The Taxation Laws Amendment Act has made significant changes to Section 11(w) of the Income Tax Act. Section 11(w) deals with the deduction of contributions, for tax purposes, on employer/company-owned policies, and the resulting taxation of benefits paid out under such policies.
The previous section 11(w) of the Act allowed contributions to these policies to be tax-deductible in the employer's hands, and the benefits were generally taxable.
The new section 11(w) contains two new subsections: section 11(w)(i) and section 11(w)(ii).* Section 11(w)(i) allows an automatic deduction for employer contributions to policies that are subjected to fringe benefits tax in the hands of an employee.
This communication focuses on section 11(w)(ii), the so-called 'key-person' policy amendments, where an employer insures itself against the consequences of death, disablement or severe illness of a director or employee of that employer. A deduction is only allowed in terms of section 11(w)(ii) if all the specific requirements are fulfilled.
Requirements of Section 11(w)(ii)
The owner is insured against loss in terms of the policy by reason of the death, disablement or severe illness of an employee or director of the owner (the life assured);
The policy is a risk policy with no cash or surrender value;
The policy is not the property of any other person other than the owner at the time of the payment of premiums.* Premiums will still be deductible, however, if the policy is held by a creditor of the owner as security for a debt of the owner; and
The policy must reflect that section 11(w)(ii) is applicable - either in the policy agreement (policies with a start date of 1 March 2012 and later), or by way of an addendum (policies with a start date prior to 1 March 2012)
Policy types applicable
Any policy where the employer is insured against any loss by reason of the death, disablement or severe illness of an employee or director. This does not include policies with an investment component. Any policies with an investment component are therefore automatically excluded.
What must employers do to ensure they can claim deductions?
If the policy is a new policy with date of commencement on or after 1 March 2012, and complies with the above requirements, the employer policyholder must elect, on upload of the policy, whether it would like the contributions paid on the policy to be tax-deductible. A specific clause will be inserted into the policy document reflecting the tax-deductibility of the contributions.
Policyholders whose policy has a date of commencement prior to 1 March 2012, are required by the new provisions to elect whether they would like to claim a Section 11(w)(ii) tax deduction on premiums. This election must be made prior to 31 August 2012. Further communication and processes will be communicated shortly in this regard. Please do not submit requests at this stage.**
Please only select the 'Conforming' option, where the policyholder elects the option for premiums paid to be tax deductible in accordance with Section 11(w)(ii). Please note that the policyholder must specifically agree to this. The Policy Document will reflect confirmation that the premiums are tax deductible.
I trust that the above clarifies the impact of the changes to Section 11(w) and the process to be followed. If you have any queries in this regard, please let me know.