The loss of a key employee or director through death, disability or serious illness can have a detrimental impact on the business. For this reason, 'key-man' insurance is widely used in the commercial community to provide a financial cushion should such a tragedy come to pass.
Since it is the employer that is taking out insurance against the expenses and losses that may be incurred, it is the employer who pays the premiums. Section 11(w) of the Income Tax Act allows the premiums on such policies to be claimed as a deduction and the proceeds of a claim under such a policy are included in the employer’s gross income.
SARS has been concerned that some key-man insurance plans, ostensibly designed to cover the employer against losses, have in reality been taken out for the benefit of employees, in that payouts under such policies were immediately passed on to the employee or surviving relatives. The employer then claimed a deduction for the amounts so paid, thereby neutralising the inclusion of the payout in the employer’s gross income.
In order to incorporate anti-avoidance provisions in this regard, s 11(w) was revised in respect of premiums on such policies incurred on or after 1 January 2011. SARS has now thought fit to secure a complete redrafting of s 11(w) and this provision has been replaced in its entirety in respect of premiums incurred on or after 1 March 2012.
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