Although we reported in our November newsletter that the proposed retirement funds reform, due to be introduced in March 2015, has been postponed, the changes to the tax treatment of income protection policies is still effective from that date. Just to remind our clients, here is a brief summary of how these changes will affect income protection policies:
Deductibility of income protection policy premiums
The tax deductibility of income disability policies will be brought in line with capital disability policies. The result is that the premiums paid by natural persons on income protection policies will no longer be tax deductible from 1 March 2015.
Where an employer is the owner and premium payer of an income protection policy on the life of an employee for the benefit of that employee, the employer will still be entitled to deduct the premium under section 11(w)(i) of the Income Tax Act as long as the premium is included in the gross income of the employee as a fringe benefit. As the premium is included in the gross income of the employee it will be subject to income tax. (At the moment the employee is entitled to a tax deduction under section 11(a) read with section 23(p), which effectively neutralises the income tax payable on the premium, however, this deduction will fall away from 1 March).
When an income protection policy pays out, an exemption will apply so that the benefits will be tax free. Section 10(1)(gI) is introduced into the Act. This section infers the following requirements for the exemption to apply:
- An amount due under the insurance policy is payable to a natural person;
- This natural person is also the policyholder of that policy; and
- The policy must relate to the death, disablement, severe illness or unemployment of that person.
Please contact us if you need more information.