Key person insurance Section 11 W determine whether the premiums paid will be allowed as a deduction. If a key person policy does not comply with section 11 W and will therefore not be allowed or claimed as a deduction for income tax , will the eventual p
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Section 11(w) is quoted here for ease of reference:
For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived … expenditure incurred by a taxpayer in respect of any premiums payable under a policy of insurance (other than a policy of insurance that relates to the death, disablement or illness of an employee or director of the taxpayer arising solely out of and in the course of employment of such employee or director) of which the taxpayer is the policyholder, where—
(i) (aa) the policy relates to the death, disablement or illness of an employee or director of the taxpayer; and
(bb) the amount of expenditure incurred by the taxpayer in respect of the premiums payable under the policy is deemed to be a taxable benefit granted to an employee or director of the taxpayer in terms of paragraph 2 (k) of the Seventh Schedule; or
(ii) (aa) the taxpayer is insured against any loss by reason of the death, disablement or illness of an employee or director of the taxpayer;
(bb) the policy is a risk policy with no cash value or surrender value;
(cc) the policy is not the property of any person other than the taxpayer at the time of the payment of the premium; and
(dd) in respect of any policy entered into—
(A) on or after 1 March 2012, the policy agreement states that this paragraph applies in respect of premiums payable under that policy; or
(B) before 1 March 2012, it is stated in an addendum to the policy agreement by no later than 31 August 2012 that this paragraph applies in respect of premiums payable under that policy;
Note, the subsection refers to two kinds of policies. For the second kind, the subparagraph (ii) ones, it is required that the policy agreement (or an addendum to the policy agreement) states that section 11(w) applies in respect of premiums payable under that policy.
You referred to “a key person policy”. You must remember that, for purposes of the section 11(w) deduction, the employer must be the policyholder.
The premiums that may be deducted, by the employer, are limited to term policies that solely cover the insured employee (or director) against the insured risks (see above). Where the premiums are incurred in respect of policies that have underlying elements of investments, they will not be deductible.
A taxable benefit will arise where “the employer has made any payment to any insurer under an insurance policy directly or indirectly for the benefit of the employee or his or her spouse, child, dependant or nominee” – see paragraph 2(k) of the Seventh Schedule to the Income Tax Act.
Under paragraph (m), of the definition of gross income any amount received or accrued in respect of a policy of insurance of which the taxpayer is the policyholder, where the policy relates to the death, disablement or illness of an employee or director (or former employee or director) of the taxpayer, is included in the employer’s gross income.