VAT, Indemnity Payments and Capitec Bank: The Good, The Bad and The Ugly (Part 1)

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v15_n2_a2
• Author: Des Kruger Kruger
• Pages: 1-14
• Date: 01 July 2024
• Published date: 01 July 2024
• Published By: Siber Ink

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© Juta and Company (Pty) Ltd

VAT, Indemnity Payments and

Capitec Bank:

THE GOOD, THE BAD AND THE UGLY (PART 1)

DES KRUGER*

ABSTRACT

The recent Constitutional Court decision in Capitec Bank Limited v Commissioner

for the South African Revenue Service is seminal, but is, with respect, unfor-

tunately wrongly decided (the bad). That said, Rogers J, in a unanimous

judgment, has provided clarity in regard to a number of VAT provisions (the

good and the bad), most notable the treatment of a supply for no considera-

tion and the application for apportionment outside the ambit of the Value-

Added Tax Act, 1991 (VAT Act), amongst others.

In essence Capitec Bank sought a deduction under section 16(3)(c) of

the VAT Act of amounts credited to borrowers accounts under a loan cover

arrangement on the happening of specif‌i ed events, namely the death or

retrenchment of the borrower. Capitec Bank has essentially undertaken to

apply the claim proceeds derived by it under a credit life policy entered into

with an insurer against the indebtedness of the borrower on his or her death

or retrenchment.

Section 16(3)(c) provides for a deduction against a vendor’s output tax

of any amounts paid to a person to indemnify that person under a ‘contract

of ‘insurance’. The deduction is equal to the tax fraction (15/115) of such

indemnity payments.

Importantly, the deduction is only available if the ‘contract of insurance’

under which the payments are made is a taxable supply.

SARS sought to disallow the deduction on the grounds that the ‘contract of

insurance’ was not a taxable supply as it was not a supply made in the course

or furtherance of any ‘enterprise’ carried on by the bank. SARS argued that

as no consideration was charged for the loan cover, it could not be said that

Capitec Bank was carrying on an enterprise in relation to its loan cover activi-

ties. In addition, SARS argued that the loan cover was so closely connected to

its exempt activity of providing loans (an exempt supply), that the provision

of the loan cover similarly constituted an exempt supply. An exempt supply is

specif‌i cally excluded from the ambit of the def‌i nition of ‘enterprise’.

Capitec Bank naturally sought to counter such arguments by submitting

that the supply of the loan cover free-of-charge did not disqualify the supply as

being a taxable supply, relying, inter alia, on the provisions of section 10(23)

of the VAT Act. As regards the argument by SARS that the supply of the loan

cover was an exempt supply, Capitec Bank argued that the loan cover related

to its overall business that comprised both exempt (loans) and taxable (fee)

activities and as such was not in itself an exempt supply.

*

Consultant, Webber Wentzel Attorneys; Adjunct Professor, Department of Com-

mercial Law, University of Cape Town.