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New taxation regime for long term insurers (again)?

04 March 2014   (0 Comments)
Posted by: Author: Emil Brincker
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Author: Emil Brincker (Cliff Dekker Hofmeyer)

The taxation treatment of long-term insurance companies has been the subject matter of much debate over the years. For instance: 

  • long-term insurers had to account for a deemed realisation of capital assets for the first year of assessment that ended on or after 29 February 2012 even though the relevant assets would not have been disposed of; and

  • last year the expense ratio was changed with reference to the ability of long-term insurers to claim a deduction in respect of so-called indirect expenses.

Even though it was mooted during the 2013 Budget Speech, it has now been confirmed that risk policies issued by a long-term insurer will in future be taxed in the corporate fund as opposed to the individual policyholder fund, the company policyholder fund or the untaxed policyholder fund. This implies that only investment policies will continue to be taxed in the relevant funds whereas profits that arise from risk business will in future now be taxed in the corporate fund. 

It was also indicated that Government will review the tax rate that is currently applicable to the individual policyholder fund, where a 30% tax rate is currently applied irrespective of the actual income level of the policyholder concerned.

The critical issue to determine is how the transitional period will be dealt with and on what basis risk policies will be 'transferred' from the policyholder funds to the corporate fund. This follows from the fact that, to the extent that there were profits in the policyholder funds, these profits had to be transferred on an annual basis to the corporate fund and would have been taxed in the corporate fund. Given the fact that the suggested amendment will largely impact upon life policies, one may well expect the premiums either to be increased or the benefits under these policies being reduced to cater for the additional costs. 

There are a number of uncertainties pertaining to this change, amongst others when the change will become effective and how one is going to treat hybrid policies that contain both an element of investment as well as life risk. Be that as it may, the amendment will have a significant impact upon long-term insurers.

This article first appeared on cliffedekkerhofmeyr.com.


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