Long Term Insurers: Some welcome administrative relief

26 July 2019 BDO

When the legislature introduced a ‘fifth fund’ to the already burdensome ‘four fund’ approach to the Long-Term Insurance legislation in 2016, many wearied tax managers’ and practitioners’ shoulders slumped further.  On closer investigation the introduction of the ‘fifth fund’, or Risk Policyholder Fund (“RPF”), brought apparent administrative relief to many, as most of their policies could be lumped into this one fund leaving them with two funds, together with the ever present ‘Corporate Fund’, instead of four or a dreaded five to administer.

The initial excitement around the prospect of having to only deal with two funds was curbed however to a degree when it became apparent that the RPF could not house policies in terms of which annuities were being paid. This meant that once annuities became payable on a policy which qualified as a ‘risk policy’ until then happily residing in the RPF, no longer qualified as a risk policy and had to be transferred to the Untaxed Policyholder Fund (“UPF”). Many Long-Term Insurers had to establish and maintain a UPF for income tax purposes, thereby adding to the administrative burden of inter alia:
- separating the actuarially determined policyholder liability in respect of annuitised policies;
- expanding on its expense allocation calculations as directed by SARS in Binding General Ruling 30; and
- debating with its auditors whether or not to raise a deferred tax liability on a return transfer credit remaining in the UPF.

The Draft Taxation Laws Amendment Bill of 21 July 2019 (‘the Bill’) contains a positive proposed amendment which will have the effect of permitting annuitised risk policies to remain in the RPF.

The proposed amendment will in our view especially assist smaller Long-Term Insurers in administering their tax affairs by reducing the number of policyholder funds to administer.

This proposed amendment is set to apply to years of assessment commencing on or after 1 January 2020. We believe this is too late and should rather apply immediately or at least with effect from years of assessment ending on or after that date. We will make this suggestion to SARS and Treasury as part of BDO’s commentary on the Bill.

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