SARS move on life cover makes lot of tax sense

SARS has tightened up the legislation relating to employer-provided life insurance schemes (often referred to as group life schemes).

This may make a bit extra cash for SARS, but it is in the interests of the taxpayer, or rather the deceased taxpayer”s beneficiaries.

In the past many group life schemes worked on the basis that as the employer was the owner/beneficiary of the policy, the premiums were tax deductible for the employer.

And no monthly fringe benefit accrued to the employee.

On death, the insurance proceeds were paid to the employer and then on-paid to the employee”s estate or nominated beneficiaries. This resulted in the employer being tax neutral, and the payout being taxed as a death benefit in the employee”s estate.

The new laws provide that, other than in special complex circumstances, the employee”s monthly contribution will be taxed as a fringe benefit. That”s the bad news. But on death, payment to the estate or beneficiaries will be tax-free. And that”s the good news.

Ask the average South African how much life insurance they carry, and they will answer: “Ag man, my employer sorts that out!”

Few have stopped to examine the reality or take out supplementary cover.

Most group life schemes pay a benefit ranging between two and four times annual salary. Yet for a “30-something” These very best-horoscope.com traits will help its possessor to develop relationships, which were started gorgeously and superbly. employee with a spouse and two kids, the actual assessment of the life insurance requirement is in the region of 10 to 12 times annual salary, which makes the usual cover insufficient. If the benefit is then reduced by tax, the widows and orphans have to take in boarders the day after the wake. I applaud the new amendments. They are effectively forcing employees to make additional provision for life insurance.

In most cases, the taxpayer also stands to benefit as the additional tax paid on the monthly fringe benefit is minimal compared to the tax payable on the death benefit.

Something else is forgotten – estate duty. Two years ago, Finance Minister Pravin Gordhan announced a review of estate duty. Not much has happened and I will fall off my chair if estate duty is repealed in next month”s budget. It”s not the politically correct move.

Meanwhile, tax-deductible contributions to retirement funds result in death benefits exemption from estate duty. And premiums paid out of after-tax income to life insurance policies can result in estate duty being levied on death benefits. That”s just bonkers.

Furthermore, the growth within the insurance policy is taxed. Retirement funds are exempt from tax and will even receive tax-free dividends when dividend tax is implemented on April 1. Surely the time has come to exempt all insurance policy benefits from estate duty.

Originally published in the Sunday Times Tax Talk column.


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  1. Is estate duty worth the trouble? – Unemployment over 35% and increasing daily – Death Duties destroys small to medium business resulting in Lost Jobs , less taxpayers and a smaller tax base for SARS. All taxpayers should play by the same rules. Economic Apartheid Death Taxes should be paid or abolished for all.

    The honourable minister Pravin Gordham said in his budget two years ago – ” Estate duty raises limited revenue and is cumbersome to administer. Moreover, its efficacy is questionable; many wealthy individuals escape estate duty liability through trusts and other means. Taxes upon death will be reviewed. Both Estate duty and capital gains tax are payable upon death, which is perceived as giving rise to double taxation.

    The minister is 100% correct and it should be the politically correct move to remove death duties for everyone. Why should the super wealthy be able to avoid estate duty via Generation skipping trusts and many other loopholes only available to the Super Wealthy via expensive tax lawyers. Why should a small business owner and the middle class have to pay death duties when the super wealthy do not pay death duties. This is economic apartheid.
    In 2009 Unemployment was over 25% – today its over 35% and increasing – Who is going to create jobs in South Africa – We are going to go the same way as Zimbabwe unless we do something now.
    R3.5m exemption ($400,000 dollars) is small by World Standards.
    Who is going to create jobs in South Africa – Entrepreneurs and small business owners create jobs – 80% of small business fail and the 20% that succeed are killed by needing cash to pay South Africa Death Duties when the original owner or one of the brothers of the family business dies.
    Entrepreneurs are a rare breed of smart risk takers – Many of South Africa’s entrepreneurs are and were attracted to Canada, Australia, USA, New Zealand, Hong Kong and many other countries were there are NO DEATH DUTIES or the the Threshold is very high.
    These countries have very low rates of Unemployment and therefore more taxpayers and a larger tax base for Govt from allowing successful small business to grow and grow and grow and employ more people.
    Please tell me how you suggest we solve Unemployment when there is No Incentive for entrepreneurs to build up a business, own the property of the business, buy an investment property and be able to retire and then leave the business to his brothers or kids who can continue to grow the business. At the moment there is a penalty for success and dying with over $400,000 dollars unless you are Super Wealthy and can afford expensive tax lawyers. The Super Wealthy can die and pay NO DEATH DUTIES thanks to generation skipping trusts etc…

    The minister is correct in wanting to eliminate death duties for small and medium business ( the super wealthy do not pay death duties ) – Imagine Unemployment reversing – Imagine small business succeeding and getting bigger and bigger and employing more people and when original owner dies business continues to grow and grow and grow with his kids and there kids in the business.
    The Tax base for SARS and GOVT Income will increase as there will be more taxpayers, the tax base from business will increase as the business can grow and grow and not have to fear Death Duties. Tax accountants and tax lawyers will have more work as there will be more taxpayers and more business that need there services.
    Capital and Cash can be put back into the business which will be in South Africa and not Overseas. There should be a level playing field for all taxpayers.
    We need to give incentives for the small 20% of successful owners who are creating jobs and not a penalty for dying a successful creator of jobs – at the moment smart entrepreneurs are being lost to Overseas Countries. We need seeds (entrepreneurs) to grow crops (jobs). If we send the seeds (entrepreneurs) Overseas those Countries will get the jobs
    We need to attract entrepreneurs and seeds from Overseas who will bring money and skills and create jobs in South Africa and grow the Govt tax base – At the moment DEATH TAX DUTIES are destroying jobs and are unfair as only the small business and middle class pay them – All taxpayers should play by the same rules. Economic Apartheid Death Taxes should be paid or abolished for all

    Comment by Johnwilliams — 2 February 2012 @ 8:16 am

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