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Car insurance payout received due to motor vehicle accident: what are the VAT issues?

19 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: A VAT vendor buys a passenger motor vehicle and does not claim the input VAT on the purchase price.

The vehicle is insured and input VAT is claimed on insurance premiums.

The vehicle is written off in an accident and the insurer pays out on the claim.

Are the proceeds of the insurance claim subject to output VAT?

Would the answer be different if input VAT had not been claimed on the insurance premiums?

A: The deduction of the input tax in respect of an insurance premium paid is a matter separate to whether or not the indemnity receipt (payment by the insurer) will have tax consequences. 

In terms of section 8(8) of the Value-Added Tax Act the payment by the insurer to the insured is deemed, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, to be consideration received for a supply of services performed on the day of receipt of that payment.  That doesn’t depend on whether or not the input tax was deducted.  (Note we don’t comment on the deduction of the input tax itself). 

Section 8(8) then specifically provides that the subsection must not apply in respect of any indemnity payment received by a vendor under a contract of insurance to the extent that such payment relates to the total reinstatement of goods, stolen or damaged beyond economic repair, in respect of the acquisition of which by the vendor a deduction of input tax under section 16(3) was denied in terms of section 17(2) or would have been denied. 

As the input tax in respect of the motor car was denied, no deemed supply arises when the indemnity payment is received. 

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 


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