SA2-07: Taxation (2) Q7.6 (iv) South Africa

[yuli2513]

Hi,

I have one more question on the last sentence in the answer to Q7.6 (iv). It is said that "Corporate policies and more recent protection policies, which are allocated to the corporate fund, company policyholder fund and risk policy fund, if the corporation tax rate is higher than the average policyholder income tax rate."

I understand that the corporation tax rate applies to these funds according to the 'five-fund approach', but I do not see why it matters whether the corporation tax is higher or lower than the average policyholder income tax rate in this case, as only the corporation tax rate should be applicable. The average policyholder income tax is only applicable to the individual policyholder fund.

Thanks in advance for helping out!

 

[Lindsay Smitherman]

The question is basically asking: under what circumstances would a South African life insurance company pay higher tax?

So the point here is that IF the corporation tax rate is higher than the average policyholder income tax rate, it would pay a higher rate of tax if it sold proportionately more of the business that is taxed at the corporation tax rate (ie anything in the corporate, company policyholder or risk policy funds) rather than business that is taxed at the policyholder income tax rate (ie anything in the individual p/h fund).