Posts Tagged ‘income protection’

SARS no longer allows claims for income protection for the 2016 year of assessment which used to be claimed under source code 4018. If you manually capture this amount on your ITR12, you will not be able to submit your income tax return. In cases where source code 4018 is pre-populated on your ITR12 for the year of assessment 2016, your income tax return will be received by SARS but this amount will not be allowed on assessment.

The tax treatment of life and disability premiums and policy proceeds was aligned in 2013, with effect from 1 March 2015. The premiums will not be deductible and the policy proceeds will be tax free. However, the wording prohibiting the deduction of the premium for tax purposes does not cover all circumstances, which may allow providers to argue that certain structured products fall outside the ambit of the legislation. It is proposed that the wording be clarified so that premiums paid on all personal insurance policies not be allowed as a deduction against income, and that the policy proceeds from such policies are tax free.


As a general matter, there are currently two forms of disability insurance plans that are offered to individuals – capital protection and income protection. The tax outcomes of each differ in terms of premiums and pay-outs. Disability policies are offered to salaried workers, employers and self-employed business-owners (including professionals). In the case of capital protection plans, cover exists to protect individuals against the loss of the individual’s income earning capacity (e.g. through loss of a limb or mental capacity). In plans of this kind, no deduction is available in respect of premiums paid, but there is no tax payable in respect of insurance policy pay-outs. In the case of income protection plans, cover exists to protect individuals against the loss of future income (focusing on the negative income impact of the disability rather than the disability itself). In plans of this kind, premiums are deductible but tax fully applies on policy pay-outs.

Reason for change

The distinction between disability capital protection and income protection is unfortunate. The net benefit of these plans is often economically the same with the terminology easily blurred to suit the client’s tax needs. The unique tax treatment of disability plans aimed at income protection is also questionable when the overall tax treatment of individual insurance is considered Both life and disability insurance essentially have the same objective – to protect the financial future of an individual and his or her family through insurance against an adverse personal event (death or disability). The amount of cover chosen is designed ultimately for future “income” protection whether the payments come in the form of a lump sum for reinvestment (with reinvestment earnings providing the desired safety) or as an annuity. In the end, life and disability plans premiums are essentially expenses of a personal nature. Policy proceeds are mainly designed to protect personal lifestyles, not to fund business continuation. Even if some funds are ultimately applied for business continuation, policy proceeds for business should be deductible when applied – not the initial insurance premiums (being too remote from the trade itself with the premiums essentially acting as disguised “deductible” reserve for expenses that are often personal in nature).

Amendments to give effect to the above

The new legislation treats life and disability premiums and pay-outs in the same manner for tax purposes, regardless of whether the policy is aimed at capital or income protection. The key aspect of these plans is the personal nature of the contingency involved, not the potential use of funds (a use which may or may not be deductible at a later date). Going forward, premiums paid by natural persons in respect of life, disability and severe illness policies will no longer be deductible per se if the policies are aimed at income protection. However, all pay-outs on life, disability and severe illness policies will be tax-free, irrespective of whether the pay-out takes the form of a lump sum or an annuity. The same dispensation will apply in the case of disability policies, so that annuities payable in respect of a disability policy will be free from tax. Some employers pay a premium in respect of an employer-provided insurance policy for the benefit of employees. The premiums will be deductible for the employer, as long as the premiums are taxed as a fringe benefit in the hands of employees. With the employee being taxed on the premium (with no subsequent deduction available), the policy pay-outs will be tax-free. Lastly, the system will operate cleanly going forward. There will be no transitional period for current policy holders, meaning that premiums going forward will no longer be eligible for deduction even if the plans are pre-existing. On the other hand, all policy pay-outs will be tax free even if the policy previously generated deductible premiums.

Effective date

The amendment to section 10(1)gG) of the Income Tax Act, insertion of sections 10(1)(gI)and 23(r)and deletion of paragraph 12C(2) of the Seventh Schedule to the Income Tax Act are effective as from 1 March 2015 and will be applicable in respect of expenditures incurred as well as receipts and accruals in respect of years of assessment commencing on or after that date.