Employees earning remuneration are generally prohibited from claiming tax deductions for any expenditure other than those items listed in the Income Tax Act. This is in contrast to persons carrying on a trade independently of an employer.
One of the few deductions still available to employees is for premiums paid on income protection insurance policies. Currently, such premiums are deductible if
- the policy covers the person against loss of income as a result of illness, injury, disability or unemployment, and
- the amounts payable in terms of the policy constitute or will constitute income.
The general principle has been that the premiums will be deductible if the proceeds are taxable – for example, if the policy pays a salary replacement annuity to the policyholder in the event that he is no longer able to earn a living. The deduction available for these premiums is, however, an exception to the general rule that personal expenditure is non-deductible, on the basis that these premiums incurred may, in fact, produce taxable income.
The deduction is also an exception to the general prohibition on tax relief for personal insurance – for example, life insurance – again on the basis that life insurance proceeds are typically a non-taxable capital lump sum. This exception carries through into the way the premiums are treated for fringe benefits tax purposes: where such premiums are paid by employers on these policies to cover employees, the premiums are not a taxable fringe benefit, as opposed to premiums for employer-paid group life insurance, which are taxable (but again, the proceeds of employer-fund group life policies, where the premiums are taxed as fringe benefits, are specifically exempt from tax).
The deductibility of income protection policy premiums will fall away from 1 March 2015.
So, the situation going forward is quite simple –you will not be able to get any tax deduction for the premiums paid insuring yourself against any risk – be that risk death, injury, disability or loss of income. However, any proceeds received for any of these insured events are not taxable. The effective date of this change is 1 March 2015. After that date premiums paid are not deductible. The good news is that any proceeds received after that date are not taxable, even though you may have in the past (i.e. prior to 1 March 2015) claimed those premiums as a deduction.
While the proposed regime is quite clean, simple and consistent, it has the potential to discourage individuals from taking out this type of cover, and similarly discourage employers from offering it as a benefit (indeed, if it is offered as a benefit, the take-up by employees will no doubt be reduced). Policymakers have pointed out that the proceeds are now tax-exempt, which should reduce the amount to be insured to achieve the same coverage. This should, in turn, reduce premiums and encourage insurance. There is, however, the potential that people will value a tax deduction today more than the potential of tax-free proceeds in the future, and so are likely to cancel or avoid such insurance. This, in turn, creates the potential of more uninsured people
Employer-provided policy:
- An employer takes out a policy which covers all its employees, so that if they are injured after hours and unable to work, they will receive a limited annuity.
- The policy costs R1 000 000 pa and covers 100 employees. The fringe benefit is therefore approx R833 per month. However this is a nil value fringe benefit so the employees pay no tax on it.
- From 1 March 2015, the employees will pay tax on this benefit. For a highest-rate taxpayer, the additional tax will be R333 per month.
It should be noted that the premiums may change once the tax rules change given that the proceeds of the policies will become tax-free.