The South African Revenue Service (SARS) has secured a High Court victory
Image: Doctor Ngcobo Independent Newspapers
The South African Revenue Service (SARS) has secured a High Court victory after the Western Cape High Court ruled that a R10 million tax deduction claimed by Meiring Citrus (Pty) Ltd was not allowed.
According to Richan Schwellnus, Team Lead: Tax Controversy & International Tax, and Charlotte McLaren, Tax Associate: Tax Controversy & Dispute Resolution at Tax Consulting South Africa, the dispute stems from a R10 million deduction that Meiring Citrus claimed in its 2017 tax return after entering into what it considered to be an insurance arrangement with Santam.
The arrangement involved Meiring Citrus paying R10 million to Santam, which provided an additional R2.4 million in cover.
Santam deducted an underwriting fee of R400,000, while the remaining R9.6 million was placed into an experience account linked to Meiring Citrus.
The company claimed that under the arrangement, it would effectively be paid from the funds held in the experience account. The funds also earned interest for Meiring Citrus and could be repaid to the company if the arrangement was cancelled.
"Any insurance claims would effectively be paid from the funds standing to Meiring Citrus’ credit in that account. The funds earned notional interest for the benefit of Meiring Citrus, and upon 30 days’ notice, Meiring Citrus could cancel the arrangement and have the balance of the account repaid to it. The arrangement had a significant tax effect". Tax Consulting South Africa said.
"Meiring Citrus claimed the full R10 million as a deduction in its 2017 year of assessment, reducing its taxable income from approximately R13.5 million to R3.5 million".
The revenue service challenged the deduction, arguing that the arrangement did not amount to genuine insurance.
The High Court agreed, finding that the arrangement did not involve a sufficient transfer or spreading of risk and that most of the funds remained, in substance, Meiring Citrus’ own money.
"The court ultimately concluded that the arrangement did not satisfy these requirements. In particularly strong language, the court held that the agreement was: “draped as an insurance contract but in our view, in law it is not.”
"The arrangement was described as an investment transaction disguised as insurance, self-insurance rather than true insurance and the antithesis of insurance because there was no transfer or spreading of risk.
"The court found that the R9.6 million remained, in substance, Meiring Citrus’ own money given that it earned interest for its benefit and it could be reclaimed on cancellation. Further to this the money could be pledged as security and lastly claims were effectively paid from its own funds".
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