Employers who provide disability benefits through Disability Income Schemes, or Income Continuation Insurance (ICI) plans are going to be affected by the recent changes to the Income Tax Act. The National Treasury has amended the taxation of employer-owned ICI policies providing cover in the event of the temporary disablement of an employee.

Tax deductible expenseRecent changes to the Income Tax Act in South Africa will affect disability income schemes

At present, the employer pays the disability insurance policy premiums in full, as a tax deductible expense. But in terms of the amendment, the employer will only qualify for a tax deduction if the amount is taxed as a fringe benefit, with the employee responsible for the premium payment (this excludes the employer waiver). The employee won’t be able to deduct the premium, meaning that they’ll incur an additional tax cost.

The amendment is effective for the first tax year from 1st January 2011, but the Association of Savings and Investments South Africa (ASISA) is currently liaising with the Treasury, hoping for an agreement to allow employers to process the deductions in bulk on their payroll systems so that employees won’t be out of pocket.

Make other arrangements

If the Treasury grants this concession, there could be a backdated reversal of this part of the Act, and employees will remain tax-neutral. If they delay or don’t approve, employers may have to consider an “employee paid” arrangement.

The Treasury has indicated though that benefit payments will not impact the employer if the policy specifies that benefits are payable to the employee. And once the policy has been amended, premiums can be paid either by the employer, or the employee (a better alternative).

For more information

For a full breakdown of the changes to the Income Tax Act regarding Disability Income Schemes, please download Sanlam’s Newsflash on Disability Income Benefits- Tax Changes.