Value-added Tax on Insurance Indemnity
18 January 2008
Posted by: TaxFind ™
Value-added Tax on Insurance Indemnity Payments: Luxor Paints (Pty) Ltd v Heritage Insurance Brokers and Subsection 8(8) of the Value-added Tax Act 89 of 1991.
The decision in Luxor Paints (Pty) Ltd v Heritage Insurance Brokers (unreported, WLD, 26 Apr 2006, case no 04/18159) practically illustrates some of the duties of insurance brokers towards insured.In particular, and to avoid under-insurance, it concerned an insurance broker’s duty to ensure that all sums insured include value-added tax (‘VAT’) on insurance indemnity payments - where applicable -as well as to obtain increased insurance cover immediately upon being instructed to do so.The decision will be discussed shortly (see pars 2-3 below), but first some background.
Subsection 8(8) of the Value-Added Tax Act 89 of 1991 (the ‘VAT Act’), as amended (it was substituted by s 15(1)(e) of the Taxation Laws Amendment Act 136 of 1992 and amended by s 11(b) of the Taxation Laws Amendment Act 20 of 1994) is central to any discussion of the payment of VAT on insurance indemnity payments.
The subsection in essence provides that, subject to its two provisos, where an insured vendor receives an indemnity payment under a contract of insurance, that payment will, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, be deemed to be consideration received for a supply of services on the day that the payment is received by the vendor in the course or furtherance of its enterprise.The same applies where an insured vendor is indemnified under a contract of insurance by the payment of an amount of money to another person.The measure will be discussed in more detail below (see par 4).
This note will attempt to explain the principles relating to the payment of VAT on insurance indemnity payments, and the importance for both insured and insurance brokers to take account of VAT.It will do so with reference to Luxor v Heritage Insurance Brokers.It concerns the pressing and moot question whether an insured may recover from the insurer the VAT payable on an indemnity payment received from the latter. (It may just be mentioned in passing that as a vendor an insurer is not allowed to advertise a price (that is an insurance premium) which does not reflect the VAT fraction or which does not stipulate that the price is not VAT inclusive (see s 65 of the VAT Act).
Source: By W Jacobs (University of South Africa)
Click here to view full article