QUESTION WE VE BEEN ASKED

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1 Date f issue: 23 February 2018 QUESTION WE VE BEEN ASKED QB 18/05 Incme Tax insurance persnal sickness and accident insurance taken ut by emplyer fr the benefit f an emplyee This Questin We ve Been Asked (QWBA) cnsiders the incme tax treatment f persnal sickness and accident insurance plicies where an emplyer takes ut the plicy fr the benefit f an emplyee. This QWBA replaces QB 15/10: Incme Tax Insurance Persnal sickness and accident insurance taken ut by emplyer fr the benefit f an emplyee Tax Infrmatin Bulletin Vlume Twenty Seven, N 10 (Nvember 2015). Key prvisins Sectins CA 1, CA 2(2), CE 1(1), CE 5, CE 11, CW 34, CX 2, CX 16, CX 31, DA 1, DA 2, GB 32 and the definitin f expenditure n accunt f an emplyee in s YA 1 f the Incme Tax Act This QWBA applies frm 30 March Questin What is the incme tax treatment f a persnal sickness r accident insurance plicy that is: taken ut by an emplyer (the emplyer is the plicy hlder), and an emplyee (r their spuse, civil unin partner, de fact partner r child) is the beneficiary? This item applies t bth individual persnal sickness r accident insurance plicies and grup plicies where the emplyees (r assciates) are the beneficiaries f the plicy. Answer The emplyer will generally be entitled t a deductin fr the premiums paid. The premiums paid will nt be subject t PAYE. The premiums paid will be subject t FBT unless they are premiums paid fr incme prtectin insurance where: the emplyer has a liability t pay (r cntribute t) the premiums; and 1

2 a claim payment under the insurance plicy wuld be assessable incme f the emplyee. Claim amunts paid (r that an emplyee is therwise entitled t) under incme prtectin insurance plicies will be incme under s CE 11. Claim amunts paid (r that an emplyee is therwise entitled t) under ther persnal sickness r accident plicies will be incme nly if they are incme under rdinary cncepts (s CA 1(2)). Claim amunts that are nt incme under rdinary cncepts will nt be subject t tax. Claim amunts that are incme under s CE 11 r s CA 1(2) will be exempt incme if they are payments: made t a persn because they (r anther persn) are incapacitated fr wrk; and either paid by a friendly sciety (s CW 34(2)(a)); r nt calculated accrding t a lss f earnings (s CW 34(2)(c)). If the claim payment des nt meet these criteria, it will be assessable incme. Explanatin Scpe 1. This QWBA cnsiders the incme tax treatment f persnal sickness r accident insurance plicies. Sme persnal sickness r accident insurance plicies include elements f incme prtectin insurance. There are specific prvisins in the Act that apply nly t incme prtectin insurance, s incme prtectin insurance may have a different tax treatment t ther persnal sickness r accident insurance. 2. This QWBA des nt cnsider the treatment f claim payments t r frm sickness, accident, r death benefits funds. 3. This QWBA als des nt cnsider the treatment f weekly cmpensatin purchased under s 223 f the Accident Cmpensatin Act Backgrund 4. Inland Revenue undertk a review f all Public Infrmatin Bulletins (see During that review, tw items n the incme tax treatment f insurance in an emplyment cntext were identified as being ut f date. The tw items are Staff insurance schemes (Public Infrmatin Bulletin N 70 (December 1972): 11) and Life and accident insurance plicies (Public Infrmatin Bulletin N 106 (July 1980): 2). Thse PIBs cvered a number f different scenaris. Thse items were replaced with a series f Questins We ve Been Asked (QWBAs) cvering cmmn scenaris. 5. Since thse QWBAs were published changes have been made t the Incme Tax Act t simplify the treatment f emplyer prvided insurance. Thse changes came int effect n 30 March It has, therefre, been decided t update and replace the affected QWBAs. 6. This QWBA cnsiders the situatin where a persnal sickness r accident insurance plicy is taken ut by an emplyer fr the benefit f an emplyee. The previus versin 2

3 f this QWBA was QB 15/10: Incme Tax Insurance persnal sickness and accident insurance taken ut by emplyer fr the benefit f an emplyee Tax Infrmatin Bulletin Vlume Twenty Seven, N 10 (Nvember 2015). See QB 18/04 fr discussin f situatins where the emplyee takes ut the plicy and the emplyer pays the premiums. 7. There are many different types f insurance plicies that culd be sickness r accident insurance (r culd include an element f persnal sickness r accident insurance). These include medical insurance, incme prtectin insurance, accident insurance, and trauma r critical illness plicies. Claim payments under these insurance plicies can be peridic r lump sum and can be calculated in a variety f ways. 8. Where nly part f a plicy cmes within a particular definitin, it may be necessary t apprtin premiums between different types f insurance. Similarly where a claim payment under a plicy is made fr mre than ne thing, apprtinment f the receipt may be required. Deductibility f premiums fr emplyer 9. A persn is allwed a deductin fr an amunt f expenditure r lss t the extent that it is incurred by them in the curse f carrying n a business fr the purpse f deriving assessable (and/r excluded) incme (s DA 1). Sectin DA 2 sets ut sme limitatins n deductibility. Fr example, expenditure that is capital in nature, r expenditure incurred in deriving exempt incme, is nt deductible (s DA 2(1) and (3)). 10. In mst cases, salary and wage csts will be deductible because they will satisfy the nexus test in s DA 1 and nne f the general limitatins will apply. The payment f a sickness r accident insurance premium fr an emplyee that is paid in cnnectin with the emplyee s emplyment is a business cst just like salary r wages. Therefre, prvided the csts f an emplyee s salary r wages are deductible, the csts f paying the insurance premiums will be t. When amunt f premium is subject t FBT 11. An emplyee s incme includes expenditure n accunt f that emplyee (s CE 1(1)(b)). Expenditure n accunt f an emplyee means a payment made by an emplyer relating t expenditure incurred by an emplyee (r t be incurred by an emplyee) (s CE 5(1)). In this case the emplyer has the legal bligatin t pay the premium (as they have cntracted with the insurance cmpany t take ut the plicy). Cnsequently, the payment f the premium is nt expenditure n accunt f an emplyee and is nt subject t PAYE. It is, therefre, necessary t cnsider whether FBT applies. 12. Under s CX 2, a fringe benefit is a benefit that is prvided by an emplyer t an emplyee in cnnectin with their emplyment (s CX 2(1)(a)) and cmes within either ne f ss CX 6, CX 9, CX 10, r CX 12 t CX 16 (specified benefits) r is an unclassified benefit under s CX 37 (s CX 2(1)(b)). Sme benefits are als excluded frm being fringe benefits by specific prvisins in subpart CX (see s CX 2(1)(c)). 13. The Cmmissiner s view is that the prvisin f an accident r sickness insurance plicy where the emplyee is a beneficiary is a benefit t the emplyee. It prvides an ecnmic advantage t the emplyee as it gives the emplyee benefits (cverage under the plicy) t which they wuld therwise nt be entitled. Prvided the benefit is prvided t an emplyee in cnnectin with their emplyment, s CX 2(1)(a) is satisfied. It is, therefre, necessary t cnsider whether the plicy is a specified benefit under ne f ss CX 6, CX 9, CX 10, r CX 12 t CX 16, r whether an unclassified benefit arises (s CX 37). It is als necessary t cnsider whether any exclusin culd apply. 3

4 14. The nly ptentially relevant specific prvisin is s CX 16. Sectin CX 16 applies when an emplyer pays a specified insurance premium r makes a cntributin t the insurance fund f a friendly sciety fr the benefit f an emplyee (s CX 16(1)). The relevant parts f the definitin f specified insurance premium are s CX 16(3)(b) and (c): CX 16 Cntributins t life r health insurance... Meaning f specified insurance premium (3) In this sectin, specified insurance premium means a premium paid fr the benefit f an emplyee n an insurance plicy t the extent t which the insurance plicy is fr (b) (c) accident r medical insurance referred t in sectin EY 8(3) n the life f the emplyee r their spuse, civil unin partner, r de fact partner, r n their jint lives, r n the life f their child: insurance against accident, disease, r sickness, whether fatal r nt, suffered by the emplyee, their spuse, civil unin partner, r de fact partner, r their child. 15. Persnal sickness and accident plicies are plicies that insure against accident, disease, r sickness. Therefre, the plicies cvered by this QWBA will cme within s CX 16 and s CX 2(1)(b) will be satisfied. 16. Where an emplyer prvides a fringe benefit t a persn assciated with an emplyee, s GB 32 may treat the benefit as if it were prvided by the emplyer t the emplyee. This is subject t the sharehlder-emplyee exemptin in s GB 32(2) and the lkthrugh cmpany exemptin in s GB 32(2B). Therefre, subject t thse exemptins, premiums paid n plicies f persnal sickness and accident insurance taken ut by an emplyer fr the benefit f an emplyee s spuse, civil unin partner, de fact partner r child will als be subject t FBT. Exclusin frm FBT 17. The nly ptentially relevant exclusin is s CX 31. Sectin CX 31 prvides: An emplyer wh satisfies a liability t pay, r cntribute t the payment f, a premium fr incme prtectin insurance fr the benefit f an emplyee des nt prvide a fringe benefit t the emplyee if a payment f the insurance t the emplyee wuld be assessable incme f the emplyee. 18. Sectin CX 31 will exclude frm FBT such incme prtectin insurance: prvided by an emplyer; fr the benefit f an emplyee; where the emplyer satisfies a liability t pay (r cntribute t) the premiums; and a pay-ut under the insurance plicy wuld be assessable incme f the emplyee (this requirement is cnsidered belw). 19. Where a persnal sickness r accident plicy is als (r als includes) incme prtectin insurance and all f the abve requirements are met, the prvisin f the incme prtectin insurance will nt be a fringe benefit. In all ther cases, FBT will apply. Where nly part f a plicy is incme prtectin insurance, apprtinment may be required. Incme tax treatment f claims paid 20. Whether a claim payment made under an insurance plicy is taxable will depend n what it is paid fr. Sme claim payments will nt be incme (under a specific prvisin r rdinary cncepts) and, therefre, will nt be taxable. Claim payments that are 4

5 incme may be either assessable r exempt incme depending n the circumstances. The fllwing discussin is intended t assist with determining hw a claim payment under an insurance plicy shuld be treated. Is the payment t the emplyee incme? 21. If a persnal sickness r accident insurance plicy is (r includes) incme prtectin insurance, s CE 11 may apply. Claim payments made under a plicy f incme prtectin insurance where an emplyer is liable t pay r cntribute t the premiums are incme t the emplyee under s CE There are n specific prvisins that apply t make claim payments under ther persnal sickness r accident insurance plicies incme. Therefre, claim payments under these plicies will be incme nly if they are incme under rdinary cncepts (s CA 1(2)). 23. Whether a claim payment under an insurance plicy is incme r nt will depend n the relatinship between the payer and the recipient and the purpse f the payment (Reid v CIR (1985) 7 NZTC 5,176). Where a claim payment is made t replace incme which the recipient wuld therwise have earned r where the purpse f the payments is t prvide the recipient with amunts t meet their living expenses, the payments are likely t be incme. Claim payments that are regular r recurring are much mre likely t be incme (Reid). Hwever, a ne-ff claim payment may still be incme (FCT v Hytec Hiring Pty Ltd 92 ATC 4,694). 24. Therefre, the claim payments that are mst likely t be incme are payments that are intended t cmpensate an insured persn fr lst incme (whether peridic, r lump sum) and ther regular r peridic payments intended t help the insured persn meet their living expenses. Other lump sum and reimbursing payments are unlikely t be incme (fr example, a lump sum payment made fr the lss f a limb, r a payment reimbursing medical expenses). 25. Claim payments that are nt incme (either under s CE 11 r s CA 1(2)) will nt be taxable. If a claim payment is incme, it is necessary t cnsider whether it is assessable incme r exempt incme. Is the claim payment exempt incme f the emplyee? 26. The relevant exemptin prvisin is s CW 34. A claim payment f incme made under a plicy f persnal sickness r accident insurance will be exempt under s CW 34 if: It is made t a persn because they (r anther persn) are incapacitated fr wrk; and either the payment is made by a friendly sciety; r the payment is nt calculated accrding t a lss f earnings. 27. If the claim payment des nt meet these criteria, it will be assessable incme. 28. The fllwing diagram sets ut the prcess fr determining hw a claim amunt paid ut under a plicy shuld be treated. Each claim payment needs t be cnsidered separately. As nted abve, where a single claim payment is made fr mre than ne thing, apprtinment may be required: 5

6 Treatment f claim payment made t a persn under a plicy f persnal sickness r accident insurance Applicatin date 29. This QWBA reflects changes t s CX 16, which came int frce n 30 March The QWBA, therefre, applies frm that date. Fr the psitin prir t 30 March 2017, see QB 15/10: Incme Tax Insurance Persnal sickness and accident insurance taken ut by emplyer fr the benefit f an emplyee Tax Infrmatin Bulletin Vlume Twenty Seven, N 10 (Nvember 2015). 30. The fllwing example is included t assist in explaining the applicatin f the law. Example Keith s emplyer takes ut medical insurance plicies fr each f its senir staff. The plicies pay ut varius amunts if the insured persn cntracts a disease r becmes sick. Keith s emplyer is allwed a deductin fr the premiums. The premiums are subject t FBT because a fringe benefit arises under s CX 16. 6

7 Keith cntracts influenza and is hspitalised. Keith receives a $10,000 claim payment as a reimbursement f his hspital expenses. Keith wants t knw whether t include the $10,000 in his incme. The $10,000 is nt incme. The amunt is nt incme under rdinary cncepts. It is a ne-ff payment. Als, it is nt paid t cmpensate Keith fr lst incme.. References Subject references Expenditure n accunt f an emplyee FBT Fringe benefit Incme prtectin insurance Life insurance Persnal sickness r accident insurance Legislative references Incme Tax Act 2007: ss CA 1, CE 1(1), CE 5, CE 11, CX 2, CX 16, CX 31, DA 1, DA 2, GB 32, RD 3, RD 5(2) and the definitin f expenditure n accunt f an emplyee in s YA 1 Other references Life and accident insurance plicies Public Infrmatin Bulletin N 106 (July 1980): 2 Staff insurance schemes Public Infrmatin Bulletin N 70 (December 1972): 11 QB 15/10: Incme Tax Insurance persnal sickness and accident insurance taken ut by emplyer fr the benefit f an emplyee Tax Infrmatin Bulletin Vlume Twenty Seven, N 10 (Nvember 2015). Case references FCT v Hytec Hiring Pty Ltd 92 ATC 4,694 Reid v CIR (1985) 7 NZTC 5,176 7