MaxKnowledge — Knowledge base — Guide for Short-Term Insurance

Guide for Short-Term Insurance

www.sars.gov.za

‌FOREWORD
This guide is a general guide concerning the application of the VAT Act to short-term insurance transactions in South Africa. Although fairly comprehensive, the guide does not deal with all the legal detail associated with VAT and is not intended for legal reference. Technical and legal terminology has also been avoided wherever possible. For details about the general operation of VAT, refer to the VAT 404 – Guide for Vendors which is available on the South African Revenue Service (SARS) website.

All references to “the VAT Act” or “the Act” are to the Value-Added Tax Act 89 of 1991 and references to “sections” are to sections of the VAT Act, unless the context indicates otherwise. The Tax Administration Act 28 of 2011 is referred to as “the TA Act”. Any reference to the Short-Term Insurance Act 53 of 1998 and Long-Term Insurance Act 52 of 1998 are referred to as “the STI Act” and “the LTI Act” respectively.

The terms “Republic”, “South Africa” or the abbreviation “RSA”, are used interchangeably in this document as a reference to the sovereign territory of the Republic of South Africa, as set out in the definition of “Republic” in section 1(1). The terms “Commissioner” and “Minister” refer to the Commissioner for SARS and the Minister of Finance respectively, unless otherwise indicated. A number of specific terms used throughout the guide are defined in the VAT Act. These terms and others are listed in simplified form in the Glossary, which also includes a selection of terminology used in the insurance industry.

The information in this guide is based on the VAT legislation (as amended) at the time of publishing, up to and including -

the Taxation Laws Amendment Act 22 of 2012 which was promulgated on 1 February 2013 (as per GG 36122)

the Tax Administration Laws Amendment Act 21 of 2012 which was promulgated on 20 December 2012 (as per GG 36036).

the Tax Administration Act 28 of 2011 which was promulgated on 4 July 2012 (as per GG 35491); and

The information in this guide is issued for guidance only and does not constitute a ruling as contemplated in Chapter 7 of the TA Act or section 41B of the Act unless otherwise indicated. Binding General Ruling (VAT) No. 14: VAT Treatment of Specific Supplies in The Short-Term Insurance Industry (BGR 14) which is included in Annexure A deals with some specific aspects of insurance in more detail. BGR 14 will take precedence over any statements in the guide concerning the following aspects:

Time of supply of short-term insurance and related intermediary services

Alternative documents to be used as a tax invoice in respect of the supply of short-term insurance and the related intermediary services

Approval to issue recipient-created tax invoices, debit or credit notes

International transport policies including stock through-put, goods in transit, marine insurance policies and travel coupons

Hull and associated liability insurance

Insurance cover provided to South African residents in respect of fixed property and movable property

Excess payments

Indemnity payments

Third party payments

Recoveries

Group accident claims

Reinsurance

The following guides have also been issued and may be referred to for more information about specific VAT-related topics:

AS-VAT-08 – Guide for Registration of VAT Vendors

Trade Classification Guide (VAT 403)

Guide for Vendors (VAT 404)

Guide for Fixed Property and Construction (VAT 409)

Guide for Entertainment Accommodation and Catering (VAT 411)

Share Block Schemes (VAT 412)

Deceased Estates (VAT 413)

Associations not for Gain and Welfare Organisations (VAT 414)

AS-VAT-DR-03 – Diesel/Biodiesel reference guide

AS-VAT-10 – Quick Reference Guide for VAT Vendors

AS-VAT-02 – Quick Reference Guide (Diplomatic Refunds)

Guide for Municipalities (VAT 419)

Guide for Motor Dealers (VAT 420)

Should there be any aspects relating to VAT which are not clear or not dealt with in this guide, or should you require further information or a specific ruling on a legal issue, you may –

visit the SARS website at www.sars.gov.za;

contact your local SARS branch;

if calling locally, contact the SARS National Call Centre on 0800 00 7277;

if calling from abroad, contact the SARS National Call Centre on +27 11 602 2093;

submit a ruling application to SARS headed “Application for a VAT Class Ruling” or “Application for a VAT Ruling" by email to VATRulings@sars.gov.za or by facsimile on +27 86 540 9390; or

contact your own tax advisors.

Comments and/or suggestions regarding this guide may be emailed to: policycomments@sars.gov.za.

Prepared by:

‌Legal and Policy Division South African Revenue Service 28 March 2013‌‌

‌CONTENTS

CHAPTER 1: INTRODUCTION

1.1

Policy background

1.2

Scope of insurance topics

1.3

Approach of the guide

CHAPTER 2: WHAT IS INSURANCE?

2.1

Legal principles of insurance

2.2

Ordinary meaning and general description of insurance

2.3

Long-term vs. short-term insurance

CHAPTER 3: VAT CONCEPTS, DEFINITIONS AND TERMINOLOGY

3.1

Time and value of supply

3.2

Consideration

3.3

Enterprise

3.4

Goods, fixed property and second-hand goods

3.5

Services and imported services

3.6

Supply and taxable supply

3.7

Insurance

3.8

Financial services

CHAPTER 4: AGENT vs. PRINCIPAL

4.1

Introduction

4.2

Legal principles of agency

4.3

Tax invoices, credit notes and debit notes

4.4

Application of agency principles

CHAPTER 5: ACCOUNTING FOR VAT

5.1

Introduction

5.2

The mechanics of VAT

5.3

Application of VAT principles

5.3.1

General tax administration matters

5.3.2

Output tax

5.3.3

Input tax

5.4

Insurance premiums

5.4.1

General

5.4.2

Premiums received through intermediaries

5.4.3

Premiums on Lloyd’s policies (coverholder business)

5.5

Commissions

5.6

No claim bonuses and cashback incentives

5.7

Recoveries and recoupments

5.7.1

Recoveries made under subrogation

5.7.2

Recoveries from reinsurers

5.7.3

Contribution from other insurers

5.7.4

Sale of salvage

5.8

Other income from taxable supplies

5.9

Imported services

CHAPTER 6: TRADE PAYMENTS, INDEMNITY PAYMENTS AND EXCESS

6.1

Introduction

6.2

Trade payments

6.3

Indemnity payments

6.3.1

Legal provisions

6.3.2

The insurer

6.3.3

The insured

6.3.4

Excess

ANNEXURE A: BINDING GENERAL RULING NO. 14

ANNEXURE B: VAT PRACTICE NOTE NO 1 OF 2001

ANNEXURE C: LEGAL PRINCIPLES OF INSURANCE

GLOSSARY

CONTACT DETAILS

‌CHAPTER 1
‌INTRODUCTION

‌POLICY BACKGROUND

The proposal to subject short-term insurance to VAT when it was introduced in 1991 was in recognition of the value that the provision of short-term insurance adds to the economy. Short-term insurers require the use of labour and capital resources and these are charged to users of their services. Evidence led before VATCOM1 was that short-term insurance business in South Africa was split almost equally between private households and businesses. In addition the view was that short-term and life (long-term) insurance business was significantly different and that the provision of life insurance is focussed mainly on individuals.

VATCOM was persuaded that conceptually, a tax should be imposed on all financial services. However, it also considered that as the term "financial services" embraces very sensitive expenditure, such as interest on housing, pension and provident fund contributions and death and health insurance, the cost of these could be increased by the VAT rate if VAT is imposed. VATCOM therefore recommended that “financial services” should be exempted from VAT but that short-term insurance should not fall within the ambit of the exemption.

When VAT was introduced on 30 September 1991, supplies of short-term insurance became subject to VAT, but long-term insurance was exempt (being a “financial service”). At that time, certain other fee- based services, for example, providing financial advice, arranging financial services and debt collection services were also regarded as exempt financial services. However, from 1 April 1995, the Act was amended to exclude such services from the definition of “financial services” from that date. Credit guarantee insurance which was also initially exempt became taxable from 1 October 1996.

‌SCOPE OF INSURANCE TOPICS

This guide deals with the VAT implications of transactions related to short-term insurance business in South Africa and the accounting in respect thereof. Included is a discussion on how insurance and related transactions impact on brokers, agents and other intermediaries2 as they play an important role in the insurance industry. The guide does not deal with long-term insurance services, except to the extent that it serves to clarify the distinction between long-term insurance, short-term insurance and other goods and services supplied in the course of writing short-term insurance business. The guide will focus mainly on the following aspects:

The nature and meaning of “insurance”

Before delving into the application of the VAT law in regard to short-term insurance, we will first establish what is meant by the term “insurance”, which has both an ordinary legal meaning as well as a defined meaning for VAT purposes. The distinction is important in that the VAT treatment of transactions is based primarily on the characterisation of the underlying supplies. We will also mention some of the main legal principles upon which insurance is based, as well as clarify the distinction between long-term and short-term insurance.

‌1 VATCOM was a committee consisting of members from the private and public sectors, was appointed in 1990 by the Minister to consider the comments and representations made by interested parties on the government’s draft Value-Added Tax Bill.

‌2 For the purposes of this guide, unless otherwise indicated, the terms “agent”, “intermediary”, “broker” or “independent intermediary” are used interchangeably and indicate the designation of a legal agent of the insurer (principal).

Supply of short-term insurance

Generally, VAT is payable at the standard rate on the supply of risk cover in terms of a short-term insurance policy. There are, however, certain instances when the premiums will be subject to VAT at the zero rate. Premiums payable in respect of long-term insurance such as life assurance and endowment policies are generally exempt from VAT. As with any type of legal contract involving supplies, there will be a supplier and a recipient. These two parties will be referred to in the guide as “the insurer” and “the insured” respectively. The explanation of the VAT implications of providing and receiving short-term insurance services includes –

how and when VAT must be accounted for on transactions and payments;

the rules regarding the classification of supplies and the issuing of tax invoices; and

whether output tax must be declared and input tax may be deducted on premiums and other payments associated with insurance contracts.

Supplies made by brokers, agents and other intermediaries (agents)

In the insurance business, agents are often involved in the conclusion of the transaction and the maintenance of the policy. As these agents play an important role in the insurance industry, the guide also deals with the VAT consequences of persons who act as agents and clarifies, amongst others -

whether these agents are liable to register and account for VAT in respect of the receipt of premiums, commissions, fees and other types of income received;

whether these agents are regarded as employees or independent contractors; and

the calculation of commissions.

Deemed supplies arising from indemnity payments and third party transactions

This is one of the more complex aspects of insurance and is an area of the law where there is the most uncertainty. An indemnity payment made under a contract of insurance would not normally be considered to be payment for a supply of goods and services. However, the Act specifically deems such a payment to be in respect of a taxable supply of services made by the insured to the insurer (subject to a few exceptions). There are also a number of different ways in which insurance claims can be settled. For example, the insured goods could be reinstated, a service provider might be paid to restore the goods, or an indemnity payment could be made to the insured or a third party. In this process, there is also the matter of excess payments to consider. The guide will therefore discuss these different methods to enable vendors to establish whether certain events will trigger a liability for output tax or a right to deduct input tax.

‌APPROACH OF THE GUIDE

‌The approach of this guide in dealing with the topics mentioned in paragraph 1.2 is set out below.

Chapter 1 – Sets out the policy framework which governs the VAT treatment of insurance in general. It includes a description of the policy background as determined by VATCOM before VAT was introduced in South Africa on 30 September 1991. It also describes the scope of topics concerning short-term insurance transactions that will be covered in the guide and the approach adopted.

Chapter 2 – Explores some of the principles which underpin the law of insurance in South Africa and the ordinary meaning of the term “insurance”. Included, is a description of what insurance is all about and a discussion of some of the differences between short-term and long-term insurance. This chapter is important in coming to terms with the main principles of insurance law so that the VAT implications of certain insurance-related transactions explained later in the guide can be understood.

Chapter 3 – Introduces the reader to the most important VAT concepts, terms and definitions mentioned in the guide so that the VAT treatment of supplies which are explained in later chapters can be understood. Key points addressed in this chapter include an explanation of the terms “enterprise” and “financial services” in the context of insurance, as well as the meaning of the term “insurance” which is specifically defined for VAT purposes and is wider than the ordinary meaning. The chapter also explains the difference between taxable and non-taxable supplies which is fundamental in establishing whether output tax must be declared and input tax may be deducted.

Chapter 4 – Provides a brief overview of the legal concepts “agent” and “principal”. This is important as the VAT consequences of a transaction cannot be determined until the contractual relationship between the parties is established. These concepts are particularly important with regard to supplies of insurance as agents, brokers and other intermediaries play an important role in the insurance industry in writing and maintaining policies of insurance and providing auxillary services which are related to the supply of insurance.

Chapter 5 – Deals with how VAT should be accounted for in respect of the different types of supplies made by insurers and intermediaries including the timing rules. The chapter sets out the general rules with regard to classifying supplies, record-keeping, invoicing and documentation required. It discusses the VAT treatment of premium income which may be paid directly or collected via intermediaries as well as commissions and some other types of supplies which are typically found in the insurance industry. The effect of the imported services provisions for insurers that make exempt supplies are also dealt with in this chapter. The VAT implication of deemed supplies arising as a result of the making and receiving of indemnity payments is dealt with separately in Chapter 6.

Chapter 6 – This chapter focuses on the VAT implications of settling claims and the different ways in which this can be done. The most important aspects include how to deal with input tax from the insurer’s perspective when making trade payments and indemnity payments. From the insured’s perspective, the most important aspects include the VAT treatment of the deemed supply which may arise as a result of receiving an indemnity payment, as well as the VAT treatment of excess payments.

‌CHAPTER 2
‌WHAT IS INSURANCE?

LEGAL PRINCIPLES OF INSURANCE

Very few reported cases or legal principles were established until the landmark English contract law case of Carter v Boehm in 1766, in which the duty of utmost good faith (uberrimae fidei) in insurance contracts was established. The judge in Carter v Boehm stated as follows regarding this principle: 3

Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque as if it did not exist. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.

In addition to the duty to disclose information and generally to act in utmost good faith, other legal principles which are unique to the law of insurance also developed over time. The main legal principles of insurance which were derived mainly from English contract law are:

‌Indemnity;

‌Insurable interest;

‌Duty of disclosure;

‌Average;

‌Contribution;

‌Subrogation; and

‌Proximate cause.

These principles apply in addition to the general principles of the law of contract. More information on these principles as well as other insurance related terminology can be found in Annexure C and in the Glossary: Part 2 – Selected insurance terms.4

ORDINARY MEANING AND GENERAL DESCRIPTION OF INSURANCE

The term “insurance” has been defined as follows:

The act or instance of insuring; a sum paid for this; a premium; a sum paid out as compensation for theft, damage, loss, etc., insurance policy; a measure taken to provide for a possible contingency.5

The act, system, or business of providing financial protection for property, life, health, etc., against specified contingencies, such as death, loss, or damage, and involving payment of regular premiums in return for a policy guaranteeing such protection.6

The term “insurance” can also be described as:

A contract whereby an insurer promises to pay the insured a sum of money or some other benefit upon the happening of one or more uncertain events in exchange for the payment of a premium. There must be uncertainty as to whether the relevant event(s) may happen at all or, if they will occur (eg death) as to their timing.7

3 Passage adapted from the press release entitled “What is insurance?” dated 5 March 2007 by the Ombudsman for Short-Term Insurance – website www.osti.co.za.

‌4 The terms and phrases in the Glossary are not agreed definitions which have a universal meaning, but are intended merely to provide the reader with a general understanding of insurance terminology which is used in the industry and in this guide. These terms have been compiled from a number of sources, but are mainly derived from the information available on the Insurance Gateway website www.insurancegateway.co.za.

‌5 The Concise Oxford Dictionary.‌

‌6 Collins English Dictionary (Desktop edition).

‌7 Lloyd's glossary of insurance-related terms www.lloyds.com/Common/Help/Glossary?page=2.

The purpose of insurance is to help businesses and individuals to reduce the financial impact of a risk occurring. While an insurance policy does not remove a risk, it provides the policyholder with some peace of mind that if the insured event should occur, the financial impact on the business or individual will be covered in full, or at least minimised.

When a business that provides insurance (known as the “insurer”) agrees to take on the risk on behalf of another business or individual (known as the “insured”), it does so through the conclusion of an insurance contract (known as a “policy”). In the policy, the insurer will state what risks it has agreed to insure against, and how much it will pay if the risk happens so that the insured is restored to the same position as if the risk had not happened. The policy may also include a list of things that are not covered by the policy (known as “exclusions”). In return, the insurer receives a fee from the insured (known as the insurance “premium”).

The insurer collects premiums on a number of policies and pools these funds, which it then invests. Should there be any claim on a policy the insurer will pay out on that claim from the pool of funds. The insurer is usually in business to make a profit and will be hoping that the total premiums it receives, together with any income it can make by investing the money, will exceed the total claims it has to pay out. It is also a common feature of policies that the insured will be required to contribute financially towards the cost of any claim made in terms of the policy (known as the “excess” amount). “Excess” is regarded as the self-insured or uninsured portion of a risk.

To be included in an insurance policy, a risk must be capable of being measured in monetary terms, there must be uncertainty as to whether the events concerned will occur, and the insured person must stand to lose something of appreciable value if the thing insured is lost, destroyed or damaged (known as the “insurable interest”). The insurer will look at all the circumstances surrounding a risk before deciding whether or not to provide insurance cover against it. This process is called “underwriting”. Underwriters are the specialists employed by the insurer to carry out the risk assessment and will want to know how likely the event is to occur, what steps have been taken to reduce the risk, and what the financial consequences will be if the event occurs. This also involves an assessment of the extent to which a particular cause leading to the loss is covered by the policy (known as the “proximate cause”). 8

From the above, the following characteristics of insurance can be identified:

The insurer issues a policy to the insured which sets out the contractual conditions under which the risks relating to the insurable interest are covered, and specifies the premium payable.

There must be an element of uncertainty as to whether the insured event will occur or not (or in the case of long-term insurance, the uncertainty relates to when the event will occur).

The policy is based on the transfer of risk from the insured to the insurer. In the event of the risk occurring, the insurer indemnifies the insured, either by making an indemnity payment, or by replacing or repairing the things covered in the policy. The objective being to restore the insured party to the original financial position before the event occurred.

The consideration in return for the insurance cover in terms of the policy is referred to as a “premium”. The term “premium” in the context of insurance means “the amount paid or payable, usually in regular instalments, for an insurance policy”.9 By using the word “premium”, the inference is that the payment is usually made on a periodic basis over the duration of the period of cover, although in some instances, the premium may be paid in a lump sum at the beginning of the policy term.

‌Insurance business is basically broken down into two main fields, namely, long-term and short-term insurance. The term “assurance” is sometimes confused with “insurance”, and refers to cover that is taken out against something that is certain to happen. The term “assurance” therefore refers to life policies and falls within the field of long-term insurance which will not be discussed in any detail in this guide. The main differences between long-term and short-term insurance are explained in paragraph 2.3.

8 Passage adapted from the article “Insurance – The Basics” http://www.lloyds.com/Lloyds/About-Lloyds/What-is- Lloyds/Insurance.

‌9 Collins English Dictionary (Desktop edition).

LONG-TERM vs SHORT-TERM INSURANCE

Long-term insurance

The LTI Act contains definitions which describe the ambit of long-term insurance as follows:

“long-term insurance business” means the business of providing or undertaking to provide policy benefits under long-term policies;

“long-term insurer” means a person registered or deemed to be registered as a long-term insurer under this Act;

“long-term policy” means an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is varied.

Long-term insurance (or “assurance”) provides both peace of mind and an investment, because at some time in the future the policy will pay out an amount for the benefit of the insured, or other nominated person. Long-term insurance refers to long-term policies such as life insurance or annuities and the cover relates to death, disablement or old age. The premium is payable for the full term of the contract, which is usually until the death of the insured, or a specified future date. Long-term insurance policies usually have a specified term so there is no annual renewal involved, but as they usually have an investment component, they cannot be terminated without fairly severe financial consequences for the insured. The supply of long-term insurance written under the LTI Act is an exempt financial service for VAT purposes.

Examples of long-term insurance:

Whole or universal life insurance policy. (Provides for payment, upon the death of the insured, of a sum of money to be paid into the insured’s estate or to a nominated beneficiary.)

Retirement annuity fund (RAF) and endowment policies. (Investment-type policies which pay a lump sum or income stream to the insured upon maturity and may also include cover for death and disability.)

Funeral policy. (Covers the costs of funerals and burial of the insured or that person’s spouse or family.)

Health policy. (Examples include medical aid or hospital plans to cover medical costs.)

Accidental death and disability policy. (Covers the death or disability of the insured resulting from the insured being involved in an accident.)

Short-term insurance

The STI Act) contains definitions which describe the ambit of short-term insurance as follows:

“short-term insurance business” means the business of providing or undertaking to provide policy benefits under short-term policies;

“short-term insurer” means a person registered or deemed to be registered as a short-term insurer under this Act;

“short-term policy” means an engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy or transportation policy or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is renewed or varied.

Short-term insurance cover relates to loss, damage and liabilities in relation to property and possessions by means of theft, fire or other means of destruction or dispossession. This is referred to as “indemnity insurance”. Premiums may be paid monthly or on an annual basis. Typically, short-term insurance is for a period of one year and is renewable annually at the option of the insured. It can also be for an unspecified (indefinite) period. Short-term policies do not pay out any investment component at the end of the contract, but may include clauses which provide cover in respect of personal accident, third party liability claims and medical insurance. This is referred to as “non-indemnity insurance”.

The inclusion of a non-indemnity clause in a short-term policy will not affect the VAT treatment of the premium payable or the compensation/indemnity payout made in terms of the policy. The supply of short- term insurance written under the STI Act is a taxable supply for VAT purposes.

Examples of short-term insurance:

Homeowner’s insurance policy. (Cover for the actual building and fixtures.)

Household insurance policy or all risks policy. (Covering loss, damage or destruction from any cause not specifically excluded relating to movable contents of a home.)

Fire policy. (Insures against damage or destruction caused by fire, lightning or explosion.)

Comprehensive motor vehicle policy. (Covers loss of or damage to an insured vehicle and liability of the insured for damage to property of a third party arising from an accident.)

Credit-guarantee insurance. (Safeguards a business against loss resulting from the supply of goods or services on credit in the event that the customer fails to pay.)

Conclusion and summary

From the above explanations, it is evident that whilst there may be some overlaps, the main difference between long-term and short-term insurance is the type of risks covered. Although the definitions in the LTI and STI Acts do not provide absolute certainty from a VAT perspective, the distinction between the different types of policies should be clear in most cases. Besides the fact that each type of business is covered by a different Act, the distinction is important for the purposes of this guide because only the premiums and indemnity/compensation payments made in terms of short-term insurance policies attract VAT.

‌CHAPTER 3
‌VAT CONCEPTS, DEFINITIONS AND TERMINOLOGY

TIME AND VALUE OF SUPPLY

The purpose of the time of supply rules is to establish the date when a supply of goods or services is regarded as being made for VAT purposes. The time of supply therefore establishes the date that the supplier is required to declare the VAT charged on any supply made, and the date that the recipient may be permitted to deduct input tax on goods or services acquired. The output tax and input tax is declared and deducted by the vendor on a VAT 201 return at the end of the applicable tax period covering the time of supply (refer to paragraph 5.3).

The general rule for the time of supply in terms of section 9(1) is the date when an invoice is issued in respect of a supply or the date that payment of the consideration for the supply is received, whichever date is the earlier. However, some supplies have a special time of supply rule. The time of supply rules are set out in section 9.

A short-term insurance policy document does not create an obligation for the insurer to supply any service, or for the insured to make payment in respect of any supply. Consequently, the insurance service is only supplied when the premium is paid. As a result, the time of supply is not triggered by the issuing of the policy document or any renewal notice, but only upon receipt of the premium by the insurer or its intermediary.

The general rule for the value of supply is that it is equal to the price charged for the supply of goods or services less the VAT included in the price. The value of the supply of goods or services is therefore an amount that excludes VAT. The amount that includes VAT is referred to as “consideration”. The calculation of the value of supply and the consideration (including standard-rated VAT charged at 14%) can be illustrated by using the formula:

‌VALUE + VAT = CONSIDERATION

therefore

‌CONSIDERATION – VAT = VALUE

There are also special rules which may apply in certain cases for determining the value of the supply or the consideration. For example, where the supplier and the recipient in a transaction are related (connected persons) and the recipient is either not a vendor, or not able to deduct the full input tax on the supply received, the consideration for the supply is determined as being equal to the open market value. The value of supply rules are set out in section 10.

‌Refer to the VAT 404 – Guide for Vendors for more details on the special time and value of supply rules.

CONSIDERATION

The term “consideration” in its simplest form means anything that is received in return for the supply of goods or services. It includes, for example:

A cash payment in respect of the purchase price of goods;

A debit order payment of a policy premium;

Commissions earned by agents for concluding contracts and collecting premiums;

Any barter transaction in terms of which there is an exchange of goods, exchange of services, or any combination thereof, including any payment in money to account for any differences in the value of goods or services exchanged;10 and

The amount of any indemnity payment received by the insured in certain circumstances.11

Some other important features of “consideration” are as follows:

The term refers to the amount paid for a supply. It does not determine whether the amount received is taxable or not.

When the term is used with reference to a taxable supply, it is a VAT-inclusive concept. VAT is therefore regarded as being included in the payment, whether the parties have regarded it as being inclusive or not. The same rule applies in respect of any part-payment of the consideration.

The term includes pre-payments for supplies as well as any past payments in the form of instalments, current payments, or payments which are still to be made in the future in respect of any taxable supply.

Consideration can be received from a third party on behalf of the recipient/beneficiary, or payment of consideration can be made to a third party on behalf of the recipient/beneficiary.

Specifically excluded from the ambit of consideration is a donation made to an association not for gain. Also, a “deposit” payment whether refundable or not, given in respect of a supply of goods or services is not regarded as payment made for the supply unless and until the supplier applies the deposit as consideration for the supply or the deposit is forfeited.

ENTERPRISE

The term “enterprise” is the test for determining whether a person is liable to be registered for VAT purposes in the Republic. A person is generally considered to be carrying on an enterprise if all of the following requirements are met:

An enterprise or activity must be carried on continuously or regularly by a person in the

Republic or partly in the Republic.

In the course of the enterprise or activity, goods or services must be supplied to another person.

There must be a consideration charged for the goods or services supplied.

‌When a person conducts an enterprise and the value of taxable supplies made by that person in any 12- month period exceeds, or is likely to exceed the compulsory VAT registration threshold of R1 million, the person is obliged to register for VAT. In cases where the value of taxable supplies is less than the compulsory VAT registration threshold, but more than R50 000, a person may apply for voluntary registration. The voluntary registration threshold is R60 000 for persons that supply “commercial accommodation” and not R50 000, as is the case for other businesses.

10 In such cases, a value must be attributed to each component of the consideration and aggregated to determine the final VAT-inclusive amount.

‌11 The Act deems the indemnity payment to be consideration received in respect of a taxable supply made to the insurer where the claim arose from a short-term insurance policy as a result of a loss incurred in the course of carrying on an enterprise by the insured. There are some exceptions to this rule – refer to section 8(8).

‌Continuously or regularly

The definition also contemplates that the enterprise activity is carried on all the time (continuously), or it must be carried on at reasonably short intervals (regularly). “Continuously” is generally interpreted as ongoing, that is, the duration of the activity has neither ceased in a permanent sense, nor has it been interrupted in a substantial way. The term “regular” refers to an activity that takes place repeatedly. Therefore, an activity can be “regular” if it is repeated at reasonably fixed intervals taking into consideration the type of supply and the time taken to complete the activities associated with making the supply.12

‌Non-enterprise activities

Specifically excluded from the definition of “enterprise” is any activity that involves the making of exempt supplies.13 A person that only makes exempt supplies will not be able to register for VAT nor deduct input tax on expenses incurred to make the exempt supplies. Similarly, if a person is registered for VAT in respect of a taxable activity, and also conducts an exempt activity, output tax cannot be charged on the supplies made in the course of carrying on the exempt activity. In such cases, input tax is only allowed to the extent that any expenses incurred on any goods or services acquired are for the purposes of making taxable supplies, or if it is for mixed purposes (both taxable and non-taxable purposes), the VAT on the allowable portion must be determined by applying the default method of apportionment (i.e. the turnover- based method).14 The vendor may not use another apportionment method unless the Commissioner has authorised the use of that method in a VAT ruling or VAT class ruling.

The writing of local long-term insurance business is a “financial service” and an exempt supply which constitutes a non-enterprise activity.15 Similarly, activities conducted in order to earn income in the form of dividends from investments which might be received in the course of carrying on insurance business will also be non-enterprise activities. These receipts, although not specifically exempt under section 12, are nevertheless non-taxable. These payments are sometimes referred to as “out-of-scope” receipts.

Insurance supplied by the Road Accident Fund (RAF) is another example of a non-taxable supply. The RAF is a State insurer which was set up in terms of the Road Accident Fund Act, 1996 to provide compulsory third party liability insurance to motorists for bodily injury. The “premiums” are paid via a levy on fuel purchases such as petrol and diesel. As the RAF is a public authority16 whose activities are out-of- scope for VAT purposes, it is not registered as a VAT vendor and is not liable to charge VAT on its premiums. Any claims paid by the RAF to a person will not attract VAT.

‌Lloyd's of London

Insurance business underwritten by Underwriting Members of Lloyd's of London (Lloyd's) is regarded as the carrying on of an enterprise in the Republic.17 This applies to the extent that Lloyd's correspondents conclude short-term insurance contracts in South Africa (known as “coverholder business”). Short-term premiums paid in this regard will therefore attract VAT in the same manner as any other supply of short- term insurance in the Republic. Any indemnity payments made in terms of coverholder business contracts will also potentially give rise to a deemed supply and a liability to account for output tax in the hands of the insured in terms of section 8(8).

12 Refer also to paragraph 5.9 for the application of this concept in the context of “imported services”.

‌13 Refer to section 12.

‌14 Whether the method is prescribed or not, it is always a requirement that the method must be appropriate and should yield a fair and reasonable result for the type of enterprise carried on by the vendor. For more details on apportionment of input tax, refer to Chapter 8 of the VAT 404 – Guide for Vendors and BGR 16.

‌15 Note, however, that commissions paid to intermediaries for writing long-term insurance business are not “financial services” as defined, and will be subject to VAT at the standard rate (unless the zero rate applies in terms of section 11).

‌16 The term “public authority” as defined in section 1(1) includes government departments and public entities listed in Schedules 3A and 3C of the Public Finance Management Act, 1999. Public authorities are dealt with in paragraph (b)(i) of the definition of “enterprise” and will only register for VAT if notified to do so by the Minister. The RAF has not been notified to register.‌

‌17 The definition of “enterprise” was amended with effect from 1 January 2001 to provide clarity as there was previously some uncertainty as to whether Lloyd’s conducted an enterprise in the Republic.

Lloyd's contracts concluded outside of South Africa which involves the placement of risk by independent intermediaries (known as “open market correspondents”) directly to a Lloyd's broker in London constitutes non-taxable (out-of-scope) supplies. This is known as “open market business” and any premiums paid in terms of these policies will not attract VAT, nor will a liability for output tax arise as a result of any indemnity payment received by a vendor under such a policy. Open market business may, however, qualify as taxable “imported services” if it meets the requirements. (Refer to paragraph 5.9.)

‌Self-insurance

The term “self-insurance” refers to a situation where a person may find that insuring a specific risk is too expensive. To mitigate the risk, a person may decide to self-insure by setting up a fund from which losses will be paid. Sometimes very large risks will be insured and smaller losses carried by the business itself, or will be reflected in the acceptance of a higher excess amount in terms of the policy. This form of self- insurance does not involve a supply to any other person and will therefore not constitute an enterprise activity. However, another form of self-insurance is where a company sets up its own insurance company (a so-called “captive insurance company”) to handle losses of the company. Alternatively, the head office or holding company of a group of companies could assume the risk in return for the payment of a premium by its subsidiaries.

When self-insurance schemes of this nature are carried on, this will constitute the supply of “insurance”18 to another person and will be an enterprise activity if the value of supplies exceeds the VAT registration threshold, either alone or in addition to the value of other taxable supplies made. Any short-term premiums payable for this type of insurance cover will consequently attract VAT according to the normal VAT rules and any indemnity payments made in terms of those contractual arrangements will potentially give rise to a deemed taxable supply as envisaged in section 8(8).

‌Registration of insurers with the Financial Services Board (FSB)

Subject to a few exceptions, a person must be registered with the FSB and be approved as a “short-term insurer” or a “long-term insurer” in terms of the STI or LTI Acts to be able to conduct insurance business legally in South Africa. A direct insurer may not register with the FSB to conduct both short-term and long- term insurance business under the same legal entity, except in the case of reinsurers.19 Each type of insurance must therefore be conducted under separate registrations in terms of the relevant Acts. From a VAT perspective, if a person conducts short-term insurance business in South Africa without being registered or approved by the FSB, and the premiums received or receivable from that activity are in excess of the VAT registration threshold, there is a liability to register and account for VAT. This rule applies despite the fact that the activities may be unlawful and regardless of whether the insurer is a resident or non-resident.

GOODS, FIXED PROPERTY AND SECOND-HAND GOODS

The term “goods” includes corporeal movable things, fixed property and any real right in such thing or fixed property. The definition basically refers to any tangible property and any real right in such tangible property, but excludes the supply of services and money.

“Fixed property”, in turn, is defined to mean –

land, including any improvements permanently affixed thereto;

any sectional title unit;

any share in a share block company which confers a right to or an interest in the use of immovable property;

any “time-sharing interest” as defined in section 1 of the Property Time-Sharing Control Act, 1983; and

any real right in any of the above.

‌18 As defined in section 1(1) – refer also to paragraph 3.7.

‌19 It has been proposed that an exception will also be made for micro-insurers in the future. Refer to the National Treasury‘s policy document "The South African Microinsurance Regulatory Framework" issued in July 2011.

“Second-hand goods” includes goods which were previously owned and used. As the term “goods” also includes fixed property, if that property has been previously owned and used, it may also constitute second-hand goods. It is necessary to determine whether goods are second-hand because if such goods are acquired by a vendor under a non-taxable supply for the purposes of making taxable supplies, input tax may be deducted on the acquisition (Refer to paragraph 5.6.)

SERVICES AND IMPORTED SERVICES

The term “services” is defined to mean anything done or to be done, resulting in a definition of wide inclusion. Therefore, anything that does not constitute “goods” or “money” may be a “service”. The supply of short-term insurance comprises a taxable supply of a service if supplied by a vendor.

The term “imported services” is defined to mean a supply of services that is made by a supplier (who is resident or carries on business outside the Republic) to a recipient who is a resident of the Republic, to the extent that such services are used or consumed in the Republic for non-taxable purposes. Section 7(1)(c) imposes VAT on the supply of imported services under these circumstances. (Refer to paragraph 5.9 for more details in this regard.)

SUPPLY AND TAXABLE SUPPLY

The term “supply” is defined very broadly and includes all forms of supply and any derivative of the term, irrespective of where the supply is effected. The term includes performance in terms of a sale, rental agreement, instalment credit agreement or barter transaction as well as supplies which are made voluntarily or by operation of law. Section 8 also provides for certain “deemed supplies”. This provision clarifies, amongst other things, whether certain events or transactions are regarded as being included or excluded from the meaning of “supply”. For example, the receipt of an indemnity payment by the insured in settlement of an insurance claim under a short-term insurance contract would fall outside the scope of the Act if it were not for section 8(8) which deems a taxable supply to take place in certain circumstances.

Supplies can be classified into two main types, namely taxable supplies and non-taxable supplies.

Taxable supplies

A taxable supply is any supply (including a deemed supply) of goods or services made by a vendor in the course or furtherance of an enterprise, which is potentially chargeable with VAT in terms of the Act. Taxable supplies, in turn, are divided into standard-rated supplies which attract VAT at the standard rate (currently 14%) and zero-rated supplies which attract VAT at the zero rate (0%).

Non-taxable supplies

A non-taxable supply is a supply on which no VAT is charged in terms of the Act. There are two types of non-taxable supplies, namely exempt supplies and out-of-scope supplies. Section 12 contains a list of specific types of supplies of goods and services which are exempt. Examples include financial services (such as long-term insurance), transport of fare-paying passengers by road or rail, the rental of a dwelling and certain educational services.

Supplies made by persons who are not vendors, and supplies by vendors not made in the course or furtherance of an enterprise constitute non-taxable supplies which fall outside the scope of the Act. For example, the ad-hoc supply of short-term insurance by a non-resident insurer who is not a vendor to a person in the Republic is an out-of-scope (non-taxable) supply.20 Income earned from activities which do not involve a supply to any other person are also non-taxable. These are sometimes referred to as “non- supplies”. An example of this is when dividends from investments are earned.

‌20 Such a supply may constitute “imported services” in the hands of the recipient if the insurance service is imported for non-taxable purposes. The recipient in such a case will be liable to pay VAT to SARS. Refer to paragraph 5.9 for more details on imported services.

Although the provision of long-term insurance will usually constitute an exempt financial service, most long-term insurers will also be registered for VAT as they make other types of taxable supplies. For example if a reinsurer provides both long-term and short-term insurance to residents, it will only be making taxable supplies to the extent that it writes short-term reinsurance business. Similarly, if a long- term insurer owns an office block where the offices are rented to businesses, it will be making taxable supplies to the extent that it carries on the letting activity.

INSURANCE

From the description of insurance and the principles of insurance as discussed in Chapter 2, one can get a general sense of what insurance is, and how it works. However, the term “insurance” is also specifically defined for VAT purposes. In order to apply the VAT law correctly, it is necessary to have a proper understanding of the term as defined in the Act as explained below.

Section 1(1) defines “insurance” to mean -

Insurance or guarantee against loss, damage, injury or risk of any kind whatever, whether pursuant to any contract or law, and includes reinsurance; and “contract of insurance” includes a policy of insurance, an insurance cover, and a renewal of a contract of insurance: Provided that nothing in this definition shall apply to any insurance specified in section 2.

This definition can be broken down into four main parts as follows:

“Insurance or guarantee against loss, damage, injury or risk of any kind whatever, whether pursuant to any contract or law…” This statement aligns with the ordinary meaning of insurance as discussed in paragraph 2.2. However, it goes further in that it is not limited to persons (insurers) who are supplying the kind of insurance services which require them to be registered with the FSB. All that is required is for a contract to exist between the parties and for the risk to be transferred from one party to the other in return for the payment of a premium. Refer to the discussion in paragraph 3.3 for more details.

In terms of the STI Act, a guarantee against loss would include a “guarantee policy”, as it is specifically mentioned in the definition of “short-term insurance policy” as defined in section 1 of the STI Act. A “guarantee policy” is further defined in the STI Act to mean “a contract in terms of which a person, other than a bank, in return for a premium, undertakes to provide policy benefits if an event, contemplated in the policy as a risk relating to the failure of a person to discharge an obligation, occurs; and includes a reinsurance policy in respect of such a policy”.

[Emphasis added.]

The second part “… and includes reinsurance…” also aligns with the ordinary meaning and makes the point that “reinsurance” is included within the ambit of the meaning of “insurance”. Reinsurance refers to a situation where an insurer will transfer part or all of its risk of loss under the insurance policies which it writes to another insurer under a separate contract. The entity providing the reinsurance protection is called the “reinsurer”. Reinsurers are essentially the insurers of those that are in the business of providing insurance. It follows that whatever the VAT treatment is for the premiums and indemnity payments in regard to policies of insurance, the same will apply for policies of reinsurance.

The third part “…and ‘contract of insurance’ includes a policy of insurance, an insurance cover, and a renewal of a contract of insurance:…” includes a further definition of a “contract of insurance” embedded within the definition of “insurance”. This part clarifies that a policy of insurance, insurance cover and a renewal of a contract of insurance are all included within the ambit of the defined meaning of the term “insurance”. Further, the use of the word “includes” means that the definition is not limited to the insurance cover and contracts mentioned in the definition, but may include other types of contracts and arrangements which have not been specifically mentioned.

Lastly, the definition includes a proviso which has the effect of specifically excluding any long- term insurance which is regarded as an exempt “financial service” in terms of section 2 (read with section 12(a)). However, certain types of long-term insurance cover which are taxable at the zero rate in terms of section 11 are also included within the ambit of the definition. Refer to paragraph 3.8 for more details in this regard.

In short, the definition of the term “insurance” in section 1(1) is broader than the ordinary meaning of the term “insurance” as discussed in Chapter 2 because it includes all contracts, policies or arrangements where risk is transferred from one person to another in return for the payment of a premium or other consideration. For example, it includes some of the self-insurance arrangements mentioned in paragraph 3.3. However, the proviso to the definition specifically excludes any type of insurance which is regarded as a “financial service”, from falling within the ambit of the term “insurance” as defined in the Act. (Zero-rated long-term insurance is therefore not excluded by this proviso.)

FINANCIAL SERVICES

The Act defines the concept “financial services” in section 2 which lists a number of activities which are deemed to be financial services for VAT purposes. Financial services are generally exempt from VAT in terms of section 12(a), but the supply of certain financial services qualify to be charged with VAT at the rate of zero per cent under section 11 (in which case the zero rate takes precedence over the exemption).

The following are some examples of financial services:

The exchange of currency.

The issue, allotment, drawing, acceptance, endorsement or transfer of ownership of a debt security.

The issue, allotment or transfer of ownership of an equity security or a participatory security.

The provision of credit.

The provision or transfer of ownership of a long-term insurance policy or the provision of reinsurance in respect of any such policy (excluding any activity to the extent that it constitutes the management of a superannuation scheme).

The provision or transfer of ownership, of an interest in a superannuation scheme.

The buying or selling of any derivatives.

An important exception, however, is that any consideration payable in the form of a fee, commission, merchant’s discount or similar charge, (not being a discounting cost or an interest charge) payable over and above the amount attributable to the underlying financial instrument is not deemed to be a financial service. The definition is therefore intended to exempt interest and investment growth, but any fee or similar charge in connection with, ancilliary to, or of a complimentary nature in relation to the underlying financial instrument is taxable.

For example, the following services are taxable in terms of section 7(1)(a) and do not constitute exempt financial services:

A document fee for providing credit in terms of an instalment credit agreement.

Bank charges (excluding interest) for banking transactions such as debit orders, stop orders and deposits.

Management fees charged for administering a pension fund.

Debt collection fees.

Within the definition of “financial services”, certain other terms such as “debt security”, “derivative”, “equity security”, “long-term insurance policy”, “participatory security” and “superannuation scheme” (amongst others) are also defined for the purposes of applying the definition of “financial services”. Sub-sections (3) and (4) of section 2 also clarify that certain instruments and transactions do not fall within the meaning of “debt security”, “equity security” and “participatory security” and that certain other transactions are excluded from the definition of “financial services”.

‌Example 3 – Taxable fees charged in connection with the provision of exempt “financial services”

‌Scenario

In July 2002, Good Life Insurance Company (GLIC) enters into an endowment policy with Mrs Potter who is a resident of the Republic. Mrs Potter’s primary motive is to invest for her retirement, but she also includes a small amount of cover for physical disability and death. The premium of R640 (subject to an annual escalation) is payable every month for the next 30 years, at which time, the policy will mature. In August 2012, Mrs Potter has a financial crisis and needs to borrow R20 000 against her policy. GLIC agrees to allow the loan and charges Mrs Potter a once-off policy loan fee of R228 to facilitate the loan.

‌Question

What are the different supplies made by GLIC and what is the VAT treatment of those supplies?

‌Answer

GLIC is providing Mrs Potter with long-term insurance. This supply is an exempt financial service as contemplated in section 2(1)(i) read with section 12(a) of the VAT Act. The premium of R640 will therefore not include any VAT. However, if GLIC is registered, or required to be register for VAT, it will have to charge VAT at the standard rate in terms of section 7(1)(a) on the policy loan fee. The reason is that the service related to the loan charge does not fall within the meaning of “financial services” as contemplated in section 2.

In summary, the most important aspects that need to be noted from the definition of “financial services” in the context of an insurance business are as follows:

Financial services are exempt from VAT (unless the zero rate applies in certain circumstances);

The supply of insurance services under a long-term insurance policy constitutes “financial services” and is generally exempt from VAT, whereas this is not the case for insurance services supplied under a policy of short-term insurance.

Any fee based charges related to the provision of financial services such as policy fees, document fees, administrative charges, commission or other charges in relation to insurance policies are not exempt financial services.21

Credit guarantee insurance is not an exempt financial service.22

The management of a superannuation scheme is not an exempt financial service.

‌21 This applies with effect from 1 April 1995. There are, however, some exceptions to this rule for certain fees which are charged on the basis of a “premium based cost allocation” or “asset management cost allocation” in respect of long-term insurance policies. In these cases, the fee allocations are regarded as forming part of the exempt premium payable.

‌22 This applies with effect from 1 October 1996.

‌CHAPTER 4
‌AGENT vs. PRINCIPAL

INTRODUCTION

Before determining the VAT consequences of a transaction, it is necessary to establish the relationship between the parties. This is to determine if the vendor is acting as an agent on behalf of another person or as principal. Section 54 contains special provisions to deal with the VAT consequences arising from an agency relationship. This chapter aims to provide clarity regarding the VAT treatment of supplies where an agent/principal relationship exists and specific examples are provided to illustrate these concepts.

LEGAL PRINCIPLES OF AGENCY

In order to correctly apply the VAT legislation to the concept of agents, it is necessary to identify and understand the concept of an “agent” as understood in common law. An agency contract is an arrangement whereby one person (the agent) is authorised and required by another person (the principal) to contract or to negotiate a contract with a third person. In the course of representing the principal, the agent creates, alters or discharges legal obligations of a contractual nature between the principal and the third party. The agent therefore provides a service to the principal and normally charges a fee (generally referred to as “commission” or an “agency fee”) but does not acquire ownership of the goods and/or services supplied to or by the principal.

This agent/principal relationship may be expressly construed from the wording of a written agreement or contract concluded between the parties. Where a written agreement or contract does not exist, the onus of proof of an implied agency agreement is on the person who seeks to bind the principal in a contract. An understanding of the relationship between the parties is therefore a requirement in understanding the VAT treatment of supplies made by the parties. In essence, the differences indicate that the principal is ultimately responsible for the commercial risks associated with a transaction, and that the agent is trading for the principal’s account. The agent is appointed by and takes instruction from the principal regarding the facilitation of transactions as per the principal’s requirements and generally charges a fee or earns a commission for that service.

TAX INVOICES, CREDIT NOTES AND DEBIT NOTES

The normal rule is that any tax invoice, credit note or debit note relating to a supply by, or to the agent, on the principal’s behalf should contain the principal’s particulars. However, the Act provides that if an agent (being a vendor) makes a supply on behalf of another vendor (the principal), the agent may issue a tax invoice or a credit or debit note relating to that supply as if the supply had been made by the agent. In such a case, the agent’s details may be reflected on the tax invoice, credit note or debit note and the principal may not also issue a tax invoice or credit or debit note in respect of that same supply. The Act also makes provision for the agent to be provided with a tax invoice, credit note or debit note as if the supply is made to the agent.

When a tax invoice, credit note or debit note has been issued by or to an agent in the circumstances described above, the agent must maintain sufficient records so that the name, address and VAT registration number of the principal can be ascertained.

In addition, the agent must, in terms of section 54(3), notify its principal within 21 days after the end of each month in writing of –

a description of the goods supplied;

the quantity or volume of the goods supplied; and

either –

the value of the supply, the amount of tax charged and the consideration for that supply; or

where the amount of tax charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the amount of tax charged, or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged.

In these circumstances, the agent is required to retain the original tax invoices, credit notes or debit notes (if these documents are to be retained on the principal’s behalf) and sufficient records should be maintained to enable the name, address and VAT registration number of the principal to be ascertained. (Refer also to paragraphs 4.4, 5.3.1 and 5.5. and BGR 14.)

In the insurance industry, it is common practice not to issue invoices in respect of short-term insurance cover. However, the Commissioner has directed in terms of sections 20(7) and 21(5) that short-term insurers do not have to issue tax invoices, credit or debit notes in respect of the supply of short-term insurance, subject to the condition that the policy documents contain certain information (refer to paragraph 2.2(a) of BGR 14). In addition to concluding new business, brokers and intermediaries may carry on different functions on behalf of insurers such as collecting premiums and processing claims. The statement issued to the insurer by the broker or intermediary in respect of any commission or agency fees for services provided must reflect all of the required information as set out in section 54(3). The statement is known in the industry as a bordereau.23 It should be noted, however, that the bordereau does not have a set format and might not be contain sufficient information on its own. In such cases the bordereau should be accompanied by a separate document such as a commission statement containing any further details which may be necessary to meet the requirements of section 54(3).

BGR 14 (refer to Annexure A) deals with a number of issues relating to insurers as well as brokers and intermediaries who conduct business in the insurance industry. The BGR includes, amongst other things, arrangements relating to the retention of records, certain documents which qualify as tax invoices, debit or credit notes, and self-invoicing requirements.

For more information, refer to paragraph 5.3.1, paragraphs 2.2 and 2.3 of BGR 14 and BGR 15 “Recipient- Created Tax Invoices, Credit and Debit Notes” dated 22 March 2013.

APPLICATION OF AGENCY PRINCIPLES

There are many role players in the insurance industry and it is important to be able to dististinguish between them on the basis of their roles as agent or principal so that the VAT consequences of transactions can be determined.24 For example, other than the insurer and the insured parties, the following parties may also be involved in the conclusion or administration of an insurance contract:

23 A bordereau can be described as a detailed memorandum, especially one that lists documents or accounts, or a memorandum or invoice prepared for a company by an underwriter, containing a list of reinsured risks.

‌24 One of the difficulties in the insurance industry is that a large number of brokers appear to act in a dual capacity as agent for both the insurer and the insured parties. The office of the Ombudsman for Short-Term Insurance has indicated that in a large proportion of the complaints which they receive, the complainants were not able to identify accurately the actual insurer or underwriter, or in fact to distinguish between the broker and the insurer. This shows that careful attention needs to be paid to this aspect in answering any VAT related question on insurance contracts.‌

Underwriting manager;

Claims or policy administrator;

Broker and sub-broker;

Collecting agent; and

Canvassing agent.

Agency principles are particularly important in the case of insurance as a significant amount of business is conducted through independent intermediaries (usually referred to as “brokers”). Brokers often carry out a number of functions on behalf of insurers, for example –

invoicing;

the collection of premiums;

handling and reporting of claims; and

act as sub-brokers for certain supplies of insurance, for example, SASRIA policies.25

Example 4 – Determining the principal in an agent/principal relationship26

‌Facts

In taking out comprehensive motor-vehicle insurance, the insured dealt with a broker who also acted as canvassing agent for the insurer. The broker issued the policy on behalf of the insurer after completing the proposal form. A certificate by the manufacturer as to the details of the immobiliser fitted to the vehicle was confirmed in writing by the broker as complying with the policy specification.

The insurer repudiated a subsequent claim arising from the theft of the vehicle some months later on the grounds that the immobiliser did not comply with the policy specifications. The insurer submitted to the Ombudsman a copy of the agreement under which the broker was appointed as canvassing agent, which specifically prohibited the agent, amongst other things, from making any representations which bound the insurer. The insurer also submitted that, in any event, the broker was the insured’s agent.

‌Held

That the normal rule that the broker was the agent of the insured did not apply in the case where the broker had specifically been appointed as the insurer’s agent.

That the insured could not be expected to be aware of any limitations to the agent’s authority contained in the agreement with the insurer.

That the written confirmation by the agent regarding the adequacy of the immobiliser bound the insurer.

The Ombudsman formally recommended that the insurer honour the claim by the insured.

‌25 SASRIA stands for the South African Special Risks Insurance Association. SASRIA policies constitute additional insurance for risks (other than war risk) that other insurers are not prepared to cover.

‌26 This example is extracted from the Ombudsman for Short- Term Insurance’s Formal Ruling No.6 – reference M42/98. Refer to the Ombudsman’s website at www.osti.co.za/index.php?page=case-studies

‌Example 5 – Insurers act as agents for SASRIA policies

SASRIA policies cover risks associated with riots, public disorder, labour disturbances, civil unrest, strikes and lockouts which are not covered by conventional policies. A SASRIA policy is therefore an optional add-on to a conventional policy already concluded between the insurer and the insured.

SASRIA works through a network of agents and brokers so that the person who is the primary insurer for the conventional policy acts as SASRIA’s agent in supplying the special risks cover as well as administering any claims in terms of that policy. It follows that the VAT on the premiums paid in terms of a SASRIA policy, must be declared as output tax by SASRIA (the principal) and not by the primary insurer (the agent).

The primary insurer that acts as the agent in this case may be entitled to a commission on writing the policy on SASRIA’s behalf. The primary insurer will therefore declare output tax on any commission received either directly from SASRIA, or through the deduction of any amount from the premium collected from the insured on SASRIA’s behalf. The primary insurer may also be entitled to a fee for administering any claims in regard to these policies and will therefore also charge VAT on any amount charged for this service. SASRIA, in turn, will be able to deduct input tax on the commission paid to the primary insurer as the expense is incurred in the course or furtherance of its enterprise of providing short-term special risks insurance.

The insured will be able to deduct the VAT paid on the premiums for the primary insurance and the SASRIA insurance, provided that the correct documentation is held and the normal rules for deducting input tax have been met.

Guidance on roles in terms of the STI Act.

The STI Act contains a number of provisions which govern who may be regarded as an independent intermediary and how that person shall perform functions and charge for services rendered.

For example, the following definitions can be found in section 1 of the STI Act:

“independent intermediary” means a person, other than a representative, who renders services as intermediary and includes a Lloyd’s correspondent;

“representative” means a person employed—

by or working for a short-term insurer and receiving or entitled to receive remuneration: and

for the purpose of rendering services as intermediary in relation to short-term policies entered into or to be entered into by the short-term insurer only;

“Lloyd’s correspondent” means a person who is approved by Lloyd’s and authorised by a Lloyd’s broker or Lloyd’s underwriter to act in the Republic as an agent for or on behalf of such broker or underwriter.

Furthermore, in terms of section 8(2) of the STI Act, there is a prohibition against any person rendering services as an independent intermediary in relation to a short-term policy unless -

short-term insurers are the only underwriters in terms of the short-term policy concerned;

such person is a Lloyd’s correspondent and Lloyd’s underwriters are the only underwriters in terms of the short-term policy concerned;

short-term insurers and Lloyd’s underwriters through a Lloyd’s correspondent are collectively the only underwriters in terms of the short-term policy concerned; or

such person does so with the approval of the Registrar.

Employee (“representative”) or independent contractor (“independent intermediary”)

In addition to being able to recognise when there is an agent/principal relationship, and who the agent represents, a further aspect is to be able to distinguish when a person is acting in the capacity of an independent intermediary (that is, as an agent), or as an employee of the insurer (where there is no agency contract).

For example, an insurance broker is an “independent intermediary” that acts as an agent on behalf of an insurer in concluding insurance business on behalf of the insurer who is the principal for the purposes of the supply. In return for writing the insurance business and maintaining the policy, the broker will earn a commission or brokerage fee. Brokers may also be involved in making other supplies to insurers and clients and a fee will be charged for the agency services. For example, brokers often act as collection agents and deal with claims administration on behalf of insurers. If the broker is a vendor, VAT must be charged on all forms of consideration received for providing services, whether in the form of a service fee, commission or other charge (subject to the zero-ratings and exemptions contained in sections 11 and 12). Brokers, in their capacity as agents of the insurer will also be responsible to keep the prescribed records on the insurer’s behalf as prescribed in section 54(3) and discussed in paragraph 4.3. Brokers may also appoint or act as sub-agents in certain instances.

On the other hand, a person known as a “representative” is essentially an employee of the insurer. Although the employee of an insurer is often referred to in layman’s terms as an “insurance agent”, the term is misleading as there is no legal contract of agency with the insurer (the employer) which allows that person to act as an independent intermediary. Representatives may earn remuneration by way of a fixed or variable salary, by way of a commission, or in any other manner. “Remuneration” paid by the insurer to its employee does not include any VAT component and the insurer will not be entitled to deduct any input tax thereon. Similarly, the employee will not be entitled or required to register for VAT as a vendor and to account for any output tax on the remuneration received.

Only in the case where a person acts truly independently as the legal agent of the insurer, will that person be regarded as an “independent intermediary” as contemplated in section 1 of the STI Act. Further, that person must have the capacity to act as an independent intermediary as contemplated in section 8(2) of the STI Act.

Whether a person is an employee or an “independent contractor” will depend on the facts and circumstances of the case. Usually a person cannot be regarded as acting independently if the employer (the insurer) exercises substantial supervision and control over that person’s capacity to earn. The common law dominant impression test for establishing whether an employer and employee relationship exists in any particular case is conclusive as to whether an individual is an employee or independent contractor.

The rules pertaining to whether Pay-As-You-Earn (PAYE) must be deducted from any payments made to the person as set out in the Fourth Schedule to the Income Tax Act, 1962 will also be a useful guideline. For more information in this regard please refer to Interpretation Note No. 17 (Issue 3) “Employees’ Tax: Independent Contractors” dated 31 March 2010.

‌CHAPTER 5
‌ACCOUNTING FOR VAT

INTRODUCTION

The South African VAT is destination based, which means that only the consumption of goods and services in South Africa is taxed. VAT is therefore paid on the supply of goods or services in South Africa by a vendor as well as on the importation of goods into South Africa by any person. VAT is presently levied at the standard rate of 14% on most supplies and importations, but there is a limited range of goods and services which are either exempt, or which are subject to tax at the zero rate (for example, exports are taxed at 0%). The importation of services is only subject to VAT where the importer is not a vendor, or where the services are imported for private, exempt, or other non-taxable purposes. Certain imports of goods or services are exempt from VAT. Persons who make taxable supplies in excess of R1 million in any 12-month consecutive period are liable for compulsory VAT registration, but a person may also choose to register voluntarily provided that the minimum threshold of R50 000 has been exceeded in the past 12-month period. Persons who are liable to register, and those who have registered voluntarily, are referred to as vendors. Vendors have to perform certain duties and take on certain responsibilities, for example, vendors are required to ensure that VAT is collected on taxable transactions, that they submit returns and payments on time, and that they issue tax invoices, debit notes and credit notes where required.

In this Chapter we will have a look at the general factors that influence the amount of VAT that must be accounted for by a vendor. The focus will be in particular on identifying the different types of supplies and explaining the input tax and output tax implications for the parties. The settlement of claims by way of trade payments and indemnity payments by the insurer and the deemed supplies which may arise in the hands of the insured in terms of section 8(8) will be dealt with separately in Chapter 6.

THE MECHANICS OF VAT

The VAT system of taxation is based on a subtractive or credit-input method which allows the vendor to deduct the tax incurred on enterprise inputs (input tax) from the tax collected on the supplies made by the enterprise (output tax). Input tax may be deducted subject to the retention of prescribed documentation (for example, tax invoices, debit notes and credit notes, bills of entry etc) and may not be deducted if the expense was incurred for non-taxable purposes, for example, for the purposes of long-term insurance business. There are also some expenses upon which input tax is specifically denied, such as the acquisition of motor cars and entertainment. Further, since input tax may only be deducted to the extent that goods or services are acquired for taxable “enterprise” purposes, insurers who make both taxable and non-taxable supplies will have to apportion certain of their inputs which cannot be directly attributed to either taxable or non-taxable purposes.

A vendor must report to SARS at the end of every tax period on a VAT 201 return, where the input tax incurred is offset against the output tax collected due for the particular tax period and the balance is paid to SARS (usually by no later than the 25th day after the end of the tax period concerned, although e-Filers may pay on the last business day of that month). Alternatively, if the input tax for the tax period exceeds the output tax, SARS will refund the vendor. The VAT collected by vendors is usually paid over to SARS every two months, but where the value of taxable supplies in a 12-month period exceeds R30 million, the VAT must be accounted for on a monthly basis. Since most insurers will fall into the latter category, for the purposes of this guide it will be assumed that the insurer –

must account for VAT on a monthly basis;

must account for VAT on the invoice basis of accounting; and

must submit returns and make payment by electronic means (via e-Filing).

As mentioned in paragraph 3.1, in the case of short-term insurance, the service is only supplied to the extent that the relevant premium is received. The liability for the insurer to declare output tax on short- term policy premiums will therefore only arise once payment is received, either directly by the insurer, or when the payment is received by the broker or collection agent. Insurers are also allowed to deduct the tax fraction (14/114) of any indemnity payments made under taxable short-term insurance contracts against their output tax liability.27 For all other supplies, the normal VAT rules will apply in regard to the declaration of output tax and input tax as explained in earlier chapters and in the VAT 404 – Guide for Vendors. This is based on the time and value of supply rules applicable to the supplies concerned, as well as the accounting basis (invoice or payments basis) and the tax period which applies to the insurer.

APPLICATION OF VAT PRINCIPLES

General tax administration matters

In terms of section 20, all vendors are obliged to issue a tax invoice when the consideration for a taxable supply exceeds R50. Also, section 16(2) requires that vendors must retain tax invoices and certain other documents to substantiate any input tax or other deductions which may be allowed to claim against the output tax liability for any particular tax period. Similarly, when an insurer makes an indemnity payment, there are certain documentary requirements which must be met to validate the deduction claimed in that regard. (Refer to Chapter 6 where this aspect is discussed in more detail.)

From the recipient’s perspective, if a short-term insurance policy and the premium notice or renewal notice contains all the particulars of a tax invoice, the documentary requirements required in terms of the Act will be satisfied. The document concerned must, however, contain a statement notifying the insured to that effect that the premium or renewal notice becomes a tax invoice once the premium is paid in full. Proof that the premium has been paid must be held as part of the documentation. It is accepted that the requirement for a serialised number to appear on the tax invoice is satisfied by reference to the policy number.28 When a broker or intermediary (acting as agent) issues any documents on behalf of the insurer, the broker or intermediary’s particulars have to be reflected on the documents. In this situation the agent must keep the prescribed records and report to the insurer (the principal) in writing each month on the supplies made and received on the insurer’s behalf as prescribed in section 54(3). (Refer to Chapter 4.) The VAT registration number of the insurer (or intermediary – as the case may be) must also be included, as well as the VAT registration number of the insured where the consideration for the supply is R5 000 or more.

Although insurers and their agents will issue tax invoices in some cases, (for example, when a once-off annual premium is paid), in practice, it will be found that tax invoices are generally not issued each and every month for monthly premiums paid. However, BGR 14 provides for special arrangements in terms of which, certain documents may serve as an alternative to a tax invoice, debit or credit note for the purpose of meeting the documentary requirements required in terms of the Act.29 BGR 14 sets out the conditions under which the Commissioner will accept these alternative documents. It may also apply in respect of commissions payable to brokers and other independent intermediaries which are based on bordereaux or commission statements.

27 Refer to section 16(3)(c). For the purposes of this guide, unless otherwise indicated, the deduction allowed for these indemnity payments will also be referred to as “input tax”. (Refer to Chapter 6.)

‌28 Refer to BGR 14 for more information in this regard. The Commissioner has provided approval that the policy document can be regarded as a tax invoice when payment of the premium occurs if certain requirements are met.‌

‌29 Before BGR 14 was issued, this practice was provided for in Practice Note 2 of 1991:Tax Invoices, Debit Notes and Credit Notes (now withdrawn).

BGR 14 grants permission in terms of section 20(7)(b) that a tax invoice is not required if sufficient records will be available to establish the particulars of the supply in question. As long as the conditions in paragraph 2.2(a) of BGR 14 are met, a vendor does not need to obtain a specific ruling in this regard.

The manner in which the insurance industry operates, lends itself to “recipient-created invoicing” (also known as self-invoicing). Self-invoicing is a process in terms of which the recipient issues the required tax invoices and debit/credit notes for supplies instead of the supplier.30 Insurers and brokers may apply self- invoicing as provided in BGR 15 “Recipient-Created Tax Invoices, Credit and Debit Notes” dated 22 March 2013.31 As long as the conditions set out in paragraph 3.3 of BGR 15 are met, a specific ruling to apply self-invoicing procedures does not need to be obtained. BGR 15 grants approval to vendors to apply self-invoicing where the recipient –

determines the consideration for the supply of the goods or services; and

is in control of determining the quantity or quality of the supply, or is responsible for measuring or testing the goods sold by the supplier.

As VAT is a self-assessment type of tax, a great deal of emphasis is placed on making sure that accurate and complete records of transactions are kept.

Section 55 does not contain a complete list of records relating to all vendors, as this would be impractical. However, it prescribes that certain specific records must be kept to satisfy the Commissioner that the vendor has observed the requirements of the Act. Sections 29 and 30 of the TA Act also impose a duty on a person to retain certain records, books of account or other documents in a particular form and manner to comply with a tax Act. The requirements of both Acts must therefore be observed. Failure or neglect to retain proper records as required under either Act is a criminal offence and may trigger administrative non-compliance penalties under Chapter 15 of the TA Act.

The term “records” includes any document or information which a vendor may be required to have in order to justify or confirm, amongst other things, that –

the value of standard rated, zero-rated and exempt supplies declared on form VAT 201 for past tax periods is correct;

the correct amount of input tax (or other deductions allowed against the output tax liability) has been claimed, including that tax invoices, bills of entry and other prescribed documents have been retained which indicates the amount of VAT which may be deducted;

VAT at the zero rate was correctly charged on certain supplies of goods or services (or that VAT was not charged because the supply was exempt or out-of-scope for VAT purposes).

This means that all reasonable accounting documents and records for the particular type of business (or businesses) carried on, should be accessible to enable auditors to establish the nature, time and value of all taxable supplies and the importation of any goods and services. This includes information which assists in reconciling the accounting records and audited financial statements with the VAT returns submitted for at least the past five years. Details of any exempt supplies, other non-taxable activities, adjustments and any method of apportionment used should also be available.

Refer to the VAT 404 – Guide for Vendors for more information as well as the Short Guide on the TA Act, 2011 for more information on record-keeping and tax administration matters in general.

‌30 Refer to sections 20(2) and 21(4).

‌31 Refer also to paragraph 2.3 of BGR 14.

Output tax

Most of the supplies made by short-term insurers will generally attract VAT at the standard rate as the definition of “enterprise” is wide and not restricted only to the main business activity of insurance services. For example, if an insurer owns a commercial building which it rents to tenants as offices, it must charge VAT on the rental income earned for the offices as well as on the premium income received in respect of short-term insurance policies. No output tax is declared on any income relating to financial services rendered such as the provision of long-term insurance, as financial services are generally exempt from VAT. However, certain other fee-based services in connection with the provision of the underlying financial service are subject to VAT at the standard rate. For example, fees charged for providing financial advice, arranging financial services, managing a superannuation scheme and debt collection services.

As the VAT calculation for any particular tax period depends on accurate record-keeping and documentation, due care should be taken to ensure that the different types of supplies are properly described, classified, and entered in the accounting records as either –

standard-rated supplies;

zero-rated supplies;

non-taxable supplies, or receipts not in respect of any supply (exempt or out-of-scope); or

not a receipt belonging to the insurer, but an amount received (or paid) as agent for another person.

Output tax must also be declared on form VAT 201 to the extent that any services are imported for non- taxable purposes in the tax period concerned. If the insurer is not a vendor, the payment of the tax on imported services can be made on eFiling, but the declaration (form VAT 215) must still be completed and submitted manually to the local SARS office, together with proof of payment and any other supplementary documents.

With regard to zero-rated supplies, refer to Interpretation Note 31 (Issue 3)32 “Documentary Proof Required for the Zero-Rating of Goods and Services” to ensure that the zero rate has been correctly applied and that the appropriate documents as prescribed have been obtained and retained as part of the accounting records. If the relevant documentation is not obtained within the prescribed period, certain output tax or input tax adjustments may be applicable.33 Refer to Chapters 6 and 12 of the VAT 404 – Guide for Vendors for more details in regard to zero-rated supplies, exports and the documentation required.

Insurers and their agents and intermediaries should also take care to establish which insurance services qualify for the zero rate and whether the associated premium income or commission will be subject to VAT at the zero rate. Note that not all commissions associated with zero-rated insurance premiums qualify for the zero rate. Below is a summary of the most common zero-rating provisions relating to short- term insurance premiums:

Section 11(2)(d) – insurance services in regard to the international transport of passengers and goods (including any fee or commission charged for the service of arranging that insurance).

Section 11(2)(f) – insurance services provided directly in connection with fixed property (land and improvements) situated outside the Republic.

Section 11(2)(g) – insurance services provided in certain circumstances which are directly in connection with –

goods (movable property) situated outside the Republic;

goods exported to foreign going ships and aircraft;

certain goods temporarily imported for processing or repair before being exported again; and

foreign-going ships and aircraft that are temporarily in the Republic.

32 As updated.

‌33 Refer to BGR 14 and paragraph 5.5 regarding the records required for the application of the zero rate under section 11(2)(d) and the consequential adjustments which will be required in the event of the incorrect application of that provision.‌

BGR 14 provides further details on the different kinds of insurance cover and the conditions under which those supplies will be subject to VAT at the zero rate.

Insurers should ensure that exempt or out-of-scope receipts are not incorrectly recorded as zero-rated. This applies in particular to insurers that do not make any exempt supplies, or if out of scope receipts are not usually received in the ordinary course of doing business. A note should also be made in the records as to why no VAT was charged. For example, if an insurer wins a settlement in court when pursuing its subrogated rights under a contract of insurance due to a claim by the insured, the court documentation should be retained as part of the records to verify the non-taxable treatment of the amount received.

Similarly, it should also be clear from the records which sub-paragraph of section 12 applies in the case of any amount received in respect of an exempt supply. In particular, for vendors like reinsurers and long- term insurers that make a mixture of taxable and non-taxable supplies, the provisions of section 2 (financial services) must be read together with sections 11 and 12 to establish whether the supply is exempt or zero-rated. For example, long-term insurance premiums are exempt for residents, but can qualify as zero-rated in certain limited instances when the policy is concluded with a non-resident.

Input tax

Generally, the VAT charged by a vendor to another vendor on any goods or services acquired for the business will qualify as input tax in the hands of the recipient. It does not matter if the goods or services are acquired for the purposes of consumption or use by the business itself, or for the purposes of making a supply to another person. However, it is important that input tax is only deducted insofar as the goods or services acquired are used for the purposes of making taxable supplies in the course or furtherance of the enterprise.

Brokers and intermediaries usually do not have to apportion their input tax as the commissions which they earn will constitute taxable supplies, whether they are in respect of short-term or long-term insurance policies. However, insurers sometimes make both taxable and non-taxable supplies and will be required to apportion the input tax when an expense is incurred for both taxable and non-taxable purposes. Before apportioning an expense, the first step is to determine if the expense can be directly attributed. Direct attribution means that the VAT expense must be attributed or allocated according to the intended purpose for which it will be used or consumed in the business. The application of direct attribution means that the expense is incurred either –

wholly for making taxable supplies, in which case input tax can be deducted in full; or

wholly for making exempt supplies or for other non-taxable purposes, in which case no input tax can be deducted.

For example, if a VAT-inclusive expense is incurred exclusively for conducting long-term insurance business, no input tax may be deducted. This is because the expense is directly attributable to exempt supplies. It is only when the expense cannot be directly attributed because it relates to both taxable supplies and exempt supplies (or other non-taxable purposes), that the expense must be apportioned. Expenses which have to be apportioned are usually in the nature of general overheads which relate to all parts of the business.

Once it is clear that the expense must be apportioned, the next step is to calculate the proportion of input tax which may be deducted. This is referred to as the apportionment ratio and is expressed as a percentage. The enterprise can then deduct input tax on the expenses which are incurred for both taxable and non-taxable purposes (also referred to as “mixed purposes”), but only to the extent that those expenses relate to making taxable supplies as determined in terms of the apportionment calculation. However, where the intended use relating to taxable supplies is 95% or more of total intended use, the input tax may be deducted in full. The apportionment ratio must be determined by using an approved method so that only a fair and reasonable proportion of input tax is deducted.34

‌34 Refer to section 17(1).

The only approved method which may be used to apportion input tax without specific prior written approval from the Commissioner is the turnover-based method. A record must be kept of how the apportionment percentage was calculated in terms of the turnover-based method, or if the Commissioner has approved a special method, the ruling should be kept as part of the records and should be available upon request. Note, however, that all rulings (including those concerning special apportionment methods) issued before 1 January 2007 have been withdrawn unless they were subsequently reconfirmed after that date.35

Refer also to VAT News 37 (February 2011) and Chapter 8 of the VAT 404 – Guide for Vendors for more information on input tax and apportionment, including a binding general ruling on the use of the turnover- based method of apportionment.36

‌Example 6– Determining the input tax apportionment percentage

Reinsurer V’s income of R100 million for the period is made up as follows:

R60 million in short-term premiums (standard rated).

R14 million in short-term premiums (zero rated).

R10 million in long-term premiums (zero rated).

R10 million in long-term premiums (exempt).

R2 million in interest earned on investments (exempt).

R4 million in dividends earned on investments (out-of-scope income not in respect of any supply).

‌The extent of taxable supplies is calculated as follows: y = a x 100‌

(a + b + c) 1

‌y = R60 million + R14 million + R10 million x 100 = 84%

R84 million + R12 million + R4 million 1

Therefore, Reinsurer V will be able to deduct 84% of its general overhead expenses which cannot be directly attributed to either taxable or non-taxable purposes.

Sections 16(2)(a) to (e) specify the documentation which must be held by a vendor when deducting “input tax” in terms of sections 16(3)(a) and (b) in respect of the acquisition of any goods or services, or on the importation of any goods into South Africa, for example–

a tax invoice (or alternative to a tax invoice as discussed above); or

the prescribed documents in terms of section 20(8) when second-hand goods are acquired, together with the proof of payment; or

an import bill of entry together with proof of payment of the VAT on importation.

Section 16(2)(f) requires a vendor to obtain and retain documentary evidence as is acceptable to the Commissioner, to substantiate the entitlement to the deduction referred to in sections 16(3)(c) to (n). In the context of insurers, section 16(3)(c) is the most important provision, as it deals with the deduction which is allowed to insurers for indemnity payments made.

Interpretation Note 49 (issue 2)37 “Documentary Proof Required to Substantiate a Vendor's Entitlement to "Input Tax" or a Deduction as Contemplated in Section 16(2)”, lists the various documents which the Commissioner will regard as satisfactory for deducting input tax. It also sets out the documents required for any special deduction which is allowed as input tax.

35 This is explained in Binding General Ruling (VAT) No. 2 dated 1 January 2007.

‌36 This is also stated in Binding General Ruling (VAT) No. 16 “Standard Apportionment Method”.

‌37 As updated.

Proof required to claim a deduction in terms of section 16(3)(c) includes:

The original copy of the insurance contract and any other evidence of endorsements (electronic or otherwise) relating to the claim or the contract terms and conditions.

Proof that the supply is a taxable supply. For example, a copy of the tax invoice or a statement contained in the contract documentation.

Proof that the indemnity payment (in money) was made. For example, payment advice, bank statement or internet payment confirmation.

In certain cases section 16(3)(c) does not apply. For example, if a “trade payment” is made to a third party to reinstate or replace the goods insured, input tax may be deducted under section 16(3)(a) and not section 16(3)(c). The other exclusions and more details about the deduction in terms of section 16(3)(c) are discussed in Chapter 6.

INSURANCE PREMIUMS

General

As mentioned in paragraph 3.1, it is important for vendors to correctly identify the time and value of supply rules relating to the different types of supply so that they can account for the correct amount of VAT at the correct time in the tax period concerned. The time of the supply is the date that the supplier is required to declare the VAT charged on any supply made and the date that the recipient is permitted to deduct input tax on goods or services acquired. The output tax and input tax is declared by the vendor on a VAT 201 return at the end of the applicable tax period covering the time of supply. Since reinsurance also constitutes “insurance” (refer to paragraph 3.7), the rules regarding input tax and output tax as set out in this chapter apply equally to a reinsurer in respect of reinsurance business conducted.

‌Output tax

The general rule for the time of supply is the earlier of an invoice being issued, or payment of the consideration. In the insurance industry, policies, renewal notices and endorsements are issued annually. This is because premiums, including any policy fee, are usually payable in advance. For practical reasons, it is common practice to allow insured’s to pay the premium monthly over the term of the policy. However, insurers do not usually issue invoices in respect of premiums if they are paid on a monthly basis. Part of the reason for this is that a short-term insurance policy may be cancelled at any time by the insured as a result of non-payment of the premium.

The effect is that unlike other supplies such as property rentals where the consideration is contractually due and payable monthly or annually for the entire term of the lease, insurance cover is granted only for the period in respect of which the premium is paid. Furthermore, insurers are not legally entitled to recover premiums from the insured. This means that a short-term insurance policy document does not create any obligations to supply any service, or for the insured to make payment in respect of any supply.

As the insurance service is only supplied when the relevant premium is paid, the time of supply is triggered by payment. Consequently, an output tax liability for the insurer will only arise upon receipt of the payment of the premium.38 The application of this rule means that if an annual short-term insurance premium is paid upfront in full, or if any advance payment of premiums is made, the insurer will be liable to pay output tax on the full amount received.

‌38 This includes receipt of the premium by a broker or agent on behalf of the insurer. Refer to paragraph 5.4.2.

‌Input tax

Vendors may deduct input tax on taxable short-term insurance premiums paid provided that the normal rules for deducting input tax are met. This includes the following:

The premium paid must include VAT at the standard rate;

The insurance service must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies;

The insurance service must not be acquired for private, exempt or other non-taxable purposes;

Where the insurance is acquired for mixed taxable and non-taxable purposes, an apportionment of input tax must be made;

A valid tax invoice must be held, or the alternative documents to a tax invoice as set out in PN 2 relating to tax invoices, debit notes and credit notes must be held.

Based on the application of the time of supply rules which apply to short-term insurance as discussed in paragraph 3.1 and paragraph 2.2(b) of BGR 14, input tax on short-term premiums may only be deducted in the tax period in which payment of the premium was actually made, regardless of whether the vendor is registered on the invoice basis or payments basis of accounting. Refer to Chapter 8 of the VAT 404 – Guide for Vendors for more details in regard to input tax.

Premiums received through intermediaries

In terms of the STI Act, when premiums are paid to brokers and collection agents that act as independent intermediaries, those payments should be made to the insurer within 15 days of the end of the month in which the intermediary received payment. However, the VAT Act requires that the VAT on insurance premiums must be accounted for during the period in which the time of supply occurs. Further, that in terms of section 15, the amount of VAT to be accounted for by the insurer will be based on the payments actually received by the insurer or the insurer’s agent.

As any premium received by an agent is regarded in law as a receipt by the principal, the liability to account for VAT arises in the hands of the insurer at the time that the premium is received by the agent. It is therefore very important that intermediaries (agents) who collect premiums on behalf of their principals (insurers) make sure that they supply the necessary information within the 21-day period after the end of each month as required in terms of section 54(3), as insurers will have to account for the VAT on eFiling by the end of the month after the completion of the relevant tax period.

Premiums on Lloyd’s policies (coverholder business)

Lloyd’s coverholder business is subject to VAT in RSA on the same principles which apply to other short- term insurance contracts in the Republic, but premiums in respect of “open market business”39 are not taxable. Lloyd's correspondents (“coverholders”) who act under binding authority to conclude insurance agreements in the Republic on Lloyd’s behalf merely act as agents in regard to Lloyd’s policies. As such, they do not account to SARS directly for the output tax on the premiums paid. Instead, they are required to maintain separate accounting records on Lloyd's transactions relating to premiums and claims, and to retain the relevant VAT documentation on Lloyd's behalf. They are also required to prepare the VAT calculation relating to their component of Lloyd’s coverholder business and to submit same together with the relevant supporting documentation, to Lloyd's South Africa (Pty) Ltd, who consolidates the calculations and submits the VAT return and payment to SARS.

‌39 Lloyd's contracts concluded outside of South Africa which involves the placement of risk by independent intermediaries (known as “open market correspondents”) directly to a Lloyd's broker in London (refer to paragraph 3.3). Open market business may, however, be taxed as “imported services” in the hands of the recipient (the insured) if the requirements are met. Refer to paragraph 5.9.

The commissions paid to coverholders in regard to such supplies are subject to VAT at the standard rate in the same manner as other commissions as discussed in paragraph 5.5 below. The VAT on expenses incurred by the coverholder (as agent on behalf of Lloyd’s) in conducting coverholder business in the Republic is deductible by Lloyd’s in accordance with the normal rules for deducting input tax.

COMMISSIONS

The output tax on broker’s commission or other fees received for performing intermediary (agency) services must be accounted for by the agent according to the general time of supply rule, being the earlier of the following:

At the time that an invoice is issued (for example, commission statement); 40 or

At the time any payment is received by the supplier.

This rule applies whether the commission or fee is deducted from premiums or other amounts collected on behalf of the insurer, or payment is made directly by the insurer to the broker. Brokers who collect premiums on behalf of insurers will deduct the commission payable and pay the net amount to the insurer under cover of a bordereau. The bordereau must either meet the requirements as set out in section 54(3), or must be accompanied by a separate statement by the broker which meets the requirements. (Refer also to Chapter 4 and paragraphs 2.2 and 2.3 of BGR 14.)

Commission from insurers for services rendered as intermediary is normally calculated as a percentage of the premium payable, as determined under regulations made in terms of the STI Act concerning the application of section 48 of that Act.

Some of most important provisions contained in these regulations are as follows:

The maximum commission payable is currently 12.5% of the premium payable under a motor policy and 20% under any other short-term policy. In the case where both types of cover are included in a single policy, the maximum commission payable is determined with reference to the proportion of the premium attributable to each type of cover.

No consideration can be paid to an independent intermediary (whether directly or indirectly) for rendering services as intermediary, except in the form of commission in monetary form.

Regardless of how many persons render services as intermediary in relation to a policy, the total commission payable for that policy cannot exceed the maximum amount (i.e. 12.5% or 20% – as the case may be).

Commission shall not be paid or accepted before the date on which the premium in respect of which it is payable, has been paid to the short-term insurer or Lloyd's broker.

If a premium or any part thereof is refunded by a short-term insurer or Lloyd's broker, the commission payable in respect of that premium (or part thereof) must be refunded to the short- term insurer by the person to whom it was paid.

As the regulations do not mention anything about VAT, an issue which sometimes arises in regard to the calculation of commission is whether the commission charged (based on a percentage of the premium), is a VAT-inclusive amount, or whether VAT must be added over and above the applicable percentage. For example, is the absolute maximum commission on a motor policy 12.5% of the premium or 12.5% plus 14% VAT? Or is it 12.5% of the VAT-inclusive or VAT-exclusive premium?

As the answer to this question is not prescribed, the matter becomes one of interpretation between the insurer, the agent and the regulator of the short-term insurance industry (that is, the FSB). However, section 67(3) provides some guidance in this regard in the context of a contract price or consideration which may be varied when VAT is imposed or increased, or withdrawn or decreased.

40 This consideration is usually determined by the intermediary in terms of a self-invoicing arrangement. Refer to

‌BGR 14 and paragraph 5.3.1.

The provision states as follows:

67. Contract price or consideration may be varied according to rate of value-added tax

(1) …

(2) …

Whenever the value-added tax is imposed or increased, or withdrawn or decreased, as the case may be, in respect of any supply of goods or services subject to any fee, charge or other amount (whether it is a fixed, maximum or minimum fee, charge or other amount) prescribed by, or determined pursuant to, any Act or by any regulation or measure having the force of law, that fee, charge or other amount may be increased or shall be decreased, as the case may be, by the amount of tax or additional tax charged or chargeable or the amount of tax no longer charged or chargeable, as the case may be: Provided that this subsection shall not apply to any fee, charge or other amount if such fee, charge or other amount has been altered in any Act, regulation or measure prescribing or determining such fee, charge or other amount to take account of any imposition, increase, decrease or withdrawal of such tax: Provided further that this subsection shall not be construed so as to permit any further increase or require a further decrease, as the case may be, in a fee, charge or other amount referred to in this subsection, where such fee, charge or other amount is calculated as a percentage or fraction of another amount which represents the consideration in money for a taxable supply of goods or services, other than a taxable supply charged with tax at the rate or zero per cent or a supply which is an exempt supply.

Further guidance on this aspect can be found in the context of liquidators' fees charged at a rate prescribed by the Master of the High Court. The calculation is based on a percentage of certain amounts due to an estate. In the case of Graham N.O. v Master of the Supreme Court,41 it was held that while the liquidator's fee may be calculated on the VAT-inclusive gross proceeds of sales, VAT may not be added onto the full amount of the fee so calculated. In other words, where the amount on which the fee was based already included the standard rate of VAT, a further amount of VAT could not be added over and above the calculated amount.

Based on the above, it is submitted that the correct approach for calculating the commission and the VAT thereon in accordance with the rates prescribed in the STI Act for an intermediary is as follows:

Intermediaries who are vendors

Calculation based on VAT-exclusive premium amounts

The VAT on the commission is calculated by multiplying the standard rate (currently 14%) by the calculated commission amount. For example, if the sum of the premiums (excluding VAT) on motor policies was R100 000 for the month, the maximum commission is 12.5% x R100 000 = R12 500. Therefore, the VAT payable as output tax by the intermediary is: R12 500 x 14% = R1 750. Alternatively, if the commission itself is zero-rated, no VAT is calculated.

Calculation based on VAT-inclusive premium amounts

The VAT on the commission is calculated by multiplying the tax fraction (14/114) by the calculated commission amount. For example, if the sum of the premiums (including VAT) on a non-motor policy was R114 000 for the month, the maximum commission is 20% x R114 000

= R22 800. Therefore, the VAT payable as output tax by the intermediary is: R22 800 x 14/114

= R2 800. Alternatively, if the commission itself is zero-rated, no VAT is calculated.

Intermediaries who are not vendors

Commission charged by intermediaries who are not vendors cannot include any VAT. The commissions in such cases should be calculated as a percentage of the VAT-exclusive premium.

‌If the intermediary registers for VAT, in terms of section 67(3), the commission calculated on the VAT-exclusive premium may be increased by 14% which is the current standard rate of VAT (unless there is a specific agreement to the contrary). Altenatively, if the commission itself is zero-rated, no VAT is calculated.

41 1996 CLR 797 (D) at 810.

‌Example 7 – Calculation of commission

‌Scenario

Broker K (a vendor) charges the maximum commission of 20% on short-term policies as provided in the regulations to the STI Act concerning the application of section 48 of that Act. For the period ending February 2011, Broker K received a total amount of R114 000 (including VAT at the standard rate) in premiums which were collected on behalf of Insurer S.

‌Questions

Calculate the commission and VAT which will be withheld by Broker K before paying the balance of premiums to Insurer S.

Calculate the different amounts if Broker K was not registered for VAT.

What are the input tax and output tax implications for Insurer S, if Broker K is a vendor?

‌Answers

Commission = 20% x R114 000 = R22 800 (including VAT). Broker K will therefore deduct commission of R20 000 and VAT of R2 800 before paying the balance of R91 200 to Insurer S.

If Broker K was not a vendor, he will withhold commission of R20 000 and pay the balance of R94 000 to Insurer S.

Insurer S must declare output tax on the full VAT-inclusive premium (R114 000 x 14/114 = R14 000). Upon receipt of the appropriate documentation, Insurer S would be entitled to deduct input tax of R2 800 for the VAT paid in respect of Broker K’s commission, provided that the commission was incurred wholly for taxable purposes by Insurer S and the relevant documentation to deduct input tax is obtained.

An intermediary must declare output tax on the full commission paid on upfront payments in the same way that it applies to insurers. The insurer will be entitled to deduct the VAT paid on the commission or other charge by the intermediary as input tax if the insurer is a vendor and is in possession of the documentation required for deducting input tax.

Generally, intermediaries that are vendors must account for VAT at the standard rate on commissions they earn, unless the services supplied are zero-rated in terms of section 11(2). Note, however, in this regard that if the supply by the insurer is subject to VAT at the zero rate, it does not necessarily follow that the commissions charged will also be subject to VAT at the zero-rate. Only in the following cases will the intermediary’s commission be zero-rated.42

Arranging the international transport of passengers or goods between places situated outside of the Republic, or between a place in the Republic and a place in another country; or

Arranging the transport of passengers by air within the Republic to the extent that the transport constitutes “international carriage”; or

Arranging the transport of goods within the Republic in connection with the domestic leg of international transport in certain circumstances.

Note that when an independent intermediary uses the services of a sub-agent in the above cases, the commission payable to the sub-agents cannot be zero-rated. This is because the services of the sub- agent are rendered to the intermediary in the Republic and are one step removed from the scope of the zero-rating provision which applies to commissions earned by the intermediary.

‌42 If the insurer establishes afterwards that the conditions for applying the zero-rate were not met, the commission thereon will similarly not be subject to the zero rate. This occurs because sometimes the VAT treatment of the transport to which the insurance relates will only be known in the future and may not necessarily qualify for the zero rate when it is eventually supplied to the client. In such a case, an output tax adjustment is required. (Refer to BGR 14.)

NO-CLAIM BONUSES AND CASH INCENTIVES

There are usually only two instances when the insured will get a payment from the insurer in terms of a short-term insurance policy, namely:

When there is a claim on the policy and an indemnity payment is made to the insured to settle that claim. (This is dealt with in Chapter 6.)

When a cash bonus is paid to the insured as a result of that person not making any claims on the policy over a specified period of time (sometimes called a “no-claim bonus” or “cash back incentive”).

When a no-claim bonus is paid in cash to the insured, the VAT treatment of that payment will depend on the characterisation of the underlying supply or event giving rise to the payment. For example, if the relevant clause in the contract makes it clear that the premiums already paid are recalculated and part thereof is paid back to the insured after a specified claim-free period as a retrospective discount, this will be an adjustment event. In that case, the appropriate VAT document to be issued by the insurer would be a credit note. The insurer is entitled to deduct input tax in the tax period in which the credit note is issued. This applies whether or not the insured is a VAT vendor. However, the insured (being a vendor) would be obliged to make a corresponding output tax adjustment in the tax period in which the credit note was issued if input tax was previously deducted on the premiums which are now being discounted.

When a cash payment is made to the insured as an incentive to perform certain acts related to the better management of risk in the future, (whilst the premiums remain the same), or for any other purpose in terms of the policy, the payment will constitute consideration for services rendered, or to be rendered by the insured (inducement fee). In this case, the insured (being a vendor) would be required to account for output tax on the payment received and to issue a tax invoice to the insurer. The insurer would then be entitled to deduct input tax according to the normal rules. However, if the insured is not a vendor, the supply would not be taxable and the insurer will not be entitled to deduct input tax.

If the insurer implements the no-claim benefit by reducing the insured’s future premiums or by not imposing an increase in premiums which would otherwise apply, the insurer will merely continue to account for output tax on the reduced premium, as and when the output tax liability arises. Similarly, the insured will continue to deduct input tax based on the reduced premium (if the insured is a vendor and the expense is incurred for enterprise purposes).

RECOVERIES AND RECOUPMENTS

Recoveries made under subrogation

In the event of a claim on a short-term policy, the insurer may either pay a supplier to replace the insured’s goods and services, or an indemnity payment would be made to the insured to compensate for any loss incurred. If another person (a third party) could be held responsible for causing the loss, the insurer may pursue a claim for damages in court to recover some (or all) of the loss incurred as a result of the claim by the insured. (Refer to Annexure C (paragraph 6) regarding the legal principle of subrogation.)

If the insurer recovers any amount under its rights of subrogation either from the third party or the third party’s insurer, the amount received is not subject to VAT. This is because the amount is regarded as damages received which does not constitute consideration for the supply of goods or services. There is also currently no provision in the Act similar to section 8(8) to deem a taxable supply in these circumstances. In such a case, the insurer will not account for output tax on the receipt, nor will the insurer be entitled to deduct input tax if the whole or any part of the amount is paid over to the insured. The receipt will also not give rise to an output tax liability in the hands of the insured for the same reason stated above. (Refer to Chapter 6.)

Recoveries from reinsurers

A reinsurer is a person that provides cover to the party that is the insurer under a conventional short-term insurance policy. It follows that if the insurer makes a claim for indemnity in terms of a short-term reinsurance policy as a result of a claim made by the insured party in terms of the cover which it (the insurer) has granted to the insured, the same VAT principles apply to the reinsurance indemnity payment. The amount received as an indemnity payment by the insurer from the reinsurer will be subject to VAT in terms of section 8(8) and the reinsurer will be entitled to deduct input tax on the indemnity payment made in terms of section 16(3)(c). (Refer to Chapter 6.)

Contribution from other insurers

In the case where the insured may have cover for the same insurable interest on another short-term insurance policy with a different insurer, each insurer may be required to contribute equally, or in proportion to the value of the claim made by the insured. From the insured’s perspective, output tax must be declared on each component of the indemnity payment received from the different insurers. Similarly, each insurer will only be able to deduct input tax on that part of the indemnity payment which it is liable to pay to the insured. This will also apply in the case of co-insurance arrangements where two or more insurers enter into a collective policy with the insured to cover the risk in agreed proportions.

Sale of salvage

When insured goods are damaged beyond economic repair, the remains of the damaged goods become the property of the insurer once the insured has been fully indemnified for the loss in terms of the policy. The insured is obliged to surrender or abandon the damaged goods to the insurer as salvage and there is also a duty on the insured to minimise the loss. The insurer acquires the damaged goods in terms of the doctrine of abandonment under the law of insurance and in accordance with the terms and conditions of the policy. The insurer has a right to dispose of the salvage and to recoup any loss which it may have suffered as a result of the claim by the insured.

The sale of salvage will attract VAT in the same way as any other supply of goods. It should, however, be noted that the insurer will have acquired the salvage as second-hand goods for no consideration under the doctrine of abandonment and will therefore not be entitled to deduct any input tax thereon.43

If the salvaged goods are located outside of the Republic at the time they are sold, the supply will be subject to VAT at the zero rate. However, if the salvaged goods are imported before being sold, the insurer will be liable to pay any VAT and customs duties which may be applicable. The VAT paid on importation in such a case may be deducted by the insurer as input tax provided that it holds the appropriate documentation (for example, import bill of entry and proof of payment of VAT).

OTHER INCOME FROM TAXABLE SUPPLIES

The term “enterprise” applies not only to the main activity carried on by insurers, brokers and independent intermediaries. Once a person is liable to register for VAT, or if the person registers voluntarily, that person must account for the VAT on all other taxable activities conducted. For example, insurers are often involved in making a number of other supplies such as providing financial advice, management of funds, supplying fixed property, rental of fixed property etc. Refer to paragraphs 3.3 and 5.3.

‌43 In such cases, the indemnity payment made in terms of the policy to the insured does not constitute consideration for the supply of the salvage. On the aspect of ownership of salvage, refer for example to Hollard Insurance Company Limited v Wagenaar, Paul t/a Racedesigns (36661/2010) [2011] ZAGPJHC 25 (7 April 2011).

IMPORTED SERVICES

VAT is payable by any person who is a resident of the Republic when that person (the recipient) acquires services from a non-resident business that is not registered for VAT in the Republic, if the services are imported for non-taxable purposes.44 The recipient of the imported services is responsible for the declaration and payment of the VAT at the standard rate on form VAT 215.45 In the case of a vendor, that imports services for non-taxable purposes on or after 1 February 2011, the VAT payable must be declared as output tax in Block 12 of the VAT 201 return, together with any other VAT that is payable for the tax period concerned.

The time of supply of imported services is the earlier of the time that an invoice is issued by the supplier or the recipient, or any payment is made by the recipient in respect of that supply. The taxable value of the supply is the greater of the consideration payable or the open market value.

A resident recipient has to account for VAT on imported services when –

that person is not a registered vendor;

the person is a vendor, but the services are acquired wholly or partially in the course of making exempt or other non-taxable supplies; or

the services are imported wholly or partially for private purposes.

The imported services provisions have application in the insurance industry when the insurer is registered as an insurer under the LTI Act, or is registered under both the LTI and the STI Acts. The application of the imported services provisions in the case of such an insurer are as follows:

When services are imported exclusively for the purposes of conducting short-term insurance business, the services will not comply with the definition of “imported services” as they would be imported wholly for taxable purposes. In this case, there will be no liability to declare any VAT.

When the services are imported exclusively for the purposes of conducting exempt long-term insurance business, or exclusively for other non-taxable purposes (for example, exclusively in regard to a share transaction), VAT must be declared and paid on the greater of the consideration payable or the open market value in the tax period that an invoice is issued by the supplier or the insurer (recipient), or any payment is made in respect of that supply.

When the services are imported partially for taxable and non-taxable insurance business, VAT must be declared and paid on part of the consideration (or open market value). In this case, the consideration payable or open market value (as the case may be), must be attributed to the various taxable and non-taxable components. VAT is only declared to the extent that the imported services relate to the non-taxable supplies.

The Act also provides for some exemptions, in terms of which, no VAT will be payable on imported services as follows:

When the supply would be exempt from VAT or zero-rated if supplied in the Republic; or

When the supply of the service is subject to VAT at the standard rate (presently 14%); or

If the supply is an educational service by an educational institution established in an export country which is regulated by an educational authority in that export country; or

If the supply is the services of a non-resident employee under an employment contract.

Note also that imported services can never be subject to VAT at the zero rate. This principle and others relating to the application of the imported services provisions in the Act and the exemptions which are provided in that regard were confirmed in the judgment in VAT Case No 144: Whether imported services are zero rated or not – section 11(2)(k) (VAT Case 144) [2006] ZATC 2 (13 March 2006).

‌44 Refer to section 7(1)(c).

‌45 The payment can be made on eFiling. This method is intended for use only by persons who are not registered for VAT. Vendors will declare the imported services on the VAT 201 form (whether submitted on eFiling or manually).

‌CHAPTER 6
‌TRADE PAYMENTS, INDEMNITY PAYMENTS AND EXCESS

INTRODUCTION

When a policy holder makes a valid claim against an insurance policy after suffering a loss, the insurer will make a payment to the insured or repair or replace the damaged article to settle the claim. This process is called a “settlement”. The word “settlement” is also used to describe an agreement, or determination regarding payment to be made as a result of legal action or threatened legal action. This could relate to insurance or any other legal proceedings. The word “settlement” indicates that it is a final agreement made between the two parties or a final determination made by a court or arbitrator regarding the amount to be paid. For example if the insurer and the insured settle on a certain amount, the insured cannot claim a further amount after having accepted the settlement amount. Settlement options are available in the case of life insurance as the insured can usually choose from various options available. In short-term insurance, the insurer decides on whether a damaged item such as a car will be repaired or replaced, or if a payment will be made as compensation for the loss or damage.

The terms “indemnity” and “indemnify” are used in the context of sections 8(8) and 16(3)(c), with reference to payments made by insurers to indemnify the insured party in terms of a taxable contract of insurance. These terms are not defined in the Act, and are therefore to be interpreted in accordance with their ordinary meaning. Further, although these terms are not used in the Act with specific reference to short-term insurance contracts, it is only possible for a deemed taxable supply to arise in terms of section 8(8) if the indemnity payment was made in terms of a short-term insurance contract. These rules also apply if the payment relates to a non-indemnity clause contained in the short-term insurance contract, for example, for personal accident cover or third party liability claims.

For the purposes of this guide it is necessary to distinguish between a so-called “trade payment” to reinstate or restore goods lost or damaged under a short-term insurance policy, and a settlement paid as compensation to the insured to cover the loss. A settlement of the latter type is referred to as an “indemnity payment” or “claims payment”.

TRADE PAYMENTS

Trade payments are payments made by insurers to suppliers of goods or services, where the insurer pays to replace or repair goods or services of the insured which are lost, damaged or destroyed. Trade payments made to suppliers under short-term insurance policy claims will generally be incurred by the insurer in the course or furtherance of its enterprise. A trade payment may also be effected by way of a reinstatement voucher which will allow the insured to acquire specified goods or services as a replacement for the lost or damaged articles from specific suppliers. The VAT incurred in such circumstances may usually be deducted under the normal rules for deducting input tax, which means that the insurer must obtain and retain the required tax invoices. If the insurer acquires goods or services from non-vendors, no input tax may be deducted. Similarly, the insurer may not deduct input tax if any exempt or zero-rated goods or services are acquired to settle the claim.

When a trade payment is made by a non-resident insurer, it is possible that the services rendered could be subject to VAT at the zero rate. Goods will generally not be subject to the zero rate in these circumstances unless they are exported.46

46 An example of this is section 11(2)(g). For instance, if a vehicle is repaired in the Republic for a non-resident insurer, the supply will be made directly in connection with movable goods situated in the Republic and VAT must be charged at the standard rate. However, if the vehicle is temporarily imported specifically for the purpose of making those repairs, the panelbeater’s services (as well as any goods incorporated into the repaired vehicle) may be subject to VAT at the zero rate as the vehicle must be exported by the owner after the repairs are done.

The VAT incurred on the costs associated with handling claims and making indemnity payments may also be deducted as input tax in the same way as trade payments as discussed above. This will include, for example, claims handling fees charged by brokers, loss adjuster and assessor fees to determine the validity and extent of claims, and other administrative charges by intermediaries and agents which are incurred in the claims handling process.

INDEMNITY PAYMENTS

Legal provisions

Section 16(3)(c) contains a special provision relating to insurers. In terms of this provision, insurers are entitled to deduct an amount equal to the tax fraction (currently 14/114) of any amount paid to indemnify another person in terms of a contract of insurance.

The provision reads as follows:

an amount equal to the tax fraction of any payment made during the tax period by the vendor to indemnify another person in terms of any contract of insurance: Provided that this paragraph-

shall only apply where the supply of that contract of insurance is a taxable supply or where the supply of that contract of insurance would have been a taxable supply if the time of performance of that supply had been on or after the commencement date;

shall not apply where that payment is in respect of the supply of goods or services to the vendor or the importation of any goods by the vendor;

shall not apply where the supply of that contract of insurance is a supply charged with tax at the rate of zero per cent under section 11 and that other person is, at the time that that payment is made, not a vendor and not a resident of the Republic;

shall not apply where that payment results from a supply of goods or services to that other person where those goods are situated outside the Republic or those services are physically performed elsewhere than in the Republic at the time of that supply;

The contra (output tax) provision to the above is contained in section 8(8). This section provides that when the vendor receives an indemnity payment under a contract of insurance as a result of a loss suffered in the course of conducting an enterprise, the payment is deemed to be consideration for a taxable service supplied by the vendor to the insurer in the course or furtherance of the vendor’s enterprise.

The provision reads as follows:

(8) For the purposes of this Act, except section 16(3), where a vendor receives any indemnity payment under a contract of insurance or is indemnified under a contract of insurance by the payment of an amount of money to another person, that payment or indemnification, as the case may be, shall, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, be deemed to be consideration received for a supply of services performed on the day of receipt of that payment or on the date of payment to such other person, as the case may be, by that vendor in the course or furtherance of his enterprise: Provided that this subsection shall not apply in respect of any indemnity payment received or indemnification under a contract of insurance where the supply of services contemplated by that contract is not a supply subject to tax under section 7(1)(a): Provided further that this subsection shall not apply in respect of any indemnity payment received by a vendor under a contract of insurance to the extent that such payment relates to the total reinstatement of goods, stolen or damaged beyond economic repair, in respect of the acquisition of which by the vendor a deduction of input tax under section 16(3) was denied in terms of section 17(2) or would have been denied if these sections had been applicable prior to the commencement date.

The application of the above provisions for the insurer and the insured is explained in paragraphs 6.3.2

and 6.3.3 below.

The insurer

In terms of proviso (i) to section 16(3)(c), the deduction relating to an indemnity payment made in terms of a contract of insurance only applies where the insurance concerned is a taxable supply. In other words, input tax may be deducted whether the premium payable for the short-term insurance was subject to VAT at either the standard rate or the zero rate but no input tax may be deducted when a payment is made under any other type of policy where the premiums were exempt or out-of-scope for VAT purposes. The insurer will be able to make the deduction regardless of whether the insured is a vendor or not and includes a situation where the indemnity payment relates to a loss associated with goods or services used by the vendor for exempt, private, or other non-taxable purposes.

The wording of section 16(3)(c) is wide enough to include indemnity payments made to cover claims arising from the losses of third parties which may have been caused by the insured. In such cases, the insurer will also be able to deduct the tax fraction of the indemnity payment made to the third party as input tax. The insured, in turn, will be liable to declare output tax in terms of section 8(8) as the indemnity payment is made on behalf of the insured in terms of the contract of insurance to the third party.47

Proviso’s (ii) to (iv) to section 16(3)(c) make it clear that the insurer will not be able to make a deduction in regard to indemnity payments48 made in the following circumstances:

Proviso (ii) – where the payment is made in respect of the supply of goods or services to the vendor or the importation of any goods by the vendor. This refers to a situation where the insurer purchases or imports goods or services to effect the reinstatement or replacement of the goods insured instead of making an indemnity payment. The payment made in this case by the insurer is a trade payment. As trade payments are deductible in terms of section 16(3)(a), no deduction is allowed in terms of section 16(3)(c) in such cases (refer to paragraph 6.2).

Proviso (iii) – where the indemnity payment is made in terms of a zero-rated policy in circumstances where the person indemnified is not a vendor and not a resident of the Republic at the time that the indemnity payment is made. This will apply, for example, in certain marine insurance policies where the insured is a non-resident and not a vendor in the Republic.

Proviso (iv) – where the indemnity payment is in respect of either –

a supply of goods situated outside of the Republic to the insured; or

a supply of services to the insured where the services are physically performed outside of the Republic. For example, if the indemnity payment is a reimbursement of the cost of repairing a vehicle damaged in an accident in Namibia, the repairs would have been physically performed by a service provider in Namibia and the insurer will not be entitled to make a deduction in that case.

A few other cases where the insurer will not be able to deduct input tax in regard to payments made to the insured include the following:

Damages or excess recoveries from third parties – When the insurer recovers an excess payment or a payment for damages from a third party (or the insurer of the third party), such amount does not constitute an indemnity payment made in terms of the contract of insurance between the insurer and the insured. This also applies if the insurer subsequently pays the amount recovered (or part thereof) to the insured. Instead, the VAT implications of such payments will arise in the hands of the third party and the third party’s insurer in terms of their contract of insurance. (Refer to paragraph 5.7.1.)

47 Even when an indemnity payment is made to the third party, the insured may have a liability to declare output tax on that payment and not the third party. It is submitted that in such cases, claims documentation supported by a letter explaining the situation should be sent to the insured to advise that the claim has been settled on his or her or its behalf. The policy contract should be clear as to how this liability will feature in the determination of the amount which is payable to the third party and whether or not the VAT component of the claim will be paid to the insured. This is important because the amount is deemed to include VAT and must be declared as output tax by the insured regardless of whether the payment (or any part thereof) was actually made to the insured to cover the VAT liability.

‌48 The indemnity payment referred to here is the net amount after deducting the excess payable by the insured, whether deducted as part of the calculation, or recovered separately from the insured.

Ex gratia payments – The term ex gratia refers to something that is being done voluntarily, out of kindness or as an “act of grace”. In a purely legal context, it refers to a payment that is being made “without the giver recognizing any liability or legal obligation”49 and in the context of insurance; it refers to “an insurance payment not required to be made under an insurance policy”.50 Ex gratia payments are therefore made without the admission of liability or waiver of any rights on the part of the insurer. As ex gratia payments are not regarded as being made in terms of a contract of insurance, the insurer will not be entitled to deduct any input tax in respect thereof. However, it is important to establish the true nature of such payments and not to make a decision merely because the payment has been called “ex gratia”. Ultimately, the context and circumstances in terms of which any payment is made will determine whether or not it is received “under” or made “in terms of” a contract of insurance, and consequently, whether it has the characteristics of an ex gratia payment or not.

Interest – Interest represents a financial charge related to the time value of money and is an exempt supply of financial services for VAT purposes. It follows that no deduction can be made by the insurer where the interest is calculated, for example, as an amount related to making the indemnity payment later than expected. However, if interest is a factor which has to be considered as an integral part of the formula or method of determining the quantum of the loss (and hence the amount of the actual indemnity payment), it may be included in the amount used to determine the deduction allowed to the insured.

The insured

As mentioned in paragraph 6.3.1, section 8(8) is the contra (output tax) provision in relation to section 16(3)(c), although there will not be an exact matching of inputs and outputs between these two provisions in every case. This is because the insurer may be entitled to deduct input tax regardless of whether or not the insured must declare output tax on the receipt of the indemnity payment. Although there are a few exceptions, the general position is that when there is an indemnity payment made in terms of a contract of short-term insurance, the insurer will deduct the tax fraction of the indemnity amount paid as input tax and the insured (being a vendor) will declare output tax on the same amount. This is because the receipt is regarded as consideration received for a taxable supply of services made by the insured to the insurer. If the insured is not a vendor, there will be no output tax on the receipt.

This rule applies to all indemnity payments received on or after 30 September 1991 by a vendor, regardless of when the short-term insurance contract is concluded. Furthermore, even if the payment was not physically received by the insured, but rather, paid directly to a third party on behalf of the insured, the insured is still required to account for output tax thereon.

Output tax at the standard rate must also be declared when the indemnity payment relates to a monetary loss in the enterprise. For example –

when there is a loss in the enterprise resulting from money stolen in a robbery;

when funds have been stolen by employees and cannot be recovered, or as a result of fraud;

credit guarantee indemnity payments received as a result of debtors failing to pay for goods or services supplied on credit.

‌It was stated in paragraph 6.3.2, that insurers will be able to deduct input tax when the indemnity payment is made in terms of a short-term contract of insurance even when the premiums included VAT at the zero rate. The contra to this provision is that the insured (being a vendor) must declare output tax at the standard rate on the deemed supply which arises in terms of section 8(8).

49 http://en.wikipedia.org/wiki/Ex_gratia

‌50 Black’s Law Dictionary, 9th edition, p. 654.

In other words, the deemed supply which arises in terms of section 8(8) in respect of the receipt of the indemnity payment is not the same as the actual supply of the insurance service which was supplied in terms of the policy by the insurer. The VAT treatment of the deemed supply should also not be confused with the VAT treatment of the supplies of goods or services made by the insured to which the insurable interest may relate. An example is where the insured carries on a business of transporting passengers or goods to or from an export country in an aircraft. Even though the supply of transport in this case is subject to VAT at the zero-rate,51 it does not mean that the deemed supply which arises as a result of any indemnity payment made to repair the damage to the aircraft is subject to VAT at the zero rate. This is because the loss of the insured was incurred in the course or furtherance of carrying on an enterprise and the Act does not provide for the deemed supply to be zero-rated.52

Section 8(8) does, however, provide that the insured will not be liable to declare output tax on an indemnity payment received in terms of a contract of short-term insurance in the following situations:

Where the insurance services supplied in terms of the contract is not a supply which is subject to VAT at either the standard rate or the zero rate (that is, an exempt supply or out-of-scope supply);

To the extent that the indemnity payment is to compensate the insured to reinstate goods or services which were subject to a denial of input tax upon acquisition in terms of section 17(2), there is no liability to declare output tax.53 This means, for example, that if the indemnity payment relates to a number of different business assets, the value of the claim which is attributable to enterprise assets on which input tax was specifically denied in terms of section 17(2) must be identified separately and no output tax will be declared on that portion.54

To the extent that the insured goods and services which are the subject of the claim were used for non-enterprise purposes, section 8(8) will not apply. This is because the loss in that case would not have been incurred in the course of carrying on an “enterprise”. This applies, for example, if the vendor makes both taxable and exempt supplies and does not, for insurance purposes, take out separate policies for the assets used for taxable and exempt activities respectively. Similarly, where private assets and enterprise assets are all insured in terms of one policy, the vendor will not declare any output tax to the extent that the indemnity payment relates to a loss of the private assets, as the VAT on the premiums payable in respect thereof would have been denied as input tax to that extent, as would be the case for other non-enterprise assets insured.

Remember also the point made earlier in the guide that the word “insurance” as defined in section 1(1) means “a guarantee against loss, damage, injury or risk of any kind whatever, whether under any contract or law”. Further, that the term “contract of insurance” is not restricted to short-term policies as envisaged in the STI Act. This means, for example, that there will also be a liability to account for output tax when an indemnity payment is received in terms of certain self-insurance contracts which fall within the meaning of “insurance” as defined in section 1(1). For example, this could apply to certain contractual arrangements between holding companies or head offices and their subsidiary companies.

51 Refer to sections 11(2)(a) and (d) respectively.

‌52 Refer to VAT Practice Note No 1 of 2001 dated 31 July 2001 in Annexure B.

‌53 This refers to a situation where an enterprise has not separately insured assets on which input tax is specifically denied, such as motor cars and entertainment goods, but rather, includes these in the insurance cover for the business as a whole, together with all other enterprise assets. The provision also applies in respect of assets acquired before VAT was introduced, if the input tax would have been denied on those assets if the provisions of the Act had been applicable before the commencement date.

‌54 Despite the fact that the input tax on the acquisition of certain goods and services is specifically denied in terms of section 17(2), the input tax on the insurance of those goods and services is not specifically denied in terms of this provision.

‌Example 8 – Output tax on indemnity payments received

‌Scenario

Vendor G receives an indemnity payment from Insurer H in respect of a fire at his home from where he also conducts an enterprise as an estate agent. The damaged goods, all of which were insured, were as follows:

Motor car used exclusively in the enterprise.

50% of the house burned down, including the room which was used as an office. SARS allowed a partial input tax credit of 10% based on the square meterage, being the extent that the room formed part of the fixed property that was used for enterprise purposes.

Computer equipment and office furniture used exclusively for enterprise purposes.

Furniture, fixtures and fittings in the lounge used for private purposes.

‌Question

What are the VAT implications for Insurer H and Vendor G in regard to the claim for damages to the assets destroyed or damaged in the fire?

‌Answer

Vendor G will have to split the indemnity payment between the different assets insured as some of them were used for enterprise purposes and some were not. In addition the VAT on the motor car (although used exclusively for taxable supplies) would have been specifically denied in terms of section 17(2)(c). Vendor G will therefore have to declare output tax in terms of section 8(8) only on the amount of the indemnity payment which is attributable to the loss of the home office, the computer equipment and office furniture. Output tax on the home office will be 1/5 (10/100 x 50%) of the value of the indemnity payment which relates to the damage to the house.

No output tax must be declared on –

that part of the indemnity payment which relates to the private assets which were not used for enterprise purposes; and

the motor car (as input tax was specifically denied on the acquisition thereof).

Insurer H will deduct input tax on the full indemnity payment made (less any excess which may be applicable) in terms of section 16(3)(c). Insurer H should, however, supply the necessary details of how the indemnity payment is split between the different assets so that Vendor G will be able to calculate the output tax which must be declared on the VAT 201 return.

Excess

‌General

An excess55 is the first amount payable by the insured in the event of a loss, and is regarded as the uninsured (or self-insured) portion of the loss. In most cases when a claim is made by the insured, an excess payment will be required. The amount of the excess is either expressed as a fixed monetary amount or as a percentage of the value of the goods or services insured. Payment of the excess can be effected in a number of different ways. For example, when the insured’s vehicle is damaged in an accident and the claim is to be settled by way of a trade payment by the insurer to the panelbeater, the excess payment could be made by the insured to the insurer or to the panelbeater that is repairing the vehicle.

‌55 Also known as an “aggregate deductible”. This is the sum of all the different excess amounts applicable to the different goods and services insured in terms of the policy (or in terms of different policies) which will be deductible from a claim. For the purposes of this guide, the term “excess” includes a reference to aggregate deductibles.

Alternatively, if the insurer decides that the vehicle is too badly damaged to repair, it may choose to make an indemnity payment to the insured instead. In such a case the insured will only receive the net amount of the indemnity payment after deducting the excess amount. The insurer will then assume ownership of the damaged goods which it will sell as salvage.

The Act does not deal with matters relating to the determination of insured values, excess amounts or how the final amount of an indemnity payment is calculated, as these are contractual matters between the insured and the insurer. The Act only provides that where VAT is applicable on the transaction, the supplier must declare output tax thereon, or if the expense is incurred in the course or furtherance of the enterprise, the insured (or the insurer – as the case may be) will be entitled to deduct input tax if registered for VAT. Further, that where it concerns contract prices, the agreed price will include VAT if it relates to a taxable supply, whether or not the parties have included VAT in the amount of the consideration which is payable.

The policy wording or other policy document relating to the business operations of the insurer should therefore be clear as to how VAT features in the calculation of insured amounts and the net amount of any indemnity payment which is made in terms of the policy. In this process, both the insurer and the insured should be mindful of the fact that VAT may have to be paid to a supplier to repair or replace the insured articles, and that the insured may be liable to declare output tax in terms of section 8(8) if registered for VAT. Also to be considered is that the insured may be entitled to deduct the VAT component of excess payments made in some cases, but not in others. It seems, however, that the current general practice in the insurance industry is that where the sum insured is stated in the policy as VAT-inclusive, and the excess is calculated as a percentage of the value of the claim, the excess will generally be calculated on a VAT-inclusive basis.

‌Output tax and input tax

The VAT treatment of excess amounts payable can be summarised as follows:

The insurer – Excess payments deducted from the total claim amount by the insurer, or which are paid by insured to the insurer in respect of short-term policies are not regarded as amounts received in respect of the taxable supply of services to the insured. The insurer must therefore not declare output tax on the receipt of any excess payments. Where payment is made by the insured to a supplier of goods or services in addition to the trade payment made by the insurer, the excess is not deemed to be a payment made to the insurer. In such a case, output tax will be declared by the supplier of goods or services who received the payment. The insurer will deduct input tax only on the net amount of the trade payment to suppliers or the indemnity payment made to the insured (or to a third party on behalf of the insured) after deducting the excess amount.

The insured – As an excess payment made to the insurer is not regarded as consideration for a taxable supply by the insurer to the insured, no input tax may be deducted in that regard. This applies whether the excess was deducted in the process of calculating the net amount of the indemnity payment, or recovered separately by the insurer. When the insured makes payment of the excess to the supplier of goods and services instead of the insurer, the payment is regarded as being in respect of a supply of goods or services made by that supplier to the insured. The insured must therefore obtain a tax invoice from the supplier so that input tax may be deducted (provided that all the requirements for deducting input tax are met by the insured).56

Suppliers – Vendors must declare output tax on the full consideration charged on the taxable supply of goods or services. In this case, the supplier will usually receive payment of part of the consideration from the insured (equal to the excess amount) and partly from the insurer (trade payment). The supplier is regarded as making a separate taxable supply to both the insurer and the insured in these circumstances and may issue a tax invoice in respect of each separate supply.

‌56 Refer to BGR 14 for more details. In the event that the policy contract provides for the insurer to collect the excess payment on behalf of the supplier before releasing the goods, the insurer may request a second tax invoice on behalf of the insured which is to be issued in the name of the insured for the excess amount.

‌Example 9 – VAT treatment of trade payments and excess

‌Scenario

Insurer A (a short-term insurance company which is a vendor), supplies Vendor B (the insured) with insurance cover under a policy of insurance, to cover any damage or loss to a delivery truck. The delivery truck is used wholly for taxable supplies by Vendor B and the premium payable is R228 per month (including VAT). The truck is subsequently damaged in an accident and the cost of repairs is R12 540 (including VAT). Vendor B submits a claim to Insurer A, who undertakes to cover the full cost of the repairs. However, as Vendor B is liable for the excess payment of R1 140 in terms of the policy, the insurer will only actually cover the net amount of R11 400 (R12 540 – R1 140). Insurer A appoints Vendor C, as the approved service provider to effect the repairs and pays Vendor C directly. Vendor B pays the excess amount of R1 140 to Vendor C as required by Insurer A.

‌Question

What are the VAT implications for the parties involved in these transactions?

‌Answer Insurer A

Insurer A is making a taxable supply of short-term insurance to the insured (Vendor B). Insurer A must therefore declare output tax of R28 each month in respect of the premiums received. Insurer A (acting in the capacity of principal) has engaged Vendor C to effect repairs to Vendor B’s truck to the extent of R11 400. Insurer A will therefore be entitled to deduct input tax of R1 400 (i.e. R11 400 x 14/114) in terms of section 16(3)(a) in regard to the trade payment made to Vendor C. The deduction as contemplated in section 16(3)(c) will not be available to Insurer A. The deduction of input tax by the insurer is subject to obtaining the invoice from Vendor C as required in terms of section 16(2).

‌Vendor B

Vendor B may deduct input tax of R28 each month in respect of the insurance premiums paid, as it is using the truck wholly for enterprise purposes. The input tax deduction is subject to Vendor B being in possession of the required tax invoice for each supply or alternative documents are held (refer to paragraph 5.3). Vendor B is not required to account for output tax on the repair of the truck, as the payment for the repairs by Insurer A is a trade payment and not an indemnity payment as contemplated in section 8(8). Vendor B will be entitled to input tax of R140 (i.e. R1 140 x 14/114) on the excess payment made to Vendor C in terms of section 16(3)(a). Vendor B must obtain a tax invoice from Vendor C as required in terms of section 16(2) before making an input tax deduction.

‌Vendor C

Vendor C will declare output tax on the payments received from Insurer A and Vendor B. It is accepted in these circumstances that Vendor C makes a supply to Vendor B in respect of the excess payment and may therefore issue another tax invoice in that regard without contravening section 20 which requires that a vendor may only issue one original tax invoice for each taxable supply made. Vendor C will issue one tax invoice to Insurer A for a consideration of R11 400 and another tax invoice to Vendor B for a consideration of R1 140.

‌Example 10 – VAT treatment of indemnity payments and excess

‌Scenario

Assume the same facts as in Example 8, except that:

Insurer A decides to make an indemnity payment to Vendor B to settle the claim instead of having the truck repaired.

The “excess” amount of R1 140 will be deducted from the R12 540 indemnity payment before paying the balance of R11 400 to Vendor B.

The truck is sold by Insurer A as salvage to Non-vendor D for R2 000.

‌Question

What are the VAT implications for the parties involved?

‌Answer Insurer A

Input tax of R1 400 (i.e. [(R12 540 – R1 140) x 14/114]) may be deducted in terms of section 16(3)(c) on the indemnity payment made and output tax of R245.61 must be declared on the sale of the salvaged truck. However, no input tax may be deducted on the acquisition of the second-hand truck, as it was acquired as salvage under the contract of insurance and no consideration was paid. Insurer A may issue a tax invoice to Non-vendor D upon request for the sale of the salvage.

‌Vendor B

Output tax of R1 400 (i.e. R11400 x 14/114) must be declared in terms of section 8(8) on the indemnity payment of R11400 as the payment was received in respect of an enterprise asset. No input tax may be deducted on the excess amount of R1 140 which was deducted from the total claim amount, as it does not constitute consideration paid for any taxable supply.

‌Non-vendor D

As Non-vendor D is not registered for VAT, no input tax deduction will be allowed. When Non-vendor D sells the salvage to its customer, no VAT will be charged on the sale. The VAT charged by Insurer A therefore becomes a cost to Non-vendor D.

‌ANNEXURE A
BINDING GENERAL RULING (VAT) NO: 14
Note that the law as quoted in the Annexure to BGR 14 has not been included here.

Refer to the SARS website to access the full version of the document.

DATE : 22 March 2013

ACT : VALUE-ADDED TAX ACT NO. 89 OF 1991 (the VAT Act), SECTION : SECTIONS 1, 7, 8, 9, 11, 16, 20 AND 21

SUBJECT : VAT TREATMENT OF SPECIFIC SUPPLIES IN THE SHORT-TERM INSURANCE INDUSTRY

Preamble

For the purposes of this ruling unless the context indicates otherwise –

“BGR” means a binding general ruling issued under section 89 of the Tax Administration Act No. 28 of 2011;

“section” means a section of the VAT Act; and

“VAT” means value-added tax; and

any word or expression bears the meaning ascribed to it in the Act.

‌Purpose

This BGR sets out the VAT treatment of the issues listed below which have been highlighted during discussions with the short-term insurance industry:

The time of supply in relation to the supply of short-term insurance and the related intermediary services

Alternative documents to be used as a tax invoice in respect of the supply of short-term insurance and the related intermediary services

Approval to issue recipient-created tax invoices, debit or credit notes

International transport policies including stock through-put, goods in transit, marine insurance policies and travel coupons

Hull and associated liability insurance

Insurance cover provided to South African residents in respect of fixed property and movable property

Excess payments

Indemnity payments

Third party payments

Recoveries

Group accident claims

Reinsurance

‌Ruling

‌Time of supply

‌Supply of short-term insurance

Short-term insurers are, in terms of section 9(1) read with section 16(4), required to account for output tax in respect of the supply of short-term insurance in the tax period during which the premium is received by the insurer or its intermediaries. This is based on the assumption that the short-term insurance policy document (that is, policy, renewal notice or endorsement) is not an “invoice” as defined in section 1(1).

‌Supply of related intermediary services

Intermediaries are, in terms of section 9(1) read with section 16(4), required to account for output tax in respect of the supply of intermediary services (which include the maintenance and servicing of a short-term insurance policy, collecting or accounting for premiums payable as well as receiving, submitting or processing claims under such a policy) in the tax period during which payment in respect of the intermediary services is received.

The issuing of an invoice or tax invoice by the –

short-term insurer, other than the policy document envisaged in paragraph 4.2(a), in respect of the supply of short-term insurance; or

short-term insurer or the intermediary in respect of the supply of intermediary services;

which precedes the payment of the premium will result in the short-term insurer or the intermediary being required to account for output tax in the tax period during which the invoice or tax invoice is issued.

‌Tax invoices, credit or debit notes

‌Supply of short-term insurance

The Commissioner directs, in terms of sections 20(7) and 21(5), that the short-term insurer does not have to issue a tax invoice, credit or debit note, as the case may be, in respect of the supply of short-term insurance subject to the condition that the policy documents –

contain the short-term insurer’s and insured’s name, address and VAT registration number (the insured’s VAT registration where applicable) and the policy number;

stipulate the premium amount, indicating either the value of the supply, amount of tax charged and the consideration for the supply, or where the amount of tax charged is calculated by applying the tax fraction to the consideration for the supply, the consideration and either the amount of tax charged, or a statement that it includes a charge in respect of tax and the rate at which the tax was charged;

contain a statement confirming the Commissioner’s direction in terms of section 20(7) or 21(5), as the case may be; and

contain a statement informing the insured (being a vendor seeking to deduct the VAT paid as input tax) that for purposes of deducting input tax, the insured must be in possession of the policy document together with proof that the premium has been paid (for example, bank statements).

‌Supply of related intermediary services‌

The Commissioner directs, in terms of sections 20(7) and 21(5), that the bordereau or commission statement1 issued by the intermediary to the short-term insurer in respect of the supply of intermediary services does not have to contain the words “tax invoice”, “credit note” or “debit note”, as the case may be.

‌1 A bordereau or commission statement is a document which stipulates the amounts collected on behalf of the short-term insurer as well as the fees payable in respect of intermediary services supplied.

‌Recipient-created tax invoices, credit and debit notes

Short-term insurers who are required to determine the consideration payable in respect of intermediary services may, in terms of sections 20(2) and 21(4), issue recipient-created tax invoices, credit or debit notes in respect of the supply of intermediary services. This is conditional on –

the recipient-created tax invoice, credit or debit note issued must comply with sections 20(4), (5) or 21(3) as applicable. However, if 2.2(b) of this BGR is applicable, the bordereau or commission statement issued by the short-term insurer in respect of intermediary services does not have to contain the word “tax invoice”, “credit note” or “debit note”, as the case may be; and

short-term insurers complying with all other requirements listed in Interpretation Note No. 56 “Recipient-Created Tax Invoices, Credit and Debit Notes”.

‌International transport policies‌

The supply of short-term insurance in respect of international transport services2 [that is, transport services that are zero-rated in terms of section 11(2)(a), (b) or (c)] may be zero-rated in terms of section 11(2)(d).

Short-term insurers may zero rate the supply of short-term insurance in respect of international transport services in instances where the short-term insurance agreement is entered into before the supply of international transport services. The zero-rating is conditional on the short-term insurer –

obtaining proof confirming, within 90 days of the date the supply of international transport services occurs, that these services were zero-rated;

accounting for output tax (that is the provisions of section 64 are applicable) if the short- term insurer fails to obtain the aforementioned proof within the said 90 day period in the tax period during which the 90 day period ends; and

include as an adjustment in field 18 of its VAT201 the amount declared as output tax in sub-paragraph (ii), in the tax period during which the documentation is received. This is only applicable if the required documentation is received within 5 years calculated from the date of the time of supply of the short-term insurance.

The aforementioned is equally applicable to the supply of arranging short-term insurance in respect of international transport services.

‌Marine insurance

Marine insurance supplied directly to a person, and not through an agent or other person, who is not a resident of South Africa and not a vendor may be zero-rated in terms of section 11(2)(h)(ii) to the extent the insurance policy covers the loss to a “foreign-going ship” as defined in section 1(1).

To the extent that marine insurance includes insurance cover in respect of goods transported from a point in South Africa to a destination in an export country or vice versa, the supply of such short-term insurance is zero-rated in terms of section 11(2)(d) [refer to paragraph 2.4].

‌Hull and associated liability

‌The supply of short-term insurance, being hull insurance, falls within the ambit of the operation or management of a “foreign-going aircraft” or “foreign-going ship” as defined in section 1(1). As a result, the supply of hull insurance directly to a person, not through an agent or other person, who is not a resident of South Africa and not a vendor may be zero-rated in terms of section 11(2)(h)(ii) to the extent the insurance policy covers the loss to a “foreign-going aircraft” or “foreign-going ship”.

2 International transport policies include stock through-put, goods in transit and travel coupon cover risk policies.

The temporary presence of the “foreign-going aircraft” or “foreign-going ship” in South Africa will not impact on the zero-rating of the supply.

Short-term hull insurance supplied to a resident of South Africa does not fall within the ambit of section 11(2)(h)(ii) and is therefore subject to VAT at the standard rate in terms of section 7(1)(a).

‌Policies issued in respect of fixed property situated in an export country

Short-term insurance supplied directly in connection with land, or any improvement thereto, situated in an export country, is subject to VAT at the zero rate in terms of section 11(2)(f).

‌Policies issued in respect of movable property situated in an export country

Short-term insurance supplied directly in respect of movable property situated in an export country at the time the short-term insurance service is rendered, is subject to VAT at the zero rate in terms of section 11(2)(g)(i) [that is, the movable property must be situated in an export country during the period for which the insurance cover is provided].

‌Excess payments

‌Insured pays excess directly to third party supplier

The third party supplier,3 in making a taxable supply of goods or services, is liable to issue a valid tax invoice in respect of this supply.

The third party supplier must issue two tax invoices, that is, one to the insured to the extent of the excess payment and one to the insurer to the extent of the trade payment.

The short-term insurer is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier and is therefore not entitled to a section 16(3)(c) deduction in respect of this supply.

The insured (being a vendor) is, in terms of section 16(3)(a) and being in possession of the tax invoice, entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that those goods or services are acquired for the purposes of making taxable supplies.

The short-term insurer issuing a notice to an insured which informs the insured of the potential output tax liability, as envisaged in section 8(8), that arises as a result of a trade payment made in terms of a contract of insurance.

‌Short-term insurer pays full amount to third party service provider and recovers excess from insured

Excess payments received by short-term insurers from the insured do not constitute “consideration” as defined in section 1(1) and as a result fall outside the scope of the VAT Act. These payments are therefore not subject to VAT in the hands of the short-term insurer.

The short-term insurer is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier limited to the trade payment made in terms of the contract of insurance.

Where the short-term insurer, acts as an agent of the insured when contracting with the third party supplier for the portion of the excess payment, the short-term insurer will be required to issue a statement contemplated in section 54(3) to the principal where the third party supplier issued the tax invoice in the name of the short-term insurer.

‌3 Third party suppliers are suppliers of goods or services receiving trade payments from short-term insurers which are in respect of goods or services supplied to the short-term insurer as a result of the short-term insurer being liable, in terms of a short-term insurance policy, to replace or repair goods or services of the insured which are lost, damaged or destroyed.

The insured (being a vendor) is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that goods or services are acquired for the purposes of making taxable supplies, provided the insured obtains and retains the tax invoice or statement contemplated in section 54(3), whichever is applicable.

‌Indemnity payments‌

A short-term insurer may, in terms of section 16(3)(c), deduct an amount equal to the tax fraction (14/114) of any amount paid to indemnify another person under an insurance contract, including payments made to a third party, subject to the proviso to section 16(3)(c).

This deduction will not be permissible where the payment was made in respect of –

a supply of short-term insurance that was not a taxable supply;

trade payments [that is, a deduction is permitted under section 16(3)(a)];

the supply of short-term insurance which was zero-rated in terms of section 11(2) and the insured, at the time of the payment, is not a vendor and not a resident of South Africa; or

a supply of goods or services to the insured where the goods are physically situated outside South Africa or the services are physically performed outside South Africa at the time of the supply.

The input tax deduction envisaged in terms of section 16(3)(c) is not limited purely to indemnity payments as a result of “indemnity insurance” cover, but also includes payouts in respect of “non- indemnity insurance” such as personal accident and third party liability cover which may be included in a short-term insurance policy.

The insured, being a vendor, is required to account for output tax in respect of the indemnity payment received [that is, a deemed supply of services in terms of section 8(8)], including payments made to a third party, to the extent the payment relates to a loss incurred in the course of carrying on the insured’s enterprise. This service is deemed to be supplied on the day the indemnity payment is received or an indemnity payment is made to a third party to indemnify the insured. The provisions of section 8(8) will not apply to a vendor where –

the services supplied in terms of the insurance contract did not constitute taxable supplies in terms of section 7(1)(a); or

the payment received relates to the total reinstatement of goods which were stolen or damaged beyond economic repair where the input tax on those goods are denied in terms of section 17(2), for example motor cars, was denied.

The third party is not required to account for output tax in respect of the indemnity payment received from the short-term insurer.

‌Recoveries

A short-term insurer is not liable to account for output tax on amounts recovered from a third party or the third party’s short-term insurer. These amounts are not payment in respect of a supply to the third party or the third party’s short-term insurer.

‌Group personal accident claims

‌Employer acting as principal

The employer, being a vendor, may deduct input tax in respect of short-term insurance acquired to the extent that it is acquired for the purposes of making taxable supplies and subject to the provisions of section 20 read with sections 16 and 17.

Subject to the exceptions set out in 2.10 above:

Any indemnity payments received by the employer in terms of a contract of insurance will result in the employer being liable to account for output tax in terms of section 8(8).

The short-term insurer may deduct VAT in terms of section 16(3)(c) in respect of the indemnity payment made.

The employer will not be entitled to deduct any VAT in respect of amounts subsequently paid to the employee.

‌Employer acting as agent on behalf of employees

The employer, acting as agent of its employees, entering into a contract of insurance with the short-term insurer will not be entitled to deduct input tax in respect of short-term group personal accident insurance.

‌Reinsurance

The supply of reinsurance is treated in the same manner as insurance and therefore paragraphs

2.1 to 2.10 of this BGR will apply.

‌Documentary proof in respect of zero-rating

The zero-rating of supplies contained in this BGR are conditional upon the insurer obtaining and retaining the documentary proof as provided for in terms of section 11(3) read with Interpretation Note No. 31 “Documentary Proof Required for the Zero-Rating of Goods and Services” as updated. Failure to obtain and retain the required documentary proof will result in the vendor effecting the relevant adjustments as stipulated in Interpretation Note No. 31.

‌Documentary proof in respect of input tax

The statements contained in this BGR regarding input tax deductions are conditional upon the vendor obtaining and retaining the documentary proof as provided for in Interpretation Note No. 49 “Documentary Proof Required to Substantiate a Vendor's Entitlement to “Input Tax” or a Deduction as Contemplated in Section 16(2)” as updated. Failure to obtain and retain the required documentary proof will result in the vendor effecting the relevant adjustments as stipulated in Interpretation Note No. 49.

‌Period for which this ruling is valid

This BGR is issued in accordance Chapter 7 of the Tax Administration Act No. 28 of 2011 as made applicable to the VAT Act by section 41B. It is effective from 1 July 2013 and will apply for an indefinite period.

Group Executive: Interpretation and Rulings Legal and Policy Division

SOUTH AFRICAN REVENUE SERVICE

‌ANNEXURE B
VAT PRACTICE NOTE NO 1 OF 2001

31 July 2001

‌Treatment of Insurance Indemnity Payments

This practice note is issued in order to clarify any uncertainties regarding the meaning of the provisos to section 8(8) of the Value-Added Tax Act, 1991.

Section 8(8) of the Act provides that:

“(8) For the purposes of this Act, except section 16(3), where a vendor receives any indemnity payment under a contract or is indemnified under a contract of insurance by the payment of an amount of money to another person, that payment or indemnification, as the case may be, shall, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, be deemed to be consideration received for a supply of services performed on the day of receipt of that payment or on the date of payment to such other person, as the case may be, by that vendor in the course or furtherance of his enterprise: Provided that this subsection shall not apply in respect of any indemnity payment received or indemnification under a contract of insurance where the supply of services contemplated by the contract is not a supply subject to tax under section 7(1)(a): Provided further that this subsection shall not apply in respect of any indemnity payment received by a vendor under a contract of insurance to the extent that such payment relates to the total reinstatement of goods, stolen or damaged beyond economic repair, in respect of the acquisition of which by the vendor a deduction of input tax under section 16(3) was denied in terms of section 17(2) or would have been denied if these sections had been applicable prior to the commencement date.” (My emphasis.)

Proviso 1

Section 7 of the Act is the section in terms of which value-added tax is levied and paragraph (a) of subsection (1) specifically levies VAT in respect of the supply of goods and services by a vendor in the course or furtherance of his enterprise. Even though VAT may, in terms of section 11 of the Act be levied at the rate of zero per cent, it does not alter the fact that VAT is in the first instance levied in terms of section 7(1) of the Act. Section 11 of the Act merely serves to alter the rate of tax from the standard rate, which is currently 14 per cent, to the rate of zero per cent, but the supply nevertheless remains a taxable supply.

Premiums on short-term policies are payments for services supplied and are, in terms of section 7(1)(a) of the Act, subject to VAT at the standard rate if the insurer is a vendor. However, section 11(2) of the Act provides that where VAT is chargeable under section 7(1) it will in certain cases be charged at the rate of zero per cent, e.g. where the insured vendor pays short-term insurance premiums to the insurer who is also a vendor for insuring the transport of passengers or goods to or from an export country (see section 11(2)(d) of the Act). Even though the premium for the insurance of passengers or goods is zero rated, the indemnity payment/claim is standard rated. Section 8(8) of the Act deems the claim to be a consideration received by the insured for a supply of services.

It follows that, where an insurer who is registered as a vendor under the Act, provides insurance to another vendor, any indemnity payment to the insured or any other person, excluding those catered for in proviso 2, whereby the insured is indemnified by the insurer, will attract VAT in the hands of the insured to the extent that it relates to a loss incurred by the insured in the course of carrying on his enterprise. This is so, irrespective of the fact that the service of providing insurance may have been supplied at the rate of zero per cent, e.g. as contemplated in section 11(2)(d) of the Act.

Proviso 2

Where the supply of services contemplated by the insurance contract is not subject to tax under section 7(1)(a) of the Act, for example, where an overseas insurance company which is not registered as a vendor makes an indemnity payment, the provisions of section 8(8) of the Act do not apply. The implication of this is that input tax is not claimable in respect of premiums and indemnity payments are not subject to output tax in terms of section 8(8) of the Act.

In respect of an indemnity payment received by a vendor on insured goods on which an input tax deduction was denied in terms of section 17(2) of the Act, no output tax is payable.

All previous rulings issued by the Commissioner for SARS or any official under his control relating to the first proviso to section 8(8) of the Act, where the premium (or part thereof) was subject to VAT at the zero rate, is hereby withdrawn with immediate effect.

‌ANNEXURE C
LEGAL PRINCIPLES OF INSURANCE

‌INDEMNITY

Indemnity is one of the most fundamental principles of insurance law and is directly linked to the principle of insurable interest. Indemnification is described as the act of providing compensation for a loss where the clear intention is for restoration of the insured party to the financial position before the loss. The object of indemnity is, therefore, to restore the insured party after the loss, to the same position that the person occupied immediately before the loss occurred. The person should not be placed in a better or worse position. Indemnity is a process of taking over the responsibility for loss by the insurer in exchange for the payment of insurance premiums. Benefits are not set at a predetermined level or amount, but rather, are based on restoring the policyholder’s financial position.

The following are some other important aspects of indemnity:

Not all insurance contracts are contracts of indemnity. For example, life insurance is not an indemnity contract.

The insured will not always be indemnified to the full extent of the loss, unless appropriate cover has been taken specifically to deal with those losses. These factors include under-insurance, the amount of the excess, inadequate sums insured as well as non-adherence to the terms of the policy. Account is also taken of depreciation in some policies. The principles of “average”, “contribution” and “subrogation” which impact on the concept of indemnity are dealt with below.

Indemnity claims can be settled in a number of ways, including:

Monetary payment to the insured, or to a third party.

Reinstatement, replacement or repair of assets destroyed or damaged.

Unless the policy specifically makes provision for settling claims on a “new for old” basis, claims are settled on the actual value of the property at the time of the loss. In most cases, this value is determined by deducting an amount in respect of age and wear-and-tear.

Most insurance policies give insurers the right to decide whether to repair, replace or reinstate the damaged property or to pay its value in cash.

‌INSURABLE INTEREST

Insurable interest is required for all types of insurance and is a characteristic which underlies the legitimacy of insurance business as distinguishable from gambling. The principle is that if the insured can show that there is a risk of losing something of appreciable commercial value by the loss or destruction of the thing insured, then the interest will be an insurable one. Also, as a general rule, insurable interest should exist at the time of taking out the policy as well as at the time the loss is incurred. This means, for example, that if a person has an insurable interest in an asset at the time of taking out the policy but subsequently disposes of that asset, the policy will immediately cease to be valid and enforceable in regard to that asset as there is no longer any insurable interest.60

60 This applies in short-term insurance contracts. There are some exceptions with regard to insurable interests in long-term insurance contracts.

‌DUTY OF DISCLOSURE

Insurance contracts are based on the information provided by the insured, and generally, the insured will know more about the risk and circumstances concerning the asset to be insured than the insurer. Insurance law therefore requires that disclosure of information between the parties must take place with utmost good faith (uberrima fides). This means that the parties must deal with each other openly and honestly and without suppressing material facts that may influence the judgment of the other party. As in the case of insurable interest, the duty to act in good faith applies to all types of insurance contracts. The South African courts accept the need for disclosure but have rejected the definition of materiality as used in English law, which requires that every circumstance must be disclosed that would influence the judgment of a prudent insurer in fixing the premium or to determine whether cover for the risk will be provided under the policy.

The proper test of materiality in South Africa is the standard test of a reasonable person and not that of a prudent insurer. Failure to disclose material facts renders the contract voidable at the discretion of the insurer. However, the insured is only expected to disclose facts that are known, or that should reasonably be expected to be known.

‌AVERAGE

Average is a concept that applies when the insurer is of the view that the insured has insured the asset for less than its market value. The difference between the insured value and the market value is referred to as the amount “under-insured” or the “self-insured” amount. The principle of average means that if there is under-insurance, the insured party is regarded as their own insurer to the extent of the under- insurance. Consequently, the insured will be required to bear part of the loss as a penalty. The application of the principle of average is not automatic in law, but it will be found in most cases that insurers will include a clause in the policy for average to apply in the event of an indemnity claim. The principle of average only applies to contracts of indemnity and not to life insurance contracts.

Formula for average: sum insured x loss sustained

market value

‌Example – Application of the principle of average

Bongi has a homeowner’s insurance policy which covers loss or damage to his home in the event of a variety of perils occurring. His house has a market value of R500 000 but he has only insured the house for R300 000.

Half of his house burns down in a fire and Bongi makes a claim to the insurers for R250 000, being the estimated cost of repairing the damage to restore the house to its original condition. If the policy has a clause relating to average, he would only be entitled to 3/5 of R250 000 as he is under-insured to the extent of 2/5 of the value of the house.

‌CONTRIBUTION

This principle applies when a person has insurance cover of the same type on the same asset under more than one policy. As the principle of indemnity forbids the insured from recovering more than the actual loss suffered, the insured cannot in such a case recover the full value of the loss from each of the policies. Under the principle of contribution, if the insured has cover under more than one policy from different insurers, the insured can claim indemnity from any of the insurers. The insurer that pays the indemnity can then claim contribution from the other insurer(s) involved. Normally the insurers contribute on a pro-rata basis towards the loss, but in some cases they may be required to contribute equally.

‌SUBROGATION

The literal meaning of subrogation is “to stand in place of”. Subrogation is therefore the right of one person to stand in the place of another in the application of the law. In terms of this principle, the person who has subrogation rights is availed of all the rights and remedies to which the insured is entitled. The principle of subrogation applies as a way of preserving the principle of indemnity and to prevent the insured party from profiting from any loss arising in terms of a contract of insurance.

‌Example – Application of the principle of subrogation

Sipho drives negligently and causes an accident which results in Thandi’s car having to be written off. The replacement value of Thandi’s car under her insurance contract is R114 000 (including VAT). Thandi has two options to recover the loss. She can either sue Sipho in delict for damages of R114 000, or she can claim the amount from her insurer. If she pursues both options, she will receive double compensation and would profit from her misfortune. Therefore, when the insurer replaces Thandi’s car, or pays her the insured amount of R114 000, she will be prevented from pursuing damages against Sipho in court. Instead, the insurer will acquire Thandi’s rights of action against Sipho under the principle of subrogation. The insurer can then decide if it wishes to take the necessary legal action to recover the R114 000 from Sipho.

There are a number of principles which apply to subrogation, such as:

The insurer cannot acquire the rights of action of the insured under subrogation unless and until the insurer makes good the loss to the insured.

The insurer cannot acquire any additional rights of action under subrogation over and above those which would have been available to the insured.

The insured cannot prejudice the insurer’s right of subrogation by, for example, renouncing any right of action against the third party if by that action the loss would be diminished. For example, the insured cannot accept a payment from the third party as compensation for not pursuing his or her right to damages in court.

The insurer may also not make a profit from the subrogation rights, but is entitled to recover only the exact amount paid as indemnity. If a larger amount is recovered, the balance should be paid to the insured.

Subrogation gives the insurer the right of salvage over the insured goods. This means that if the goods are damaged and cannot be repaired (or are lost, but later recovered), the insurer will be legally entitled to take control over those goods and to sell them to recover any loss it has suffered as a result of the indemnity payment made to the insured.

‌PROXIMATE CAUSE

Proximate cause is described as the direct, dominant or specific cause of a loss or the uninterrupted chain of events that brought about the loss. For a loss to be paid under a policy of insurance it must have been caused by an insured peril and the onus of proving proximate cause by an insured peril rests with the insured. If the insured submits reasonable evidence to conclude that the loss was proximately caused by an insured peril, the insurer is obliged to pay the indemnity unless the policy provides for an exception to apply. For example, if furniture is thrown out of a burning house to diminish the effect of a spreading fire, and the furniture is damaged in the process, the proximate cause of the damage to the furniture would be the fire.

‌GLOSSARY
PART 1 – VAT TERMINOLOGY

Consideration

This is generally the total amount of money (incl. VAT) received for a supply. For barter transactions where the consideration is not in money, the consideration will be the open market value of goods or services (incl. VAT) received for making the taxable supply. Section 10 determines the value of supply or consideration for VAT purposes for different types of supplies.

Any act of forbearance whether voluntary or not for the inducement of a supply of goods or services will constitute consideration, but it excludes any donation made to an association not for gain. Also excluded is a “deposit” which is lodged to secure a future supply of goods and held in trust until the time of the supply.

A supply for no consideration has a value of “nil”, except when a special value of supply rule is applicable, for example, in certain cases when a supply is between connected persons.

Exempt supplies

An exempt supply is a supply on which no VAT may be charged (even if the supplier is registered for VAT). Persons making only exempt supplies may not register for VAT and may not recover input tax on purchases to make exempt supplies.

Section 12 contains a list of exempt supplies. Examples:

Certain financial services.

Supplies by any "association not for gain" of certain donated goods or services.

Rental of accommodation in any "dwelling" including employee housing.

Certain educational services.

Services of employee organisations e.g. trade unions.

Certain services to members of a sectional title, share block or retirement housing scheme funded out of levies. (Not applicable to timeshare schemes.)

Public road and railway transport for fare-paying passengers and their luggage.

Childcare services in a crèche or after school care centre.

Goods

The term “goods” includes –

corporeal (tangible) movable things, goods in the ordinary sense (including any real right in those things);

fixed property, land & buildings (including any real right in the property e.g. servitudes, mineral rights, notarial leases etc);

sectional title units (including timeshare);

shares in a share block company;

electricity;

postage stamps; and

second-hand goods.

The term “goods” excludes –

money i.e. notes, coins, cheques, bills of exchange, etc (except when sold as a collectors item);

value cards, revenue stamps, etc. which are used to pay taxes (except when sold as a collectors item); and

any right under a mortgage bond.

Insurance

Insurance or guarantee against loss, damage, injury or risk of any kind whatever, whether pursuant to any contract or law (including reinsurance). The term “contract of insurance” includes a policy of insurance, an insurance cover, and a renewal of a contract of insurance. The definition of “insurance” does not apply to any insurance specified in section 2 (financial services).

Invoice

A document notifying a person that there is an obligation to make payment in respect of a supply.

Person

The entity which is liable for VAT registration and includes –

sole proprietor i.e. a natural person;

company/close corporation;

partnership/joint venture;

deceased/insolvent estate;

trusts;

incorporated body of persons e.g. an entity established under its own enabling Act of Parliament;

unincorporated body of persons, e.g. club, society or association with its own constitution;

foreign donor funded project; and

municipalities/public authorities.

Recipient

The recipient is the person to whom a supply of goods or services is made. The recipient is not always the same as the person who pays for the supply. In the case of imported services, the recipient is liable to pay the VAT.

Resident of the Republic

This is a person who is regarded as a “resident” as defined in section 1(1) of the Income Tax Act. However, any other person (including a company) is deemed to be a resident of the Republic for VAT purposes to the extent that a person carries on an enterprise or other activity in the Republic through a fixed place of business or permanent establishment in the Republic.

SARS

The acronym for the South African Revenue Service

Services

The term “services” is very broad and includes –

the granting, assignment, cession, surrender of any right;

the making available of any facility or advantage; and

certain acts which are deemed to be services in terms of section 8.

The term excludes –

a supply of goods;

money; and

any stamp, form or card which falls into the definition of “goods”.

Examples:

Commercial services – electricians, plumbers, builders.

Professional services – doctors, accountants, lawyers.

Advertising agencies.

Intellectual property rights – patents, trade marks, copy rights, know-how.

Restraint of trade.

Cover under an insurance contract.

Supply

Includes performance in terms of a sale, rental agreement, instalment credit agreement and all other forms of supply, whether voluntary, compulsory or by operation of law, irrespective of where the supply is effected.

Taxable supply

A supply (including a zero-rated supply) which is chargeable with tax under the Act. There are two types of taxable supplies, namely –

those which attract the zero rate (listed in section 11); and

those on which the standard rate of 14% must be charged.

A taxable supply does not include any exempt supply listed in section 12, even if supplied by a registered vendor.

VAT

The acronym for Value-added tax.

Vendor

Includes any person who is registered, or is required to be registered for VAT. Therefore any person making taxable supplies in excess of the threshold amount (presently R1 million) prescribed in section 23 is a vendor, whether they have actually registered with

SARS or not.

PART 2 – SELECTED INSURANCE TERMS

Accident Insurance

A contract of insurance to provide for loss sustained through an accident, or as compensation for personal injuries. Various types of policies are included within the category of accident insurance. These include personal accident and health insurance

Assurance

Insurance cover against an eventuality that (sooner or later) must occur. For example, the death of the person covered under a life insurance policy. It is therefore a term commonly used to distinguish life (long-term) "assurance" from short-term (i.e. non life and property) "insurance".

Adjuster

See loss adjuster.

Agent

A person who acts on behalf of another and in the case of insurance is the intermediary between the proposer and the insurer.

Average

A clause in a contract to ensure that in the event of a claim, insurers are not prejudiced by under-insurance. For example, if an item or property is valued at R10 000, but insured for only R6 000 the insurer will not cover the balance or shortfall of R4 000. The insured must in these cases carry a rateable proportion of any loss in regard to the claim for any under- insured items forming part of the claim.

Assessor

Similar to a loss adjuster but may just do motor claims and is not necessarily independent and is not a member of the Institute of Loss Adjusters.

Bordereau

A bordereau can be described as a detailed memorandum, especially one that lists documents or accounts, or a memorandum or invoice prepared for a company by an underwriter, containing a list of reinsured risks.

Broker

A professional full-time independent agent or intermediary. An agent who acts on behalf of the insured in effecting and servicing an insurance policy.

Cancellation

A complete termination of an existing policy before its expiration. Usually the insured may only cancel a policy if all premiums due have been paid.

Claims

A demand on the insurer for indemnification for a loss incurred from an insured event.

Co-insurance

An arrangement whereby two or more insurers enter into a single contract with the insured to cover risk in agreed proportions at an overall premium.

Collective policy

Policy issued by the leading insurer on behalf of all the insurers who share a risk by way of co-insurance.

Commission

The fee paid to a broker for the broker’s services and is calculated as a percentage of the premium generated on the insurance policy. Also referred to as brokerage. Commission levels are presently capped by law.

Composite insurance company

An insurer conducting both life and non-life business.

Contribution

This clause is similar to the average clause but applies in circumstances where there is more that one policy covering the same loss. Under these circumstances each policy (insurer) will pay a rateable proportion of the loss in the ratio that their policy's sum insured bears to the loss.

Cover

The scope of the protection provided by an insurance policy.

Cover note

Confirmation of insurance cover or temporary evidence of the granting of insurance.

Credit life insurance

A single or recurring premium term life insurance policy taken out by borrowers. Its purpose is to cover payment of outstanding loan balances in the event of their dying, or on the happening of other specified events. This class of business is sold in both the life and short-term insurance industries.

Damages

An amount of money claimed by or awarded to a third party as compensation for injury or loss.

Deposit premium

An advance payment made by the insured before the final premium has been calculated

Duty of disclosure

The duty of the parties to a contract of insurance to reveal all material facts to each other before a policy is issued and before each renewal. See Uberrimae fidei.

Endorsement

Documentary evidence of a change to an existing policy, for example, change of address, increase in sum insured etc. An endorsement may result in an additional premium, a return premium or no premium adjustment.

Excess

A policy condition whereby the insured is required to pay a portion of the loss, as stipulated in the policy (for example the first R2 000 of a motor vehicle damage claim). The insurer would pay the balance over that amount. In general there are three types of excess, namely:

Standard excess;

Additional excess; and

Voluntary excess.

Exclusions

Provisions in a policy or treaty that exclude certain types of risk from coverage under the policy or treaty. Two of the more common exclusions are in connection with aviation and war.

Ex-gratia payment

Payment of a claim which is not covered in terms of the policy wording. Ex-gratia means, literally, “an act of grace”. If a claim is paid in full or in part by an insurer without admission of liability and without waiver of right it is paid ex gratia.

FSB

Acronym for the Financial Services Board which is a public authority established in terms of the Financial Services Board Act 97 of 1990 to oversee the South African Non-Banking Financial Services Industry in the public interest. Amongst other functions, the FSB acts as the regulatory authority and the registrar for long-term and short-term insurance in South Africa.

Foreign insurer

An insurer situated outside the Republic of South Africa.

Good faith

The principle where the parties to a contract undertake to deal with one another honestly and openly in good faith regarding disclosure of material facts. (See uberrimae fidei.)

Health insurance

Insurance providing for the payment of benefits as a result of sickness or injury. Includes various types of insurance such as accident insurance, disability income replacement insurance, accidental death, dismemberment insurance and hospital cash plans.

Householders insurance

This covers loss or damage in respect of household contents.

Homeowner’s insurance

This covers loss or damage to the home of the insured from a variety of perils, essentially fire and allied perils.

Hull insurance

Insurance against loss of or damage to an aircraft, ship and other air and water borne craft.

Insurable interest

You are only able to insure property in circumstances where you stand in some legally recognised relation thereto whereby you will benefit by the safety of the property or object or be prejudiced by its loss. Examples include: owners of property or goods, mortgages, finance houses, bailees, trustees.

Indemnity

This is the basis upon which a claim is settled if the property of the insured is destroyed or lost for any event which is covered by the policy. The insurers undertake to place the insured party back in the same financial position immediately before the loss occurred. It is against public policy for a person to benefit from a misfortune as there would be no inducement for the protection of property and deliberate losses would, as a result, proliferate. Unless the policy specifically makes provision for settling claims on a “new for old” basis, claims are settled on the actual value of the property at the time of the loss. In most cases, this value is determined by deducting an amount in respect of age and wear- and-tear. Most insurance policies give the insurers the right to decide whether to repair, replace or reinstate the damaged property or to pay its value in cash. Indemnity is also affected by the application of average, excesses, limitations and the adequacy of the sums insured.

Insurance

A risk transfer arrangement whereby the responsibility for meeting losses passes from one party (the insured) to another (the insurer) on payment of a premium. Under an insurance contract, the insurer indemnifies the insured against a specified amount of loss, occurring from specified eventualities within a specified period, provided a fee called a “premium” is paid. In general insurance, compensation is normally proportionate to the loss incurred, whereas in life insurance usually a fixed sum is paid. Insurance provides protection only against tangible losses. It cannot ensure continuity of business, market share, or customer confidence, and cannot provide knowledge, skills, or resources to resume the operations after a disaster.

Insurance broker

An agent on behalf of the insured who negotiates the terms and cover provided by the insurer in the insurance policy.

Insurance policy (or policy)

A document which is evidence of a contract of insurance. A contract whereby one party (the insurer), in return for consideration known as a premium, agrees to indemnify another party (the insured) against specified damage, loss or liability arising from the occurrence of specified risks or to compensate the insured or beneficiary upon the occurrence of a specified event.

Insured

The person whose interest is insured, usually the policy owner.

Insured peril

Source of loss which is covered under an insurance policy. A peril is a contingency or fortuitous happening which could cause losses. Possible loss occurrences against which insurance cover is obtained. For example, fire, windstorm, collision, hail, bodily injury, property damage, loss of profits etc.

Insurer

The person offering risk protection via insurance policies.

Intermediary

A person who negotiates contracts of insurance or reinsurance with the insurer or reinsurer on behalf of the insured or reinsured.

Lloyd’s of London

An association of persons grouped together in syndicates providing insurance. Also refer to the following in this regard:

Lloyd’s broker: A broker that has been given the responsibility by Lloyd’s of placing insurance at Lloyd’s.

Lloyd’s syndicate: A group of underwriters with Lloyd’s of London who specialise in underwriting particular risks.

Lloyd’s underwriter: An individual member of a Lloyd’s syndicate.

Loss adjuster

An independent, qualified person who acts on behalf of the insurer, or the insured, to investigate the circumstances of a loss and assesses the size or value of a loss to recommend the amount to be paid. Also known as an adjuster, assessor, or loss assessor.

Market value

The price at which an item can be bought or sold at a specific time.

Marine insurance

Marine insurance covers the risk of loss to ships and vessels and also provides cargo cover. Marine cargo insurance may be divided into two divisions: inland marine, which covers property and goods in transit between locations without requiring sea transport, and ocean marine, which covers property and goods subject to a sea voyage. Marine cargo policies are issued in various forms depending on the requirements of the shipper, the shipowner, the charterer, the consignee etc.

Material fact

Anything which would affect the judgment of a reasonable person in accepting or rejecting or deciding the terms for a risk. A false description of a material fact is called a misdescription and a false statement of a material fact is called a misrepresentation.

New business

Policies written in response to applications for insurance, as distinguished from renewal.

No-claims bonus

The amount by which a renewal premium is reduced if the insured has not made a claim under the insurance policy for one or more consecutive preceding years. Applied particularly to motor comprehensive cover.

Personal accident

A class of insurance which provides a fixed payment in the event of an insured being injured in an accident or killed in an accident. The amount paid varies according to the nature of the injury, for example, loss of a finger, loss of an arm.

Policy

See “insurance policy”.

Policy fee

An amount added to the basic premium to reflect the cost of issuing the policy.

Premium

The monetary consideration which the policyholder pays to the insurance company for a contract of insurance.

Proposal

A request for insurance submitted to the insurer by or on behalf of the insured. The proposal usually includes sufficient facts for the insurer to determine whether or not it wishes to accept the risk. It will be illegal for a broker to allow an insured to sign a partially completed or blank proposal form upon the introduction of the policy holder protection rules.

Proximate cause

The direct cause of a loss without the intervention of any other event, which may contribute to the loss. The direct, dominant or specific cause of a loss or the uninterrupted chain of events that brought about the loss.

Public liability insurance

A prescribed class of insurance business covering liability exposures of individuals and businesses for damage to property and injury to individuals.

Reinsurance

An agreement whereby an insurance company transfers part or all of its risk of loss under insurance policies it writes by means of a separate contract or treaty with another insurance company. The insurance company providing the reinsurance protection is the reinsuring company or reinsurer. The insurance company receiving the reinsurance protection is the ceding company. Reinsurance protection provided is known as reinsurance accepted; from the standpoint of the ceding company, reinsurance protection received is known as reinsurance ceded.

Renewal

The process for continuing a policy for a further period after the first or current period of cover has expired.

Risk

The hazard exposure or chance of loss. The term “risk” is used also in a general way to designate the subject matter of an insurance policy. It may also be used as a generic term for the insured.

Salvage

Whatever is recovered after an insured item or part of it has been lost or damaged beyond repair. Also refers to the amount received by an insurer from the sale of property (usually damaged) on which a total loss has been paid to the insured.

Self-insurance

An insured protects his or her own risk out of own resources. This can be done in different ways, including inter-company transactions, special accounts or via a risk financing arrangement.

Short-term insurance

Non-life insurance. Insurance that operates on a yearly basis and which may be terminated by the insurer or the insured. In the United States of America this is referred to as “property and casualty insurance” and in the United Kingdom as “general insurance”.

Sub-agent

A person appointed by an agent to perform some duty, or the whole of the business relating to the agency. Sub-agents may be considered in two points of view, firstly, with regard to their rights and duties or obligations, towards their immediate employers, and secondly, as to their rights and obligations towards their superior or real principals. A sub- agent is generally invested with the same rights and incurs the same liabilities in regard to the immediate employers as if that person were the sole and real principal.

Subrogation

The insurer’s right to take whatever steps it deems necessary to recover the amount of the loss from the responsible third party, after the insured party has been compensated for that loss. This includes instituting legal action in the name of the insured as it is usually a policy condition that the insurer be provided with the necessary assistance in exercising these rights.

Sum insured

The stated monetary amount or amounts of indemnity or cover under an insurance policy.

Third party

Any person, not a party to the insurance contract, who has an alleged or actual right of action for injury or damage against the person insured under the policy.

Uberrimae fidei

(Utmost good faith)

In all contracts of insurance, it is a fundamental principle that the parties must exercise the utmost good faith towards each other. Any material fact which would influence the parties to the contract must be disclosed, otherwise there is ground for avoiding the policy. This applies to both intentional and innocent failure to disclose material facts. The test of materiality is whether that fact would have influenced a reasonable person in making a decision to accept the risk and determining the premium to charge. The test is considered in view of all circumstances at that time, including the full circumstances of the fact undisclosed.

Under-insurance

The difference between the possible loss and limit in insurance.

Underwriter

Another name for an insurer. Underwriting is the process of assessing a proposal for insurance to decide on its acceptability and if so, on what terms and conditions.

Void

Where the insurance policy has no legal effect.

Waiver

The surrender of a right or privilege which is known to exist, or might exist.

Warranty

A condition, which must be complied with literally. A clause in an insurance contract

presenting a condition relating to the degree of risk, non-compliance with which invalidates the contract.

‌CONTACT DETAILS
‌The SARS website contains contact details of all SARS branch offices and border posts.

Contact details appearing on the website under “Contact Us” (other than branch offices and border posts) are reproduced below for your convenience.

SARS Head Office

Physical Address

South African Revenue Service Lehae La SARS

299 Bronkhorst Street Nieuw Muckleneuk 0181

Pretoria

Postal Address Private Bag X923 Pretoria

0001

South Africa

SARS website

www.sars.gov.za

Telephone

(012) 422 4000

SARS Fraud and Anti-Corruption hotline

0800 00 28 70

SARS Large Business Centre (LBC) Head Office

Physical Address Megawatt Park Maxwell Drive Sunninghill Johannesburg

Postal Address Private Bag X170 Rivonia

2128

South Africa

Telephone

(011) 602 2010

LBC@sars.gov.za

For the contact details of each LBC sector go to “Contact Us” on the SARS website then go to “SARS Large Business Centre”.

SARS Service Monitoring Office

Telephone

0860 12 12 16

Fax

(012) 431 9695

(012) 431 9124

Postal Address

PO Box 11616

Hatfield 0028

South Africa

Website

www.sars.gov.za/ssmo

ssmo@sars.gov.za

e-Filing

Sharecall

0860 709 709

Cellular

082 234 8000

Fax

(011) 361 4444

info@sarsefiling.co.za

Website

www.efiling.gov.za

‌ National Call Centre

Please note:

All the e-mail addresses and fax numbers displayed below are routed to the central SARS National Call Centre.

If you are not a tax practitioner, and you have eFiling queries, you can contact the channel for the specific tax type you are dealing with (for example, VAT, PAYE, Income Tax etc) for assistance.

Query Type

Telephone

Fax

‌Income Tax

0800 00 7277

031 328 6011

021 413 8901

it.cc@sars.gov.za

it.wc@sars.gov.za

‌Value-Added Tax (VAT)

0800 00 7277

021 413 8902

vat.wc@sars.gov.za

‌Pay As You Earn (PAYE)

0800 00 7277

031 328 6013

paye.cc@sars.gov.za

‌Tax Clearance Certificates

0800 00 7277

031 328 6048

021 413 8928

tcc.kzn@sars.gov.za

tcc.wc@sars.gov.za

‌Customs: General

0800 00 7277

031 328 6017

021 413 8909

customs.qry@sars.gov.za cq ry.wc@sars.gov.za

‌Tax Practitioners

0860 12 12 19

011 602 5049

pcc@sars.gov.za

‌Tax Practitioners: eFiling

0860 12 12 19

011 602 5312

pccefiling@sars.gov.za

VAT Rulings

Should there be any aspects relating to VAT on which a specific VAT ruling is required, you may submit a ruling application to SARS headed “Application for a VAT Class Ruling” or “Application for a VAT Ruling" by fax or email. All applications must comply with section 79 of the TA Act ( excluding sections 79(4)(f) and (k) and (6)).

Fax

+27 86 540 9390

VATRulings@sars.gov.za