My client holds one share in a company with a paid up capital of $2. In October last year, the other shareholder was killed in a motor vehicle accident.Prior to his death, the company took out a life insurance policy on both shareholders. The insurance policy settlement on the deceased shareholder is over $200,000. My client wishes to pay the insurance money to the deceased shareholder’s spouse and wishes the spouse to transfer the share she holds as personal representative of the deceased shareholder to my client.The insurance policy was supposed to have been taken out in the name of the shareholder with the surviving shareholder to benefit from the death of the other shareholder with that money being used to buy out the deceased spouse’s interest in the business. This did not happen and somehow the company was the recipient of the insurance policy. Notwithstanding that the insurance policy should have been in the name of the shareholders and not the company, it was always the intent of the shareholders that the insurance money should be used to payout the spouse of the deceased shareholder.What are the tax implications for:The company if it pays the money to the spouse; andThe spouse if she transfers the share for $1 and receives the insurance payout.

‍

Normally, amounts received by a company under an accident or term policy taken out for its directors or other employees are assessable as ordinary income if the purpose is to fill the place of a revenue item (e.g. to replace profits lost through the loss of the employee’s services).

In these circumstances, any premiums paid on the policy would be tax deductible.

The proceeds of such policies would not be assessable if the purpose of the insurance is to guard against a capital loss. An example is where funds are needed to pay out a debt owing to a director in the event of his accidental death.

It appears you would have to provide evidence as to the company’s intention at the time it took out the policies and show whether or not the company has claimed tax deductions for premiums paid.

You will also need to consider how the company, as the lawful recipient of the insurance proceeds, intends to pass these funds to the widow. Payments by a company to a shareholder can run serious risk of falling foul of Division 7A. Should the company enter into a buyback arrangement and buyback the widow’s share? Should the company advance the money to your client in accordance with the Division 7A rules to enable your client to purchase the widow’s share? You will need to carefully look at the widow’s taxation position as there is every possibility she might be caught with a CGT liability.

Unfortunately, we cannot be more specific without knowing the full circumstances of the company, the director’s intentions, any relevant director resolutions, etc. You should consult with a lawyer and/or accountant specialising in taxation matters.

‍

‍