The risk insurance business of South Africa’s long-term insurers will in future be taxed as part of their corporate funds if proposals by the National Treasury progresses to the statute books.
The proposed change, Treasury said, aims to prevent profits and losses from their risk business being incorporated in the tax calculation of policyholders’ funds.
This is because the business “is not part of the investment business that should be taxed on the trustee basis” and should rather be taxed into the corporate fund, which will be a mixed fund including both the insurer’s risk business and its surplus assets.
Risk policies include disability and health insurance covers, term life insurance, credit life insurance, life cover and funeral cover, which pay benefits when a future, uncertain event such as death or an accident takes place. They also include reinsurance policies for these risk policies.
Even mixed investment and risk policies with only a small risk element will be treated as risk policies under the proposals in the draft Taxation Laws Amendment Bill, which was released on the Treasury website earlier this week for comment. The incorporation of risk policies into the corporate fund will only apply to those policies issued after the effective date of 1 January 2016 and will not be backdated to previously issued policies.
Gary Eaves, head of tax at the international investment, savings, insurance and banking group Old Mutual, said that the change would generate more revenue for the South African Revenue Service but not significantly so. The effect would be that insurers would lose some tax relief on selling expenses in their policyholder funds.
“In my opinion the change is a necessary one that makes the taxation of long-term insurers more philosophically consistent and appropriate,” said Eaves.
“This is an exceptionally complex issue. Limiting the impact to policies issued after 1 January 2016 is good in that it avoids making it even more complex, I’m thus grateful that policies already issued are not affected. More consultation is required to resolve ambiguities and practical difficulties.”
South Africa’s long-term insurers are required to divide their business into four funds for tax purposes, each of which are taxed according to different principles. These are the individual policyholder funds for policies owned by individuals; the company policyholder fund for policies owned by corporate entities; the untaxed policyholder fund for untaxed entities and annuity contracts; and the corporate fund consisting of all the assets held by the insurer and all the liabilities owed by the insurer not falling in the other policyholder funds.
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