Allocation of direct and indirect expenses | KPMG | KE

Allocation of direct and indirect expenses within and between an insurer’s funds

Allocation of direct and indirect expenses

The Binding General Ruling (BRG) No. 30 determines the allocation of direct and indirect operating expenses within and between the funds that are required to be established by insurers.

1000

Related content

This Binding General Ruling (BGR) No.30 determines the allocation of direct and indirect operating expenses within and between the funds that are required to be established by insurers under section 29A and the subsequent deductibility of such operating expenses, and the deductibility of expenses against inter fund transfers.[1]

Expenses have to be allocated in a manner[2] consistent to which the business is conducted. Expenses and associated costs are allocated to a policyholder fund or risk policy fund if the expense is incurred to produce excess assets to be transferred from a policyholder fund to a corporate fund. When expenses are allocated to the corporate fund they are not regarded to be incurred with a view to obtaining an abovementioned inter fund transfer. 

Expenses which do not directly relate to a specific fund (such as operational overhead costs and general marketing costs, for example) are however generally treated inconsistently by taxpayers.

Determination of taxable income

The extent to which expenses in policyholder funds are deductible are
limited. Expenses in the corporate fund are however not subject to expense
relief. Facts and circumstances dictate to which fund expenses are attributable, for which a (direct) causal link is required.

Summary of the ruling

In view of the inconsistent treatment of expenses within and between the
separate funds of an insurer, BGR 30 has been issued to clarify the treatment of expenses that is accepted [3] by SARS: 

Direct expenses

  • Direct expenses are allocated to the policyholder funds and the risk policy fund in a manner consistent with which the business is conducted. 
  • Direct expenses relating to shareholder activities can only be allocated to the corporate fund.

Indirect expenses

  • When indirect operating expenses are incurred to produce the excess assets which will be transferred from the policyholder / risk policy fund to the corporate funds, the associated costs are allocated to such policyholder or risk policy fund. 

  • If indirect operating expenses cannot be allocated to a specific fund:

    - An apportionment of the expenses must be made between the corporate fund and the other funds in aggregate, using the average value of liabilities for the policyholder funds and the risk policy fund and the average market value of assets for the corporate fund at the commencement and end of the year of assessment. 

    - A further apportionment then occurs using the gross premiums received by the individual policyholder fund, company policyholder fund, untaxed policy holder fund and risk policy fund. 

    - The expense ratio [4] is then used to determine the deductible portion of the indirect operating expenses in the individual policyholder and company policyholder funds. 

    - Finally, the apportioned indirect operating expenses allocated to the corporate fund and risk policy fund should further be apportioned according to the ratio of income (as defined) in the respective fund plus the taxable capital gain of that fund over total amounts received or accrued. Transfers from the policyholder funds at the end of the year of assessment are excluded from the income and amounts received or accrued in the above calculations.

Other

  • Indirect operating expenses which are allocated as per the above must be treated as indirect expenses and subject to the expense relief. 
  • Deductible expenses [5] include expenses directly attributable to income in the individual and company policyholder funds. If expenses are directly attributable to assets that give rise to income in these funds they can also be claimed, unless it is of a capital nature. Similarly, expenses attributable to assets that give rise to exempt income is not deductible, so also is expenses directly attributable to exempt income in the untaxed policyholder fund. 
  • The deduction of expenses in the corporate fund and risk policy fund are subject to the requirements of section 11 and section 23 of the Income Tax Act.
  • Expenses cannot be deducted in the corporate fund from inter fund transfers if it relates to corporate fund activities, since no expense is incurred in such a transfer.

Other

Period for which this ruling is valid:

This BGR applies from 7 January 2016 until it is withdrawn, amended or the relevant legislation is amended.  

References 

[1] Section 29A(7) of the Income Tax Act.
[2] Section 29A(12) of the Income Tax Act.
[3] Section 29A(11) of the Income Tax Act.
[4] For purposes of section 29A(11) and section 29A(12) of the Income Tax Act. 
[5] In terms of section 29A(11)(a)(i) of the Income Tax Act.

© 2017 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Connect with us

 

Request for proposal

 

Submit