6. South African Insurance Taxation

Question 1

Which sections of the Income Tax Act specifically relate to life insurance?

Answer 1

Part of Income Tax Act 58 of 1962
Sections 29A and 29B relate to life insurance

Question 2

What retirement-related change affected the taxation rules for insurance?

Answer 2

Implementing Insurance Act in 2018 had effect of how actuarial L are valued for tax purposes
Introduction of new tax fund for risk policies
Consolidation of rules governing retirement, pension and provident funds under retirement reforms
Implementation of changes to taxation of life insurance companies due to transition to IFRS17

Question 3

How are premiums treated for life insurance policies owned by individuals?

Answer 3

Premiums paid on after tax income
Lump sum proceeds from life insurance are tax exempt except for second hand policies
Applies to basic policy and profits/bonuses from policy
If whole or portion is payable as income over specified term, treated as annuity and income tax levied
If it’s a capital sum payable by instalments over specified term, and hence no interest to ph&raquo_space; instalments may not be taxable.
From March 2015, IP benefits no longer taxable&raquo_space; increased anti-selection and over insurance

Answer 4

Taxpayer, i.e. employer, must be ph
Only benefit payable on death, disablement or SI of employee or director
Amount of expenditure incurred by taxpayer wrt premiums payable under policy is deemed to be taxable fringe benefit granted to an employee or director of the taxpayer in terms of the Seventh Schedule to ITA

Question 5

How are policy proceeds treated for companies when they are the policyholder?

Answer 5

Proceeds of policies must be incl in taxable income of company and taxed as such

Question 6

What is the tax treatment for life insurance policies owned by tax-exempt institutions?

Answer 6

Owner = tax exempt institution
No tax

Question 7

What was the aim of the retirement reform proposals from December 2004?

Answer 7

Proposed changes made in paper from December 2004 with aim to ensure consistent and equitable treatment between diff methods of funding retirement

Question 8

What are vested rights in the context of retirement funds?

Answer 8

Ensures that members’ vested rights (benefits accrued before 1 March 2021) are preserved and exempt from compulsory annuitisation.

Question 9

Under TLAB 2021, what is the new carry-forward limit for excess contributions?

What is the purpose of the “2-pot” retirement system introduced by TLAB 2021?

Answer 9

Taxation Laws Ammendment Bill
New limit- no more than 80% of excess E can be carried forward

New “2-pot” system: rules for accessing retirement savings
One pot accessible annually (subj to limits)
Other pot only accessible at retirement

Question 10

What is the contribution cap for retirement funds?

Answer 10

Capped at lesser of:
27.5% of greater of taxable income or remuneration
350 k annually
Apply to employee and employer contributions (treated as fringe benefits for employees)

Question 11

How are non-deductible retirement contributions treated?

Answer 11

Carried to next assessment year
Available to offset lump sum during withdrawal / at retirement

Question 12

At retirement, what portion of a retirement fund must be used to purchase an annuity?

What are the tax rates for retirement lump sums and death benefits?

Answer 12

2/3rd Must be taken as compulsory annuity

1/3rd can be taken as lump sum cash at retirement- full payment allowed if less than 247500

*Cash lump sum and death benefit tax rates:
0–500 000: 0%
500 001–700 000: 18% of excess
700 001–1 050 000: R36 000 + 27% of excess
Above 1 050 000: R130 500 + 36% of excess
Diff tax rates for withdrawals

Question 13

Are transfers from other funds into RA funds taxed?

Answer 13

Tax free transfers between provident, pension and RA
Transfers out of RAs are taxed but transfers from other funds to RA funds are tax free

Question 14

Can contributions to benefit funds be deducted from taxable income?

Answer 14

Can deduct benefit funds (friendly societies and registered medical schemes) contributions from taxable income, as per Section 11(l) of the Income Tax Act
Payments from these funds do not receive special tax treatment.

Question 15

How are voluntary annuities taxed when purchased with net income?

Answer 15

If purchased with net income, only portion exceeding the “capital element” is taxed
Capital element determined upfront:
Lump sum paid / expected total payments over annuitant’s e(x)

Question 16

Are disability insurance premiums and benefits taxable?

Answer 16

Premiums paid from after tax income and benefits are tax free

Question 17

What is the estate duty threshold and tax rate in South Africa?

Answer 17

Based on total estate value, incl. certain policies and benefits
Deductions and abatement of 3.5m allowed
20% tax on remaining amount

Question 18

What are the contribution limits for tax-free savings accounts?

Answer 18

Tax-free returns
36k annual limit; 500k lifetime limit
Withdrawals, don’t reset limits

Question 19

What is insurance company tax?

Answer 19

Taxable income calculated on standard provisions of ITA but subject to rules in Section 29A
Rules in Section 29A guide classification of A+L into diff tax funds, transfers between funds, deductions of expenses, tax treatment of premiums and claims incl. reinsurance

Question 20

What is the purpose of Section 29A classification for tax?

Answer 20

Purpose- mandates life insurers to establish 5 separate funds to manage diff tax liabilities
Each fund is treated as distinct taxpayer, reflecting nature of policies and ph

Question 21

When was the Risk Policy Fund (RPF) introduced and what does it include?

Answer 21

Introduced by 2014 Tax Laws Amendment Act, effective for policies issued after 1/01/2016
Includes policies qualifying as “risk” policies where benefuts can’t exceed premiums except incases of death, disability, illness or unemployment
A in fund have MV equal to L
Insurers can include qualifying policies sold before cutoff date

Question 22

What types of policies are included in the Untaxed Policyholder Fund (UPF)?

Answer 22

*Policies that are tax exempt e.g
Pension, provident, RA and preservation fund policies
Tax exempt entities
*Includes annuity contracts where payments currently being made
*A represent MV of policy L, allowing tax neutrality in cases where ph are inherently exempt

Question 23

What is the Company Policyholder Fund (CPF)?

Answer 23

Policies owned by individuals excl those in RPF and UPF
Reflect L of individual ph, ensures proper allocation of investment income and expenses to individuals for tax purposes

Question 24

How does the CPF mirror the IPF?

Answer 24

Policies owned by companies excl those in RPF or UPF
Mirrors setup of IPF but specifically for corp policyholders, so income and gains are taxed at appropriate rates

Question 25

What is included in the Corporate Fund (CF)?

Answer 25

A not included in other four funds- representing sh interests Reflects earnings and profits directly attributable to sh

Question 26

How are trusts treated for insurance tax fund allocation?

Answer 26

Trusts: “Look-through” approach- nature of beneficiaries influences allocation to appropriate tax fund

Question 27

How are jointly owned policies treated if not all owners are individuals or tax-exempt?

Answer 27

Joint ownership: If not all ph are individuals or tax-exemt, policy considered to be owned by a company for tax purposes, ensuring consistent treatment under CPF

Question 28

How is taxable income in the Risk Policy Fund (RPF) determined? Why does the RPF often result in zero taxable income in practice? What deductions are allowed in IPF and CPF? How is taxable income determined in the Corporate Fund (CF)? What is the key restriction on deductions in the CF?

Answer 28

RPF Follows std income tax principles- tax is on profits within fund Deductions for transfers into CF often result in zero taxable income for practical purposes IPF & CPF Investment and other income (interest, rental, taxable foreign dividends and admin fees) … … less deduction for expenses Capital asset allowances can’t be claimed. UPF No taxable income CF Follows std income tax principles, with exception of treatment between CF and other tax funds When determining profits for CF for tax purpose, ONLY expenses INCURRED IN CF are deductible against taxable income in CF, and not against transfers into CF.

Question 29

Briefly explain how you calculate L for tax purposes

Answer 29

IFRS basis used over prudential basis since prudential basis = recognising all future profits now = paying tax before cash received (TLA of 2017 change) Zeroise – L Is a 6 year transitional period in which change in L from SVM adjusted for reinsurance and current L to new tax basis will be taxed in Under IFRS17, still same basis is used but … … where L are zeroised, the liability for incurred claims won’t be included in this calc Transitional amount = L under old acc basis – L under new basis will be phased in over 6 years Specific care was taken to consider the re-classification of certain items from assets to negative liabilities … …(e.g. premium debtors are now included within the long-term liabilities), to ensure they don't artificially create a transitional amount.**Q

Question 30

Briefly explain how you transfer assets between 5 tax funds

Answer 30

Any excess(shortfall) between MV(A) and MV(L) will be transferred to(from) CF Any amount transferred TO CF will be included in the taxable income of the CF There is a limited deduction from ph fund (see below) Any amount transferred FROM CF can’t be deducted from taxable income of CF This amount will NOT be included in taxable income of other funds Once amount is transferred FROM CF, any future amounts transferred back to CF will not be included in taxable income in CF unless it exceeds original transferred amount

Question 31

Explain how you deduct expenses in ph funds

Answer 31

Total of: Expenses directly attributable to income of that fund (Expenses allocated to that fund, but excl any expenses directly attributable to amounds which do not constitute income) X expense relief ratio (Y) 30% of any amt transferred to CF multiplied by Y, if this amt doesn’t exceed balance of income remaining in that fund after accounting for other deductions Expense relief ratio aka Y Y=X+UZ where, X:amt which would be equal to taxable income in respect of the fund but excl any dedcution during the year of any amt incurred in respect of expenses U:amount incl. in Z*0.4 in case of IPF and 0.8 in case of CPF Z:amt in X plus: 1.Agg of all dividends which are exempt from normal tax received in fund during asmt year 2.Agg of all foreign dividends received in fund for year less any amount of that agg that is incl in taxable Y 3.Agg capital gain for that year that isn’t incl in taxable income in respect of the fund by virtue of CGT inlusion rate being 40% for IPF and 80% for CPF 4.Min(MV(A) at end of year – MV(A) at start of year, 0)

Question 32

What happens if deductible expenses exceed taxable income in a fund? Can Excess E amounts be carried forward? What is the limit on the amount of Excess E that can be carried forward?

Answer 32

If deductible expenses > taxable income of fund Will not pay tax if in Excess E position and … … amount by which it’s in excess E can be carried forward to next year to offset against taxable Y Maximum amount that can be carries forward is 80% of taxable income in the year>> applies to ph funds Max came into effect on 31 March 2023

Question 33

What events trigger CGT for insurers?

Answer 33

CGT triggers Sales of investments Deemed disposal of assets from PFs to/from CF from year-end transfers which are deemed to take place at MV(A) Actual A transfer between funds which is required if there is a change in the ownership of the policy / change in status of an owner of a policy

Question 34

How is a capital gain calculated? What base cost options are available for assets acquired before 1 Oct 2001?

Answer 34

Realised gain = Sale proceeds – Base cost For assets acquired before 1/10/2001, taxpayers can choose base cost to be: MV on 2 October 2001 Value that would result in a capital gain proportionate to the totalgain on that asset as the period from 1 October 2001 to the date of sale represents to the total period that asset was owned 20% of sale proceeds Losses can be offset against other capital gains/carried forward to future tax years

Question 35

What are the CGT inclusion rates for the various funds?

Answer 35

IPF: 40% CPF & CF: 80% UPF: Exempt RPF?

Question 36

Explain deemed disposal rules

Answer 36

Introduced to handle increase CGT rates as of 1/03/2012 Insurers had to account for unrealised gains/losses as of 29/02/2012 Spreading rule: Gains/losses from this deemed disposal could be spread over 4 years (2012 and next 3 years) Similar deemed disposal rule with 3 year spread applied with 2016 CGT rate changes

Question 37

What is the income tax rate for IFP,CPF,UPD, CF

Answer 37

IPF- 30% (considered to be man of individual ph avg tax rate) CPF- 27% (current company tax rare) UPF- nil CF- 27% RPF- 27%

Question 38

Who usually has the withholding obligation for dividends tax? When is a long-term insurer considered a regulatory intermediary?

Answer 38

Tax is charged to beneficial owner of dividend, usually sh 20% Withholding responsibility lies with company declaring the dividend, unless… … dividend is paid to regulatory intermediary in which case intermediary handles withholding Long term insurers are deemed to be regulatory intermediary and have withholding obligation wrt dividends paid to insurer and allocated to the IPF Payers: Individuals IPFs Non-resident sh

Question 39

What types of securities are subject to STT? What is the rate of Securities Transfer Tax?

Answer 39

Applies to transfers of securities (e.g. shares) issued by: SA incorporated company Foreign company listed on JSE 0.25% of MV of transferred security