Taxation of Employment-Related Insurance Policies

Transcription

1 Legislative Changes

2 P a g e 2 Introduction The purpose of this document is to provide you with specific insight related to the new legislative changes following the budget speech on the 22 rd of February All legislative changes have already been deployed on the PaySpace platform and will take effect as at the 1 st of March The changes announced by the commissioner that specifically impact our area of focus encapsulate the following: Tax Table Rates Medical Tax Credits Taxation of Employment-Related Insurance Policies Reactivation of previously de-activated codes Changes to Reimbursive Travel Rate Specific SARS reference guides pertaining to the budget changes are available for download from the SARS website. Click on the below links in order to access these guides: Medical Aid Tax Credits: All you need to know Budget Tax Pocket Guide 2012 SARS Document Library: March February 2013 As a PaySpace client, all of the above changes have already taken affect without any impact on your user experience. The purpose of this document is to assist you in the areas that do require your specific attention and where further options are now available as a result of the new legislation or product feature enhancements. Automated Travel Reimbursement According to the new budget the non-taxable travel reimbursement threshold rate has changed from R3.05 to R3.16 per km. PaySpace Implication: PaySpace has extended the automated classification of travel reimbursements by releasing the following 2 features: 1. When using the component Reimbursive Travel Allowance Non Taxable (3703), the user was able to traditionally define a default rate per km at company level and override this as a once off input on employee level. The existing validation would shift the SARS classification of this component from 3703 (Reimbursive travel nontaxable) to 3702 (Reimbursive travel taxable on assessment) once the annual result exceeded the prescribed rate x 8000 kms. This validation has now been extended to

3 P a g e 3 also shift the classification from 3703 to 3702 if any reimbursement is paid at above the prescribed rate of R3.16 throughout the year. 2. A new component (Reimb Travel N/Taxable Input Recurring Km) has also been added allowing the user to specify a recurring rate per kilometer under the note section on the recurring profile. To activate this feature: Navigate to > company > Allowances / Deductions / Fringe Benefits / Contributions > Payroll Components, Click on the link under New that reads: If you would like to add a new component click here Search for Select Reimb Travel N/Taxable Input Recurring Km to activate. Optional: Specify a default rate other than the prescribed rate in the accumulation if necessary. A note component will now automatically be available allowing the user to specify a fixed recurring rate per employee on the recurring profile. All validations mentioned in point 1 above will now also be relevant for this new component Essentially, these features eliminate the complication of having to understand which SARS code to use for the relevant reimbursive travel category by always using the non-taxable codes available and allowing the system to determine the implication. Medical Aid Tax Credit (MTC) Despite the extensive information available under the SARS links above regarding the new medical aid tax credit changes that have taken effect, we can summarise these as follows: Prior to the 1 st of March 2012 the medical Aid Capp would reduce taxable income. This has been replaced by a medical aid tax credit that now reduces tax payable (similar to a tax rebate) as opposed to taxable income. The purpose of this change is to apply medical aid tax relief more equitably and interdependent of employee income bracket. This is evident when understanding that reducing taxable income for high income earners is more beneficial than an equal reduction for low income earners whereas a tax rebate will equally reduce tax paid across all income categories. The MTC rates amount to R230 for each of the taxpayer and the first dependant on the medical scheme and R154 for each additional dependant.

4 P a g e 4 The MTC value will be reported against a new code If the employee is under the tax threshold (i.e. no employees tax is calculated), then the value of code 4116 is zero. (Code 4116 will always reflect the actual applied value and not always the allowed value such as cases like the above) There are no changes to any of the other codes required to report medical contribution values. Code 4116 will also be accumulated to the control total code From 1 March 2012 the contributions paid by the employer on behalf of an employee 65 and older and who has not retired, should also be reflected under 4474 (Employer medical contributions) and 3810 (Medical Aid Fringe Benefit) A 65 and older employee is allowed the full medical scheme contribution paid by the employee as a deduction from remuneration. When an employee has retired from an employer, irrespective of the age of the employee, and the employer continues to pay contributions on behalf of that retired employee, the no value fringe benefit still applies. Due to the fact that the medical aid capp has fallen away the implication of not reducing taxable income also implies that SDL Income will not be decreased by this amount as it was traditionally. PaySpace Implication: PaySpace has incorporated the above changes without impacting the user. Please bear in mind however, that when taking on YTD figures you will need to populate 4116 as the YTD MTC. Re-activation of Previously De-activated SARS Codes In accordance with release document; SARS_BRS - Medical Scheme Fees Tax Credits_v1, the following SARS codes have been re-activated: Normal Income Codes: Code Description Explanation 3603 (3653) Pension (PAYE) Any pension paid on a regular basis as well as backdated pension payment (for current tax year). Code 3653 MUST only be used for Foreign Service income. This includes taxable disability pension.

5 P a g e 5 Code Description Explanation 3610 (3660) Annuity from a RAF (PAYE) An annuity paid by a RAF to any person. Code 3660 MUST only be used for Foreign Service income. Fringe Benefit Codes: Code Description Explanation 3805 (3855) Accommodation (PAYE) Free or cheap accommodation or holiday accommodation. Code 3855 MUST only be used for Foreign Service income (3856) 3808 (3858) 3809 (3859) Services (PAYE) Employee s debt (PAYE) Taxable Bursaries or scholarships (PAYE) Free or cheap services. Code 3856 MUST only be used for foreign service income. Payment of an employee s debt or release of an employee from an obligation to pay a debt. Code 3858 MUST only be used for foreign service income. Bursaries and scholarships to employees and their dependants taxable portion only. Code 3859 MUST only be used for foreign service income. PaySpace Implication: PaySpace has incorporated the above changes without impacting the user. Taxation of Employment-Related Insurance Policies Before describing the changes associated as to how to treat tax on employer related insurance policies from the 1 st of March 2012, it is important to note that the interpretation of the legislation is extremely complex and that you should obtain advice from your fund administrators with regards to the classification of your schemes. It has however been confirmed from reliable sources that life and disability insurance premiums paid by an approved pension or provident fund should not be regarded as

6 P a g e 6 taxable fringe benefits. The following interpretation summary will shed some light on the changes: Unapproved Group Schemes: Unapproved Group Scheme policies paid by the employer for the benefit of the employee will give rise to a fringe benefit for the employee. Income Protection Schemes: Employer-paid Income Protection schemes (where the benefit is paid on a monthly basis) that are paid by the employer give rise to a fringe benefit on the employee, which in turn is deemed to be deductible (both from income and remuneration), and is therefore tax neutral to the employee. If and when the monthly benefit is paid, it will be included in the employee s income and taxed. Income Protection Schemes Employee-paid: Income Protection schemes paid by the employee are deductible, both from remuneration and income. If and when the monthly benefit is paid, it will be included in the employee s income and taxed. Where the employer pays premiums on behalf of an employee to an income protection policy, the following tax certificate reporting codes will be used: Code 3801 Fringe benefit raised on the employer-paid premium Code 4018 Deduction for deemed or actual employee paid premium Key Person Schemes Conforming Policies: A conforming Key Person policy is always employer-paid and is treated as follows: the premiums paid by the employer are deductible when paid the benefit is taxable if and when the insured risk happens. * A conforming key person policy is one that conforms to the criteria specified in section 11(w)(ii): 1. The policy insures the employer against any loss due to death, disablement or severe illness of the employee. 2. The policy is a risk policy only and has no surrender (or cash) value. 3. The policy is the property of the employer at the time of paying the premiums, but can be held by a creditor of the employer as security for a debt of the employer. Further, if the key person policy conforms with the above criteria, the employer must declare that the policy falls under section 11(w)(ii) in one of two ways depending on the age of the policy - 1. If the policy was entered into after March 2012, the policy agreement must state that section 11(w)(ii) applies in respect of premiums payable under that policy; or 2. If the policy was entered into before March 2012, it must be stated in an addendum to the policy agreement by no later than 31 August 2012 that section 11(w)(ii) applies in respect of premiums payable under that policy. Key Person Schemes Non-conforming Policies: If either of the criteria to be a conforming policy are not satisfied, or no choice is made by the employer, the policy will be automatically classified as a non-conforming policy and is treated as follows: the premiums paid by the employer are not deductible when paid

7 P a g e 7 the benefit is normally tax free if and when the insured risk happens. PaySpace Implication: Income Protection Schemes: PaySpace has enabled the new SARS mapping for Income protection policies from the 1 st of March The mapping will automatically do the following: Key Person Schemes: Employer contributions will feed SARS code 3801 (Taxable) & 4018 (Tax deductible) where the net effect is therefore tax neutral. Employee contributions will feed code 4018 (Tax deductible) Due to the complex nature of establishing between conforming vs nonconforming funds, please contact us and we will gladly advise and assist you in setting this up. Life and Disability Schemes: NB: Please confirm with your fund administrators as to whether there needs to be any changes with regards to the taxability of these schemes and follow the content below. As a PaySpace user that currently administers group schemes on the system for your staff it is important to understand that the following options have been on offer depending on if the scheme is part of your approved provident or pension fund: Scenario A: Life and / or disability are part of an approved (registered in the fund s name) provident / pension Fund; If you did not want to show the group scheme components separately you would have chosen to incorporate these as part of the pension or provident employer component. If you did want to show the group scheme components separately you would have had to use the group life / disability fund components on PaySpace where you would check the box that reads do not apply fringe benefit (see below).

8 P a g e 8 Scenario B: Life and / or disability are unapproved schemes (registered in the employer s name); You would have had to use the group life / disability fund components on PaySpace where you would not check the box that reads do not apply fringe benefit (see below). Navigate to: Company > Administer Payroll Funds > Group Life Setup This checkbox governs whether or not a resulting F/B will be calculated. By checking the box you will be confirming that the particular fund is approved.