Written by Theo Jansen van Vuuren, MaxProf Audit Manager
Introduction
Understanding how and when to claim input VAT on short-term insurance payments is crucial for businesses operating under South African tax laws. This article provides a comprehensive guide based on the Value-Added Tax (VAT) Act 89 of 1991, the Tax Administration Act 28 of 2011, and the Short-Term Insurance Act 53 of 1998. The Binding General Ruling (VAT) 14 (Issue 2) (BGR 14) specifies the VAT treatment for various insurance-related transactions.
Key Aspects of BGR 14
Effective from 1 September 2016, BGR 14 provides clarity on the following topics:
- Time of supply for insurance and intermediary services.
- International transport insurance including stock throughput.
- Excess payments and indemnity payments.
- Third-party payments and intermediary services.
- Alternative documents to tax invoices for insurance-related transactions.
- Recipient-created tax invoices, debit, and credit notes.
Time of Supply for Insurance
An insurance policy, renewal notice, or endorsement does not trigger the time of supply unless it obligates the insured to make a payment. If no invoice is issued, the time of supply is deemed to be when the insurer or intermediary receives the premium.
International Transport and Stock Throughput Insurance
- Zero-Rated Policies: Under Section 11(2)(d), inbound and outbound insurance policies covering international transport can be zero-rated.
- Stock Throughput Insurance: If it covers goods transported internationally (import or export), it qualifies as international transport insurance.
- Single Premiums: If a single premium covers both standard and zero-rated supplies, it must be allocated proportionally under Section 8(15), and VAT applied accordingly.
Excess Payments: VAT Treatment
When the Insured Pays the Excess Directly
The third-party supplier must issue two tax invoices:
- One to the insured for the excess payment.
- One to the insurer for the balance.
When the Insurer Pays the Full Amount and Recovers the Excess
- The insurer does not charge VAT on excess recovery but must issue a document with specific details, including VAT amounts and supplier details.
- Input VAT deduction: The insurer may deduct tax on payments to the third-party supplier using the formula: (Total VAT-inclusive amount paid – excess received) x tax fraction.
- The insured can claim input VAT on the excess paid using the formula: Excess payment x tax fraction.
- Section 72 Arrangement: The insurer’s document can be treated as a tax invoice for VAT deduction purposes if:
– The insured retains the document issued by the insurer.
Indemnity Payments and Recoveries
- Indemnity Cover VAT Deduction: Section 16(3)(c) allows input tax deductions not only for indemnity insurance but also for non-indemnity policies like personal accident and liability cover.
- Notification Requirement: Insurers must issue a document informing the insured of potential output tax liability arising under Section 7(1)(a) and 8(8).
- Recoveries: Insurers are not liable for output VAT on third-party recoveries under subrogation claims.
Employer Acting as an Agent
When an employer arranges group personal accident insurance on behalf of employees:
- No input tax deduction is allowed for the employer.
- No output tax liability arises if the insurer compensates the employee directly.
Tax Invoice Requirements for Insurance and Intermediary Services
Under Section 20(7)(a) and 21(5)(a) policy documents can serve as tax invoices, and credit notes if they:
- Include proof of premium payments.
- Contain all required VAT invoice details.
- State: “In terms of Binding General Ruling No. 14, this document constitutes a tax invoice, debit note, and credit note.”
Intermediary Bordereaux: These can serve as tax invoices if they meet Section 20(4) and 21(3) requirements, even without standard invoice labels.
Recipient-Created Tax Invoices, Credit, and Debit Notes
- Insurers determining intermediary service fees may issue recipeint-created tax invoices under Sections 20(2) and 21(4).
- These must comply with Interpretation Note No. 56 and all standard VAT invoice requirements.
- Bordereaux issued by insurers to intermediaries can serve as valid invoices even without standard tax invoice labels.
Conclusion
Claiming input VAT on short-term insurance payments is a complex process requiring adherence to BGR 14 and the VAT421 guide. Ensuring proper documentation and compliance with VAT Act provisions is essential to avoid tax disputes.
