Chapter 6 - South African insurance taxation

Question 1

Describe the tax for life policies owned by individuals? (3)

Answer 1

• 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

Question 2

Describe the tax for life policies owned by companies (key man policies)? (2)

Answer 2

• 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

Question 3

Describe the risk policy tax fund of a life insurance company? (6)

Answer 3

Risk policy fund
* 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)
* All policies sold after January 2016 which fall under the definition of risk policy will fall in this fund
* The definition of risk policy is any policy where the benefits payable cannot exceed the amount of premiums received
* Except where the all policy benefits are payable due to death, disability, illness or unemployment
* Excluding contracts where annuities are payable
* In addition insurers has the option to allocate polices sold before January 2016 to this fund

Question 4

Describe the untaxed policy tax fund of a life insurance company? (4)

Answer 4

• 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)
• 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
• Any policy not in the risk policy fund whose owner is tax exempt
• Any annuity contract in respect where annuities are being paid

Question 5

Describe the IPF, CPF and CF tax fund of a life insurance company?

Answer 5

The individual policyholder fund (IPF)
* Assets have a market value equal to the value of liabilities
* 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)
* Assets have a market value equal to the value of liabilities
* These are polices that are not included in the risk policy fund or UPF where the policyholder is a company

Corporate fund/shareholder fund
* These are represented by assets held by the insurer other than those mentioned in the above funds

Question 6

Describe how transfers between various funds impact the taxable income of the fund? (4)

Answer 6

At the end of each financial year,
any excess/shortfall of the [MV of A’s] over the [value of liabilities] in each fund will be transferred to/from the corporate fund

• Transfers to the CF will be included in the taxable income of the CF
• Transfers from the CF cannot be deducted from the taxable income of the CF
  o Then, not included in the taxable income of the policyholder or risk policy funds
• BUT, if transfer from CF and then transfer back to CF  not included in taxable income of CF

Question 7

Describe Excess E (unreleived expenses) on policyholder funds? (2)

Answer 7

• [Deductible expenses of the policyholder fund] > [taxable income of the fund]
  o  fund in “excess E” position
  o  fund will not pay tax and generates a tax shield
• Excess E amount is carried forward to the next year and offset against that year’s taxable income

Question 8

Describe the implications of capital gains tax on the policyholder funds? (4)

Answer 8

Capital gains arising will be subject to CGT as part of the taxable income of the fund

CGT can arise from:
* Sale of any investment
* Deemed disposal of A’s from policyholder funds to/from the corporate fund
* The actual transfer of A’s between funds which are required when there is a change in ownership of the policy or change in the status of the owner of the policy

• Realised gain = [Sales proceeds] – [Base cost]
  o Base cost =
   actual expenditure incurred in acquiring asset
   OR if asset acquired before 1 Oct 2001  base cost = either:
  –MV on 1 Oct 2001
  –20% of sales proceeds OR
  –[total gain] * [period from 1 Oct 2001 to sale date] / [ total period owned]
• Capital losses are deducted from other capital gains in the relevant fund
  o Any net capital losses are carried forward to the next year
• Net capital gain is multiplied by the relevant CGT inclusion rate and added to the fund’s taxable income
  o 40% IPF
  o 80% CPF

Question 9

Describe the impact of the increase in the inclusion rate on the capital gains in taxable income? (4)

Answer 9

CGT Inclusion Rate & Deemed Disposal

• Problem: CGT inclusion rate increase affected insurers’ policyholder assets.
• Solution: Section 29B introduced a deemed disposal & re-acquisition rule.
• Impact: Insurers paid CGT on unrealized gains before 1 March 2012.
• Relief: Tax payments spread over four years (2012 rule) & three years (2016 rule).