Private Portfolio – New year fireworks
Whereas we city dwellers are prohibited from exercising our pyrotechnical skills to herald the New Year, it would appear that the Ministry of Finance has adopted this time of the year to display its fireworks.
It was not too long ago – at the same time of the year – when changes to the tax treatment of interest income were announced which caused quite a flurry.
This time around they again succeeded in presenting a show to behold. The fire is directed amongst others at various life insurance products, provisional tax payers and their tax estimates and the ring fencing of deductible losses to name but a few.
Having barely recovered from the New Year’s hangover, this is proving to be quite a lot to stomach especially where the draftsmanship is also pretty demanding.
Apparently representations will be made to the authorities to clarify issues. However, in the mean time I shall devote this article to how I see certain issues as they now stand.
The first issue is the death knell for life insurance investment policies that are owned by employers or companies on the lives of employees or directors. Simply put an investment or endowment policy taken out by an employer or company on the life of an employee or director was taxable when it paid out to the employer on maturity or surrender. This inclusion in the taxable income definition led to the practise of allowing the contributions to such policies as a tax deduction for the paying employer.
From 1 March 2012 such employer-owned investment life insurance policy premiums will no longer be tax deductible.
I have no clue why this particular product has been singled out when there are a number of competitor products offered in the short term insurance industry which provide exactly the same tax benefits with the blessings of the Revenue authorities. It seems that the life insurance industry has incurred the wrath of the authorities for reasons unknown to me. This becomes even more evident when one looks at the cumbersome treatment of education policies in the amendments.
Furthermore, the amendments do not stop with just disallowing the tax deductions for employer-owned investment life insurance products. They go further to provide exact requirements for contributions to be tax deductible and to what limit. It is here where the draconian measures are even more evident. As mentioned before, such policies may not have a cash or investment component any more. Added to this, from now on the premiums paid by an employer on a policy where the employee is the insured must be added to that employee’s taxable income.
Thirdly, the proceeds of such policies payable on death, disability or severe illness may not be paid to the employee or his estate or his dependants. So the employee is taxed on the contributions but may never receive the benefits. Try making sense of this!
Lastly the aggregate amount of premiums that may be deducted is limited to N$40 000 per year and this limit also includes the employer’s contributions to retirement funds and education policies. Apart from the anomaly of who may receive the policy benefits, think of the implications for the following:
With no definition for a long term insurance policy in the tax law, I use the definition provided in the Long Term Insurance Act, which defines a long term policy as “a disability policy, fund policy, funeral policy, health policy, life policy or sinking fund policy or a contract comprising a combination of these policies”.
Does this now mean that employers who provide group life, disability and health benefits on an individual basis must now add the cost to the taxable incomes of the employees and no benefits are to be paid to these employees nor their estates, dependants or heirs?
Similarly, take the situation that often occurs where banks insist that businesses insure their directors as so-called key men to secure credit. Must the director now carry the burden of being taxed on the premium that is actually paid by the company to keep the bank happy?
Not only did I realise that I shall not understand this legislation while suffering from a hangover, I also wonder what affliction did the person suffer from while drafting this legislation?