The government has given notice that it may tax, effectively as a fringe benefit, the contributions your employer makes on your behalf to an "unapproved" group life assurance scheme assuring employees mainly for death and permanent disability.
Most contributions to group life schemes equate to about 1.5 percent to two percent of your annual income. But not all group life assurance schemes should be affected by the proposal.
Anton Swanepoel, legal adviser to Sanlam Employee Benefits, says there are two types of group life assurance schemes, namely:
- Approved schemes:
These are group life assurance policies that are issued to the retirement fund of which you are a member. In many cases the employer pays the premiums and deducts the amount from its taxable income. There is no fringe benefit tax due from members on these premiums, Swanepoel says.
- Unapproved schemes:
These are schemes outside a retirement fund where the employer holds the policy on behalf of employees. Swanepoel says that in this case, where the employer pays the premium and claims the premium against its taxable income, it is a fringe benefit for employees, and fringe benefits tax is due. He says this is the current requirement, but it appears that some employers do not know the difference and do not collect fringe benefits tax from employees. An alternative with an unapproved scheme is for the employee to pay the premiums with after-tax income, as would happen with any individual risk policy.
If fringe benefits tax is applicable, you will pay tax on the amount at your marginal rate of income tax. For example, if you earn a taxable income of R150 000 a year, the contributions to a group life assurance scheme at 1.5 percent will be R2 250. At an income of R150 000, your marginal tax rate is 25 percent, which means you would pay R562.50 on top of your tax of R17 440 (after deducting the primary rebate).
According to the 2009 annual Sanlam pension survey, employers that have occupational retirement funds for their employees contribute about 9.5 percent on average of pay to employees' group life assurance and retirement savings. Of the 9.5 percent, 4.1 percentage points went to group life assurance premiums and administration costs. The survey does not give a breakdown of approved and unapproved schemes.
In the Budget Review document, the National Treasury says it intends to limit salary-structuring opportunities to make the tax system more equitable and efficient.
It will target employees' deferred compensation and insurance schemes.
The Treasury says deferred compensation insurance policies are used by employers to retain staff by providing a bonus on maturity of the policy. The schemes allow employers to claim premiums as tax deductions while deferring tax on what is income for the employee until the benefit is paid.
The Treasury says: "Problems also exist with employer-provided group life assurance schemes. Steps will be taken to ensure employer deductions match employees' gross income. Employee insurance packages will be taxed fully as fringe benefits on a monthly basis."
However, Keith Engel, director of tax policy at the National Treasury, says the issue is still under discussion. The main concern is that special top-hat assurance schemes being used are aimed at boosting income for senior executives while limiting and deferring tax.