04 - Company owned Policies Flashcards
Old position: 1982 to 2012
Pre 1 June 1982 policy
A policy that only pays a benefit on death or disablement within a period fixed in the contract
A conforming policy. Certain requirements had to be met for a policy to fall into this category.
Amendments in 2012
Amendments
- paragraph (d) and (m) of the definition of ‘gross income’ w.e.f. 1 March 2012
- The Seventh Schedule to the ITA amended to treat certain premiums paid by a company/employer as a fringe benefit.
Additions
Three new subparagraphs 10(1)(gG), 10(1)(gH) and 10(1)(gI) inserted (ITA Section 10).
ITA - Section 1 - Para (i)
Includes the cash equivalent of certain fringe benefits into gross income.
The cash equivalent must be determined under the Seventh Schedule of the the Income Tax Act.
What does the ITA say about policies paid by employers for the benefit of their employees?
ITA - 7th Sch - Para 2(k)
If the policy taken out and paid by the employer is directly or indirectly for the benefit of the employee/dependent/nominee, then it will be included in the employee’s gross income as a fringe benefit.
What is the link between Seventh Schedule para 12C and ITA - 7th Sch 2 - Para (k)?
Determines the cash equivalent of the taxable fringe benefit for the policy mentioned in ITA - Sec 2 - Para (k)
ITA - Section 23 (r)
Prohibition of deduction
Prohibition of deduction of any deduction contemplated in section 11
- in respect of any premium paid by a person in terms of an insurance policy,
- to the extent that the policy covers that person against death, disablement, severe illness or unemployment.
Deductions under Section 11(w)
Deductions in respect of premiums paid by an employer
Two categories
- 11 (w) (i) Fringe benefit policies
- 11 (w) (ii) Key person policies
ITA - Section 11 (w) (i)
Fringe benefit policies
- Policy is for the benefit of the employee
- Premium IS included in the gross income of the employee or director
Requirements
(1) Policy must relate to the death, disablement or severe illness of an employee or director of the taxpayer
(2) the premium paid by the employer/company is deemed be a taxable benefit granted to the employee/director (para 2 (k) )
Policy can be a pure risk policy, endowment policy with a cash and surrender value or a combination of the two.
ITA - Section 11 (w) (ii)
Key person policy
- Policy is for the benefit of the employer
- Premium IS NOT included in the gross income of the employee or director
- Only in respect of premiums paid by 1 March 2012
Requirements
(1) Operating Loss - Taxpayer is insured against any OPERATING LOSS by reason of the death, disablement or severe illness of an employee or director of the taxpayer (e.g. pure key man policy).
(2) Pure Risk - The policy is a pure risk policy with no cash or surrender value
(3) Ownership - The policy is not owned by a person other than the taxpayer at the time of payment of the premium (security cession DISQUALIFIES this requirement)
(4) (a) >= 1 March 2012 - policy agreement states that this paragraph applies in respect of premiums payable under that policy (basically stating that you want premiums to be tax deductible).
(4) (b)
Gross Income - para (d) (ii)
Related to sec 11 (w) (i)
Includes proceeds into gross income of employee
(Irrespective of whether premiums ranked for tax deduction or not)
para (d) (ii)
- Amount paid to person/dependent/nominee directly or indirectly (through employer) in respect of proceeds from a policy of insurance where the person is a or was an employee or director of the policyholder.
Special cases
- lump sum award from a retirement fund
- Amount payable in consequence of death will be deemed to have accrued to the person immediately prior to his/her death.
- paid to beneficiary/nominee. Accrues to employee/director.
Gross Income - para (m)
Related to sec 11 (w) (ii)
Includes proceeds into gross income of company
Irrespective of whether premiums ranked for tax deduction or not
ITA - Section 23 (p)
a) the value in respect of any cession of a policy of insurance ceded by a taxpayer to
i) any
aa) employee or former employee
bb) director or former director
cc) dependent or nominee of the employe (or former employee) or director (or) former director of the tax payer
ii) an pension fund, pension preservation fund, provided fund, provident preservation fund or retirement annuity fund for the benefit of any
aa) employee or former employee
bb) director or former director
cc) dependent or nominee of the employe (or former employee) or director (or) former director of the tax payer
If the employer cedes a policy to the employee, the employer cannot deduct the value of the policy so ceded. On cession of the policy no amount is included in the employer’s gross income. If a deduction were allowed, it would be deducted from other trade income.
ITA - Section 10 (1) (gG)
(Exemption available to the employee/director and NOT the employer)
Exempts amounts included in the gross income of the employee/director under paragraphs (d) (ii) and (d) (iii) from tax in the following instances:
i) in the case of a policy that is a RISK POLICY with no cash value or surrender value - if premiums paid in respect of policy by the employer of the person has been deemed a taxable benefit of the person in terms of the Seventh Schedule since the later of:
aa) the date on which the employer or company in those sub paragraphs became the policyholder of that policy;
bb) 1 March 2012 or before that date
ii) in the case of ANY OTHER POLICY (has cash or surrender value), all premiums payable has been included in the income of the person as a taxable benefit in terms of the Seventh Schedule since the date on which the policy was entered into;
ITA - Section 10 (1) (gH)
(Available to the employee or director)
Exempts any amount received or accrued in respect of a policy of insurance where
i) policy related to death, disablement or severe illness of an employee or director (or former) of the person that is the policyholder AND
ii) no amount of premiums payable in respect of that policy ON OR AFTER 1 March 2012 is deductible from the income of that person for the purposes of determining the taxable income derived by the person from carrying on any trade;
ITA - Section 10 (1) (gI)
Any amount received or accrued in respect of a policy of insurance relating to the death, disablement, severe illness or unemployment of a person who is the policyholder in respect of that policy of insurance.
Simple explanation
Policyholder is the same as the life insured. Amount received is exempt.