Taxation Laws Amendment Act 7 of 2010
Hi Justine, I read with interest your summary of the Amendment Act. Just a few observations and suggestions which could be a source of opportunity in our businesses.
The R300 000 exemption increased to R315 000 on 1/3/2011, but I gather you wrote this in Oct 2010
I’m pretty sure the conditions for premiums on an employer owned policy to ‘conform’ are if the ‘employee’ is the assured for risk only, not the employer. See second bullet point under 3.
If I’m understanding this ‘keyman’ policy scenario correctly, it seems grossly unfair. Lets say R1000 premium buys R1 000 000 life cover on an employee. The R1000 premium is added to the employees’ income and he pays tax of R400 on the ‘benefit’ (no benefit to him – ever!). So the employer needs to compensate the employee with an additional R667. Now the cost to the employer is R1 667, which is deductible, so the employer ends up paying R1 200 (ignoring STC). If the employee dies, the employer receives R1 000 000 less tax, i.e. R720 000, or R654 500 if STC is taken into account. No benefit upfront (in fact it costs more!), AND fully taxed at the end. The receiver is getting his cake and eating it! Not fair. Is any industry body lobbying against this unfair practice?
And with ‘deferred comp’, the premiums are no longer deductible. When the employer receives the proceeds and ‘by agreement’ passes these on to the employee, is the employers’ tax neutral status still applicable? The employee now pays 40% tax, with no-one having been granted a tax relief. The receiver has however been receiving tax on the capital as it was growing according to the four fund approach. Make sense? Not to me. These schemes were designed to reward loyalty. It appears that no longer is rewardable, perhaps due to its’ scarcity. Any lobbying against this?
These schemes were designed to solve real problems in business. If a key employee died, the success of the employers’ business could be in jeopardy, negatively affecting the employer and other fellow employees. To retain valuable employees, it is beneficial to provide a reward for that employees’ loyalty. Share option schemes too are very effective in this area, but not all employers can offer these.
What I would like to see is a ‘universal’ type policy created, i.e. one that has risk and investment benefits, where the employer owns the risk benefit and the employee owns the investment benefit. The contributions will not be deductible, and the proceeds tax free. There is an ‘insurable’ interest so the employee can be the assured and the employer benefits if the employee dies before retiring (the ‘keyman’ benefit) and the employee receives the investment at retirement in terms of the ‘Risk/Reward Agreement’ (the deferred compensation for loyalty). Cut the receiver out of the equation altogether and pay for a solution to real problems. Save a lot of time too trying to ‘prove’ deductibility etc. and have certainty about the results re tax. No longer have to fear a new ‘Taxation Law Amendment Act’.
With regard to the concession in terms of transfer duty when transferring from a company or trust to another, if the ‘recipient’ company or trust must be ‘dissolved’ within 6 months, who’s the new owner going to be? Should not the ‘dispositioning’ company or trust be ‘dissolved’ within 6 months?
SA_Taxation_Laws_1110.pdf 
