Tax Laws Amendment Act, 2011

Tax Laws Amendment Act, 2011

Payroll / eTorQue, Tax

Taxation of Unapproved Insurance Benefits and Medical Credits

The recent changes to the Income Tax Act have impacted on the taxation of the premiums and proceeds in respect of an employer owned unapproved policy. What your insurer needs to supply you with to ensure that your payroll is correct.

Medical Credits – The difference between the previous method and the new method.

Taxation of Employment Related Insurance Policies

A specific provision has now been included that forces the taxation of the insurance policies paid for employee’s by employers, if the policy is unapproved.

What does this mean?

If the employer is paying the premiums for Group Life, Dread Disease, Funeral Policy or Disability / PHI / Income Protector on behalf of the employee if it is an unapproved fund. The employee needs to pay tax on these benefits in the form of a fringe benefit through the payroll and it needs to be reported on the tax certificate.

The employer can then claim a deduction for the premiums.

Proceeds received will then be tax exempt in the employee’s hands, unless the employee is entitled to a tax deduction as in the case with a Disability / PHI / Income Protector. This income is not paid as a lump sum payment and is taxed when paid monthly to the disabled employee, the employee is entitled to a tax deduction through the payroll. This has the effect of making the Disability / PHI / Income Protector portion of the insurance, tax neutral.

What do you need to do?

If you have an insurance policy of this nature for your employees, or a pension or provident fund which has a portion of this type of insurance built into the monthly contribution, and the company pays it on behalf of the employee, please contact your insurance broker today.

Ask if the risk portion is approved or unapproved.

If it is unapproved, please request the information regarding the contributions that fall into these categories and send to your payroll administrator at HRTorQue Outsourcing: [email protected].

Please note that you must place reliance on your broker / insurer to provide you with the necessary information / guidance in this regard. We cannot ensure that the payroll calculates correctly in this regard unless you give us the information now and each time there is a change to contributions.

Medical Credits

The principal difference between the previous method and the new Medical Credit method is:

  • A tax deduction lowers the individuals’ taxable income
  • A tax credit reduces the individuals’ tax liability
  • Therefore lower income earnings will benefit more under the new system

What does this mean?

High earners will benefit less as a result of Medical Credits, current higher earners are going to get less Nett Pay for March 2012 – this will result in lots of queries!

The base Medical Credits for 2012 are:
R230 p/m for the main member
R230 p/m for the first dependant (spouse?)
R154 p/m for all other dependants
R230 p/m for dependants/ persons over 65
R230 p/m for a disabled dependant
Additional medical credits require “special application”

If an employee is over 65, still employed and on the medical aid, the full medical aid contributions paid by or deemed to be paid by an employee on the last day of the tax year must still be deducted from that employee’s taxable income. The amount of contributions paid by the employer on behalf of an employee who is 65 years and older and has not retired from that employer, will be a taxable fringe benefit, employer contributions are deemed to be employee contributions

However, when an employee has retired from an employer, irrespective of the age of the employee, and the employer continues to pay contributions on behalf of that retired employee, the no value fringe benefit still applies.

What do you need to do?

Please ensure that the date of birth and the identity numbers on the payroll are correct as the payroll will use this to determine the age of the employee.

Please ensure that the number of medical dependant details are correct on the payroll.

If you have employees who are “retired”, (you can be younger than 65 and retired) but are still on the payroll and are on the medical aid, please inform your payroll administrator on [email protected].