Page 520 - Juta's Indirect Tax

BGR 014 VALUE-ADDED TAX ACT: BinDing gEnErAL rULingS BGR 014
The third party supplier*, in making a taxable supply of goods or services, is liable to issue a valid tax invoice in respect of this supply. The third party supplier must issue two tax invoices, that is, one to the insured to the extent of the excess payment and one to the insurer to the extent of the trade payment.
The short-term insurer is, in terms of section 16 (3) (a), entitled to deduct input tax on the goods or services acquired from the third party supplier and is therefore not entitled to a section 16 (3) (c) deduction in respect of this supply.
The insured (being a vendor) is, in terms of section 16 (3) (a) and being in possession of the tax invoice, entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that those goods or services are acquired for the purposes of making taxable supplies.
The short-term insurer issuing a notice to an insured which informs the insured of the potential output tax liability, as envisaged in section 8 (8), that arises as a result of a trade payment made in terms of a contract of insurance.
(b) Short-term insurer pays full amount to third party service provider and recovers excess from insured
Excess payments received by short-term insurers from the insured do not constitute ‘consideration’ as de ned in section 1 (1) and as a result fall outside the scope of the VAT Act. These payments are therefore not subject to VAT in the hands of the short-term insurer.
The short-term insurer is, in terms of section 16 (3) (a), entitled to deduct input tax on the goods or services acquired from the third party supplier limited to the trade payment made in terms of the contract of insurance.
Where the short-term insurer, acts as an agent of the insured when contracting with the third party supplier for the portion of the excess payment, the short-term insurer will be required to issue a statement contemplated in section 54 (3) to the principal where the third party supplier issued the tax invoice in the name of the short-term insurer.
The insured (being a vendor) is, in terms of section 16 (3) (a), entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that goods or services are acquired for the purposes of making taxable supplies, provided the insured obtains and retains the tax invoice or statement contemplated in section 54 (3), whichever is applicable. 2.10 Indemnity payments
A short-term insurer may, in terms of section 16 (3) (c), deduct an amount equal to the tax fraction (14/114) of any amount paid to indemnify another person under an insurance contract, including payments made to a third party, subject to the proviso to section 16 (3) (c). This deduction will not be permissible where the payment was made in respect of – (a) a supply of short-term insurance that was not a taxable supply;
(b) trade payments [that is, a deduction is permitted under section 16 (3) (a)];
(c) the supply of short-term insurance which was zero-rated in terms of section 11 (2) and the insured, at the time of the
payment, is not a vendor and not a resident of South Africa; or
(d) a supply of goods or services to the insured where the goods are physically situated outside South Africa or the
services are physically performed outside South Africa at the time of the supply.
The input tax deduction envisaged in terms of section 16 (3) (c) is not limited purely to indemnity payments as a result of ‘indemnity insurance’ cover, but also includes payouts in respect of ‘non-indemnity insurance’ such as personal accident and third party liability cover which may be included in a short-term insurance policy.
The insured, being a vendor, is required to account for output tax in respect of the indemnity payment received [that is, a deemed supply of services in terms of section 8 (8)], including payments made to a third party, to the extent the payment relates to a loss incurred in the course of carrying on the insured’s enterprise. This service is deemed to be supplied on the day the indemnity payment is received or an indemnity payment is made to a third party to indemnify the insured. The provisions of section 8 (8) will not apply to a vendor where –
(i) the services supplied in terms of the insurance contract did not constitute taxable supplies in terms of section 7 (1) (a); or
(ii) the payment received relates to the total reinstatement of goods which were stolen or damaged beyond economic repair where the input tax on those goods are denied in terms of section 17 (2), for example motor cars, was denied.
The third party is not required to account for output tax in respect of the indemnity payment received from the short-term insurer.
2.11 Recoveries
A short-term insurer is not liable to account for output tax on amounts recovered from a third party or the third party’s short-term insurer. These amounts are not payment in respect of a supply to the third party or the third party’s short-term insurer.
2.12 Group personal accident claims (a) Employer acting as principal
The employer, being a vendor, may deduct input tax in respect of short-term insurance acquired to the extent that it is acquired for the purposes of making taxable supplies and subject to the provisions of section 20 read with sections 16 and 17.
Subject to the exceptions set out in 2.10 above:
• Any indemnity payments received by the employer in terms of a contract of insurance will result in the employer being liable to account for output tax in terms of section 8 (8).
• The short-term insurer may deduct VAT in terms of section 16(3)(c) in respect of the indemnity payment made. The employer will not be entitled to deduct any VAT in respect of amounts subsequently paid to the employee.
* Third party suppliers are suppliers of goods or services receiving trade payments from short-term insurers which are in respect of goods or services supplied to the short-term insurer as a result of the short-term insurer being liable, in terms of a short-term insurance policy, to replace or repair goods or services of the insured which are lost, damaged or destroyed.
512 Juta’s IndIrect tax 2016