When planning Keyperson Insurance, first we must identify the method of value and then we decide whether the proceeds are a 'Revenue' or a 'Capital' purpose, which will have taxation treatment implications.
As a general rule if the purpose is of a 'Revenue' nature, the premium is deductible and proceed paid is assessable income. However, the business' operating expenses, to which the contract proceeds are applied, are tax deductible costs of the business. e.g. recruitment and replacement costs.
If the purpose is of a 'Capital' nature, the premium is not deductible and the proceeds are not assessable as income.
This type of insurance cover is generally taken out as a protection owned by the business, but where a business is privately held it may be more appropriate for the ownership to be the life insured, spouse or relative.
The Capital Gains Tax (CGT) treatment of proceeds paid is another taxation consideration. Normally, if the policy owner is the Life Insured/Relative/Original Beneficial Owner, CGT does not apply. However, if it is someone other than the above, CGT may apply. (see relevant rulings IT 155, IT 2434, section 118-300 and section 118-37).