ASISA said the Act, which comes into effect on 1 January next year, puts into effect the 2010 Budget tax proposals and introduces radical changes to Section 11(w) of the Income Tax Act which regulates the tax deductibility of premiums on employer owned policies.
Peter Stephan, senior policy adviser at ASISA, explained many employers use key person insurance to legitimately protect the business against loss of profits should a key employee or director die, become disabled or suffer from ill health. He added long term insurance plans have also been used to provide employees with deferred compensation, with the policy proceeds intended for the key employee being taxed at a lower rate.
“While existing anti-avoidance laws have largely stopped practices whereby long-term insurance plans are used to provide deferred compensation at a tax mismatch, some remain,” said Stephan. “Often these anti-avoidance restrictions also undermined legitimate commercial practices such as the use of long-term insurance as collateral for debts owed.”
Stephen said the new rules completely revise the requirements for deductable key person insurance schemes and removes the barriers to legitimate commercial practices.
“The legislation will have a big impact on deferred compensation schemes as they will no longer be tax deductible for the employer after 1 January next year unless the employee is taxed on the premiums,” he said.
“Also affected are group life and disability schemes that fall outside the approved retirement fund environment and therefore receive different tax treatment.”
Stephan added, in light of the significant changes, it is important employers making use of long-term key person policies seek professional advice to ensure they have the necessary adaptations come 1 January 2011.
