VAT, Indemnity Payments and Capitec Bank: The Good, The Bad and The Ugly (Part 2)

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v15_n3_a4
• Author: Des Kruger Kruger
• Pages: 23-30
• Date: 01 September 2024
• Published date: 01 September 2024
• Published By: Siber Ink

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VAT, Indemnity Payments and

Capitec Bank:

THE GOOD, THE BAD AND THE UGLY (PART 2)

DES KRUGER*

ABSTRACT

In the previous edition of this journal, the writer dealt with the substan-

tive issue that was required to be addressed by the Constitutional Court in

Capitec Bank Ltd v Commissioner for the South African Revenue Service, namely

whether Capitec Bank Ltd was entitled to claim a deduction under section

16(3)(c) of the Value-Added Tax Act, 1991, in respect 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

had 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. No consideration was payable

for the loan cover by Capitec.

This Part of the article address the remaining issues dealt with in this seminal

case, namely apportionment, capitalisation and supplies for no consideration.

It is, with respect, submitted that the court addressed these related issues

succinctly and appropriately. As regards apportionment, the court held that

while section 16(3)(c) did not deal specif‌i cally with apportionment, it would

in essence be fair and reasonable to do so given that the loan cover related to

the bank’s taxable and exempt activities. As noted by the writer, the court’s

dicta is apposite as regards supplies that fall to be dealt with under section

8(15). Section8(15) provides that where a single supply of goods or services

would, if separate considerations had been payable, been standard rated

and zero rated, each part of the single supply is deemed to be a separate

supply. However, there are no rules as to how the consideration related to

each notional separate supply is to be determined. Rogers J in Capitec Bank

provides a practical answer — apportionment under general principals.

As regards capitalisation, Rogers J held that the components of the

borrowers’ accounts retain their character of interest (exempt) and fees

(taxable) and fell to be dealt as such for VAT purposes. While the writer

acknowledges the correctness of the analysis and conclusion arrived at by

the court, he notes that this approach gives rise to issues where a trust makes

distributions to a benef‌i ciary after many years out of capitalised trust capital

and is required to apply Binding General Ruiling No 16 (‘BGR 16’) in relation

to that distribution. BGR16 provides for a mandatory apportionment meth-

odology, the so-called turnover-based method. The writer suggest this is

something that needs to be considered by SARS.

* Consultant, Webber Wentzel Attorneys; Adjunct Professor, Department of

Commercial Law, University of Cape Town.

2024 15(3) BTCLQ 23

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