Understanding the taxation of employer paid insurance policies

Effective 01 March 2012, the following principles must be applied when determing the taxability of an employer contribution towards an insurance policy.

Firstly, you need to establish whether the contribution is made towards an approved retirement fund or unapproved insurance fund.

When dealing with a contribution towards an approved retirement fund (pension or provident funds) it is common practice that the contribution paid by the employer on behalf of the employee might include a portion for group life cover, disability or funeral cover. Eventhough these contributions on their own could be seen as unapproved insurance policy contributions, they are treated as retirement fund contributions if included in a payment made towards an approved retirement fund. Any payment made towards an approved retirement fund must be taxed according to retirement fund rules and reported as such contributions on an employee’s tax certificate.

Contributions made by an employer on behalf of an employee towards an unapproved insurance fund will give rise to a taxable fringe benefit in the hands of the employee. Group life policy contributions are not tax deductible as the benefits are tax free when paid out to the beneficiary. If the employer does pay the premium on behalf of the employee, the payment must be included as a taxable fringe benefit in the employee’s gross remuneration. When reporting the fringe benefit on the employee’s tax certificate, one of the following fringe benefit codes should be used:

Code 3801 – General Fringe Benefits if the policy is owned by the employer.

Code 3808 – Payment of Employee Debt if the policy is owned by the employee.

Employer contributions made towards an Income Protection policy on behalf of an employee are also taxable but now deemed to be an employee contribution as well. This means that the amount paid by the employer on behalf of the employee must be included in the employee’s gross remuneration as a taxable fringe benefit but at the same time it will be allowed as a tax deduction. Income Protection policy contributions made by an employee is tax deductible therefore the employer contribution, which is now also deemed to be an employee contribution, will be included in the total tax deduction reported against code 4018 on the tax certificate. This results in income protection policy contributions made by employers on behalf of their employees being tax neutral.

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