Recent amendments have been introduced to section 8(8) which covers the scope and implications of indemnity payments. The amendments are a result of the previous amendment to section 72 of the Value-Added Tax Act. The amendment to section 72 had an impact on Binding General Ruling 42 which deals with the VAT treatment of specific supplies in the short-term insurance industry, including the VAT treatment of excess payments.
Muneer Hassan CA(SA) Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course
Section 8(8) of the VAT Act triggers a deemed supply for the insured VAT vendor in relation to indemnity payments. Section 8(8) covers short-term insurance, which is a taxable supply. Long-term insurance (ie life insurance) is an exempt supply read into the definition of ‘financial service’.
Scope
- Indemnity payment received (insurance claim) or indemnified by the payment of an amount of money to another person for loss suffered in the course of carrying on an enterprise, and
- In terms of a contract of insurance
Implication
Deemed output tax for the insured, even if the payment is made to another person.
Time of supply
Date of receipt of the payment or on the date of payment to another party.
Value of supply
The consideration received x 15/115 x the extent applied for taxable use.
Non-application
There is no deemed supply if the payment:
- Relates to a supply that is not subject to tax at 15%
- Is made to a third party (retailer) to reinstate (replace) the insured goods or services of the insured unless the payment is made by any other party in which case, if the third party is a VAT vendor, there is a deemed supply by the third party (output tax) and the party making the payment can claim a corresponding input tax; further the third party (VAT vendor) must issue a tax invoice to each person that makes payment, or
- Relates to a denied input
Examples of non-application
The first non-application refers to a position where, for example, a foreign insurance company makes a payment for losses suffered in South Africa. There will be no VAT implications as the insurance contract was not subject to VAT in South Africa under section 7(1)(a).
The second non-application example refers to a scenario where, for example, Company A sells computer laptops, and assuming that a laptop falls and is damaged beyond economic repair. If the insurance company makes a payment to a third party (retailer) and the third party reinstates (replaces) the laptop, this payment is excluded from the scope of section 8(8) and Company A will not have any VAT implications.
Finally, the third non-application rule applies where a denied input, for example a motor car, is written off in an accident. In this case the indemnity payment received will not have any VAT implications for the insured.
These amendments became effective on 1 January 2024.
