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

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

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

Author: Des Kruger

ISSN: 2219-1585
Affiliations: Independent Consultant
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 1 – 14

Abstract

The recent Constitutional Court decision in Capitec Bank Limited v Commissioner for the South African Revenue Service is seminal, but is, with respect, unfortunately 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 consideration 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 specified 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 activities. 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 specifically excluded from the ambit of the definition 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.

 

Circular Cash Flows: A Primer

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

Circular Cash Flows: A Primer

Author: Ed Liptak

ISSN: 2219-1585
Affiliations: Independent Consultant
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 15 – 23

Abstract

Tax shelter schemes based upon circular cash flows presented a significant problem when the current general anti-avoidance rule (‘GAAR’) was enacted in 2006. It was hoped that by including a non-exclusive list of the most common characteristics of these schemes in the GAAR itself it would give the South African Revenue Service (‘SARS‘) the tools to identify and stop these arrangements and, more importantly, to deter taxpayers from entering into them in the first place. Unfortunately, experience has shown that practitioners and commentators — and even SARS from time to time — continue to overlook or ignore the telltale signs of circular cash flows. This article is intended to be a primer on that score.

 

The Enviroserv Case: A Shift in Interpretation of What is a Process of Manufacture

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

The Enviroserv Case: A Shift in Interpretation of What is a Process of Manufacture

Author: Michael Rudnicki

ISSN: 2219-1585
Affiliations: Tax Executive, Bowman’s Attorneys, Johannesburg
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 24 – 30

Abstract

This article explores the case of Enviroserv Waste Management (Pty) Limited v the Commissioner for the South African Revenue Service in relation to the facts,
the outcome and the principles developed therein. The case focuses on the business of waste management services conducted by Enviroserv and whether the decomposition and biodegradation of waste in the cells within a landfill site constitute a process of manufacture or a similar process. The article considers the objective transformation of the input into the process as considered in some of the older court decisions. In those decisions the court argued that an article must be ‘essentially different’ from the article that existed before it had undergone the process. The more recent cases focus on the nature, form, shape or utility of the article and that a non-physical transformation could also be an essential difference in a product. The disputed issue related to whether the process that took place in the cells constituted plant used directly in a process of manufacture or a similar process, as contemplated in section 12C of the Income Tax Act, 1962 (‘the Act’). SARS argued that the cells are a storage facility, and that leachate is a byproduct of the waste disposal process. The Commissioner further argued that the cells are buildings and not plant. The provisions of section 12C do not apply to buildings. Section 12C provides a taxpayer a deduction of 20% per annum of the cost of machinery or plant, owned by the taxpayer and used directly in a process of manufacture or a similar process. The court considered the meanings of ‘process’ and ‘manufacture’, which are not defined in the Act from various precedent, to be something made which is different from that out of which it is made. The court held that the process undertaken by Enviroserv constituted a process of separation of the leachate from the solid waste. SARS argued that the cells are ‘waste disposal assets’, defined in section 37B of the Act, are not ‘plant’ as defined in section 12C and are akin to dumps or reservoirs contemplated in the section. Defining features of section 37B are that assets are used in a process that is ancillary to a process of manufacture and are required by environmental law. The provisions of section 12C do not have such requirement. The court also did not find it necessary to consider whether the structure was permanent. The focus was on the process undertaken inside the cell and that this process was intended and desired by the taxpayer within its manufacturing process and therefore not ancillary thereto.