Summary

This paper describes the theoretical framework underlying the four-funds basis for taxing life insurance in South Africa and records the historical steps in the development of the basis from inception, proposed in the Jacobs Committee Report in 1992, to its current form. It goes on to evaluate the basis in its current form and to propose possible changes that should be considered.

The paper provides a brief overview of the different aspects of taxation in South Africa: taxation of income; taxation of capital gains; and taxation of life insurance policies. Taxation of premiums by policyholders and benefits to policyholders is briefly explained, while the focus is the four-funds taxation basis of life insurance. The problems with the taxation approach and approximations used are discussed, especially with the reference to the Individual Policyholders’ Fund. The issues of approximating policyholders’ marginal tax rates, individual policyholders’ exemptions and capital gains are discussed. A comparison is also drawn between the taxation of life-wrapped investment policies and the taxation of unit trusts.

This is also a review the work of TE Hartwig, published in the Transactions of the Actuarial Society of South Africa, (1994), X(I), 196-239, in the paper called Taxation of life insurance.

http://www.actuarialsociety.org.za/Portals/1/Documents/8e8c5dcd-87c9-41b2-ae12-80a5a2db581a.pdf