15 July 2004
Income Protection Policies – Tax Issues
Statement by Simon Swanson, Managing Director, Sovereign
Sovereign is concerned that confusion is being caused amongst advisers and their customers due to liberal
interpretations some companies are making regarding Inland Revenue Department (IRD) definitions of income protection
cover.
A number of products have been launched that appear to assume a definition different to that of the IRD. Sovereign is
concerned that advisers and their customers may be unwittingly placing themselves at the risk of tax penalties.
We have contacted the IRD with our concerns, and received a letter confirming that the well-established 1994 Policy
Statement remains the Commissioner’s position on the issue. Therefore, Sovereign urges advisers and their customers to
check the tax promises of any income protection cover product against the IRD policy to avoid any problems.
Some products currently allow cover on an agreed value to 75% of the assured’s income. This approach poses two problems:
1) the assured could receive a greater income whilst on claim than they did prior to the claim; 2) the assured may be
under the impression that the premiums are tax deductible – they are not. The IRD has indicated in the policy, and in
its response to Sovereign’s 1999 ruling application, that agreed value disability income is non-deductible and
non-assessable, and therefore the cover should remain at 55%.
The letter from the IRD confirms that the 1994 Policy Statement applies until a new policy is promulgated - the IRD
Rulings Unit is looking at the issue. Sovereign expects any change to be an expansion of the 1994 interpretation, rather
than a change of interpretation to make policies taxable. Sovereign will maintain its current position, which is inline
with the IRD policy and eliminates any risk for advisers or their customers, until any formal changes are made.
ENDS