In a daring transfer, the South African Revenue Service (Sars) appealed an hostile Tax Court determination on to the Supreme Court of Appeal (SCA), which overturned the Tax Court determination with prices, together with the prices of two counsel.
The SCA judgment was handed down on 21 June.
The matter concerned a notional enter tax deduction of R71.5 million claimed by Capitec in its November 2017 value-added tax (Vat) return referring to its unsecured lending enterprise.
Background
Capitec conducts enterprise as a retail financial institution, and gives banking companies equivalent to financial savings and bank card services, in addition to unsecured loans to clients.
It gives mortgage cowl to its clients that can cowl the excellent mortgage within the occasion of the shopper’s loss of life or retrenchment, at no cost.
Under the insurance coverage insurance policies with insurance coverage suppliers, Capitec paid the premiums on the mortgage cowl, and have become entitled to the advantages if the shopper’s mortgage was not repaid.
From November 2014 to November 2015, Capitec obtained payouts and made corresponding funds in respect of the mortgage cowl within the quantity of R582.4 million. Capitec claimed the R71.5 million tax fraction of the entire insurance coverage payouts as a notional tax enter.
Sars disallowed the deduction and in addition levied a ten% late fee penalty for the resultant understatement of Capitec’s Vat legal responsibility.
Taxable provide
The SCA needed to decide whether or not the mortgage cowl was a taxable provide; that’s, whether or not it was equipped within the course or furtherance of an enterprise.
Sars was of the view that the mortgage cowl didn’t represent a ‘taxable supply’, however an ‘exempt supply’, given that the mortgage cowl was equipped at no cost in the midst of Capitec’s enterprise of offering credit score to its clients.
Capitec contended that though it doesn’t cost a definite charge for the mortgage cowl, it was integral to its unsecured lending enterprise which generated each curiosity earnings and charge earnings.
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Legislation
The Vat Act gives for a deduction of the tax fraction of any fee made to indemnify one other particular person by way of any contract of insurance coverage, supplied the provision of that contract of insurance coverage is a ‘taxable supply’. A taxable provide means any provide of products or companies that’s chargeable with tax.
Vat is to be levied on the provision by any vendor of products or companies in carrying on an enterprise.
The Vat Act additional gives that the making of exempt provides is excluded from qualifying as an enterprise exercise, and the provision of any monetary companies is exempt from Vat
Court reasoning
The SCA was impressed with the argument put ahead by Sars’s counsel on the “matching principle”, that’s, that the Vat collected by the seller on the outgoing provide should be matched with the Vat enter tax levied on the incoming provide.
The SCA agreed with Capitec’s counsel that “because the loan cover was supplied as part and parcel of the credit offering business, there was thus a direct link between the supply of the loan cover and the credit supply”, however discovered that Capitec is within the enterprise of offering credit score, which is an exempt provide, and isn’t within the enterprise of offering insurance coverage.
The SCA referred to the Commissioner for the South African Revenue Service v Tourvest Financial Services, by which the court docket mentioned the apportionment of tax paid on items and companies acquired between taxable provides and exempt provides, and reasoned that “only the part attributable to the taxable supply may be deducted as input tax”.
The SCA opined that the place a vendor carries on the enterprise of offering monetary companies, that is still its primary enterprise.
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The incomes of taxable charges, a minor a part of Capitec’s enterprise, could also be carved out as such and the Vat enter claimed accordingly.
However, as Capitec doesn’t cost its shoppers for credit score insurance coverage, the provision of the mortgage cowl doesn’t qualify as an ‘enterprise’ beneath the Vat Act, and provides made for no consideration don’t qualify as conducting the exercise of an enterprise, and don’t qualify as a taxable provide.
Capitec was allowed an enter tax deduction in respect of the premiums paid to the insurance coverage firm Guardrisk, and was required to pay output tax on the indemnity fee it obtained from Guardrisk.
Hence, each the enter tax deduction and the output tax have been accounted for in Capitec’s books.
The extra notional enter tax deduction
The SCA discovered that:
- Capitec “wants to treat that same deemed supply as a new notional input tax deduction”.
- “This will leave the books of Capitec skewed, as this would result in there being deductions of input tax without any corresponding output tax”.
- Capitec didn’t apportion the deduction in its tax return, had not raised the difficulty of a blended tax provide within the Tax Court, nor did it plead apportionment as a floor of objection to Sars’s evaluation or floor of attraction. Therefore, “there would be no basis to allow an apportionment and SARS was correct to disallow Capitec’s deduction of the whole amount”.
- Capitec had cheap grounds to assert the deduction, and had obtained a beneficial opinion from a senior counsel, and that the one method Capitec might take a look at the difficulty was to assert the deduction in its tax return. The SCA remitted the penalty.
Appealing on to the SCA on a posh matter is a strategic transfer on Sars’s half, contemplating plenty of current poor excessive court docket judgments.
This article initially appeared on Moneyweb and has been republished with permission. Read the original here.
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