Recent changes have been made to legislation that impacts on the taxation of key man policies, deferred compensation schemes, self-standing (unapproved) group life benefits, disability lump sum benefits and disability income benefits.
HRTorQue Outsourcing as a client of Momentum has liaised with their legal advisors to obtain clarity on these legislative changes and how they impact on the funds administered by them. Momentum has provided us with their interpretation of this legislation, but also suggested that companies using other insurers get their individual interpretation of these matters. These tax changes will have a fringe benefit implication in many cases, and it is imperative that you identify how this will impact on your payroll.
In cases where there is an income replacement policy in the name of the employer, paying a monthly income to a disabled member, the premium will need to be added to the employee’s remuneration, as a fringe benefit, and taxed accordingly.
National Treasury has indicated that the intention is that section 23(m)(iii) of the Income Tax Act will be amended to allow the employee to get a tax deduction in terms of section 11(a) of the Income Tax Act for the ’employer’ paid premium that has been added to their taxable income. However, the Act still has to be amended before the employee can claim the deduction. It is hoped that these deductions can be processed in bulk, by the employers through the payroll systems, so that there is no financial impact on the employees. It is important to note, however, that a final decision has yet to be made by Treasury in this regard.
In the case of a long term insurance policy in the name of the employer, the employer can only claim a deduction for contributions made if the amount is included in the taxable income of the relevant employee. The premiums made by the employer must be taxed as a fringe benefit in the employee’s hands.
In the case of an “Unapproved” Disability Lump Sum benefit or Death Benefit, the beneficiary under the policy is the employee, or their dependents, respectively. Premium contributions made by the employer to the fund are then added to the employee’s remuneration as a fringe benefit and taxed accordingly. The payout to the employee or beneficiaries would then be tax-free.
It is important that you obtain clarity from your broker / insurer as soon as possible regarding this issue, so that the necessary changes can be implemented into your payroll. If contributions to any of these risk benefits constitute a taxable fringe benefit, they now will need to be loaded as a fringe benefit.
Should you require any further assistance in this regard, HRTorQue Outsourcing can consult with your broker / insurer on your behalf. Contact Dave Beattie on 031 582 7410 should you require assistance.