It seems that the focus of the legislator and the revenue authorities has shifted from financial institutions to insurance companies. Apart from the elimination of so-called captive cell arrangements, it has also been mentioned that specific focus will be given on scenarios where premiums are paid by a parent company at increased rates on the basis that the excess so paid back to the company by way of tax-free preference share dividends, will be specifically addressed.

However, pursuant to a number of assessments issued to insurance companies over the last few months, it has been indicated that the solvency requirements applicable to insurance companies are not currently consistent with the tax treatment thereof. In the case of short-term insurance companies, it has been specifically indicated that the recognition of certain reserves have had both a positive and negative effect for short-term insurers.

In the context of long-term insurance companies, it seems that the so-called forefront trustee system of taxation is to be reconsidered. Essentially the business of a long-term insurance company is divided into an untaxed policyholder fund, a company policyholder fund, an individual policyholder fund and a corporate fund. Different tax principles apply to each fund and the assets accounted for by each fund. For instance, the untaxed policyholder fund is not subject to any tax. The different treatment has also given rise to mismatches from an account perspective. For instance, at one stage reinsurance liabilities were not recognised even though reinsurance assets were recognised for tax purposes, resulting in substantial anomalies.

It has been indicated that the tax system for calculating short-term insurance reserves will be addressed during 2012, with the long-term insurance industry being considered during 2013. One can expect far-reaching amendments, especially given the aggressive attitude that has been displayed by the revenue authorities towards insurers of late. However, recognition will have to be given that reserves play a critical role in this context, especially with reference to claims that are to be submitted in the future and the way in which insurance companies have to recognise same.

Written by Emil Brincker, Director, National Practice Head, Tax, Cliffe Dekker Hofmeyr