BGR 30 (Issue 2): Allocation of direct and indirect expenses within and between an insurer’s funds

The taxable income derived by any insurer in respect of any year of assessment must be determined in accordance with the Income Tax Act (“the Act”), but is subject to sections 29A and 29B of the Act.

Every insurer is required to establish five separate funds and to maintain such funds. These funds form the foundation for the operation of section 29A as a whole. The taxable income derived by an insurer in respect of the individual policyholder fund, the company policyholder fund, the corporate fund and the risk policy fund must be determined separately in accordance with the Act as if each such fund had been a separate taxpayer. The income received by or accrued to an insurer from assets held by it in, and business conducted by it in relation to, the untaxed policyholder fund is exempt from tax.

An insurer is required to re-determine the value of liabilities in each policyholder fund and the risk policy fund within three months after the end of every year of assessment. Where the market value of the assets in the fund exceeds the value of liabilities, assets with a market value equal to the excess must be transferred from such fund to the corporate fund. Where the market value of the assets is, however, less than the value of liabilities, assets with a market value equal to the shortfall must be transferred from the corporate fund to the relevant fund. These transfers are viewed as notional adjustments relevant only for purposes of calculating the insurer’s annual tax liability and do not affect the insurer’s legal ownership of the assets concerned.

BGR 30 serves as a ruling to determine the following:

• the allocation of direct and indirect operating expenses within and between the funds that are required to be established by insurers under section 29A and the subsequent deductibility of such operating expenses, and
• the deductibility of expenses against transfers under section 29A(7).

Issue 2 of BGR 30 is a copy of Issue 1, which has now been archived by SARS, with the only difference being that Issue 1 also highlighted specifically that the requirement of five funds (as referred to above) instead of four funds took effect from 1 January 2016. Given the time which has lapsed since 1 January 2016, references to the effective date of 1 January 2016 has been removed from Issue 2 of BGR 30.

A copy of issue 2 of BGR 30 can be accessed here. 

20/05/2022