Group Risk Cover and Fringe Benefit Tax

28 Mar 2012

The purpose of this newsletter is to focus on the practical aspects relating to the changes introduced in the 2011 Budget Speech. GIB, the retirement fund administrator of the Destiny Retirement Funds provides members with a basic understanding on how it will affect the operational side of a business with effect from 1 March 2012.

What is fringe benefit tax?

Where an employer grants a benefit to an employee as a reward for services rendered, such benefit is taxable as a fringe benefit. The employer is obligated to then determine the cash value of such benefit, and such benefit is taxed in the employee`s hands. Examples of fringe benefits include group risk cover, low or interest free loans, free or cheap accommodation, medical aid contributions etc.

Previously the Group Risk Benefits that incurred fringe benefits tax excluded the Monthly Disability Benefit.

Background (Pre 1 March 2012)

  • Contributions for monthly disability benefits were managed as a deduction for the employer in terms of section 11(a) read with section 23(g) - an expense to generate income.
  • The benefits (proceeds) paid from these schemes are normally paid back to the employer (taxable) who then processes these amounts as part of the payroll system in the payment of salaries.

Going forward (Effective 1 March 2012)

From 1 March 2012 the tax implications will be managed differently by introducing the individual employee as an additional layer:

  • The contributions towards income disability benefits will be reflected as a deduction for the employer under section 11(w) of the Income Tax Act.
  • The contribution will then be added to an employee’s gross income for fringe benefit tax purposes – which as you know is nothing but marginal tax.
  • Contributions so allocated to the gross income of an employee will however be allowed as a deduction for the individual, and be managed as part of the PAYE system. Important to note: It will be an in/out at employee level and the net tax effect on the employee will be zero.
  • The actual income benefit paid will be taxable as normal.
  • The payment of the actual disability income benefit can, as is currently the situation, either be paid to the employee directly from the insurer or it could be paid via the employer’s payroll system.

Taxation Overview of Monthly Disability:

  Before 1 March 2012 From 1 March 2012
Policyholder Employer Employer
Tax deductibility of premiums (employer ) Yes, under section 11(a) Yes, under section 11(w)
Tax deductibility of premiums (employee) Not applicable Yes, under section 12C(2) of the Seventh Schedule
Fringe benefit tax - member No Yes, employer will levy fringe benefit tax. Will be tax neutral for employee.
Beneficiary Employee through Employer, or Employee directly from Insurer Employee through Employer, or Employee directly from Insurer
Tax on benefit - employer Two options exist: The gross benefit can be paid to the Employer to be processed via the payroll system. The Insurer can manage the tax and other deductions and pay the net amount to the Employee Two options exist: The gross benefit can be paid to the Employer to be processed via the payroll system. The Insurer can manage the tax and other deductions and pay the net amount to the Employee
Tax on benefit - member As income As income
Estate Duty Not applicable Not applicable

 

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