INSURANCE Taxable Income
GENERAL NON-LIFE INSURANCE CALCULAITONS
Profit before Tax
Add Depreciation
Add Loss on Disposal of fix assist
Less Capital Allowance
Taxable Profit
Tax 35%
Profit after Tax
LIFE INSURANCE CALCULAITONS
Insurance Business
o Investment Income
o Less Admin and finance costs (%)
Pension Management Business
o Pension Management Fees
o Less Admin and management fees (%)
o Taxable profit
o Tax 35%
o Profit after Tax
Insurance
A process for alleviating the financial consequences of the risks in
the daily life
The risk to be insurable needs to be related ot a specific loss and
measurable a value placed on it
Parties
The insured – The person who does not want to bear the risk, the
company or individual who manages their risk by way of transferring
it to another person, this is done at a cost to them
The Insurer- the company that accepts the risk from the insured,
general insurance, life insurance, reinsurance
The middlemen- insurance brokers and insurance agencies
The Regulator- The pensions and Insurance Authority
Classes of Insurance Business
Prior to 2007 insurance companies were allowed to deal in both
General and Life Insurance, Law has since been amended that you
may only conduct business in one class
General Insurance Class
Business other than life (house insurance, car insurance)
Short term
A means of spreading or sharing the burden of financial loss should
the insured event occur
Life Insurance Class
A policy under which the insurer assumes a contingent obligation
dependant on human life
Long term
Sometimes regarded as a saving medium
Accounting for Insurance Business
Risk pooling is the distribution of insured risks among
policyholders (insured persons).
Risk shifting is the transfer of risks to an insurer for a
consideration called a premium.
Underwriting risk is the insurer’s risk of financial loss because
premiums are less than its claims and expenses
Gross premiums – The total turnover, premium is the price of
insurance protection for a specified risk for a specified period of
time
Reinsurance- This is the insurance that an insurance company
buys for its own protection. The risk of loss is spread so a
disproportionately large loss under a single policy doesn’t fall on
one company
Reinsurance Ceded- The unit of insurance transferred to a
reinsurer by a ceding company
Net Commissions- The difference between the commissions paid
out to brokers and agencies and the commissions received from
reinsurers
Consideration for Annuities– This is the purchase price for the
annuity plan. This price can be in a Lump sum or in form of periodic
payments a period between the date of right to buy and the date
when the share option matures
Pension Management Fees – A fee that is paid to the Life insurer
for the services that they provide in managing pension funds for
various organizations (Tax it differently its not insurance profit)
Unearned Premiums- The part of the premium applicable to the
expired part of the policy period
Premium Earned – The amount of the premium that has been paid
for in advance that neared because the time as passed without the
claim
Claim- A Demand made by the insured or the insured’s beneficiary
for payment of benefits as provided by the police
Incurred But Not Reported- The estimated cost of claims of
settling claims already incurred but not yet reported
Taxation of Insurance Income
Section 25 of the Income Tax Act provides that gains or profits of an
insurance business are ascertained in accordance with the provision
of the third schedule
The third schedule of the ITA gives guidance on taxation of profits or
gains of insurance business in cases of residents and no residents
doing life insurance and general insurance
Mr. Mpundu visits your office with sets of property transfer tax
documents. One set pertains to a case where property is being
transferred form one subsidiary company to another subsidiary
company. The other set is a case where property is being
transferred to a trust from another trust.
What would you look out for in both cases before you raise the
assessments?
What are Two items that form part of a life insurance business
and is usually not of a non-life insurance business.
Pension Management fees
Consideration for annuities
Subparagraph 1 of Paragraph 1 of the 3 rd Schedule to the Income
Tax Act sets safeguards as to how the unearned premium
reserves (UPR) should be arrived at. Mention two things that are
not allowable for tax purposes in computing unearned premium
reserves
To avoid arbitrary methods 40% or 50% of net premiums
The ITA provides for a use of 1/24
The reserves for the unearned premiums and the outstanding claim
must not contain an equalization reserve
LIFE INSURANCE TAX
Gross premium income 4500
Consideration for annuities 500
Reinsurance ceded (gross) -1500
Net premium income 3500
Unearned premiums -550
Net premium income earned 2950
Pension management fees 2500
Reinsurance recoveries 500
Reinsurance commission received 250
Investment income 2000
Total Income 8200
Expenses
Claims -2500
Commissions -150
Administrative expenses -5000
Finance costs -450
Transfer to insurance funds -1000
Total expenses -9100
Loss before income tax -900
Information on the tax file shows that an agreement was reached between
the Tax office and Zuma Insurance Company Ltd to apportion expenses
according to the following ratio
Insurance business 80%
Pension Management 20%
Required:
Compute the taxable profit/loss and tax liability of Zuma Insurance
Company Ltd
Investment Income
Investment Income (80%) 2,000
Less
Finance Costs (80% X450) -360
Administration Expense (80%5,000) -4000
Net loss we don’t tax it (2,360.
00)
Penson Management
Investment Income (20%) 2,500
Less
Finance Costs (20% X450) -90
Administration Expense (20% X 5,000) -1000
1,410.
Taxable Profit 00
493.
Tax Liability 35% (1,410X35%) 50
916.
Net Profit 50
General Insurance (NON LIFE)
Profit Before Tax 1,100
Add Back
Depreciation 200
Loss on Disposal 100
Less
Capital Allowance -250
Taxable Profit 1,150.00
Tax Liability 35% (1,150X35%) 402.50
Net Profit 747.50