Buy/sell arrangements set the ground rules between co-owners of a business (shareholders in a company, partners in a firm or unitholders in a unit trust) as to what is to happen if a co-owner dies, becomes totally and permanently disabled, or suffers some illness or trauma that will likely require them to leave the business. Fundamentally buy/sell arrangements deal with when and how the other co-owners will acquire the interests of the outgoing or disabled co-owner in the business.
There are two key aspects to a buy/sell arrangement: the transfer agreement, which sets out how the business interest will be transferred to the continuing co-owner(s); and the funding agreement, which details how the continuing co-owner(s) will obtain the money necessary to buy out the outgoing co-owner’s share. There are various ways to structure a buy/sell arrangement and the trick is to choose the method that best suits the co-owners' circumstances.
In particular, co-owners should consider whether to hold the insurance that supports the buy/sell arrangements inside their self managed superannuation fund.
There are some material benefits of holding insurance inside a SMSF including:
- concessional contributions can be made to the fund and premiums may be tax deductible to the fund, meaning effectively nil contributions tax on the pre-tax contributions;
- proceeds are available in low tax and ultimately no tax environment;
- proceeds are quarantined from the outgoing co-owner’s debts and other legal liabilities; and
- even if excess contributions tax is paid, the benefits of the proceeds inside super may still be worthwhile.
Townsends Lawyers have developed specific advice and tailored documentation suitable for the implementation of buy/sell arrangements to ensure the future of your business.