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Income Tax Amendment Act – Act 15 of 2011, Gazette 4864 of 30 December effective 1 January 2012 for companies and 1 March 2012 for taxpayers other than companies, except paragraph 4 which is deemed to have come into effect on 1 March 2009.

1. Employer Funded Policies

Paragraph (m) of the definition of "gross income" is substituted. In short this section stipulates as "gross income" "any amount received or accrued under or upon surrender or disposal of, or by way of any loan or advance granted by the insurer…, any policy of insurance upon the life of any person who at any time while the policy was in force was an employee…or director of the company, if any premium paid …was deductible…under section 17…". Any loan or advance previously included in "gross income" is to be excluded. If a policy is terminated and a paid up policy is issued these are deemed to be one and the same policy.

Section 17(1), which deals with "general deductions" which are allowed, is expanded by the addition of subsection (w). This deals with "expenditure incurred by the taxpayer in respect of any premiums payable under a long-term policy of which the taxpayer is the policyholder, where…" any of the following conditions apply:

  • the premium is included in the taxable income of the employee;
  • the taxpayer is insured against any loss by reason of the death, disablement or sever illness of an employee;
  • the policy is a risk policy (as opposed to an investment policy) that has no cash or surrender value prior to maturity or the death of an employee;
  • the policy is not the property of any person other than the taxpayer;
  • there is no scheme in place in terms of which policy proceeds are paid over by the taxpayer to the employee or a connected person, to the estate of the employee or to any person who is or was dependent upon the employee.

What to do?

Companies:

A number of retirement arrangements have been set up in the past capitalizing on a "loophole" in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees. The "loop hole" allowed the policy proceeds due in the event of death of any employee to be paid to the employee"s dependents or nominees tax free.

Policy proceeds upon the death of an employee are now taxable in the hands of the employer, if the employer claimed any premiums in respect of the relevant policy for tax purposes, in the past. An employer who maintains such a life assurance scheme needs to introduce a new policy to define its intention regarding the impact of tax on the gross proceeds. i.e. will the employer carry the cost or will the cost be passed on to the beneficiary/ies? If the tax is to be recovered from the gross proceeds before affecting payment to any beneficiary/ies, procedures and controls need to be introduced to ensure that the gross proceeds are reduced by the tax effect before paying a benefit.

2. Commutation of Small Pension Fund Annuities

The Act creates another opportunity to taxpayers to commute small "pension fund" annuities, if the capital of an existing annuity as at 1 April 2010 did not exceed N$ 50,000.

What to do?

Trustees:

Trustees need to consider whether they want to draw their pensioners" attention to this opportunity, recognizing that the payment of every annuity normally attracts a fee either based on the annuity capital, or a transaction based fee or both.

3. Education Policies

The following new definition of "education policy" is introduced - "A policy of insurance taken out by a tax payer exclusive and solely for the purpose of making provision for future education or training of a child or step-child of the tax payer contemplated by section 16(1)(ab)(ii);"

Paragraph (dC) of the definition of "gross income" is substituted as follows – "any amount received or accrued under or upon the maturity, payment, surrender or disposal of any education policy if any premium was allowed as a deduction in terms of section 17(1)(qA);"

Furthermore paragraph 11A is inserted in schedule 2 of the Act which regulates employees" tax and the employer"s administrative responsibilities. In terms of this section:

"(1). An employer must issue a declaration to the Minister within 30 days following the month in which any payout is received or accrued to a tax payer under or upon maturity, payment, surrender or disposal of an education policy to which paragraph (dC) of the definition of "gross income" applies;

(2). if an employer fails to submit such a declaration in terms of subparagraph (1)within the period prescribed in that subparagraph he or she is liable to pay a penalty equal to 10% of the amount received or accrued to a tax payer under or upon the maturity, payment, surrender or disposal of the policy."

As far as it concerns the employee, section 16(1)(ab)(i) is substituted to now clarify that proceeds are only exempted from income tax if they will be used to fund "…education or training…" at an "…educational institution of public character; and is undergone or will be undergone… for the purpose of obtaining a post-school qualification;".

What to do?

Companies:

This means that where one of your staff members claims premiums towards an educational policy against the taxable income administered by your company, we suggest that you consider the following:

  1. the employee to provide a copy of the policy to prove that the policy complies with the definition per above;
  2. your HR/payroll department to diarise the maturity date of the policy and to introduce a strict routine to follow up on maturity date;
  3. the employee to sign an undertaking, to inform HR/payroll department immediately upon cashing in the policy proceeds and to indemnify your company against any penalty as contemplated in section 11A of schedule 2, should he/she fail to inform your company immediately upon having cashed in the policy proceeds.

Individuals:

To ensure that proceeds from an education policy are not subjected to income tax, the employee

needs to ascertain that the purpose of the policy is to provide capital for -

  • education or training at an educational institution of public character;
  • the purpose of obtaining a post-school qualification.

4. Withholding Tax on Interest

Section 34A is amended to clarify that withholding tax does not apply to "…interest from stock or securities, including Treasury Bills issued by the Government of Namibia, any regional council or local authority in Namibia…" or to "…any amount of interest accruing to or in favour of any person in respect of any negotiable instrument issued by such (Namibian) banking institution…"

What to do?

Individuals;

For financial planning purposes, take into account that there is no withholding tax on bills and bonds issued by Government, regional and local authorities or on negotiable instruments issued by a local bank.

5. Withholding Tax on Services Payments to Non-residents

Newly introduced Section 35A is likely to affect most of us. It firstly introduces definitions of the services that will be subjected to this tax:

"(1) "entertainment fee" means any amount payable to an entertainer (including cabaret, motion picture, radio, television or theatre artiste and any musician) or sportsperson, and includes any payment made to any other person in relation to such activity; "management or consultancy fee" means any amount payable for administrative, managerial, technical or consultative services or any similar services, whether such services are of a professional nature or not;"

This section requires any resident person ("the State, a regional council or a local authority in Namibia", "a natural person ordinarily resident in Namibia", "a company, partnership, board or trust which is formed or established or incorporated under the laws of Namibia or which is managed or controlled in Namibia") who becomes liable to pay any management fee, consultancy fee, director"s fee or entertainment fee to deduct 25% of such fees and pay this tax to the fiscus within 20 days of the end the month during which such tax was withheld, together with a "…return in the manner and form and containing the information as prescribed…".

Non-compliance attracts penalties of 10% for each month or part thereof and interest at the rate of 20% per annum.

  • In this regard, the double taxation agreement with South Africa (DTA) deals with:
  • "independent personal services" derived by a resident individual. Such services include especially scientific-, literary-, artistic-, educational-, teaching services as well as other activities of physicians, lawyers, engineers, architects, dentists and accountants. These shall only be taxable in the state in which they were derived;
  • dependent services, meaning salaries, wages and other similar remuneration. These shall only be taxable in the state in which they were derived;
  • directors" fees derived by a resident individual serving on a board of a company in the other state. These shall only be taxable in the state in which they were derived;
  • income derived by resident entertainers and sportspersons, may be taxed in the state in which these activities are exercised.

Reading the DTA together with section 35A, Namibian persons will have to withhold the tax referred to in section 35A but the recipient, as a South African tax payer can claim a deduction against any SA tax on the same income in terms of Article 23 of the DTA. Residents of countries who do not have a double taxation agreement with Namibia will suffer a reduction in fees equal to the withholding tax.

What to do?

Companies, trustees and individuals:

Ascertain whether you have any business dealings with any foreigner. If you do, ascertain whether these dealings fall into the ambit of the definitions of "entertainment fee", "management or consultancy fee" or director's fee. If they do, inform your business associate that you will be obliged to withhold 25% as from 1 January 2012 (all companies), respectively 1 March 2012 (all tax payers other than a company). Institute systems and procedures to identify taxable services, separately record the tax withheld from the gross amount, ascertain that all amounts withheld are paid over to Inland Revenue on or before the 20th of the month following the month in which any amount was withheld and complete the required form to accompany such payments.

Trustees and directors of unit trust management companies take note that funds and unit trusts are defined to be a "company" and are therefore required to start deducting withholding tax as from 1 January 2012.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

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