Chapter 6 Tax Flashcards
The Taxation of individual policyholder
Life Polices
- Lump sum proceeds are exempt in the hands of policyholders or beneficiaries, except for secondhand policies i.e. selling a policy
- This includes any profits or bonuses accumulated on policy
- If portion of proceeds payable in income, treated as an annuity and taxed. However, if it can be established as a capital sum payable over installments with no interest, may not be taxable
- Premiums paid from after tax income i.e. no tax relief
The Taxation of company policies on employee lives
Premiums maybe deductible from taxable income of employer e.g. keyman policy if meet certain criteria:
- Taxpayer ie employer must be policyholder
- Benefit paid on death, disablement or severe illness of employee
- Taxed as a fringe benefit
• Proceeds form part of the taxable income of company.
Tax exempt institution
• E.g. public benefit organization do not attract tax.
Taxation of Retirement Annuities, pension funds and provident funds
Contribution are tax deductible subject to following limits, lower of:
27,5% of the greater of taxable income or remuneration
R350000
Employer contributions are deductible in hands of employers but treated as a fringe benefit in employees hands. Any excess non deductible contributions ,are carried forward to subsequent years
At retirement 1/3 of proceeds can be converted to cash and balance must be used to purchase an annuity. Pensions worth R247500 or less entire benefit maybe converted to cash in lieu of purchasing small annuities.
Tax on lump:
0-500000 0%
500001-700000: 18% of amount above R500000
700001- 1050000: R36000 plus 27%of amount exceeding R700000
Exceeding 1050000: R130500 plus 36% of amount exceeding R1050000.
Taxation of Voluntary Annuities
Voluntary annuities purchased for a lump sum, shall be taxed on the amount of the annuity less the capital element. Capital element determined at outset and remains constant for duration of annuity, is equal to the cash consideration divided the total payment expected to be made by insurer and multiplied by annuity amount
Taxation of Disability Benefits
Lump sum and income disability are not subject to tax, premiums do not attract tax relief. Effective since 1 March 2015
Estate duty
Tax rate of 20% on dutiable amount
- Dutiable amount = estate: property and property deemed part of estate including policies on life and benefits from funds payable on death less abatement of R3.5 m
- Estate duty act, 1955
Describe the tax funds for the Taxation of Life Insurance Companies
Long term insurers pay tax on profits generated by insurer, as well the taxable income and capital gains generated on behalf of policyholders. 5 funds are established, each separate taxpayer.
Risk policy fund
- New fund introduced by 2014 tax amendments.
- All policies sold after 1 Jan 2016, which meet risk policy definition
- Risk Policy: Any policy where the premiums cannot exceed the benefits, except when most is paid on death, disability, illness or unemployment, excludes annuities paid.
- Insurers had the option of allocating policies sold before 1 Jan 2016, that meet the definition
- Assets having a market value equal to liabilities will represent this fund
Untaxed policy
Assets having a market value equal to liabilities will represent this fund:
• Any policy not in risk fund, owned by pension, RA or benefit fund
• Policy not included in risk fund, whose owner is exempt from tax
• Annuity contracts of which annuities are being paid
Individual policy fund
Assets having a market value equal to liabilities will represent this fund if not in the UPF or RPF and owner is a person other than a company.
Company policy fund
Assets having a market value equal to liabilities will represent this fund if not in the UPF or RPF, owner is a company
Corporate Fund
Represented by assets held by insurer, other than in the other 4 funds
Determination of the taxable income of each of the 5 classes
Risk policy fund- determined in accordance with income tax principles i.e. on profits earned on the fund, except there is a deduction of transfer from RF to CF. This effectively results in 0 taxable income.
IPF, CPF- Investment and other income generated by the fund less expenses. No capital asset allowance.
UPF- Non- taxable fund, no taxable income
CF- determined in accordance with tax rules, exception of transfers between the other funds. Expenses incurred in the CF can only be deducted against the taxable income in the CF and not the transfers.
Describe the Calculation of Liabilities for tax purposes
- PSR basis recognizes much of the profit on commencement of policy rather than over lifetime of policy.
- Would result in payment of tax before insurer receives cash
- IFRS basis will be used, but negative liabilities will be zeroized.
- In addition, there is a transitional period where the old tax/SVM basis will be used , phased in over 6 years
Describe the Transfer of assets between the five funds
• Insurer must determine value of liabilities for funds, any excess/ shortfall of MV of assets shall be transferred to/from the CF.
o Any amount transferred to the CF, shall be included in the taxable income of CF
o Any amount transferred from the CF to other funds is not deductible. Any amount transferred back to the CF subsequently, will not be included in taxable income of CF, not exceeding original amount.
