TAX

Question 1

Why is transfers out of a retirement annuity taxed but transfers to a retirement annuity (from provident fund, pension fund & co. and between them) not taxed?

Answer 1

This can be seen as a transfer to a less restrictive retirement vehicle (RA is most restrictive). This is discouraged, because the less restrictive the vehicle
- the more likely you are to have access to your funds
- higher risk of funds leaving the retirement system
- want to promote lifetime income which stricter vehicles help with.

Question 2

Why can the prudential supervision reporting basis not be used as the tax basis?

Answer 2

The prudential supervision reporting basis for calculating liabilities as required by the
Insurance Act is considered to be inappropriate for tax purposes as it recognises the majority
of profits on the commencement of the policy, rather than gradually over the lifetime of the
policy. Using the prudential supervision reporting basis for the tax basis would therefore result
in the payment of tax before the insurer has received the cash associated with the policy. The

Question 3

How might Capital Gains Tax arise?

Answer 3

1. When a fund sells any investment (like shares or property)
2. Year-End Transfers to Corporate Fund when there are excess assets.
   This transfer is treated as a “deemed disposal” at market value which triggers CGT even though you haven’t actually sold anything.
3. Policy Changes Requiring Fund Transfers. When policy ownership changes or policyholder status changes
   Example from text: If individual becomes disabled and starts receiving an annuity

Policy moves from IPF to UPF
Assets must physically transfer between funds
This transfer triggers CGT

Question 4

Why can’t you apply normal income tax rules to insurers?

Answer 4

1. Timing mismatch: for regular company you receive payment for service you deliver in same year, life insurer you receive premium now and only pay death claim in 20 years. For that reason, if single premium, massive profit recognised in year 1 and losses thereafter but that’s not true reflection of profitability.
   Above wouldn’t apply to 1 year term assurance, could just tax normally.
2. Investment growth: You pay R100 but family paid R1000 on your death. Should PH or insurer get taxed for the R800 growth? Cause R800 isn’t just insurance but investment returns.
3. Pure risk not taxed: 1 year term assurance, 5 PH, all contribute R1000 in premiums. That pool of R5000 will be used to cover the R1000 sum assured of anyone who dies. Anyone who dies doesn’t get anything out, so no value created for PH, so cannot tax them. However, the insurer can be taxed on all unused risk premium as it can be considered profit.