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SARS move on life cover makes lot of tax sense

Tuesday, 24 January 2012   (0 Comments)
Posted by: SAIT Technical
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SARS move on life cover makes lot of tax sense

By Matthew Lester

SARS has tightened up the legislation relating to employer-provided life insurance schemes (often referred to as group life schemes).

This may make a bit extra cash for SARS, but it is in the interests of the taxpayer, or rather the deceased taxpayer’s beneficiaries.

In the past many group life schemes worked on the basis that as the employer was the owner/beneficiary of the policy, the premiums were tax deductible for the employer.
And no monthly fringe benefit accrued to the employee.

On death, the insurance proceeds were paid to the employer and then on-paid to the employee’s estate or nominated beneficiaries. This resulted in the employer being tax neutral, and the payout being taxed as a death benefit in the employee’s estate.

The new laws provide that, other than in special complex circumstances, the employee’s monthly contribution will be taxed as a fringe benefit. That’s the bad news. But on death, payment to the estate or beneficiaries will be tax-free. And that’s the good news.

Ask the average South African how much life insurance they carry, and they will answer: "Ag man, my employer sorts that out!”

Few have stopped to examine the reality or take out supplementary cover.

Most group life schemes pay a benefit ranging between two and four times annual salary. Yet for a "30-something” employee with a spouse and two kids, the actual assessment of the life insurance requirement is in the region of 10 to 12 times annual salary, which makes the usual cover insufficient.

If the benefit is then reduced by tax, the widows and orphans have to take in boarders the day after the wake. I applaud the new amendments. They are effectively forcing employees to make additional provision for life insurance.

In most cases, the taxpayer also stands to benefit as the additional tax paid on the monthly fringe benefit is minimal compared to the tax payable on the death benefit.

Something else is forgotten - estate duty. Two years ago, Finance Minister Pravin Gordhan announced a review of estate duty. Not much has happened and I will fall off my chair if estate duty is repealed in next month’s budget. It’s not the politically correct move.

Meanwhile, tax-deductible contributions to retirement funds result in death benefits exemption from estate duty. And premiums paid out of after-tax income to life insurance policies can result in estate duty being levied on death benefits. That’s just bonkers.

Furthermore, the growth within the insurance policy is taxed. Retirement funds are exempt from tax and will even receive tax-free dividends when dividend tax is implemented on April 1. Surely the time has come to exempt all insurance policy benefits from estate duty.

• Lester is a professor at the Rhodes University Business School, Grahamstown

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