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Tax treatment of life insurance policies

Tax Alert - March 2015

Inland Revenue recently undertook a review of all Public Information Bulletins (PIB) and as a result, identified out of date items that needed replacing. Two draft Questions We’ve Been Asked (QWBA) have been released to replace items: “Staff insurance scheme” (PIB No 70 (December 1972):11) and “Life and accident insurance policies” (PIB No 106 (July 1980):2), on the income tax treatment of insurance in an employment context. 

The first QWBA, PUB0215: Income Tax – Insurance – Term life insurance policy taken out by employee looks at the situation where a term life insurance policy is taken out by an employee and the premiums are paid by the employer on the employee’s behalf. The Commissioner concludes that:

  • The employer will generally be entitled to a deduction for the premium paid
  • The amount of the premium is treated as salary and wages and is subject to PAYE as it meets the definition of expenditure on account of an employee under section CE 1(1)(b) of the Income Tax Act 2007 (the Act).
  • A lump sum payout under the terms of the policy to the employee would not be taxable income.

The second QWBA, PUB0215-2: Income Tax – Insurance – Term life insurance policy taken out by employer deals with the situation where a term life insurance policy is taken out by an employer for the benefit of an employee. Under the scenario contemplated, the premiums payable on a term life policy are unable to be refunded or converted to cash by the employee and the benefits are only payable on the death of the employee or those payable because of accident, disease or sickness of the employee.

The Act expressly excludes, from the definition of expenditure on account of an employee, an amount being a premium that an employer pays on life insurance taken out for the benefit of the employee where the premium cannot be refunded or converted into cash for the employee and benefits are only payable on death of the employee. As such, the PAYE rules do not apply.

Instead, the FBT rules apply as the amount will be classified as an unclassified benefit which an employer provides to an employee in connection with their employment. The employer will be entitled to a deduction for the premium paid while any lump sums paid out under the policy will not be taxable income of the employee (or of the employee’s estate).

The two drafts are relatively straight forward and deal with uncontroversial matters. It is noted that there are other types of arrangements which these items do not address. For example where an employer provides life insurance through group life policies and the employer is a beneficiary of the policy. A published Inland Revenue item on this would also be useful.

The deadline for comment is 27 March 2015. Please contact your usual tax advisor for more information about making a submission or on this issue generally.

 

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