Private Portfolio – Dead and buried
In my previous article I focused on recent amendments to our income tax law pertaining to so-called employer or company owned life insurance products. To date, it appears that representations to have these amendments reviewed are proving futile.
In any case a law cannot be overridden by a ruling. So for all practical purposes the use of company or employer owned policies insuring the lives of directors or employees are basically dead and buried. As is always the case, the devil lies in the detail.
This not only became very apparent on closer inspection of the amendments pertaining to these employer owned policies, but also when one looks at the tax amendments dealing with so-called education policies. These policies have also attracted the wrath of the legislator. For the first time we now have a definition of an education policy.
This definition however says nothing on how such a policy should be structured except to say that the taxpayer must own it and it must be for the exclusive and sole purpose of making provision for future education or training of a child or step child.
Where a tax payer has a multitude of endowment policies, what proof must he present to the authorities that one or more of them qualify for a tax deduction because they will be used for the purpose as defined? How can the insurer be asked to make such a distinction? Why could retirement annuity policies be so easily regulated when it comes to the deduction of contributions and taxation of proceeds? By simple definition! I can only surmise that the authorities have lost control over deductions that are being claimed on the one hand and on the other they have no mechanism to police the pay-outs.
It is this latter aspect or feature that most likely irked the most in the case of employer owned policies where proceeds went untaxed because of non-disclosure or disguised loans that are deemed to be of a capital nature. The same can happen with these education policies. They can also be surrendered, part surrendered or loaned against and by either non-disclosure or capital receipt arguments remain untaxed. But unlike the company owned investment policies that have basically been removed from the tax law, the authorities are adamant in keeping these education policies on the books so to say.
To close the loophole of policy pay-outs going through undetected, the legislator simply amended the section dealing with Employee’s tax. Now the taxpayer’s employer has to disclose to the Receiver when one of his employees has received an education policy pay-out. Should the employer fail to provide such information to the Receiver he is liable for a penalty of 10% of the amount the employee received. How on earth can you expect an employer to know which staff member has such education policies and who cashed in such a policy?
Of course any sane person would say but the authorities meant insurer instead of employer. If that is so, then why can’t somebody write it? As I have mentioned in previous articles on this education policy topic, it still defies my logic why a tax payer who funds a child’s tertiary education via an insurance policy obtains tax relief on his expenses while a parent taxpayer who directly bears the costs of his child’s tertiary education gets no such tax relief. Now the authorities have to grapple with the misuse that is being made with such policies and we see the results as clear as mud.