Chapter 6- South African Insurance Taxation Flashcards
List the three recent changes to taxation laws? (3)
- Effect of SAM on valuation of policyholder liabilities for tax purposes
- New tax fund for risk policies
- Consolidation of the rules governing retirement, pension and provident funds under proposed retirement reforms
Describe the tax for life policies owned by individuals? (3,5)
• Premiums: paid from after tax income no tax deduction allowed for life assurance premiums
• Benefits: Lump sum on death or maturity:
o Exempt from income tax in the hands of the original policyholder (or beneficiaries)
Except second hand policies (policies which policyholder sells to another person)
o Applies to basic policy AND accumulated bonuses/ profits
• Benefits: Regular income treated as an annuity:
o Income tax is charged on the payments made in the hands of the policyholder
o If SA is payable by instalments over a specified term (with no interest payable to policyholder) instalments may not be taxable
Describe the change in tax treatment of Income protection polices?
- Before 1 March 2015: premiums were tax deductible and benefits were subject to income tax in the hands of the policyholder
- After 1 March 2015: premiums paid from after-tax income and benefits are not taxable
Describe the tax for life policies owned by companies (key man policies)? (2,3)
• Premiums: may be deducted from the employer’s taxable income if the policy meets the following requirements:
o Taxpayer (i.e. the employer) must be the policyholder
o Only benefit payable is as a result of death, disablement or severe illness of the employee
o [Premiums payable by the taxpayer] is deemed to be a [taxable fringe benefit granted to an employee] of the taxpayer in terms of the Seventh Schedule to the Income Tax Act
• Benefits: proceeds must be included in the taxable income of the company, and taxed accordingly
Describe the retirement reforms proposed to consolidate the treatment of retirement funds? (3)
The tax law amendment bill 2015 made change to the contributions by members and employees to all approved funds such that they are all tax deductible (subject to limits).
It has also been proposed that the treatment of benefits be consolidated between funds with the minimum mandatory annuitisation of two thirds of the benefits at retirement irrespective of whether be a RA, pension or provident fund.
Extensive transitional rules have also been proposed to ensure that current vested rights of members are not prejudiced.
Describe the tax treatment of contributions into a retirement fund? (4)
• Max deductible contribution to combination (RA + pension + provident) p.a.
= min of
o 27.5% * max(taxable income, remuneration)
o R350,000
^ limits apply to employer & employee contributions
Employer contributions tax deductible in employer’s hands, but taxed as fringe benefit in hands of employee
• Excess non-deductible contributions are carried forward and regarded as current contributions in subsequent year of assessment
o Previously disallowed deductions are available to set-off against lump sum benefit on withdrawal/ retirement
Describe the tax treatment of the benefits of a retirement fund? (5)
• RA & pension
o Benefits must be taken as compulsory income (annuity)
included in taxable income taxed accordingly
o One third can be commuted for cash sum tax according to the sliding scale
o If total proceeds (RA + pension) =< R247,500
can take a lump sum
to avoid paying very small annuities
• Provident
o Benefits usually lump sum
May be taken as an annuity
• Lump sum benefits taxed according to sliding scale
o Retirement and death benefits – use the same scale
• R1 050 001 (R130 500 plus 36% of excess above R1 050 000)
o Withdrawal benefits – different scale ‘
Currently, there are rules regarding the transfer of another retirement fund which is tax-free is transferred to the same or higher level fund in the following hierarchy:
• Retirement annuity fund (highest rank)
• Pension fund or Pension preservation fund
• Provident fund or provident preservation fund
Describe the tax treatment of contributions into a benefit fund? (2)
The employer’s contribution to an approved benefit fund may generally be deducted from the employer’s taxable income in term section 11 (I).
The income tax Act recognises two types of benefit funds-friendly society and medical schemes registered under the medical scheme Act.
Describe the tax treatment of voluntary annuities? (2)
Tax is levied on: [the amount of the annuity] less [the “capital element”]
Capital element:
Determined at the outset by the StatAct of insurance company,
remains unchanged throughout the duration of the contract
Basis for calculation is prescribed in the Income Tax Act
= ((Lump sum annuitized (i.e. cash consideration))/(Total payment expected over annuitant^' slife expectancy)) ×(annuity amount)
Describe estate duties tax? (4,3)
- Estate duty act (1995)
- Tax levied on the estate of a deceased = Dutiable amount * 20%
• Dutiable amount = [total value of the estate] – [allowable deductions and abatements]
o Total value of estate includes
Property
All policies on the life of the deceased (including benefits payable from funds on or as a result of death)
o Abatement of R3,5m
Describe tax-free savings rules? (6)
• Incentive to save • Introduced by gov of SA • Endowment contracts that meet certain criteria can qualify • Investment returns are tax free • Limits on amounts to be invested o R33,000 p.a. o R500,000 life time limit • If policy reached limit – no further premiums allowed o Even if funds are withdrawn
Describe the tax structure of life insurance companies? (3,6)
• Long-term insurers pay tax on both
o profits generated by the insurer AND
o taxable income and capital generated on behalf of policyholders
(pay tax on behalf of PHs trustee principle)’
• A&L’s must be classified into five separate funds, each of which is treated as a separate taxpayer
o 1 for shareholders, 1 for risk policies, and 3 for different classes of policyholders
• Specific rules for life insurers relate to:
o Classification of A&L’s into 5 tax funds
o Transfers of A’s between tax funds
o Deduction of expenses
o Treatment of premiums & claims (& related reinsurance)
• New fund = RPF
o 2014 Taxation laws amendment act
o All risk policies sold after 1 jan 2016
Option to include risk policies sold before 1 jan 2016
o Regardless of owner of the policy
Describe the risk policy tax fund of a life insurance company? (6)
• Risk policy fund
o Assets have market value equal to value of liabilities (IFRS 17 basis for tax purposes although 6 year transitional period from SVM basis previously used)
o All policies sold after January 2016 which fall under the definition of risk policy will fall in this fund
o The definition of risk policy is any policy where the benefits payable cannot exceed the amount of premiums received
o Except where the all policy benefits are payable due to death, disability, illness or unemployment
o Excluding contracts where annuities are payable
o In addition insurers has the option to allocate polices sold before January 2016 to this fund
Describe the untaxed policy tax fund of a life insurance company? (4)
o Assets have a market value equal to the value of liabilities (IFRS 17 basis for tax purposes although 6 year transitional period from SVM basis previously used)
o Any policy that is not included as part of a risk policy fund and is owned by a pension, provident, retirement annuity funds or benefit fund
o Any policy not in the risk policy fund whose owner is tax exempt
o Any annuity contract in respect where annuities are being paid
Describe the IPF, CPF and CF tax fund of a life insurance company?
• The individual policyholder fund (IPF)
o Assets have a market value equal to the value of liabilities
o These are polices that are not included in the risk policy fund or UPF where the policyholder is not a company
• Company policyholder fund (CPF)
o Assets have a market value equal to the value of liabilities
o These are polices that are not included in the risk policy fund or UPF where the policyholder is a company
• Corporate fund/shareholder fund
o These are represented by assets held by the insurer other than those mentioned in the above funds
(IFRS 17 basis for tax purposes minimum of zero although 6 year transitional period from SVM basis previously used)