Expense allocation - changes to Life Insurance Tax | KPMG | ZA

Expense allocation - changes to Life Insurance Tax

Expense allocation - changes to Life Insurance Tax

The allocation of expenses between the Individual Policyholder Fund (“IPF”), Company Policyholder Fund (“CPF”), Untaxed Policyholder Fund (“UPF”), the Corporate Fund (“CF”) and the newly introduced Risk Policy Fund (“RPF”), has always been a contentious issue for long-term insurance companies.

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expense-allocation

The allocation of expenses between the Individual Policyholder Fund (“IPF”), Company Policy holder Fund (“CPF”), Untaxed Policy holder Fund (“UPF”), the Corporate Fund (“CF”) and the newly introduced Risk Policy Fund (“RPF”), has always been a contentious issue for long-term insurance companies.

The South African Revenue Service (“SARS”) issued Binding General Ruling 30 (“BGR 30”) on 7 January 2016 with the purpose to determine 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 transfers under section 29A (7).

It follows that the allocation of expenses are crucially important as it impacts the following:

  1. Direct result on the tax charge or tax loss owing to each fund. The Income Tax Act requires a long-term insurance company to treat each fund as a separate taxpayer. A long-term insurance company may also not offset the tax loss within one fund against the taxable income of another fund.
  2. Direct result on the transfers from one fund to another fund as required per the Income Tax Act which may result in an impact on the tax charge or tax loss owing to a specific fund.
  3. The tax deductibility of an expense within a fund. It follows that a specific expense may be tax deductible in one fund, but deemed non- deductible within another fund.
  4. Section 29A (11) requires a company to allocate a deductibility ratio per fund to indirect expenses. Therefore, the misallocation of indirect expenses from one fund to another fund or from direct expenses to indirect expenses can have an impact on the tax charge or tax loss.

Past treatment

Discrepancies identified in the expense allocation method applied – not only ranged from one entity to another – but also within the same entity’s application from one year to another year and in some instance, within the same year. SARS also created doubt owing to revised assessments issued to companies attacking the tax deductibility of expenses allocated to the CF. 

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