South Africa: Draft legislation amending income tax law to align with new accounting standard for insurance contracts
Draft legislation that amends income tax law to align with terminology referred to in IFRS 17
Draft legislation amends income tax law to align with terminology referred to in IFRS 17
Treasury on 26 October 2022 released draft legislation that amends South Africa’s income tax law to align with terminology referred to in IFRS 17 Insurance Contracts (IFRS 17)—the new accounting standard for insurance contracts effective for reporting periods commencing on or after 1 January 2023. Read TaxNewsFlash
Set forth below is a summary of the proposed amendments for both long and short-term insurers.
A phasing-in period of six years would be provided for the phasing-in amount to be allowed as a deduction from (or included in) the income of the corporate fund. In addition, the amount that has been deducted as a “phasing-in amount” will be included in the income of the corporate fund in the following year of assessment (or vice versa).
The phasing-in amount would be calculated as the difference between:
- The value of liabilities per policyholder fund and risk policy fund determined with reference to the interim standard IFRS 4 Insurance Contracts (IFRS 4)—which IFRS 17 replaces—at the end of the year of assessment commencing on or after 1 January 2022 but before 1 January 2023, and
- The value of liabilities per policyholder fund and risk policy fund determined with reference to IFRS 17 (for the same period referred to above) as if the new definitions of value of liabilities and adjusted IFRS value was applicable.
Because insurance contract liabilities are determined and presented net of premium debtors and policy loans under IFRS 17, those amounts are specifically excluded from the phasing-in amount calculation.
Because the phasing-in amount is required to be calculated in the policyholder and risk policy funds, the use of interfund transfer credits (to the extent available) may result in a lower cash tax impact for the corporate fund.
Capital gains and liquidity implications are also anticipated to be reduced as insurers will only be required to sell assets in the respective policyholder (or risk policy) fund at the time that the fund build up is completed for the specific year, and only to the extent that a surplus is determined in the respective policyholder (or risk policy) fund. As assets will only be sold as and when a transfer is required in a specific year as opposed to on the date of transition, the policyholder and risk policy funds can utilise tax losses, to the extent available in those funds.
The proposed amendments affecting short-term insurers include:
- Under IFRS 4, premiums received by or accrued to a short-term insurer are disclosed as gross written premium (GWP). In addition, a tax deduction is allowed for unearned premium reserves under IFRS 4. As GWP is being replaced with an amount disclosed as “insurance revenue” under IFRS 17, section 28 of the Income Tax Act would be amended to refer to insurance revenue and the deduction allowed in terms of section 28(3)(a) would be deleted.
- Premium income arising from cell captive arrangements and other arrangements would now be included in insurance revenue as determined under IFRS 17. In addition, a deduction would be allowed for liabilities for claims related to these cell captive and other arrangements.
- Insurance premium or reinsurance premium debtors and reinsurance premium payable balances would be excluded from the phasing-in amount calculation to avoid an unintended tax liability which would have arisen from the change in disclosure required under IFRS 17.
- In the year of transition, the impact of insurance and reinsurance receivables and payables other than those forming part of the liability for incurred claims would form part of “insurance revenue” resulting in double tax.
- It is anticipated that under IFRS 17 it will be difficult to separate “salvages/third-party recoveries” receivable and actual receipt thereof. The “salvages/third-party recoveries” receivable immediately before transition is now required to be included in taxable income of the short-term insurer in the year of transition.
Read a November 2022 report [PDF 428 KB] prepared by the KPMG member firm in South Africa
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