Edition: June - August 2015
EXPERT OPINION

Tax changes to group Income Protection/Disability policies

From 1 March 2015, a number of changes to the Income Tax Act came into effect and
include changes to Income Disability policies, also known as Permanent Health Insurance
(PHI), Income Replacement Benefits (IRB) or Income Protection Plans (IPP)
. An income
disability benefit (paid from an IPP or PHI policy) provides income replacement to members
who become disabled and can no longer work, provided the member meets the definition of
being disabled.

  Before 1 March 2015 After 1 March 2015
DEDUCTIBILITY OF PREMIUMS
Employee
  • Employer-paid income protection premiums are included in the employees gross income as a
    fringe benefit
  • The above premiums are deductible in the hands of the employee (section 11(a) read with section
    23(m) of the Income Tax Act
  • Employer-paid income protection premiums will continue to be taxed as fringe benefits
  • The premiums will no longer be deductible in the hands of the employee
  • The employee will effectively be taxed on the value of the fringe benefit
Employee
  • Employers may claim a deduction for premiums paid on behalf of the employee, provided the premium is included in the employees gross income as fringe benefit (section 11(w) of the Income Tax Act)
  • No change
PAYMENT OF INCOME DISABILITY BENEFIT
Employee

All benefits paid from such policies are taxable

For example, a member earning R20,000 has a benefit of R15,000. The member pays R1,670 tax on the benefit, resulting in a net benefit of R13,329.

Benefits paid out from such policies will be tax free

For example, the same member with a benefit of R15,000 will pay no tax, resulting in a net benefit of R15,000

Liberty Corporate views PHI/IPP as critical cover to have in place since the risk of becoming disabled is a real one.

This product remains relevant even though employees are no longer entitled to tax relief on the premiums. Because Group policies cover a range of members with differing incomes, cover needs and individual circumstances, it is important for employers to review the appropriateness of the current cover after these changes.

Employers and their employees are encouraged to seek financial advice from qualified experts on tax and other matters in light of the evolving tax and legislative environment.

Many employers have taken out a disability income benefit for their employees. These tax changes have direct impact on employers, employees and payroll providers. SARS must still release its final Business Requirements Specification (BRS) which will reflect the changes in the tax codes that apply to this product.

The tax code information below is based on the draft BRS issued by SARS:

How does this affect employers’ payroll systems and processes from 2016 year of assessment (which begins on 1 March 2015)?

  • Employer payrolls and tax certificates issued for the 2015/2016 tax year will have to be updated to reflect the changes
  • The payroll system must still reflect the fringe benefit tax on the premiums in the hands of the employee but should no longer have the corresponding tax deduction (section 11(a) of the Income Tax Act)
    • If an employer is paying for the IPP contribution, the employer must raise a fringe benefit under code 3801.
    • The corresponding ‘deduction’ is removed so code 4018 is no longer applicable.
  • If an employer is receiving a monthly annuity for a staff member who is disabled, tax must no longer be deducted from the monthly annuity and the entire gross benefit must be paid to the disabled member.
    • The employer will issue that benefit under code 3602, and this will be included in the code 3696 (gross non-taxable income)
Hunter Head: Risk Product Development - Malusi Ndlovu

How does this impact the employer’s ability to claim a tax deduction?

As long as the employer includes the premium in the employee’s gross income as a fringe benefit it may claim a deduction for premiums paid on behalf of the employee, in terms of section 11(w) of the Income Tax Act.

What is the impact on employees?

Employees are no longer in a tax neutral position with their disability income premium as they
are no longer allowed to claim the tax back. This may affect their take-home pay. For the majority of taxpaying employees, the impact of this tax change will be negligible.

Employees who are receiving a monthly disability annuity income will no longer be required to pay tax on their benefits and this may result in an increase to their net benefits. Even though these disabled members will not be subject to tax on assessment, they should still include the IT3(a) tax certificate in their annual tax return for disclosure purposes.

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For more information, visit www.libertycorporate.co.za.