Payouts from disability policies to be exempt from income tax

The most significant tax event during the month of July was the publication of the 2013 taxation bills, the Draft Taxation Laws Amendment Bill (‘TLAB’) and the Draft Tax Administration Laws Amendment Bill (‘TALAB’).

In terms of proposed amendments contained in the 2013 Draft Taxation Laws Amendment Bill, individuals will in future enjoy an exemption from Income Tax in respect of all payouts from disability insurance policies in respect of which they are the policyholder. This exemption will apply irrespective of whether the policy is a capital or income protection policy.

At present capital protection policies are non-deductible in the hands of such an individual but are tax-free on payout whereas income protection policies are tax deductible but taxable on payout. Premiums paid by an employer in respect of either type of policy will be tax deductible in the hands of the employer provided that the employee is taxed on the premiums as a fringe benefit. The payouts in such a case will be tax-free.

According to the Explanatory Memorandum, one reason for this amendment is such insurance policies are of a personal nature. Another reason is that the distinction between the types of policies can too easily be blurred so as to suit the Income Tax needs of the contributor.

Good news for taxpayers is that the system is meant to operate 'cleanly' going forward, according to the Explanatory Memorandum. In other words, even if deductions in respect of income protection policies have been claimed in the past, payouts after the effective date (1 March 2014) will be wholly tax free.