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Taxability of proceeds from key man insurance policy

06 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: My client has contributed to key man policies for many years.  We have added back the full premiums since the change of S11(w) came into effect in July 2012.

The policies were paid out to my client in June 2014 and we included it in the gross income of the company.  We received tax directives from SARS for these payouts in the name of the members and we deducted PAYE from these policies. The same amount of the payout included in the gross income of the company were debited to the income statement again in employee costs.

Are these policies taxed in the hands of the members (individuals), if so, please advise where it is stated in the Act.  Is it taxed as income or capital?

A: The facts provided refer to the fact that the ‘client … contributed to key man policies’, but it is then stated that it was ‘included in the gross income of the company’.  From the facts it then seems clear that the proceeds of the policies were not paid out by the insurer to the employees – it was paid to the company (as policyholder).  The company in turn decided to pay the amount to the employee and this is presumably in terms of the employment contract.  As such the amount would be in respect of services rendered and therefore gross income for the employees.  This is in terms of paragraph (c) (or possibly (d)) of the definition of gross income.  Paragraph (m) of the definition of gross income does not apply in this instance and the exemption under section 10(1)(gG), (gH) or (gI) is also not applicable.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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