A good succession plan enables a smooth transition with less likelihood of disruption to operations. By planning your exit well in advance you can maximise the value of your business and enable it to meet future needs.

A buy/sell agreement is a contract entered into between business partners to allow for the buy out the other partner's interest in the business should a specific event occur. Events which may trigger a buy/sell agreement include death, trauma, long-term disability, retirement or bankruptcy.

These agreements are often linked to an insurance policy to provide necessary funding to be able to buy out the deceased/disabled/departing partner's interest.

Generally the agreement is structured in such a way that it does not matter what business structure has been used to own the business i.e. family trust, company, partnership.

SUCCESSION OPTIONS

A business may be transferred on the death of an owner either by:

• gifting the business via a will; or
• selling the business via a buy/sell agreement

The buy/sell agreement will take precedence over the will because the business will be transferred pursuant to the contract. In this way, the business will not be the subject of any claim against the estate nor, be delayed by Probate or estate administration issues.

The buy/sell agreement will need to state either the value of the business or how the value is to be determined when the agreement is triggered. The agreement will state whether the value to be applied shall be:

• the book value;
• the agreed value;
• the appraised value at the time of the specific event;
• capitalisation of earnings at the time of the specific event.

FUNDING THE AGREEMENT

The buy/sell agreement is normally funded through an insurance policy. Depending on the parties and circumstances, the policies can be held under any of the following arrangements:

• cross ownership, where the owners of the business hold policies on each other;
• principal ownership, where the owner holds the policy on himself/herself;
• discretionary trust, where the trustee holds the policies on behalf of all of the owners;
• company ownership, where the business holds the policies on behalf of all of the owners.

Clients will need legal and tax advice on what is the most suitable arrangement for them.

CAPITAL GAINS TAX IMPLICATIONS

If a buy/sell agreement triggers payment of a life insurance policy, it will be exempt from CGT provided the gain or loss is made by:

• the original beneficial owner of the policy;
• an entity that acquired the policy for no consideration;
• the trustee of a complying superannuation fund.

A trauma or total and permanent disability insurance policy is subject to CGT if it is owned by the business. Only a trauma or total and permanent disability insurance policy owned by the insured is exempt. Consideration should therefore be given to the business owner holding the policy on himself/herself. 

As the buy/sell agreement results in the sale of the business once exercised, a CGT liability will arise to the vendor. The small business CGT concessions may operate to reduce this CGT liability.

DEDUCTIBILITY OF PREMIUMS

The essential characteristic of a deductible insurance premium is that it be intended to provide an income.

A self-employed business owner can claim a deduction for premiums on a policy which will pay income during a period they are disabled. Normally, if a policy includes a component to pay a sum on death or disability, the component relating to death cover will not be deductible. However, it may be deductible if the following four criteria are met:

• the premium is paid for a revenue purpose;
• the policy’s purpose is to advance the business;
• the policy is owned by the employer;
• the employer is the beneficiary of the policy.

The negotiation and preparation of a buy/sell Agreement or other business succession documents does require legal and financial information specific to your unique circumstances. 

At Briese Lawyers, we look forward to working closely with you and your accountant/financial advisor to ensure that your personal and business succession needs are met.