MHK Chartered Accountants Comment on IRD Statement on Deductibility of Insurance Payments Paid

IRD position on a company paying insurance premiums. The IRD have in their July 2015 TIB, set out some answers to clarify this often confusing position.  Ian Malcolm, Managing Director of MHK Chartered Accountants, congratulates the IRD on their proactive approach in publishing these clarifications, although suggests that when the IRD does give some pointers, they cover a far wider range of scenarios at the same time. In their release QB 15/05 and QB 15/06 published in the July 2015 Tax Information Bulletin (TIB), the IRD state:

Question

What is the income tax treatment of a term life insurance policy that is taken out by an employer and where an employee (or their spouse, civil union partner, de facto partner or child) is the beneficiary?

This item applies to both individual term life policies and group life policies where the employees (or associates) are the beneficiaries of the policy.

Answer

•             The employer will generally be entitled to a deduction for the premiums paid.

•             The premiums paid will be subject to fringe benefit tax (FBT).

•             Lump sums paid out on death under a term life insurance policy will not be taxable income of the employee (or the employee’s estate).

Question

What is the income tax treatment of a term life insurance policy that is:

•             taken out by an employee (the employee is the policy holder), and

•             the premiums are paid by the employer on the employee’s behalf?

Answer

•             The employer will generally be entitled to a deduction for the premiums paid.

•             The amount of the premiums will be treated as salary or wages and, therefore, subject to PAYE.

•             Lump sums paid out under a term life insurance policy will not be taxable income of the employee (or the employee’s estate).

MHK Chartered Accountants agree with this statement, with their tax team commenting that “there is often confusion as to when FBT is payable, or PAYE payable, when a company pays insurance premiums, this IRD statement provides great guidance in these particular situations.  However it would be extremely useful that guidance on the position with Keyman insurance payments, and other types of insurance cover, be clarified so there is a definitive overall statement of the IRD’s position as to deductibility of all types of premiums paid, as well as accessibility of proceeds, all in the same place for ease of reference.”

MHK Chartered Accountants specialise in legally minimising all types of taxation obligations and offer a no-obligation exploratory discussion free of charge.  For more information on this, and MHK Chartered Accountants, please go to http://aucklandaccountant.net.nz .