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Proposals to the tax treatment of individual
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Proposals to the tax treatment of individual–based insurance policies to be delayed by a year

On Wednesday, the 11th of September Treasury presented the draft response document to the draft Taxation Laws Amendment Bill, 2013 to Parliament’s Standing Committee of Finance. “One significant proposal which drawn a lot of attention was the tax treatment of individual-based insurance policies”, says Erich Bell, Tax Technical Assistant with the SA Institute of Tax Practitioners (SAIT).

“Under the current state of affairs, there are two types of disability insurance plans that are offered to individuals – capital protection and income protection with both of these disability plans being treated differently for tax purposes”, explains Bell.

With capital protection plans, the individual takes out cover against a loss of his/her income earning capacity. This will typically provide cover in the event that an individual losses a limb or becomes mentally incapacitated which affects the individual’s ability to perform his daily employment duties. The premiums paid on these policies do not qualify for a deduction and similarly the pay-outs are not taxable.

Prof Sharon Smulders, SAIT Head of Tax Technical Policy and Research, explains that the Income protection plans protect individuals against the loss of future income. “The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2013 states that the key difference between the two plans is that the income protection plans focus more on the negative impact of the disability rather than the disability itself. With these types of policies, the premiums qualify for a deduction, but the pay-outs are taxable.”

In order to ensure the consistent treatment of both types of plans, of whom both are aimed at providing some sort of financial cover to the insured or his family in the event of death or disability, Treasury proposed to treat the two types of plans the same for tax purposes. Therefore, premiums paid by natural persons in respect of life, disability and severe illness policies will no longer be deductible per se if the policies are aimed at income protection. However, all pay-outs on life, disability and severe illness policies will be tax-free, irrespective of whether the pay-out takes the form of a lump sum or an annuity.

The SAIT through its technical committees, prepared a detailed written submission and presented it to the Standing Committee of Finance last month. “We [South African Institute of Tax Practitioners] supports Treasury’s proposal, since the benefits of these plans are often economically the same which makes the proposal more equitable”, says Smulders. The proposal will also ensure that there is a greater amount of certainty, because all personal insurance cover will be treated equally for income tax purposes.

“It should however be noted that the Institute and other stakeholders raised a number of concerns regarding this proposal, which may adversely affect some of the stakeholders, warns Bell.

“The most significant concern is the fact that employees and employers would need to unwind and renegotiate all their disability policies since they will otherwise be over-insured. This would create a “catastrophic administrative burden”, according to Smulders.

During the feedback session on Wednesday in Parliament, the Treasury conceded that the renegotiation of income protection policies will be administratively difficult and consequently delayed the implementation of the proposal by one year,” according to Bell . “The effective date of this proposal will now be 1 March 2015.”

SAIT is pleased to learn that the Treasury will delay the effective date by one year. “This shows that Treasury is keen on involving all stakeholders in the legal drafting process to ensure that the economic growth of South Africa is achieved with the least amount of distortions as possible.”


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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