Amendments to the Income Tax Act will come into effect on 01 March 2015 and will impact both the taxability of income disability premiums and benefits.

Currently, employees pay fringe benefit tax on income disability premiums but are immediately able to deduct the same amount, leaving them in a tax neutral position. From 01 March, income disability premiums will continue to attract fringe benefit tax but will no longer be deductible in the hands of the employee, leaving them with a higher tax bill and less take home pay.

Currently, income disability benefits that are paid out to claimants are taxable in the hands of the employee. From 01 March, these benefits will no longer be taxed and this applies to both existing and new claims.

Those responsible for payroll need to be aware of these changes and ensure they make the necessary adjustments so that income disability premiums attract fringe benefit tax under SARS code 3808. Please note, however, that references to tax treatment contained herein do not constitute tax, legal or accounting advice and that policyholders must secure their own advice to confirm how the tax treatment may apply to them.

Insurers have also looked at the impact not taxing the benefit will have and, in most instances, have come up with a new tax modified income disability scale in an attempt to place a new claimant in a similar position after the tax changes as they would have been prior to 01 March.

We will unpack the impact on the benefit in the next Connect, and provide details of what each insurer’s options will be.

Yours sincerely,

The TSA Team

You’ll find all back issues of TSA Connect by visiting our blog and you can do that by clicking here. All information provided in TSA Connect newsletters is intended to inform and explain, but please remember to always check the current terms on policies when considering options and advising clients.