Many co-owned businesses have life, TPD or trauma cover in place so that, if one owner dies or can no longer work, the others can buy that owner’s share. The legal agreement meant to sit beside that cover is sometimes missing, out of date, or written without reference to the policies.
This article, for business owners and their insurance advisers, outlines in general terms under Australian law the issues a buy-sell deed may need to address.
Consider a hypothetical Melbourne trading company owned by two unrelated founders, one holding shares through a family trust and the other personally, with family in Penang and Shanghai. Each held cover over the other’s life. When one became seriously ill, questions arose about whether the illness was a trigger under the deed, who was entitled to the proceeds, how the price was set and whether the trustee had power to sell. The right approach depended on facts that needed advice.
Why the insurance does not move the shares
An insurer pays whoever is entitled under the policy; it has no role in transferring shares or units. The transfer happens only under a binding agreement between the owners and their estates, together with the steps the constitution or trust deed requires. Without that agreement, the surviving owners may hold the cash while the departing owner’s estate keeps the shares.
Trigger events
Deeds commonly deal with death, total and permanent disablement and trauma, and some also deal with voluntary exit or retirement, which are usually not insured. A recurring issue is whether the deed’s definition of a trigger matches the policy definition. If the deed uses one meaning of disablement and the insurer another, an owner may be obliged to sell with no insurance money to fund the purchase, or the reverse.
Options or an obligation to buy
Some agreements create a binding obligation to buy and sell when a trigger occurs. Many instead use put and call options, so either side can require the transfer after a trigger. The choice can affect when a sale is treated as happening, how duty and capital gains tax apply, and the parties’ flexibility.
Setting the price
A deed may use an agreed value that the owners update periodically, a formula, or an independent valuation at the time of the trigger. An agreed value can become stale, a formula may not suit a changed business, and a valuation can be disputed or slow. The deed may also need to say what happens when the insurance proceeds are more or less than the price, and how any balance is paid.
Who owns the policies
In general terms, the common models are:
- Self-ownership, where each owner holds cover on their own life and the proceeds go to them or their estate.
- Cross-ownership, where each owner holds cover on the lives of the others.
- Trust or company ownership, where a trustee or the business holds the policies under a documented arrangement.
The model affects who receives the money, how premiums are shared, what happens when owners change, and the tax position.
Tax on the proceeds and on the transfer
Two separate questions usually arise. First, are the proceeds taxed? Under section 118-300 of the Income Tax Assessment Act 1997, a capital gain on certain life insurance proceeds may be disregarded, but in general that depends on who receives them, for example whether the recipient is the original beneficial owner of the policy or acquired its interest for no consideration. TPD and trauma proceeds generally rely on a different exemption, which may depend on whether the recipient is the insured person or a relative. A change of ownership can therefore change the answer.
Second, how is the transfer of the shares or units taxed? The departing owner or their estate may make a capital gain, small business CGT concessions may or may not apply, and the CGT changes from 1 July 2027 may affect later transfers. Duty, including landholder duty, may also need checking, particularly where the company or trust holds land. These are questions for a qualified tax adviser working with the lawyer.
Fitting with the constitution, shareholders’ agreement and trust deeds
A company constitution may contain pre-emptive rights or give directors discretion over share transfers that conflict with the deed. A shareholders’ agreement, discussed in a separate article, may have its own exit provisions. Where an owner holds through a family trust, the trustee is the party that must agree and sign, and its deed may need to allow it to buy, sell and hold insurance. Each owner’s Will also matters; a gift of the shares to a child may not work if the deed requires the estate to sell.
Family law
If an owner separates, the shares and policies may be treated as property in a family law settlement, and the court has broad powers that a private agreement may not override. Some agreements deal with relationship breakdown as a separate event, and the interaction needs family law advice.
Declined claims and lapsed cover
An insurer may decline or reduce a claim, for example where it says information given at application was inaccurate, where a definition is not met, or where premiums were not paid and the cover lapsed. The deed may need to say whether the obligation to buy continues without insurance money, how the price would then be funded, and whether owners must share premium and policy information. Disputes with an insurer may be able to go to the Australian Financial Complaints Authority.
Keeping the deed and policies current
A deed and its policies can drift apart as owners change, someone moves overseas, the business is restructured or values change.
How we work with insurance advisers
You arrange the cover; we prepare the deed and the documents around it. With the clients’ written consent, we confirm the trigger definitions, ownership model and valuation method so you can check the policies match. Because a buy-sell deed involves several owners, we consider at the outset whether we can act for all of them or whether some should be separately advised. Each client receives a costs disclosure from us.
Questions to discuss
- Do the deed’s trigger definitions match the policy definitions?
- Is the transfer an obligation or an option, and why?
- When was the agreed value or formula last reviewed?
- Who owns each policy, and how might that affect tax on the proceeds?
- Do the constitution, shareholders’ agreement, trust deeds and Wills fit with the deed?
- What happens if a claim is declined or a policy lapses?
Frequently asked questions
Do I need a buy-sell agreement if we have life insurance?
Insurance pays money but does not transfer ownership. Whether a deed suits the business needs advice.
Are buy-sell insurance proceeds tax-free in Australia?
Not necessarily. The tax treatment can depend on the type of cover, who owns the policy and who receives the money. A qualified tax adviser should review the arrangement.
What happens to a buy-sell agreement if the insurer refuses to pay?
It depends on the deed. Some still require the purchase with other funding; others may not.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates has practised in Melbourne since 1990 and prepares buy-sell deeds, shareholders’ agreements and Wills for business owners, including families with relatives in Asia. Justin Chua trained in accounting (Bachelor of Commerce, accounting major), is an affiliate member of STEP (the Society of Trust and Estate Practitioners), and advises on the legal and tax structure of family wealth together. He is a Nationally Accredited Mediator and an Accredited Family Business Advisor. We work with the client’s insurance adviser, accountant and registered tax agents, and with lawyers in Asia, and we advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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