With the planned introduction of Solvency Assessment and Management (SAM) in 2016, and the anticipated standard for insurance contained in International Financial Reporting Standards (IFRS) 4 Phase II, there has been uncertainty whether it remains feasible to continue to use the current statutory valuation method as a basis for valuing policyholder liabilities for tax purposes. Under the SAM framework, all future income on a policy is recognised upfront and is not suitable as a basis for calculating tax as it is inconsistent with general gross income principles.
In the 2015 National Budget it was acknowledged that the basis for valuing policyholder liabilities under SAM will not be in line with the current tax treatment and proposed that a new valuation method for the policyholder liabilities of long-term insurers be based on an adjusted IFRS method of valuation. Solvency II, the equivalent to SAM followed by other countries, either use IFRS or their country’s accounting standards as the basis for determining the tax liability of a long-term insurer.
The concept of ‘adjusted IFRS value’ was introduced in the 2014 Taxation Laws Amendment Act for purposes of the risk policy fund. Adjusted IFRS is defined to mean the valuation of liabilities, per IFRS, excluding negative liabilities on a per policy basis (a negative liability arises when the expected present value of future premiums exceeds the expected present value of future benefits and expenses.)
In the 2015 Taxation Laws Amendment Bill it is proposed that the ‘adjusted IFRS value’ definition that applies to the risk policy fund be extended to apply to the other policyholder funds. A further proposed amendment to this definition will allow the applicable policyholder fund to determine its liabilities in accordance with IFRS but adjusted such that it takes into account the method that was used in setting off negative liabilities in the policyholder fund for regulatory purposes for years of assessment ending in 2014. An additional amendment is also proposed to the definition of ‘value of liabilities’ to mean the ‘adjusted IFRS value’ in respect of a risk policy fund and a policyholder fund.
The amendments will come into operation when the Insurance Act, 2016, is promulgated.