (by reason of it being said that an interest in an existing life insurance interest has been acquired).

Arrangements such as this can allow all parties to plan their respective personal financial position with greater certainty on the basis that personal assets will remain intact. Financial planning becomes easier because the continuity of the business will be independent of the death or disability of any of the business principals. Even if the business is worth less when someone dies because of the loss of that key person, all parties may be adequately protected if the formula for a buyout is agreed upon and funded principally by life insurance.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Business Succession page.