Tax cases – Supreme Court of Appeal

Commissioner for the South African Revenue Service v Capitec Bank Limited [2022] ZASCA 97

SARS appealed a Tax Court decision directly to the Supreme Court of Appeal. The tax court held that Capitec was entitled to deduct VAT amounting to +/-R71 million by virtue of section 16(3)(c) of the VAT Act, however the Supreme Court of Appeal overturned this decision stating that the loan cover was supplied in the course of making exempt supplies. The input VAT was therefore denied. 

Facts 

Capitec Bank Limited ("Capital") is a registered bank that conducts business as a rental bank focussing on providing essential banking serivces, such as transactional banking services, and unsecured lending to its customers. 

The personal loans Capitec advances to its customers are governed by a standard loan agreement. In terms of clause 13 of the loan agreement, Capitec provides its customers with a loan cover, the proceeds of which are applied to settle or reduce outstanding loan amounts due to Capitec in the event of the customer’s death or retrenchment.

Under the insurance policies, Capitec is insured and becomes entitled to the benefits. During the Value-added Tax (“VAT”) periods from November 2014 – 2015, Capitec received payments and made corresponding payments in respect of the loan cover in the amount of R582,383,753.66, and claimed a VAT deduction in the amount of R71,520,811.85.

On 15 February 2018 the South African Revenue Service (“SARS”) issued a VAT assessment, and disallowed the input claim of R71 million, on the basis that it did not qualify for a deduction in terms of section 16(3)(c) of the Value-added Tax Act No 89 of 1991 (“VAT Act”). SARS also levied a late payment penalty of ten percent.

According to SARS: 

  • The loan cover payments did not qualify for an input tax deduction in terms of section 16(3)(c) of the VAT Act since the supply of the loan cover did not constitute a taxable supply.


  • SARS contended that since Capitec did not charge any consideration for the loan cover, and because the loan cover was supplied in the course of Capitec’s business of providing credit to its customers, it was an exempt supply. 

According to Capitec

  • Capitec argued in the tax court that since the customers had to pay interest and fees, consideration was provided for the loan cover, and even if the loan cover was for no consideration, it still levied a fee, which was a taxable supply in terms of section 10(23) of the VAT Act. 

  • Furthermore, Capitec contended that although it does not charge a distinct fee for its loan cover, the loan cover was integral to its unsecured lending business, thus generating both interest income and fee income and that the cost of providing the loan cover was recovered through that income.

Tax court finding:

  • The tax court was happy that the requirements of section 16(3)(c) of the VAT Act were satisfied, and that Capitec qualified for the input deduction of R71 million. It was against this decision that SARS appealed directly to the Supreme Court of Appeal (“SCA”).

Issues before the SCA

Issue 1: Whether the tax fraction of the loan cover pay-outs qualified for a deduction in terms of section 16(3)(c) of the VAT Act; and 

Issue 2: Whether SARS was correct to levy a penalty of ten percent in terms of section 213 of the Tax Administration Act No 28 of 2011 (“TA Act”), read with section 39(1) of the VAT Act.

Finding by the SCA

  • From the content of the loan agreements, it was found that; Capitec insured itself against the unpaid amounts resulting in the loan being repaid in full in the event the customers passed away or were retrenched; the pre-agreement statements expressly stipulated that “no credit life insurance or optional insurance is charged”.

  • Capitec’s 2016 Integrated Annual Report also stated that they do not charge their clients credit life or retrenchment insurance, as it was built into the interest rate Capitec charged.


  • Furthermore, the National Credit Act 34 of 2005 (“NCA”) regulates initiation fees and service fees supplied by institutions such as Capitec and cannot include money other than consideration.


  • Accordingly, in order to comply with the NCA, Capitec opted to provide insurance cover without any charge to the customers.


  • For this reason, since Capitec did not receive any consideration for the loan cover, it did not qualify as an “enterprise” as envisaged in section 1 of the VAT Act, and therefore not chargeable with tax in terms of section 7(1)(a) of the VAT Act.


  • The SCA agreed with the argument made by SARS that there is a “matching principle” in the VAT system. In terms of this principle, a vendor is required to collect VAT on the supplies it makes and pay it over to SARS. Correspondingly, the input tax charged and paid by the vendor to the supplier may be recovered from SARS, on the condition that the input tax claimed was in respect of supplies for the purpose of making taxable supplies.


  • When Capitec pays premiums to the insurance companies, those insurance companies must pay the output VAT to SARS, while Capitec is entitled to claim an input. When the insurance company pays out a settlement, Capitec must pay the output VAT while, correspondingly, the insurance company can claim a notional tax deduction in terms of section 16(3)(c) of the VAT Act. In this way the “matching principle” is satisfied.


  • Capitec attempted to claim further input on the amounts Capitec paid to its customers. According to the SCA, this will result in an input deduction, without the corresponding output tax being paid over.


  • The SCA also found that the loan cover was supplied in the course of making exempt supplies because the credit insurance policies ensured the recovery of the credit advanced to customers. Accordingly, the payouts from the credit insurance policies settled the credit balance owing.


  • The SCA concluded that the supply of the loan cover was not a taxable supply as required by the first proviso to section 163(3)(c)(i) of the VAT Act, and therefore, issue 1 must be answered in favor of SARS.


  • It is also important to note that Capitec did not apportion the deduction in its return, nor did it plead apportionment as a ground of objection to SARS’s additional assessment, listed as grounds in the appeal.


  • For this reason, the SCA believed that there is no basis for apportionment and that SARS was correct to disallow the whole amount. Capitec bears the onus to prove apportionment, and since Capitec did not raise the issue of mixed supply in the tax court, the SCA cannot decide on the matter in the appeal. It must be noted that Capitec also relied on the wording of paragraph 5.2.2 of SARS Interpretation Note 70, as well as section 10(23) of the VAT Act in its arguments. The SCA dismissed both arguments, as misplaced and ill-conceived. 


Upon reaching a decision regarding the penalty imposed in terms of section 213 of the TA Act, the SCA was of the view that section 217(3) of the TA Act applies and that this was a first-time penalty imposed by SARS. The penalty was therefore remitted.

Find a copy of the court case here.

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