6. South African Insurance Taxation Flashcards
Part of Income Tax Act 58 of 1962
Sections 29A and 29B relate to life insurance
Implementing Insurance Act in 2018 had effect of how actuarial L are valued for tax purposes
Introduction of new tax fund for risk policies
Consolidation of rules governing retirement, pension and provident funds under retirement reforms
Implementation of changes to taxation of life insurance companies due to transition to IFRS17
Premiums paid on after tax income
Lump sum proceeds from life insurance are tax exempt except for second hand policies
Applies to basic policy and profits/bonuses from policy
If whole or portion is payable as income over specified term, treated as annuity and income tax levied
If it’s a capital sum payable by instalments over specified term, and hence no interest to ph»_space; instalments may not be taxable.
From March 2015, IP benefits no longer taxable»_space; increased anti-selection and over insurance
Taxpayer, i.e. employer, must be ph
Only benefit payable on death, disablement or SI of employee or director
Amount of expenditure incurred by taxpayer wrt premiums payable under policy is deemed to be taxable fringe benefit granted to an employee or director of the taxpayer in terms of the Seventh Schedule to ITA
Proceeds of policies must be incl in taxable income of company and taxed as such
Owner = tax exempt institution
No tax
Proposed changes made in paper from December 2004 with aim to ensure consistent and equitable treatment between diff methods of funding retirement
Ensures that members’ vested rights (benefits accrued before 1 March 2021) are preserved and exempt from compulsory annuitisation.
Taxation Laws Ammendment Bill
New limit- no more than 80% of excess E can be carried forward
New “2-pot” system: rules for accessing retirement savings
One pot accessible annually (subj to limits)
Other pot only accessible at retirement
Capped at lesser of:
27.5% of greater of taxable income or remuneration
350 k annually
Apply to employee and employer contributions (treated as fringe benefits for employees)
Carried to next assessment year
Available to offset lump sum during withdrawal / at retirement
2/3rd Must be taken as compulsory annuity
1/3rd can be taken as lump sum cash at retirement- full payment allowed if less than 247500
*Cash lump sum and death benefit tax rates:
0–500 000: 0%
500 001–700 000: 18% of excess
700 001–1 050 000: R36 000 + 27% of excess
Above 1 050 000: R130 500 + 36% of excess
Diff tax rates for withdrawals
Tax free transfers between provident, pension and RA
Transfers out of RAs are taxed but transfers from other funds to RA funds are tax free
Can deduct benefit funds (friendly societies and registered medical schemes) contributions from taxable income, as per Section 11(l) of the Income Tax Act
Payments from these funds do not receive special tax treatment.
If purchased with net income, only portion exceeding the “capital element” is taxed
Capital element determined upfront:
Lump sum paid / expected total payments over annuitant’s e(x)
Premiums paid from after tax income and benefits are tax free
Based on total estate value, incl. certain policies and benefits
Deductions and abatement of 3.5m allowed
20% tax on remaining amount
Tax-free returns
36k annual limit; 500k lifetime limit
Withdrawals, don’t reset limits
Taxable income calculated on standard provisions of ITA but subject to rules in Section 29A
Rules in Section 29A guide classification of A+L into diff tax funds, transfers between funds, deductions of expenses, tax treatment of premiums and claims incl. reinsurance
Purpose- mandates life insurers to establish 5 separate funds to manage diff tax liabilities
Each fund is treated as distinct taxpayer, reflecting nature of policies and ph
Introduced by 2014 Tax Laws Amendment Act, effective for policies issued after 1/01/2016
Includes policies qualifying as “risk” policies where benefuts can’t exceed premiums except incases of death, disability, illness or unemployment
A in fund have MV equal to L
Insurers can include qualifying policies sold before cutoff date
*Policies that are tax exempt e.g
Pension, provident, RA and preservation fund policies
Tax exempt entities
*Includes annuity contracts where payments currently being made
*A represent MV of policy L, allowing tax neutrality in cases where ph are inherently exempt
Policies owned by individuals excl those in RPF and UPF
Reflect L of individual ph, ensures proper allocation of investment income and expenses to individuals for tax purposes
Policies owned by companies excl those in RPF or UPF
Mirrors setup of IPF but specifically for corp policyholders, so income and gains are taxed at appropriate rates
A not included in other four funds- representing sh interests
Reflects earnings and profits directly attributable to sh
Trusts:
“Look-through” approach- nature of beneficiaries influences allocation to appropriate tax fund
Joint ownership:
If not all ph are individuals or tax-exemt, policy considered to be owned by a company for tax purposes, ensuring consistent treatment under CPF
RPF
Follows std income tax principles- tax is on profits within fund
Deductions for transfers into CF often result in zero taxable income for practical purposes
IPF & CPF
Investment and other income (interest, rental, taxable foreign dividends and admin fees) …
… less deduction for expenses
Capital asset allowances can’t be claimed.
UPF
No taxable income
CF
Follows std income tax principles, with exception of treatment between CF and other tax funds
When determining profits for CF for tax purpose, ONLY expenses INCURRED IN CF are deductible against taxable income in CF, and not against transfers into CF.
IFRS basis used over prudential basis since prudential basis = recognising all future profits now = paying tax before cash received (TLA of 2017 change)
Zeroise – L
Is a 6 year transitional period in which change in L from SVM adjusted for reinsurance and current L to new tax basis will be taxed in
Under IFRS17, still same basis is used but …
… where L are zeroised, the liability for incurred claims won’t be included in this calc
Transitional amount = L under old acc basis – L under new basis will be phased in over 6 years
Specific care was taken to consider the re-classification of certain items from assets to negative liabilities …
…(e.g. premium debtors are now included within the long-term liabilities), to ensure they don’t artificially create a transitional amount.**Q
Any excess(shortfall) between MV(A) and MV(L) will be transferred to(from) CF
Any amount transferred TO CF will be included in the taxable income of the CF
There is a limited deduction from ph fund (see below)
Any amount transferred FROM CF can’t be deducted from taxable income of CF
This amount will NOT be included in taxable income of other funds
Once amount is transferred FROM CF, any future amounts transferred back to CF will not be included in taxable income in CF unless it exceeds original transferred amount
Total of:
Expenses directly attributable to income of that fund
(Expenses allocated to that fund, but excl any expenses directly attributable to amounds which do not constitute income) X expense relief ratio (Y)
30% of any amt transferred to CF multiplied by Y, if this amt doesn’t exceed balance of income remaining in that fund after accounting for other deductions
Expense relief ratio aka Y
Y=X+UZ
where,
X:amt which would be equal to taxable income in respect of the fund but excl
any dedcution during the year of any amt incurred in respect of expenses
U:amount incl. in Z*0.4 in case of IPF and 0.8 in case of CPF
Z:amt in X plus:
1.Agg of all dividends which are exempt from normal tax received in fund during asmt year
2.Agg of all foreign dividends received in fund for year less any amount of that agg that is incl in taxable Y
3.Agg capital gain for that year that isn’t incl in taxable income in respect of the fund by virtue of CGT inlusion rate being 40% for IPF and 80% for CPF
4.Min(MV(A) at end of year – MV(A) at start of year, 0)
If deductible expenses > taxable income of fund
Will not pay tax if in Excess E position and …
… amount by which it’s in excess E can be carried forward to next year to offset against taxable Y
Maximum amount that can be carries forward is 80% of taxable income in the year» applies to ph funds
Max came into effect on 31 March 2023
CGT triggers
Sales of investments
Deemed disposal of assets from PFs to/from CF from year-end transfers which are deemed to take place at MV(A)
Actual A transfer between funds which is required if there is a change in the ownership of the policy / change in status of an owner of a policy
Realised gain = Sale proceeds – Base cost
For assets acquired before 1/10/2001, taxpayers can choose base cost to be:
MV on 2 October 2001
Value that would result in a capital gain proportionate to the totalgain on that asset as the period from 1 October 2001 to the date of sale represents to the total period that asset was owned
20% of sale proceeds
Losses can be offset against other capital gains/carried forward to future tax years
IPF: 40%
CPF & CF: 80%
UPF: Exempt
RPF?
Introduced to handle increase CGT rates as of 1/03/2012
Insurers had to account for unrealised gains/losses as of 29/02/2012
Spreading rule: Gains/losses from this deemed disposal could be spread over 4 years (2012 and next 3 years)
Similar deemed disposal rule with 3 year spread applied with 2016 CGT rate changes
IPF- 30% (considered to be man of individual ph avg tax rate)
CPF- 27% (current company tax rare)
UPF- nil
CF- 27%
RPF- 27%
Tax is charged to beneficial owner of dividend, usually sh
20%
Withholding responsibility lies with company declaring the dividend, unless…
… dividend is paid to regulatory intermediary in which case intermediary handles withholding
Long term insurers are deemed to be regulatory intermediary and have withholding obligation wrt dividends paid to insurer and allocated to the IPF
Payers:
Individuals
IPFs
Non-resident sh
Applies to transfers of securities (e.g. shares) issued by:
SA incorporated company
Foreign company listed on JSE
0.25% of MV of transferred security
