Can key person insurance proceeds be used for any business purpose?

The permitted uses of key person insurance proceeds depend on how the policy was structured and documented for tax purposes. For revenue-purpose policies, proceeds should be used for operational needs arising from the key person's loss: replacing lost revenue during business disruption, covering costs of recruiting and training a replacement, maintaining profitability during transition, paying temporary staff or consultants to fill the gap, and covering increased operational costs. These proceeds are treated as assessable income by the ATO. For capital-purpose policies, proceeds should address capital needs: repaying business loans or debts, buying out the deceased or disabled key person's ownership shares from their estate or family, covering capital expenses related to business restructuring, or funding business succession arrangements. These proceeds generally aren't assessable income but CGT may apply. The ATO examines both how premiums were claimed (deductible or non-deductible) and how proceeds were actually used to determine correct tax treatment. Misalignment between stated policy purpose and actual use of proceeds can create tax complications. While there's no legal restriction preventing use of proceeds for any business purpose, using them inconsistently with the documented policy purpose creates adverse tax consequences. It's crucial to document policy purposes clearly and use proceeds accordingly, maintaining detailed records for ATO review.