Capital gains tax may have a significant impact on life and disability assurance taken out by employers on behalf of employees, depending on how it is structured.
Henry Dul, national manager Standard Bank Employee Benefits, says that life and disability assurance is structured in two ways. These are:
u As a policy held through a retirement fund with a member being the beneficiary. This type of policy is not subject to capital tax in the hands of a beneficiary but any payment above the amount of two times annual salary is subjected to income tax. The taxable portion of a death benefit payable from a retirement fund is the greater of R 60 000 or two times the deceased members salary subject to a maximum salary of R 60 000. If the fund takes out the life cover on the member the amount that exceeds the deduction amount (say of R 120 000 if the members salary was R60 000 per annum), will be taxed at the deceased members marginal tax rates. The R120 000 includes the proceeds from the policy and other benefits paid by the fund (for example the return of the member's contributions); or
u A policy is taken out in the name of an employer with the employee named as the beneficiary. Dul says this type of policy is often taken out to avoid the consequences of tax on a policy taken out through a retirement fund. However this type of policy now becomes vulnerable to capital gains tax.
The reason is that only the beneficial owner of a policy is allowed exemption from capital gains tax on a life assurance policy. because the policy is in the name of the employer, the employee is not "beneficial owner".
Even if the insurer is contracted to pay the benefit directly to the dependent the policy will not be exempt from CGT and will be taxable in the hands of the recipient as a taxable gain."
Dul says in both cases the proceeds will be subjected to the stipulations of the Estate Duty Act. If your estate exceeds a value of R 1 000 000 and the benefits are not paid to a surviving spouse, Estate Duty will also be payable.
Dul says it can be argued that the benefit is taxed at four different times:
u The premium as a fringe benefit in the hands of the employee (this could be avoided if structured correctly);
u The growth of the assets in the hands of the assurer;
u As income in terms of the definition of "gross income" in the Income Tax Act, or as a "capital gain" in terms of the new Capital Gains Tax legislation; and
u In terms of Estate Duty legislation.
Dul says funds and employers should get proper advice on the structuring of life and disability assurance to protect members from unexpected tax consequences.