Deduction of personal income protection

[duncan drennan]

I found out yesterday from my accountant that insurance against loss of income is a tax deductible expense (in terms of personal taxes). Here is the relevant piece of the Income Tax Act, which also covers other deductions which may be made by an employer,

Schedule 4. (2)(4)

4) The amount required to be deducted or withheld from any remuneration under this Schedule by way of employees’ tax must be calculated on the balance of the remuneration remaining after deducting therefrom--

1. any contribution by the employee concerned to any pension fund or retirement annuity fund which the employer is entitled or required to deduct from that remuneration, but limited to the deduction to which the employee is entitled under section 11(k) or (n), as the case may be, having regard to the remuneration and the period in respect of which it is payable;
   
   
2. at the option of the employer, any contribution to a retirement annuity fund by the employee in respect of which proof of payment has been furnished to the employer, but limited to the deduction to which the employee is entitled under section 11(n) having regard to the remuneration and the period in respect of which it is payable;
   
   
3. at the option of the employer, any premium paid by the employee in respect of which proof of payment has been furnished to the employer, in terms of an insurance policy—
   1. to the extent that it covers that employee against the loss of income as a result of illness, injury, disability or unemployment; and
      
   2. in respect of which all amounts payable in terms of that policy constitute or will constitute income as defined, but limited to the deduction to which the employee is entitled under section 11(a); and
   
   
4. at the option of the employer, any contribution by the employee to a medical scheme as contemplated in section 18(1)(a) [and] in respect of which proof of payment has been furnished to the employer, if the employee is entitled to a rebate under section 6(2)(b),

[Harryf]

Hi Duncan (and all)

Please remember that this does not apply to PPS (The Professional Provident Society).

Their "income protector" differs from that of other assurers and insurers in the sense that even though their product is "seen" to replace lost income, it actually pays because of an "inability to work" and thus "earn an income".

No loss of income needs to be proven with PPS while life assurers require (contractually) proof of actual loss of income.

Example: Assume the following to be true: a vet became ill and could not work for, say, two weeks. He appointed a locum (good client service and all that, you know) and did not loose a single cent in turnover - not even after having paid the locum (That is so because the handsome young bloke had ladies streaming in with their poodles, increasing the turnover).

Life assurers will not entertain claims such as the aforementioned because no loss of income will have been suffered. PPS will pay such claims simply because the guy could not perform his duties.

See? Different ideas, different way the Income Tax Act needs to respond.

So they refused PPS policyholders the right to deduct premiums under said section of The Act.

Harry

Edit note from admin: The advice contained in this post is no longer appropriate due to changes in legislation. Please read the entire thread to ensure you have the latest applicable information available on this topic.

[duncan drennan]

See? Different ideas, different way the Income Tax Act needs to respond.

So they refused PPS policyholders the right to deduct premiums under said section of The Act.

Thanks so much for that Harry! It is particularly relevant to me, as I am using PPS. Good thing to find out about that now, rather than during a tax assessment/audit

Welcome to the forum, it is good to have you as a member, and I'm glad that the regular browsing has led to you posting

[Harryf]

Thanks Duncan!

I'll see if I can get the relevant info in writing and PM it to you (as an attachment (.pdf) - may I?)

[duncan drennan]

I'll see if I can get the relevant info in writing and PM it to you (as an attachment (.pdf) - may I?)

Sure, go for it. Thanks

[Harryf]

The size of the .pdf file exceeds the maximum allowed so I'll fax it. OK?

[Eugene]

Great post and info Harry! I'm also using PPS and is quite relevant to me - thanks!

[duncan drennan]

Dave kindly uploaded the PDF to the server. You can read it here.

[defZA]

income protection tax

Hello people,

Just wondering, SARS says you can get "Income Protection Insurance" payments off your taxable income, but does anyone know which companies provide this insurance?
It's kinda difficult to find info about this online.

Any hints on who you use or know of would be helpful!

Cheers,


David

[Dave A]

I think it is all the usual suspects - Liberty Life, Mutual & Federal, Santam...

[Harryf]

Long term assurers carry those kind of risks more than short term insurers do.

Some specialist short term insurers (not the "big guns") do provide such products, but the benefits of these are limited to short term protection (maximum payment periods < 2 years, i.e. no permanent disability benefits are provided).

Apart from PPS, the rest usually only provide for long term protection, i.e., their products cater for both short - and long term illnesses/disabilities.

A financial adviser should be able to assist you in this regard, David.

hth

Harry

[defZA]

Thanks for the replies so far guys.

I tend to believe things aren't that complex that a bit of reading won't solve, so I'm trying to forge my way around the information so that at least I won't get conned by an unscrupulous character. This income protection from SARS is the only thing I have to resolve still regarding personal income.

This brings me to the main question:
What is seen by SARS as satisfying "Income protection insurance"?
Is it Life Insurance?
Accident Cover?
Dread Disease Cover?
Disability Cover?
Functional Impairment Cover?


The industry uses a lot of different terms for slightly different things.

I found this statement from their sites sars.co.za / sars.gov.za:

to the extent that it covers that employee against the loss of income as a result of illness, injury,
disability or unemployment; and

and

NOTE: Deductions will be considered in respect of policies where the loss of income is insured and not the ability of
the person to earn income.

Deductions will be considered in respect of policies where it covers you against the loss of income as a result of illness, injury, disability or unemployment and the amount payable in terms of the policy constitutes or will constitute income as defined.

I guess the best is to ask the insurance companies whether or not the receipt of payment for a specific insurance protection policy can be used as tax deduction proof (i.e. is registered to be deductible).

-----
Personal Finance: http://www.persfin.co.za is actually quite a good resource by the way for general finance SA questions.

[Harryf]

Update on Illness and disability income benefits

Hi all

Since I replied to Duncan on 28/80 of last year, quite a lot has changed in this arena.

Let me quickly expand on what I'd said in the original post:

1. The monthly amount paid by PPS during the first 24 months of any claim is not taxed. It is seen as capital and are called "SICKNESS BENEFITS";
2. The insured does not have to prove loss of income in order to claim a benefit;
3. The product then switches to permanent disability benefits. These payments are fully taxed as income;
4. The permanent disability income is paid according to specific policy rules, which I won't discuss here.

OK, now keep the structure in mind as you read along.

PPS and Sanlam seem to be drifting apart (it's another long(ish) story) and Sanlam stand achance of losing a substantial portion of the business of graduate professionals to PPS. What to do? Sanlam decided to develop a product for graduate professionals to directly oppose PPS' Sickness Benefit and launched it in February of this year.

And it is this new product that changes my original reply.

This "Sickness Benefit" that Sanlam developed for graduate professionals is similar to PPS' "Sickness Benefit" for a few reasons and different in other technical detail and cover benefits.

Let me stick to relevant similar benefits:

1. Like PPS, Sanlam's Sickness Benefit also pays out a Tax Free monthly amount whenever it pays out;
2. It pays out a maximum of 24 months per illness
3. The premium for this benefit is not allowed as a deductible expense against income
4. The insured does not have to prove loss of income to claim a benefit

The Sickness Benefit is an addition to a standard (and current) "Income protection policy". The latter pays out a taxable income, the member has to prove loss of a substantial ability to earn an income from the nominated occupation and any other income earned from the broad profession is deducted from the income paid by the policy. This product is typically sold with a 24 month waiting period when sold in conjunction with the Sickness Benefit.

The premium of the latter is allowed as an expense incurred in the production of income as Duncan asked.

Even more changes:

PPS recently announced that members will, after legal opinion was acquired and as of the 2008-2009 Tax year, be allowed to deduct certain premiums as expenses incurred in the production of income. These premiums will be the portion spent on permanent disability benefits (those that start paying after 24 months and include OSRB).

So my answer has changed as follows, Duncan and others:

1. Some of PPS' premiums may now be deducted and PPS will supply all members with a contribution certificate detailing this;
2. Sanlam has launched a product, the premiums of which may not be deducted.

In case anyone want to know more about the differences between the products and how they compare and which one is the better for you, I did a detailed (somewhat overly so, and to Sanlam's annoyance) analysis but have not been able to sit down and finalize a 53 page report into bite sized chunks devourable by people outside of the life assurance industry. Heck, even some of those in it have no idea what I am talking about. Suffice to say: "Buyer beware"

Hope yours is a great day!

Harry

[andreg]

Thanks for information Harry. Exactly what I was searching for when I joined.

[pete460]

PPS recently announced that members will, after legal opinion was acquired and as of the 2008-2009 Tax year, be allowed to deduct certain premiums as expenses incurred in the production of income. These premiums will be the portion spent on permanent disability benefits (those that start paying after 24 months and include OSRB).

So my answer has changed as follows, Duncan and others:

1. Some of PPS' premiums may now be deducted and PPS will supply all members with a contribution certificate detailing this;
2. Sanlam has launched a product, the premiums of which may not be deducted.

Harry

Will you be able to deduct the PPS premiums to Permanent Disability fund if you are a "normal salaried person" - or do you have to be a earning commissioned or contract income?
Peter