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Issues From The Budget Relating To Life Insurance

Thursday, 06 May 2010   (0 Comments)
Posted by: Author: Harry Joffe
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Issues From The Budget Relating To Life Insurance
There were several references in the recent budget to life insurance, dealing with deferred compensation and employee group risk cover on one hand, and estate duty on the other. Harry Joffe, head of legal services at Discovery Life and the life assurer’s resident tax expert, comments.

1.Deferred compensation and group risk
The budget book states the following on deferred compensation:"Companies often protect themselves against revenue shortfalls stemming from the loss of key employees by taking out employee life cover. These policies have, over time, become methods of creating immediate tax deductions for employers while providing tax-deferred benefit packages on behalf of employees upon retirement or termination of employment.”
It does seem that keyman and deferred compensation structures are being confused here.Generally, keyman policies are taken to protect the employer in the event of the death or disability of a key employee and help the employer replace such an employee on their death on disability.Surely this is to be welcomed?More importantly, the vast majority of such keyman policies are normally non-conforming, i.e. do not conform to the requirements of section 11 w of the Income Tax Act, and so are not tax deductible anyway.In respect of the reference to deferred compensation policies, this product is very seldom sold these days, because of the low cash values in the policies in the early years, and the very long-term nature of such a structure – the employee must wait until age 55 to receive any tax benefits.
Secondly, when the employee finally gets paid out what is due to them on turning 55, then they are taxed.While they might get the R30 000 concession, most employees will have already used this amount, either by way of leave pay or other gratuities, and so it is not worth that much.The only small benefit is the average rating formula, which really is quite small.Finally, the point is that the employee has no right to the policy or proceeds until they turn 55 anyway, so why should they be taxed up front?
However, it does seem that the whole R30 000 tax-free amount and average rating concession is on the way out, as the budget book had the following to say on this: "The R30 000 income-tax exemption for retrenchment packages has not been adjusted in many years.It is proposed to merge this exemption into the retirement lump sum tax exemption. In future, all retirement and retrenchment lump sum payments will be treated equally.” This will, in effect, put an end to deferred compensation plans.It remains to be seen whether SARS will address the deductibility of premiums issue. Will Section 11w be amended? However, until legislation is seen, it is impossible to be sure of the final detail, and all of the above is just speculation.That said, I would not be selling or buying any deferred compensation schemes right now.

SARS in the budget book then goes a step further "Problems also exist with employer-provided group life insurance schemes. Steps will be taken to ensure that employer deductions match employee gross income.Employee insurance packages will be taxed fully as fringe benefits on a monthly basis.”

This paragraph starts by suggesting that SARS is not happy with the way group schemes are being run in practice, with particular reference to fringe benefits tax.It seems some employers with unapproved schemes are not deducting fringe benefits tax on the premiums correctly, and SARS intends to watch this more carefully.The last line goes even further and suggests that all employee benefits are going to be carefully watched to ensure employers are treating them correctly.This would include pension and provident funds, medical scheme contributions, keyman policies and preferred compensation plans. All financial advisers are hereby warned – SARS is going to be watching payrolls and fringe benefits tax far more carefully in the future – make sure your clients are handling everything correctly
2.Estate duty
The budget book had this to say on the topic:"Over the year ahead, several issues will be researched for possible attention in tax proposals for 2011 and 2012.”
Taxes upon death
"Both estate duty and capital gains tax are payable upon death, which is perceived as giving rise to double taxation.The estate duty raises limited revenue and is cumbersome to administer.Moreover, its efficacy is questionable: many wealthy individuals escape estate duty liability through trusts and other means.Taxes upon death will be reviewed.”

This is a clear indication that government is considering scrapping estate duty.This would be in line with steps taken by many countries in South East Asia like Singapore, for example, and appears to make sense given that it collects so little revenue.It could mean a slight increase in CGT though, to compensate.If this were to happen, it would make the structuring of business assurance deals much easier, and advisers would not have to be so concerned on who owns the policies and pays the premiums, etc.This would make everyone’s life much easier when structuring both buy and sell and keyman arrangements in respect of the life assurance policies.However, note that this is just a consideration for the future and, as of now, estate duty is still very much in force.This means advisers do need to be very careful how they structure their business assurance deals, and who owns the policies and pays the premiums.
Source: By Harry Joffe (TaxTALK)



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