Tax breaks on death benefits aid beneficiaries

Issued by Fedgroup Financial Services
Johannesburg, May 11, 2016

Following the death of an employee, employers that provided employee benefits under a free-standing, employer-owned death benefit policy are now able to pay those benefits into a beneficiary fund. Previously, death benefits that arose from unapproved group life cover could only be paid into a trust.

The change, permitted under the Financial Services Laws General Amendment Act No. 45 of 2013, which came into effect on 28 February 2014, allows unapproved group life benefits to be placed in beneficiary funds that are more tax-efficient investment structures than trusts. This ultimately ensures greater financial benefit is derived by a fund member's surviving beneficiaries, dependants and nominees following the loss of their primary breadwinner.

The South African Revenue Services (SARS) defines unapproved benefits as employer-owned policy benefits derived from insurance policies, such as accident policies or group life policies that are not linked to, nor form part of, a retirement fund and are not subject to Section 37C of the Pensions Fund Act.

As monthly contributions by employees to these policies are made after their salaries or wages have been taxed, any lump sum payout of the benefits on the death of the policy holder is therefore untaxed.

By contrast, SARS defines approved benefits as those that arise from monthly contributions that are paid before an employee's tax is deducted, such as pension or provident funds. The lump sum payout of death benefits in these circumstances is therefore taxed at the deceased's marginal tax rate.

Because beneficiary funds are taxed in the same manner as pension funds, once these benefits, approved and unapproved, are paid into a beneficiary fund, the investment income is tax exempt and any payments out of a beneficiary fund (capital or income) is tax free.

This is therefore a welcome amendment, as beneficiaries stand to receive greater financial benefit. These funds also provide better protection to benefits than trusts, as the legislation governing it has stricter controls and enforcement. In addition, surviving beneficiaries can now benefit from these funds almost immediately as policies of this nature are not subject to deliberation by a Board of Trustees, and payment is effected to the nominated beneficiary as soon as all administrative requirements have been met.

As such, placing unapproved money into a beneficiary fund offers a practical solution with increased protection for the minor and should therefore be strongly considered as a preferable alternative to a trust.