A number of retirement arrangements have been set up in the past capitalizing on a 'loop hole' in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees (e.g. funeral policies, key man policies, group life schemes outside an approved fund etc.). The 'loop hole' allowed the policy proceeds due in the event of death of any employee to be paid to the employee's dependents or nominees tax free. Income Tax Amendment Act 15 of 2011 effectively closed this loop hole.

Policy proceeds upon the death of an employee are now taxable in the hands of the employer, if the employer claimed any premiums in respect of the relevant policy for tax purposes, in the past. An employer who maintains such a life assurance scheme needs to introduce a new employment policy to define its intention regarding the impact of tax on the gross proceeds. i.e. will the employer carry the cost or will the cost be passed on to the beneficiary/ies? If the tax is to be recovered from the gross proceeds before affecting payment to any beneficiary/ies, procedures and controls need to be introduced to ensure that the gross proceeds are reduced by the tax effect before paying a benefit.

If the employer recovers the premium from the employee, the employee and his/her beneficiary/ies will not be taxed on the policy proceeds, the flip side of course is that the employee will not have been able to claim the premiums as an expense against his/her taxable income.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.