New employee benefit tax legislation not without complications
Contributions which employers make to group risk benefit insurance policies as part of their employee benefits packages – other than contributions to pension or provident funds – are now a taxable benefit. As a result, this means that companies may be exposed to significant penalties if they don’t account for these payments correctly in the future.
This follows the promulgation of the Taxation Laws Amendment Act, 2011 (“Amendment Act”), which made numerous changes to the tax treatment of insurance policies for the benefit of employees and their dependants.
In terms of the amendments contained in the Amendment Act, premiums paid by an employer in respect of insurance policies for the benefit of employees constitute a taxable fringe benefit in the employees’ hands with effect from 1 March 2012 (in respect of premiums incurred on or after this date).
According to a Director at a Leading Law Firm, as such premiums are now considered to be taxable benefits, they are subject to PAYE (Pay As You Earn) tax. “Any company that miscalculates tax payments on these premiums may be leaving themselves exposed to significant penalties and interest on any underpayment of PAYE.”
He recommends that companies check with their advisors that this change has been implemented correctly within their own payroll system. “If a company is not implementing this change in their payroll, they will be at risk of underpayment of PAYE”.. The penalty levied on the employer for this underpayment is, in her experience, between 10% and 20% of the amount underpaid. “However, for a company with a large workforce, this can become a significant number.”
The amendments also affect the tax treatment of proceeds paid under such policies. “In principle, the amendments aim to achieve the result that if the premiums were funded with post-tax contributions, the policy proceeds will be tax-free, whereas if the premiums were funded with pre-tax contributions, the policy proceeds will be taxable. The tax treatment of the proceeds is also influenced by whether or not the employee claimed a tax deduction for these contributions.”
“The legislative amendments provide welcome certainty to the taxation of premiums paid to, and payments made by, risk benefit insurance policies. It is, however, clear that the implementation and administration of the amendments can be quite complex. The clarity this provides to the tax treatment of employee risk benefits is very positive, but it may take some time for the application of the legislation to be ironed out.”
“Employers will have to keep accurate records of the premiums paid and how they were treated for tax purposes to ensure that the payments made to employees are correctly treated for employees’ tax purposes,” he concludes.
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