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VAT 421

Value-Added Tax_____ Guide for Short-Term Insurance

www.sars.gov.za

DRAFT FOR PUBLIC COMMENT

VAT 421 – Guide for Short-Term Insurance (Draft) Foreword

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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 otherwise indicates. 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 of the VAT Act. 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 the Glossary in a simplified form to make the guide more user-friendly. A selection of terminology used in the insurance industry is also included In Annexure B. The information in this guide is based on the VAT legislation (as amended) as at the time of publishing and includes the amendments contained in the Taxation Laws Amendment Act 24 of 2011 which was promulgated on 10 January 2012 (as per GG 34927 dated 10 January 2012). The information in this guide is issued for guidance only and does not constitute a binding general ruling as contemplated in section 76P of the Income Tax Act, 1962 and section 41A and 41B of the VAT Act unless otherwise indicated. The following guides have also been issued and may be referred to for more information about specific VAT 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) • Diesel Guide (VAT 415) • AS-VAT-10 Quick Reference Guide for VAT Vendors (VAT 417) • AS-VAT-02 - Quick Reference Guide (Diplomatic Refunds) (VAT418) • 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 –

• contact your local SARS branch; • visit the SARS website at www.sars.gov.za; • contact your own tax advisors; • if calling locally, contact the SARS National Call Centre on 0860 12 12 18; or • if calling from abroad, contact the SARS National Call Centre on +27 11 602 2093.

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 2012

VAT 421 – Guide for Short-Term Insurance (Draft) Contents

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CONTENTS

CHAPTER 1: INTRODUCTION 4

1.1 Policy background 4

1.2 Scope of insurance topics 4

1.3 Approach of the guide 5

CHAPTER 2: WHAT IS INSURANCE? 7

2.1 Brief historical background 7

2.2 Description of insurance 7

2.3 Ordinary meaning of “insurance” 8

2.4 Short-term vs. long-term insurance 8

2.5 Legal principles of insurance 10

2.5.1 Indemnity 10

2.5.2 Insurable interest 10

2.5.3 Duty of disclosure 10

2.5.4 Average 11

2.5.5 Contribution 11

2.5.6 Subrogation 11

2.5.7 Proximate cause 12

2.5.8 Other insurance terminology 12

CHAPTER 3: VAT CONCEPTS, DEFINITIONS AND TERMINOLOGY 13

3.1 Time and value of supply 13

3.2 Consideration 13

3.3 Enterprise 14

3.4 Goods, fixed property and second-hand goods 15

3.5 Services and imported services 16

3.6 Supply and taxable supply 16

3.7 Insurance 16

3.8 Financial services 18

CHAPTER 4: AGENT vs. PRINCIPAL 19

4.1 Introduction 19

4.2 Legal principles of agency 19

4.3 Tax invoices, credit notes and debit notes 20

4.4 Application of agency principles 20

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CHAPTER 5: ACCOUNTING FOR VAT 23

5.1 Introduction 23

5.2 The mechanics of VAT 23

5.3 Application of VAT principles 24

5.3.1 General 24

5.3.2 Output tax 25

5.3.3 Input tax 26

5.4 Insurance premiums 28

5.4.1 General 28

5.4.2 Premiums received through intermediaries 28

5.4.3 Premiums on Lloyd’s policies (coverholder business) 29

5.5 Commissions 30

5.6 No claim bonuses and cashback incentives 32

5.7 Recoveries and recoupments 33

5.7.1 Recoveries made under subrogation 33

5.7.2 Recoveries from reinsurers 33

5.7.3 Contribution from other insurers 33

5.7.4 Sale of salvage 33

5.8 Other income from taxable supplies 34

5.9 Imported services 34

CHAPTER 6: TRADE PAYMENTS, INDEMNITY PAYMENTS AND EXCESS 36

6.1 Introduction 36

6.2 Trade payments 36

6.3 Indemnity payments 37

6.3.1 Legal provisions 37

6.3.2 The insurer 37

6.3.3 The insured 39

6.3.4 Excess 40

ANNEXURE A: VAT PRACTICE NOTE NO 1 OF 2001 44

ANNEXURE B: GLOSSARY OF SELECTED INSURANCE TERMS 46

GLOSSARY 53

CONTACT DETAILS 56

VAT 421 – Guide for Short-Term Insurance (Draft) Chapter 1

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CHAPTER 1

INTRODUCTION 1.1 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. Evidence led before VATCOM1

was that short-term insurance business in South Africa was split almost equally between private households and businesses and that the exemption of short-term insurance, seen in this light, would lead to significant double taxation. 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, VAT should be imposed on all financial services and that it is desirable that tax be imposed on these services which are consumption expenditure. 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. After considering all inputs it was decided that with the introduction of VAT on 30 September 1991, that “financial services” as defined would be exempted from VAT with the exception of a few exclusions. The effect of this being that long-term insurance (being a financial service) would be included in the exemption, and supplies of short-term insurance would be subject to VAT. At the time that VAT was introduced, 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 VAT Act was amended to exclude such services from the definition of “financial services”, which made them subject to VAT from that date. Credit guarantee insurance which was also initially exempt became taxable from 1 October 1996. 1.2 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

• The nature and meaning of “insurance”

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:

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. Any special rules which may be applicable for supplies which fall within the definition of “insurance” as defined in the VAT Act, will therefore not apply if the particular supply does not fall within the meaning of that term. There is also potentially a difference in what one would ordinarily regard as insurance and what is intended by the defined meaning of that term in the VAT Act. 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).

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• 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 and will deal with the VAT implications of providing and receiving short-term insurance services, including -

how and when VAT must be accounted for on transactions and payments; the rules regarding 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 in different circumstances, identifying whether commissions

are taxable at the standard rate or zero rate, and dealing with different methods of payment.

• Deemed supplies arising from indemnity payments and third party transactions

This is the most complex part of VAT and is one of the main reasons for the existence of the guide. An indemnity payment would not ordinarily be thought of as being payment for a supply of goods and services. However, the VAT Act deems such payments made under a contract of insurance 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.

1.3 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 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.

VAT 421 – Guide for Short-Term Insurance (Draft) Chapter 1

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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 insurer’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.

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CHAPTER 2

WHAT IS INSURANCE?

2.1 BRIEF HISTORICAL PERSPECTIVE 3

The earliest authenticated insurance contract which displays the characteristics of insurance in the sense of a transfer of risk or loss due to an uncertain event in return for payment of a premium (consideration) was a marine insurance contract dated 1347 in respect of a ship known as “The Santa Clara”. The policy appears in the form a maritime loan to avoid the prohibition of the church against the practice of lending money at an exorbitant rate of interest (usury). It is evident from the implementation of the earliest legislative measures enacted that there was a distinct divergence between the legal position and what occurred in practice. The earliest insurers were merchants underwriting risks for fellow merchants, on a part time basis and initially premiums were not determined by statistics or other scientific methods as they are today, but rather, by haggling. As a result, these “insurers” were in a weaker position than the insured party at the time. For this reason, many decisions handed down, and principles established were aimed at protecting the insurer. 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. In terms of this principle, the insured party is under a fundamental duty to disclose all material facts and surrounding circumstances that could influence the decision of the insurer to enter the insurance contract. Non-disclosure or a partial-disclosure makes such agreements voidable. The judge in Carter v Boehm stated as follows regarding this principle:

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.

Refer to paragraph 2.5 where this principle and others are discussed in more detail. 2.2 DESCRIPTION OF INSURANCE Insurance is the main way whereby businesses and individuals reduce the financial impact of a risk occurring. While an insurance policy does not remove a risk, it provides the policyholder with some security if the insured event should happen. A business that provides insurance (known as the “insurer”) agrees to take on the risk on behalf of the business or individual concerned (known as the “insured”) 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 insured against (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 in business to make a profit and will be hoping that the total premiums it receives, together with any money 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”).

3 Passage adapted from the press release entitled “What is insurance?” dated 5 March 2007 by the Ombudsman for Short-Term

Insurance www.osti.co.za.

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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 this task and they will want to understand a number of things about the risk such as 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.4

2.3 ORDINARY MEANING OF “INSURANCE” Some dictionary definitions of the ordinary meaning of “insurance” are 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.

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The term “insurance” can also be described as follows: 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

The following characteristics can be identified through the above descriptions:

• 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 insured to restore the insured to its original financial position.

• 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”.8

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. 2.4 SHORT-TERM vs. LONG-TERM INSURANCE All kinds of insurance have one thing in common. It protects a person against the negative financial impact of certain risks and provides peace of mind. Long-term assurance gives you both peace of mind and an investment, because at some time in the future the policy will pay out. Short-term policies do not pay out any investment component at the end of the contract. Whilst there may be some overlaps, the main difference between long-term and short-term insurance is the type of risks it protects against. 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.

4 Adapted from “Insurance – The Basics” http://www.lloyds.com/Lloyds/About-Lloyds/What-is-Lloyds/Insurance. 5 The Concise Oxford Dictionary. 6 Collins English Dictionary (Desktop edition). 7 Lloyd's glossary of insurance-related terms http://www.lloyds.com/Common/Help/Glossary?page=2. 8 Collins English Dictionary (Desktop edition).

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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”. Short-term insurance may also include clauses which provide personal accident, third party liability claims and medical insurance cover. This is referred to as “non-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. A feature of short-term insurance is that the service is only provided to the extent that premiums are paid. This means that the policy is usually regarded as cancelled if the insured party fails to pay the premium. If the insured chooses to pay the arrear premiums, the policy may be reinstated. Some examples of short-term insurance include the following:

• 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 your home). • Fire policy (insures against damage or destruction caused by fire, lightning or explosion). • Comprehensive motor vehicle policy (covers loss of or damage to 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). Some examples of long-term insurance include the following:

• 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 (a policy that is intended to cover 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 accident). The Long-Term Insurance Act 52 of 1998 (the LTIA) and Short-Term Insurance Act 53 of 1998 (the STIA) both contain definitions which describe the ambit of long-term and short-term insurance as follows:

LTIA

• “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.

STIA

• “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.

Whilst these definitions are not structured in such a way as to set out the exact differences between long-term and short-term insurance, they provide some guidance in making the distinction by mentioning the type of policies which fall within their ambit. Besides the fact that each type of business is covered by a different Act, the distinction is important in that only the premiums and indemnity payments made in terms of short-term insurance policies attract VAT. This guide is concerned mainly with insurance business conducted within the meaning of “short-term insurance policy” as defined in terms of the STIA.

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2.5 LEGAL PRINCIPLES OF INSURANCE Apart from the general legal principles of contract which governs all contracts, insurance is also governed by a number of other legal principles which are unique to the law of insurance. Some of these are discussed below as it is important to get an understanding of the principles so that the VAT implications of certain transactions explained later in the guide can be understood. 2.5.1 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. Refer to paragraphs 2.5.4 to 2.5.6 below which deal with the principles of “average”, “contribution” and “subrogation” respectively.

• 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.

2.5.2 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 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 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.9

2.5.3 Duty of disclosure As mentioned in paragraph 2.1, 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.

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

insurance contracts.

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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. 2.5.4 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 market value

x loss sustained

Example 1 – 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.

2.5.5 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. 2.5.6 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 2 – 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.

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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.

2.5.7 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. 2.5.8 Other insurance terminology As a number of insurance-related terms will be used frequently throughout this guide, a glossary of selected insurance terms and their meanings is provided for the reader in Annexure B. These terms have been compiled from a number of sources, but are mainly derived from the information available on the Insurance Gateway website http://www.insurancegateway.co.za.

Readers are, however, alerted to the fact that the meaning attached to certain insurance-related words may differ depending on the resource consulted and the context in which the words are used in discussing a particular type of insurance. The terms and phrases in Annexure B are therefore not agreed definitions which have a universal meaning, but are intended merely to provide the reader with a general understanding of those terms and phrases.

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CHAPTER 3

VAT CONCEPTS, DEFINITIONS AND TERMINOLOGY

3.1 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 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. This general rule will apply in most cases, but some supplies have a special time of supply rule which may deviate from the general rule. For example, the time of supply for goods supplied under a rental agreement is the earlier of the date that payment becomes due, or is received. In the case of short-term insurance, the policy document is not regarded as a notification of an obligation to make payment and is not an “invoice” as defined in section 1. Further, as short-term insurance is only supplied upon payment of the premium, the time of supply is the time of payment of the premium. (Refer also to Paragraph 5.4.1). It is important to note that the payments basis (or cash basis) uses the same general time of supply rule mentioned above, but the vendor only accounts for VAT on actual payments made and actual payments received in respect of taxable supplies during the period. 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. Therefore, the value of the supply of goods or services is 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

As with the time of supply, 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 of the supply. Refer to the VAT 404 - Guide for Vendors for more details on the special time and value of supply rules. 3.2 CONSIDERATION The term “consideration” in its simplest form means anything that is received in return for the supply of goods or services. It therefore includes, for example, the cash payment in respect of the purchase price of goods, the giving of a post-dated cheque for the payment of services and the value of services received in return for providing goods under a barter transaction. However, 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. Common examples of taxable consideration in the context of insurance include: the receipt of short-term insurance premiums for providing short-term insurance cover, commissions earned by agents for concluding contracts, and indemnity payments arising from short-term insurance claims.

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3.3 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

• An enterprise or activity must be carried on continuously or regularly by a person in the Republic or partly in the Republic.

of the following requirements are met:

• 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.

Therefore, when a person conducts an enterprise and the value of taxable supplies10

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.

“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. (Refer also to paragraph 5.9 for the application of this concept in the context of “imported services”.) Non-enterprise activities

Specifically excluded from the definition of “enterprise” is any activity that involves the making of exempt supplies, for example, the letting of a dwelling or the provision of passenger transport by road or rail to fare-paying passengers. A person that only makes exempt supplies will therefore not be able to register for VAT. 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. It follows that no input tax can be deducted on expenses incurred in conducting the exempt activity. In the context of insurers, the writing of local long-term insurance business is an exempt supply and will constitute a non-enterprise activity.11 Similarly, activities conducted in order to earn income in the form of fines, penalties or 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 since they do not fall within the ambit of the VAT Act and are not in respect of any goods or services supplied. These payments are sometimes referred to as “out-of-scope” receipts. Another example of a non-taxable (out-of-scope) supply is a supply made by a public authority.12

For example, the Road Accident Fund (RAF) is a public entity listed in Schedule 3A to the Public Finance Management Act, 1999 which was set up in terms of the Road Accident Fund Act, 1996. This is a state insurer that provides 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 authority 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 A practical example of the application of the definition of “enterprise” in the context of insurance, is that with effect from 1 January 2001, insurance business underwritten by Underwriting Members of Lloyd's of London (Lloyd's) is regarded as the carrying on of an an enterprise in the Republic. This applies to the extent that Lloyd's correspondents conclude short-term insurance contracts in South Africa (known as “coverholder business”).

10 The term “taxable supplies” includes supplies which are either subject to VAT at the standard rate or at the zero rate. 11 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). 12 Government departments and public entities listed in Schedules 3A and 3C of the Public Finance Management Act, 1999 are

regarded as public authorities.

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Short-term premiums paid in this regard will therefore attract VAT in the same manner as any other supply of insurance. It follows that any indemnity payments made in terms of coverholder business contracts will 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). Before the amendment to the VAT Act with effect from 1 January 2001 there was some uncertainty regarding Lloyd’s activities and whether those activities could be regarded as carrying on an enterprise in the Republic. (Refer, however, to paragraph 5.9 regarding the treatment of non-resident suppliers of services to recipients 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 constitute 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 payment received by a vendor under such a policy. Self-insurance

Another practical example to demonstrate the application of the term “enterprise” is the VAT treatment of self-insurance. The term “self-insurance” refers to a situation where a person may find that insuring a specific risk is too expensive. To cover the risk the person may decide to self-insure by setting up a fund from which the 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 to handle losses of the company (a so-called “captive insurance 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 the subsidiaries. When self-insurance schemes of this nature are carried on, this will constitute the supply of “insurance” services and will be an enterprise activity. Any short-term premiums payable for this type of insurance cover will therefore 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 FSB

A person must be registered with the Financial Services Board (FSB) and be approved as a “short-term insurer” or a “long-term insurer” in terms of the relevant Act(s) to be able to conduct insurance business legally in South Africa. However, the VAT Act does not generally concern itself with the legality of a supply – only that if supplies of goods or services are made above the registration threshold, that person will be liable to register and account for VAT. In other words, if a person writes what would constitute short-term insurance business in South Africa without being registered or approved by the FSB, there may still be a liability to register and account for VAT despite the fact that the activities may be unlawful. This will apply whether the insurer is a resident or non-resident. (Refer also to paragraph 5.9 regarding the treatment of non-resident suppliers of services to recipients in the Republic.) It should be noted in this regard that 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.13

Each type of insurance must therefore be provided under separate registrations under the different Acts (namely the STIA and LTIA).

3.4 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.

13 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.

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“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). 3.5 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.) 3.6 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. The term also includes supplies which are made voluntarily (for example, a donation of goods or services) and those supplies which take place by operation of law (forced sales, expropriation etc). Section 8 also provides for certain “deemed supplies” which refers to events or transactions which 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. 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 VAT Act. Taxable supplies, in turn, are divided into standard-rated supplies which attract VAT at 14% and zero-rated supplies which attract VAT at 0%.14

A non-taxable supply is a supply which is not regarded as a taxable supply in terms of the VAT 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 (for example, long-term insurance), transport of fare-paying passengers by road or rail and certain educational services. Supplies made by persons who are not vendors and supplies by vendors that are not made in the course or furtherance of an enterprise also constitute non-taxable supplies not falling within 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 in the Republic is an out-of-scope (non-taxable) supply. The same applies where a short-term insurer supplies fixed property which was used as a dwelling immediately before being supplied. 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, or when income is earned from the levying of certain fines or penalties which serve as punishment for breaking rules. 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 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 tenants, it will be making taxable supplies to that extent.

14 Refer to section 11 which contains provisions which prescribes that certain supplies of goods or services are subject to VAT at

the zero-rate. These zero ratings are primarily based on the destination-based principle of VAT where “exported” goods and services are actually consumed outside of the Republic. The supplies concerned can only be subject to VAT at the zero rate if they would otherwise be subject to VAT at the standard rate in the absence of the zero-rating provision. There is, however, an exception which applies for “financial services”. For example, the provision of long-term insurance to a non-resident may qualify to be subject to VAT at the zero rate under certain circumstances.

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3.7 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 and in order to apply the VAT law correctly, it is necessary to have a proper understanding of the term as defined. Section 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 parts as follows:

1. “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 2.3, but it goes further, in that it is not limited to insurers who are registered with the FSB. For example, it could include unlawful transactions or certain “self-insurance” arrangements between “connected persons” or branches of a single entity that are registered separately for VAT. 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.

In terms of the STIA, 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 STIA. A “guarantee policy” is further defined in the STIA 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”. [My emphasis]

2. 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.

3. 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 in respect of a “contract of insurance” within the meaning 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 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. (Refer to paragraph 3.3.)

4. 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. However, in the case of certain long-term insurance cover which is not exempt in terms of section 2, but rather, a zero-rated taxable supply in terms of section 11, then such insurance is not excluded from the definition.

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3.8 FINANCIAL SERVICES The VAT 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 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 to the extent that there is a consideration payable in the form of a fee, commission, merchant’s discount or similar charge, (not being a discounting cost) for providing certain services which are in connection with, ancilliary to, or of a complimentary nature in relation to the underlying financial instrument, that fee or similar charge is not deemed to be a financial service. This means that the underlying financial service itself is exempt, but any further fee charged by a vendor in connection with providing the financial service (excluding an interest charge) is a taxable supply. Stated simply, the definition is intended to exempt interest and investment growth, but a fee charged to administer or to provide advice concerning the supply of the underlying financial service 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”. The most important aspects that need to be noted from the definition of “financial services” in the context of an insurance business are therefore 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.15

• Credit guarantee insurance is not an exempt financial service.

16

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

15 This applies with effect from 1 April 1995. 16 This applies with effect from 1 October 1996.

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CHAPTER 4

AGENT vs. PRINCIPAL 4.1 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. 4.2 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 on that person’s behalf or to negotiate a contract with a third person. The agent in representing the principal, 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 is on the person who seeks to bind the principal and demonstrate that the relationship was that of a principal and an agent. An understanding of the relationship between the parties is therefore a requirement in understanding the VAT treatment of supplies made by the parties. Some of the differences between an agent and a principal are summarised below:

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.

Agent Principal

The agent is not the owner of any goods or services acquired on behalf of the principal.

The principal is the owner of the goods or services acquired on the principal’s behalf by the agent.

The agent will not alter the nature or value of the supplies made between the principal and third parties.

The principal may alter the nature or value of the supplies made between the principal and third parties.

Transactions on behalf of the principal do not affect the agent’s turnover, except to the extent of the commission or fee earned on such transactions.

The total sales represent the principal’s turnover. The commission or fee charged by the agent forms part of the principal’s expenses.

An agent only declares the commission or fee for Income Tax and VAT purposes.

The principal declares gross sales as income for Income Tax and VAT purposes, and may be allowed to claim a deduction for the commission or fee charged by the agent.

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4.3 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 VAT 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 VAT 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 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 and 5.5 for documentation relating to commissions and the collection of premiums.) 4.4 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.17

• underwriting manager;

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:

• claims or policy administrator; • broker and sub-broker; • collecting agent; • 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; • act as sub-brokers for certain supplies of insurance, for example, SASRIA policies.18

17 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 arising from short-term insurance contracts.

18 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.

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Example 3 – Determining the principal in an agent / principal relationship19

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

1. 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.

2. 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.

3. 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. Example 4 – 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.

The STIA contains a number of provisions which govern who may be regarded as an independent intermediary and how they shall perform their functions and charge for services rendered. For example, the following definitions can be found in section 1 of the STIA:

19 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 http://www.osti.co.za/index.php?page=case-studies

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• “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—

(a) by or working for a short-terrn insurer and receiving or entitled to receive remuneration: and (b) 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 STIA, there is a prohibition against any person rendering services as an intermediary in relation to a short-term policy unless—

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

the short-term policy concerned; (c) 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 (d) such person does so with the approval of the Registrar.

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 writing the 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 for which a fee will be charged. 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 and to report to the insurer (the principal) each month relating to supplies made and received on the insurer’s behalf as prescribed in section 54(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 an employee of an insurer is generally known as an “insurance agent”, the term is misleading as there is no legal contract of agency with the insurer (the employer). Representatives may earn remuneration by way of a fixed or variable salary, by way of a commission, or in any other manner. “Remuneration” paid to an 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 STIA. Further, that person must have the capacity to act as an independent intermediary as contemplated in section 8(2) of the STIA. 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.

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CHAPTER 5

ACCOUNTING FOR VAT 5.1 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 as well as on the importation of goods into South Africa. 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 the different types of supplies and the output tax which must be declared in any particular tax period. 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. 5.2 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. Refer to Chapter 7 of the VAT 404 - Guide for Vendors for more details in this regard.

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; • account for VAT on the invoice basis of accounting; and • 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 will therefore only arise once payment is received. 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.20

20 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.)

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5.3 APPLICATION OF VAT PRINCIPLES 5.3.1 General 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 necessary particulars and the insurer has written authorisation from the Commissioner to issue such documents as an alternative to a tax invoice, the documentary requirements for the deduction of input tax will be satisfied. Proof that the premium has been paid must also 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. Where 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.) Remember that 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 R3 000 or more.21

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, VAT Practice Note 2 of 1991:Tax Invoices, Debit Notes and Credit Notes (PN 2) 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 of the Act. Paragraph 4 of PN 222

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.

PN 2 essentially 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 following conditions are met, a vendor does not need to obtain a specific ruling in this regard:

1. The transactions in question must consist of a number of progressive taxable supplies made by a registered vendor in accordance with a written contract for a supply of services which provides for a regular payment of a determinable amount;

2. The recipient must be in possession of the contract document; 3. The contract document must contain the supplier’s name, address and VAT registration number;

or the supplier must have provided the recipient with a supplementary document setting out these details; and

4. The recipient must retain proof of payment of each regular amount in the form of bank statements or paid cheques.

Typically, 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, debit and credit notes for supplies instead of the supplier. Insurers and brokers may apply self-invoicing procedures under the conditions set out in paragraph 5 of Interpretation Note No. 56: Recipient-created tax invoices; credit and debit notes dated 31 March 2010. As long as the prescribed conditions are met, a specific ruling does not need to be obtained in this regard. The interpretation note essentially 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.

21 The VAT registration number of the recipient is required with effect from 1 March 2005. 22 Note that, depending on the source consulted, it may be found that the paragraphs in PN 2 have been incorrectly numbered.

Attention should therefore be paid to the heading of the paragraph rather than the numbering.

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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 prescribes that certain records must be kept to satisfy the Commissioner that the vendor has observed the requirements of the Act. The VAT Act does not contain a complete list relating to all vendors, as this would be impractical. However, all vendors are expected to maintain all reasonable accounting documents and records for the particular type of business (or businesses) carried on to enable the SARS auditors to establish the nature, time and value of all taxable supplies and importation of 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 Chapters 7 and 15 of the VAT 404 - Guide for Vendors for more details in regard to record-keeping and input tax. The term “records” therefore 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).

5.3.2 Output tax With regard to output tax, a clear distinction must be made in the insurer’s records as to which income streams and payments received are in respect of standard-rated taxable supplies, zero-rated taxable supplies and exempt supplies (or other non-taxable receipts). Records must be kept for all the different types of business in which the insurer is engaged. As the definition of “enterprise” is wide and not restricted only to the main line of business being the provision of insurance services, most of the supplies made by short-term insurers will generally attract VAT at the standard rate.23 For example, if an insurer owns a commercial building which it rents to tenants as offices, it must charge VAT not only on its premium income for the short-term insurance policies supplied, but also on the rental income earned for the offices. No output tax is declared on any income relating to financial services rendered such as the provision of long-term insurance, as they are generally exempt from VAT. However, certain other fee based financial services are subject to VAT at the standard rate. For example, fees charged for providing financial advice, arranging financial services, management of a superannuation schemes and debt collection services.24

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 adequatly described, properly 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 as agent for another person.

Output tax must also be declared on form VAT 201 for the tax period concerned to the extent that any services are imported for non-taxable purposes. With regard to zero-rated supplies, refer to Interpretation Note 31 (issue 2): Documentary proof required for the zero-rating of goods and services dated 31 March 2012 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.25 If the relevant documentation is not obtained within the prescribed period, but at a later date, certain output tax or input tax adjustments may be applicable. Refer to Chapters 5 and Chapter 10 of the VAT 404 - Guide for Vendors for more details in regard to zero-rated supplies, exports and the documentation required.

23 This will exclude certain supplies of insurance which qualify for the zero rate or long-term insurance business which is exempt.

Also excluded will be income streams which constitute the earning of dividends and interest from investments, as these will either be exempt (interest) or not in respect of any supplies made (dividends).

24 The VAT Act was amended with effect from 1 April 1995, to exclude such services from the definition of “financial services”, which made them subject to VAT from that date. Refer also to section 2, including the proviso to that section.

25 Refer to section 11 to ensure that the supply qualifies for zero-rating under the relevant paragraph.

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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.26

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

Below is a summary of the most common zero-rating provisions relating to short-term insurance premiums:

• 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.

• Section 11(2)(l) – insurance supplied to persons who are not residents of the Republic, not registered as VAT vendors, and not present in the Republic when the services are rendered.

Where any particular payment is received which is not subject to VAT at the standard rate or the zero rate, the reason why no VAT was charged should be recorded and any evidence which may support that conclusion should be obtained. For example, if an insurer receives a payment as agent for the insured, it should be clear from the documentation, that in fact, this is the case. Also, if an amount is received in respect of an exempt supply, it should be clear from the facts and circumstances of the supply, that it meets the requirements of an exempt supply as set out in section 12. In particular, for vendors such as reinsurers that supply both long-term and short-term insurance, the provisions of section 2 (which deals with “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 zero-rated in certain limited instances when the policy is concluded with a non-resident. 5.3.3 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 supplies 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, when an insurer makes both taxable and non-taxable supplies, before attempting to apportion an expense, the first step is to determine if the expense can be directly attributed. Direct attribution means that you will be required to attribute or allocate the VAT expense according to the intended purpose for which it will be used or consumed. 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 as above 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.

26 Refer to paragraph 5.5 for more details in this regard.

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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 mixed purpose expenses 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.27 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 established 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 that all rulings issued before 1 January 2007 (including those concerning special apportionment methods) which were not reconfirmed as explained in Binding General Ruling (VAT) No. 2 dated 1 January 2007, have been withdrawn. (Refer to VAT News 37 (February 2011)

.)

Example 5 – 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). • R15 million in short-term premiums (zero rated). • R10 million in long-term premiums (zero rated). • R10 million in long-term premiums (exempt). • R3 million in dividends earned on investments (out-of-scope income not in respect of any supply). • R2 million in interest earned on investments (exempt). The extent of taxable supplies is calculated as: y = a x (a + b + c) 1

100

y = R60 million + R15 million + R10 million x R85 million + (R10 million + R2 million) + R3 million 1

100

y = R85 million x 100 R100 million 1

= 85%

Therefore, Reinsurer V will be able to deduct 85% of its general overhead expenses which cannot be directly attributed to either taxable or non-taxable purposes.

Refer to Chapter 7 of the VAT 404 - Guide for Vendors for more information on input tax and apportionment, including a binding general ruling on the turnover-based method of apportionment. Sections 16(2)(a) to (e) specify the documentation that a vendor must be in possession of when deducting “input tax” in terms of sections 16(3)(a) and (b) for any VAT incurred on 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.

27 Refer to section 17(1).

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Interpretation Note 49: Documentary proof required to substantiate a vendor's entitlement to "input tax" or a deduction as contemplated in section 16(2) dated 29 July 2009,28

• Original copy of the insurance contract.

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. For example, the documents required for indemnity payments made by an insurer in terms of section 16(3)(c) are as follows:

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

• Proof that the premiums payable in terms of the insurance contract are taxable at 14% or at 0%. • Where the contract of insurance is subject to VAT at the zero rate, proof that the insured is a

vendor and a resident of the Republic. • Proof that the goods supplied are situated in the Republic or that the services are physically

rendered in the Republic, at the time of the supply. Refer to Chapters 7 and 15 of the VAT 404 - Guide for Vendors for more details in regard to the general requirements and documentation for deducting input tax. The deduction in terms of section 16(3)(c) is discussed in more detail in Chapter 6. 5.4 INSURANCE PREMIUMS 5.4.1 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 are declared and deducted 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 same rules regarding the deduction of input tax and the declaration of output tax set out in this chapter for an insurer will apply equally to a reinsurer in the case of a reinsurance contract. 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 as premiums and any policy fees29

are usually payable in advance. However, for practical reasons, it is common practice to allow the insured to pay the premium monthly over the term of the policy. Although premiums may be paid monthly, insurers do not normally issue monthly invoices in respect of premiums. Part of the reason for this is that a short-term insurance policy may be cancelled at any time by the insured due to non-payment of the premium. Unlike other supplies such as property rentals where the consideration is contractually due and payable at specified intervals 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.

The effect of this is that a short-term insurance policy document operates on an optional basis so that it does not create any obligations for the insurer to supply a service unless the premium is paid, and the insured is entitled to cancel the policy at any time by ceasing to pay the premiums. As the policy document is not a notification of an obligation to make payment, it is not an “invoice” as defined in section 1 and as the service is only supplied to the extent that 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.30

The application of the time of supply rule in accounting for VAT on short-term insurance premiums means that if an annual premium is paid upfront in full, or if any advance payment of the premium is made, the insurer will be liable to pay output tax on the full amount received and not just on the premium that would otherwise have been payable for the period concerned.

28 Refer also to the draft updated version (issue 2) of Interpretation Note 49 on the SARS website under the heading “Draft

Interpretation Notes and Rulings.” 29 A policy fee is an amount added to the basic premium to reflect the cost of issuing the policy. 30 A liability to declare output tax will also arise if the premium is received by an intermediary such as a broker or collection agent on

behalf of the insurer. Refer to paragraph 5.4.2.

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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 taxable purposes; • 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. For vendors registered on the invoice basis, the input tax may be deducted in the tax period in which the payment is made, or when it is due, whichever is earlier. Vendors registered on the payments basis of accounting will only be able to deduct input tax once payment of the premium has actually been made. Refer to Chapter 7 of the VAT 404 - Guide for Vendors for more details in regard to input tax. 5.4.2 Premiums received through intermediaries In terms of the STIA, 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, for VAT purposes the tax period may only be reduced or extended by a period of up to 10 days. Therefore, if any late premiums are received by the intermediary in a case where the insurer has extended the tax period into the next month, the intermediary should be informed accordingly. Output tax on premiums collected through intermediaries must therefore be accounted for by the insurer in the relevant tax period corresponding with the actual date that the premium was received by that intermediary. 5.4.3 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 (refer to paragraph 3.3). Lloyd's correspondents who act under binding authority to conclude insurance agreements in the Republic on Lloyd’s behalf are called “coverholders”. As coverholders merely act as agents for Lloyd’s in regard to Lloyd’s policies, 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. The commission 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. 5.5 COMMISSIONS A broker or other independent intermediary that gets paid a commission or other fee for performing intermediary services must account for output tax according to the general time of supply rule, being the earlier of the following:

• At the time that an invoice is issued (for example, a commission statement); 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.

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An intermediary, who collects premiums on behalf of an insurer, deducts the commission payable by the insurer and pays the net amount to the insurer under cover of a statement sometimes called a “bordereau”.31

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 to Chapter 4.)

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 STIA concerning the uapplication 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 mentioned above.

• 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 according to the rate of VAT, and states as follows:

67. Contract price or consideration may be varied according to rate of value-added tax (1) … (2) … (3) 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.

Based on the above, it is submitted that the correct approach for calculating commission in terms of the prescribed percentage for an intermediary, is the following:

31 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.

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• Vendors

When applying the commission rate to the premium – VAT must be added at the standard rate to the calculated amount (or nil is added if the commission is zero-rated);

When applying the commission rate to a premium which includes VAT at the zero rate – VAT is to be added to the calculated commission value.

• Non-vendors

VAT charged by intermediaries who are not vendors cannot include any VAT. Therefore, in such a case, the commissions should be calculated as a percentage of the premium.

If the intermediary registers for VAT, in terms of section 67(3), the commission previously calculated on the premium may be increased by 14% which is the current standard rate of VAT (unless there is a specific agreement to the contrary).

Example 6 – Calculation of commission Scenario

Broker K charges the maximum commission of 20% on short-term policies as provided in the regulations to STIA 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.

Question

Calculate the commission which will be withheld by Broker K before paying the balance of premiums to Insurer S. Calculate the different amounts based on whether Broker K was registered for VAT or not. Answer

Commission = 20% x taxable value of premiums (R114 000 x 100/114) = R20 000 (excluding VAT) If Broker K was not a vendor, he will withhold commission of R20 000 and pay the balance of R94 000 to Insurer S. If Broker K was a vendor, his commission would be R22 800 (R20 000 + 14%) and he would pay over R91 200 to Insurer S. Insurer S must declare output tax on the full VAT-inclusive premium (R114 000 x 14/114 = R14 000). In the case where Broker K is a vendor, upon receipt of the appropriate documentation, Insurer S would be entitled to deduct input tax of R2 800.

As is the case with insurers that must account for VAT on the full premium income when it is paid upfront, so must the intermediary declare output tax on the full commission paid on such upfront payments. 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 for arranging insurance services be zero-rated:

• arranging the international transport of passengers or goods from 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 that 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 [refer to section 11(2)(d)]; or

• arranging the insurance underwritten by a non-resident insurer or reinsurer. It should be noted that where 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 for commissions earned by the intermediary.

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5.6 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:

(a) 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.)

(b) 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 any 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). 5.7 RECOVERIES AND RECOUPMENTS 5.7.1 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 which the insurer has incurred as a result of the claim by the insured. (Refer to paragraph 2.5.6). 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 received does not constitute consideration for the supply of goods or services and there is currently no deeming provision in the VAT Act to deem a taxable supply in these circumstances. Consequently, the insurer will not account for output tax on the receipt, nor will it be entitled to deduct input tax when that amount is paid to the insured. The receipt will also not give rise to an output tax liability in the hands of the insured as no deemed supply will arise in terms of section 8(8). (Refer to Chapter 6.) 5.7.2 Recoveries from reinsurers In reinsurance, the reinsurer is essentially the insurer of the party that is the insurer under a conventional short-term insurance policy. Therefore, 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 has granted to the insured, the same VAT principles apply for the reinsurance indemnity payment. The amount received as an indemnity payment by the insurer will therefore 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.)

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5.7.3 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. 5.7.4 Sale of salvage When the 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 therefore acquires the damaged goods in terms of the doctrine of abandonement 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 therefore 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 abandonement and will therefore not be entitled to deduct any input tax thereon.32

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 in this regard (for example, import bill of entry and proof of payment of VAT). 5.8 OTHER INCOME FROM TAXABLE SUPPLIES As the term “enterprise” does not apply only to the main activity carried on by insurers, brokers and independent intermediaries, VAT must also be accounted for on all other supplies made in the course or furtherance of the enterprise. 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, and so on. Refer to paragraphs 3.3 and 5.3. 5.9 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.33

The recipient of the imported services is responsible for the declaration and payment of the VAT at the standard rate on form VAT 215. 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 Field 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. Some examples of when a resident recipient has to account for VAT on imported services are –

• when the recipient is not a registered vendor;

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

• when the recipient is a vendor, but the services are imported for private purposes.

32 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)

33 Refer to section 7(1)(c).

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The imported services provisions have application in the insurance industry when the insurer is registered as an insurer under the LTIA, or is registered under both the LTIA and the STIA. The application of the imported services provisions in the case of such an insurer will therefore be 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, 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 VAT Act also provides for some exemptions, in terms of which no VAT will be payable on imported services where –

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

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

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

• the supply concerned is a supply of 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 VAT 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).

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CHAPTER 6

TRADE PAYMENTS, INDEMNITY PAYMENTS AND EXCESS

6.1 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” (refer to paragraph 2.5.1) 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, only in the case where the insurance constitutes a taxable supply of short-term insurance, can the indemnity payment possibly give rise to a deemed supply in terms of section 8(8). For the purposes of this guide it is necessary to distinguish between two forms of settlement of a claim under a short-term insurance policy The first is a so-called “trade payment” which the insurer makes to a third person to supply goods or services to the insured to reinstate or restore the goods which have been lost or damaged. The second type is a settlement paid as compensation to the insured to cover the loss. This is referred to as an “indemnity payment” or “claims payment”. 6.2 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 therefore be deducted as input tax under the normal rules 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. 34

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 prcess.

34 An example is where a vehicle is repaired in the Republic for a non-resident insurer. As the supply will be made directly in

connection with movable goods situated in the Republic at the time the services are rendered, the supply should be subject to VAT at the standard rate. However, if the vehicle is temporarily imported for the specific purpose of making those repairs, the supply of services by the panelbeater (as well as any goods incorporated into the repaired vehicle) may be subject to VAT at the zero rate in terms of section 11(2)(g) if the vehicle is subsequently exported.

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6.3 INDEMNITY PAYMENTS 6.3.1 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:

(c) 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 -

(i) 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;

(ii) 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;

(iii) 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;

(iv) 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), which provides that when a vendor receives an indemnity payment under a contract of insurance as a result of a loss suffered in the vendor’s enterprise, the payment is deemed to be consideration for a taxable service supplied by the vendor in the course or furtherance of the 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. 6.3.2 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. However, no input tax may be deducted when a payment is made under any other type of policy where the premiums were exempt from VAT (for example, long-term insurance) or is a supply which is 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 regardless of whether the indemnity payment relates to a loss incurred in relation to a vendor’s enterprise assets or not. In other words, the insurer is entitled to deduct input tax even if the recipient is not required to declare output tax on the indemnity payment received.

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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 would be made on behalf of the insured in terms of the contract of insurance to the third party.35

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 payments 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 results either from a supply of goods to the insured where the goods are situated outside of the Republic, or from 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:

• 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 legal context it refers to a payment that is being made “without the giver recognizing any liability or legal obligation.”36 In the context of insurance, it refers to “an insurance payment not required to be made under an insurance policy”.37

• 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 as a charge, for example, which is 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 loss, and hence, the quantum of the indemnity payment itself, then it may be included in the amount used to determine the deduction allowed to the insured.

Ex gratia payments are therefore made without the admission of liability or waiver of any rights on the part of the insurer. As they are not regarded as being made in terms of a contract of the 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 tagged as “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 hence, whether it has the characteristics of an ex gratia payment or not.

• Payments not made or received in terms of the contract of insurance – When the insurer recovers an excess payment or a payment for damages from a third party (or the insurer of the third party), which amount, in turn, is paid to the insured, the insurer may not deduct input tax. Such amount recovered from the third party does not constitute an indemnity payment made in terms of the contract of insurance between the insurer and 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.)

35 Insurers should note that 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 still be sent to the insured to advise that person that the claim has been settled on his or her behalf. Further, that if the insured has a liability to account for output tax on the payment to the third party, the insurer must pay the VAT component of the claim to the insured so that it may be accounted for correctly in the insured party’s next VAT return.

36 http://en.wikipedia.org/wiki/Ex_gratia 37 Black’s Law Dictionary, 9th edition, p. 654.

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6.3.3 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. However, the general position is that when an indemnity payment is made in terms of a taxable 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 amount received 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 applies to all indemnity payments received on or after 30 September 1991 by a vendor, regardless of when the 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.38

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

Output tax at the standard rate must also be declared (subject to any exceptions discussed below) when the indemnity payment relates to an insurable interest which covers a monetary loss in the enterprise. For example –

• 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), even in cases where it relates to zero-rated supplies made by that vendor. In other words, the deemed supply is subject to VAT at the standard rate as it is a different supply from the insurance service which was supplied in terms of the policy by the insurer. It is also different from 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. Although the supply of transport in this case is subject to VAT at the zero rate, and the supply of the insurance service in respect thereof is also zero-rated,39 the deemed supply which arises as a result of any indemnity payment made in terms of the zero-rated policy is subject to VAT at the standard rate.40

In paragraph 3.7 the point was made that the word “insurance” as defined in section 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 STIA. This means that there will also be a liability to account for output tax when an indemnity payment is made in terms of certain self-insurance contracts where the insured pays a premium to another person (the insurer) for the transfer of risk, which falls within the meaning of “insurance” as defined in section 1. For example, this could apply to certain contractual arrangements between holding companies or head offices and their subsidiary companies. Section 8(8) provides, however, that the insured will not be liable to declare output tax to the extent that an indemnity payment is received in terms of a contract of insurance in the following situations:

• When 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);

• When the indemnity payment relates to goods or services which were subject to a denial of input tax upon acquisition in terms of section 17(2).41 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.42

38 Refer to Footnote 34.

39 Refer to sections 11(2)(a) and (d) respectively. 40 Refer to VAT Practice Note No 1 of 2001 dated 31 July 2001 in Annexure A. 41 Typically, this would refer to a situation where an enterprise has motor cars and entertainment goods (on which input tax is

specifically denied) insured 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 VAT Act had been applicable before the commencement date.

42 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.

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• When the insured goods and services which are the subject of the claim were used for non-

enterprise purposes. 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. 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. This is because the VAT on the premiums payable would have been denied as input tax to that extent, as would be the case for any other non-enterprise assets insured.

Example 7 – 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 include the house, a motor car, business equipment and private household assets. The facts of the case are as follows:

• Vendor G insured both his business assets and household goods under a single policy. • The motor car (passenger vehicle) was used exclusively in the enterprise. • The computer equipment and office furniture was used exclusively for enterprise purposes. • The furniture, fixtures and fittings in the lounge were used exclusively for private purposes. • 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.

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 (10/50) 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.

6.3.4 Excess General

An excess43

43 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.

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.

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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. Alternatively, if the insurer decides that the vehicle is too severly 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 and sell them as salvage. The VAT Act is generally not concerned with matters relating to the determination of insured values and excess amounts as these are contractual matters between the insured and the insurer. The Act does not, therefore, have any special rules in this regard. The only requirement is that where VAT is applicable on the transaction, that the supplier declares output tax thereon, and that 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 for supplies, the only real concern is that the agreed price will include VAT if it is a taxable supply, whether or not the parties have included VAT in amount of the consideration which is payable. This principle also applies in the case of the determination of an amount which is to be paid as an indemnity payment which gives rise to a deemed taxable supply in the hands of the insured. As insurers have different types of clients, some of which are vendors and others which are not, it would be wise to ensure that the policy wording is clear in regard to the calculation methodology applied, including whether the excess amount is to be deducted from the VAT-inclusive or VAT-exclusive claims amount. This is important because the amount of the excess has a direct impact on the amount of the claims payment (whether a trade or indemnity payment) as well as on the excess amount payable by the insured. 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 each insured has different circumstances. This means that in some cases the insured may be entitled to deduct the VAT component of excess payments made, and in other cases, this will not be allowed. 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 value as well. Output tax and input tax

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

• The insurer – Excess payments which are either deducted from the total claim amount, or paid separately by the insured to the insurer are not regarded as amounts paid or received in respect of the taxable supply of services to the insured. The insurer must therefore not declare output tax on the excess amount. 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 regarded as a payment made to the insurer. There will therefore be no VAT implications for the insurer in this regard as output tax will be declared by the supplier of goods or services who received the payment in that case, if that person is a vendor.

• The insured – As excess payments made to the insurer in respect of short-term policies are not regarded as amounts paid in respect of any supply by the insurer to the insured, no input tax may be deducted in this regard. When the excess payment has to be made 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 person to whom the excess was paid if that person is a vendor so that input tax may be deducted (provided that all the requirements for deducting input tax are met by the insured).

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

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Example 8 – 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 as a trade payment has been made to Vendor C and not an indemnity payment contemplated in section 16(3)(c). The deduction of input tax by the insurer is therefore 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, if the requirements for an alternative to a tax invoice have been met in terms of PN 2 (refer to paragraph 5.3), that such alternative documents are held. 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 as well as 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 therefore 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.

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Example 9 – 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 as salvage to Non-vendor D for R2 000. Question

What are the VAT implications for the parties involved? Answer

Insurer A In regard to the indemnity payment made, Insurer A may deduct input tax of R1 400 (i.e. [(R12 540 – R1 140) x 14/114] in terms of section 16(3)(c). In regard to the sale of the salvage, Insurer A will declare output tax of R245.61 and may issue a tax invoice to Non-vendor D upon request. Insurer A will not be entitled to deduct any input tax on the second-hand truck, as it was acquired as salvage under the contract of insurance and no consideration was paid for those goods. Vendor B Vendor B will declare output tax of R1 400 in terms of section 8(8) on the amount received (i.e. R11 400 x 14/114) as the indemnity payment was received in respect of an enterprise asset. Vendor B may not deduct any input tax 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.

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ANNEXURE A

VAT PRACTICE NOTE NO 1 OF 2001

VAT PRACTICE NOTE NO 1 of 2001

31 July 2001

Treatment of Insurance Indemnity Payments

1. 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. 2. 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.)

3. 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.

4. 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.

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5. 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.

6. 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.

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ANNEXURE B

GLOSSARY OF SELECTED INSURANCE TERMS44

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".

Act of God An uncontrollable event caused by the forces of nature. Also sometimes referred to in contracts of insurance as “Force Majeur” or “Vis Majeur”.

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.

All risks An all risks policy covers the insured against all risks of loss or damage to the property insured other than loss or damage specifically excluded.

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.

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.

Balance of third party

Third party liability cover provided by an insurer in motor policy other than compulsory insurance provided for under the Road Accident Fund.

Blanket or general policy

A policy covering different classes of property which are grouped and insured for one fixed amount. The value of any particular item is not stated separately.

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.

Cancellation clause Clause in a policy which allows the insurer to cancel after due notice.

Certificate of insurance

A document issued by an insurer which is used to certify that cover is in force.

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

44 Note that these terms and phrases are not agreed definitions which have a universal meaning, but are intended merely to provide

the reader with a general understanding of insurance terminology. Also note that the meaning attached to certain insurance-related words may differ depending on the resource consulted and the context in which the words are used in discussing a particular type of insurance.

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Comprehensive policy

A policy covering a wide variety of perils. Also known as “multi peril”. For example, a comprehensive motor vehicle insurance is primarily insurance which covers any loss of, or damage to an insured motor vehicle (including motor cycles, caravans and trailers) arising from an accident, fire or theft. Also included in this class of business is third party and property damage arising from motor vehicle accidents.

Consequential loss A loss not directly caused by damage to property, but arising as a result of such damage. For example, lost production and loss of profits following a factory fire.

Contingency An unforeseen occurrence

Contract The policy of insurance is the contract or agreement between the insurer and the insured.

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.

Creditor insurance This is a class of insurance taken out by an insured to repay loans when the insured (borrower) is incapacitated through illness or injury.

Crop insurance Insurance in respect of damage to crops in the event of hail, fire, flood, wind and lightning.

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

Date of attachment of risk

The date with effect from which an insurer accepts liability under an insurance policy.

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

Depreciation The extent to which property decreases in value due to use, wear-and-tear or other factors.

Disability See permanent disability.

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 excesses:

• Standard excess – This is the basic excess of the specific section of the policy under which you want to claim.

• Additional excess – In some cases additional excesses might apply. The additional excess would be in addition to the basic excess. An example of an additional excess would be where the driver is under the age of 25 years, and the policy stipulates an additional excess of R1 000 for drivers under the age of 25.

• Voluntary excess – As a policy holder you have the choice to increase your excess in order to pay a lower insurance premium. The voluntary excess would be in addition to both the standard excess and the additional excesses of the policy.

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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.

Exception A peril or circumstance specifically excluded from a policy as being insured events. (See exclusions.)

Exposure This is the possibility of loss. It is criterion used in measuring the extent of a risk assumed by an insurer. Exposure serves as a basis for determining the loss cost, or pure premiums on expired policies. The unit of exposure for an individual comprehensive motor vehicle is one year. The term is also used generally to represent the state of being in danger of loss from a particular hazard or the hazard threatening a risk.

Extended-warranty insurance

Extension of a manufacturer’s warranty for a specified period, generally for a single premium. This may cover motor vehicles or other manufactured items.

Extra premium (or additional premium)

An additional charge, over and above the regular standard premium for the insurance, to pay for some extra risk inherent in the situation.

Fire insurance A contract which, in consideration of the payment of an annual premium, indemnifies the policy owner for loss by fire and allied perils (in South Africa these perils include storm, wind and water, impact by aircraft, impact by road vehicles and cattle, earthquake, earth-tremor and subsidence and landslide except property fire losses of a private or domestic nature which are covered by homeowners’ and householders’ policies). Loss of profits insurance are also generally included with fire insurance business for reporting purposes. Also known as “property insurance”.

Fire insurance policy

Fire insurance policies can be broadly divided into the following different types:

• Floating policy: A policy insuring property (e.g. trading stock) which may be situated at various locations.

• Fire protection: Various measures taken by the insured to reduce the risk of damage from fire. This includes fire resistant contraction material, fire walls (walls separating parts of a building) and fire proof materials.

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.

Funeral insurance A life policy with a low sum assured intended to pay for the burial costs on the death of the insured

General insurance Insurance which is not long-term business (i.e. life and pensions).

Good faith The principle where the parties to a contract undertake to deal with one another honestly and openly in good faith regarding disclose 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.

Hospital cash plan A policy which provides for payment of a fixed amount per day or week in the event of the insured being hospitalised.

Householders insurance

This covers loss or damage in respect of household contents.

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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.

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.

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.

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 “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.

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.

Key man insurance Insurance on the life of a person on whom the continued successful operation of a business depends.

Knock for knock agreement

An agreement between motor insurers whereby following a collision, each pays the cost of repairs to its own policyholder's vehicle, regardless of fault, provided that the vehicles involved are all insured for accidental damage. The innocent party has their excess refunded and claim free group reinstated.

Limit of liability The maximum amount for which an insurer is liable on any one loss. This is sometimes referred to as “limit of indemnity”.

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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.

Loss of profits insurance

A form of consequential loss insurance which compensates the insured for loss of earnings resulting from the interruption of business, usually as a result of fire of flood. Also called “business interruption insurance”.

Market value The price at which an item can be bought or sold at specific time

Marine insurance Marine insurance covers the risk of loss to ships and vesselsand 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.

Misrepresentation Information supplied by the insured to the insurer which is incorrect to a material degree. The supply of such information whether innocently or fraudulently gives the insurer the right to repudiate the contract.

Negligence The basis for liability insurance. It is the failure to act with the legally required degree of care for others. Also known as neglect.

New for old Insurance where the replacement value of the property which has been lost or damaged is payable without deduction for depreciation. (See also reinstatement value).

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.

Non-disclosure The failure to disclose material facts before entering into a policy.

Over-insurance Insurance exceeding the amount of the possible loss on a policy.

Permanent disability A physical or mental condition that makes an insured person incapable of performing one or more duties of his or her occupation. This may be total or partial (able to still work but not in the same occupation).

Peril 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.

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.

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Policy The legal document, issued by the insurer to the policyholder that outlines the conditions

and terms of the insurance. Also called the “contract”. See also the following in this regard:

• Policyholder: A person who owns an insurance policy. Also known as the “policy owner”.

• Policy schedule: The tabulated portion of a policy giving particulars of the policyholder, goods insured, sum insured, period of cover, excesses, premiums and similar information.

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.

Product liability insurance

Insurance taken out by manufacturers, wholesalers, distributors and sometimes retailers against claims arising out of the consumption, handling or use of a product or goods away from the premises where the goods are manufactured or sold. Product recall is also written under this heading if specified.

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.

RAF The Road Accident Fund. This is a state insurer that provides compulsory third party liability insurance for motorists for bodily injury. The premiums are paid via levy on fuel purchases such as petrol andf diesel.

Reinstatement value Certain sections of a policy will be subject to this condition which determines the basis upon which you will be indemnified in the event of loss or damage. This condition permits your insurer to settle your claim on the basis of “new for old”. The cost of reinstating the damaged goods must be the cost of replacement on the same site although the actual replacement can take place on another site. The replaced goods must be identical to the destroyed goods i.e. if the new item is “more extensive than or superior to” the damaged or lost goods, insurers are entitled to request a contribution from the insured party.

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.

Replacement and/or reinstatement policies

Fire policies which are designed to protect the insured against the effect of inflation in property values.

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.

Replacement cost The value of property determined by the current purchase price of a similar article.

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SAIA Acronym for The South African Insurance Association. SAIA represents most of the short-

term insurance companies in South Africa and is authorised to negotiate on their behalf. Members of the SAIA abide by the SAIA Code of Conduct and participate in the Office of the Ombudsman for Short-term Insurance.

SAFSIA Acronym for The South African Financial Services and Intermediaries Association: This is one of the associations of insurance brokers. It lays down a code of conduct for members.

SASRIA Acronym for the South African Special Risks Association. Almost every insurance policy issued in South Africa excludes special risks damage caused by riot, civil disobedience, disorder, labour disturbances, war, rebellion, political unrest, military uprising etc. The only way to insure against these risks is to effect a coupon policy issued by SASRIA and even then not all risks can be insured against e.g. war risks.

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 this is referred to as “property and casualty insurance” and in the United Kingdom as “general insurance”.

Special perils Extra risks added to a policy to give cover not provided in terms of basic wording, the term usually applies to storm, water, wind and impact damage under a policy covering fire damage.

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.

Third party fire and theft insurance (Motor)

Third party insurance plus cover for fire damage to and the theft of the insured's own vehicle. Third party cover (under motor vehicle insurance) provides cover for legal liability for damaging Third Party property from the use of a motor vehicle.

Total loss Loss entailing the payment of the total sum insured under an insurance policy.

Uberrimae fidei 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 prudent insurer in his decision to accept the risk and 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.

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Underwriter One who determines the acceptability or retention of business. Loosely, the person

involved in setting premiums. The term is also used to denote an insurance company. 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.

Utmost good faith See uberrimae fidei.

Void Of no legal effect. 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.

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GLOSSARY

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 the 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.

• Certain financial services. Examples:

• 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.

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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.

Resident of the Republic This is a person who is regarded as a “resident” as defined in section 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 an enterprise or other activity is carried on 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.

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Taxable supply A supply (including a zero-rated supply) which is chargeable with tax under the VAT

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.

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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

email 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 email

ssmo@sars.gov.za

e-Filing Sharecall 0860 709 709

Cellular 082 234 8000

Fax (011) 361 4444

email

info@sarsefiling.co.za

Website

www.efiling.gov.za

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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 email 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 cqry.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