Blow to SARS

Blow to SARS

• 07 February 2025
• Accounting
• Kirsten Minnaar

A recent case saw a citrus farmer who attempted to deduct a R10 million premium paid for self-insurance under the Income Tax Act succeed in challenging the South African Revenue Service (SARS).

As expected, SARS rejected the deduction, prompting the farmer to take the matter to court – where they ultimately won.

Jean-Roux van Huyssteen, a director and tax attorney at TRM Tax Attorneys, who was involved in the case, explained on The Money Show that the farmer was “really just trying to protect himself”.

Van Huyssteen noted that, while operating in the citrus industry, farmers suffered financial losses due to black spot disease and false codling moth infestations, which affected their exports.

Seeking an insurance product that suited their needs – one they believed was unavailable in the market – they were introduced to an “unconventional insurance product.”

Under this arrangement, the farmer paid R10 million in exchange for cover valued at approximately R12 million to R13 million, depending on the contract.

“There was an added benefit that if they didn’t claim throughout the duration of the insurance product, they could actually get their money back plus some interest,” van Huyssteen said.

“That is where the commissioner had a bit of a problem with the deduction that they claimed.”

Importantly, van Huyssteen clarified that the farmer was not simply setting aside money in their own bank account, as some individuals do for emergencies.

Instead, they had a formal insurance contract with a major insurance provider, and the payments were made to a separate bank account under a legally binding agreement.

He explained that SARS had two main issues in this case.

• Firstly, they argued that the farmer was merely setting aside their own money rather than incurring a genuine expense, as they had not fully relinquished control over the funds.
• Secondly, even if it were considered an expense, SARS argued that the arrangement effectively created a capital asset or reserve rather than a deductible business cost.

This was their primary issue with the structure of the insurance premiums.

Van Huyssteen explained that a previous case, Taxpayer Boerdery v CSARS, had set a different precedent.

In that case, the court ruled that a similar expense was not deductible and determined that it merely created a capital asset.

However, this case demonstrated that different circumstances could lead to different legal outcomes.

The court carefully examined the farmer’s risk assessments, which showed that they managed over 100 citrus orchards but lacked the cash flow to insure them all.

As a result, they focused on the 25 orchards most at risk of false codling moth infestations and black spot disease.

Their primary goal was to protect their business operations, particularly exports.

If the disease was detected in shipments to markets such as Dubai, they would be required to dispose of not only the affected fruit but also produce from surrounding orchards, resulting in significant financial losses.

Considering this evidence, the court concluded that the farmer was not creating a reserve fund or capital asset but was instead incurring a legitimate business expense to safeguard their income-generating activities.

On that basis, the court ruled that, firstly, there was an expense since one asset was exchanged for another, and, secondly, there was no capital asset creation.

Although this is a landmark case, van Huyssteen noted that this is not the first time this issue has been raised to SARS.

“A lot of matters have been settled, where taxpayers have just felt that the risk of taking SARS to court is a bit too big.”

“But in this instance, the taxpayer felt that they had done absolutely nothing wrong. They had no intention of defrauding anyone. They really were just trying to insure themselves, and they thought that it was well worth the risk.”

Van Huyssteen explained that there is an additional layer of complexity in this matter related not just to the core tax provisions but also to taxpayer rights – specifically, statutory immunity.

Under South African tax law, once a taxpayer files their income tax return, SARS has three years to raise additional assessments.

After this period, further assessments are only permitted if there is evidence of fraud or misrepresentation.

In this case, the farmer had filed their return, which was initially verified due to the sudden increase of R10 million in insurance expenditure.

The insurance costs were explained and supported by policy schedules, and SARS initially accepted them without issue. However, after the three-year period had lapsed, SARS attempted to conduct a full audit and raise additional assessments.

To do so, they needed to prove that fraud or misrepresentation had occurred and had led to an under-collection of tax. They failed to meet this requirement, which significantly weakened their case.

As for the possibility of an appeal, the deadline is in early February, but as of now, there has been no indication that SARS intends to challenge the ruling.

Van Huyssteen cautioned that those with a similar insurance policy do not necessarily qualify for the same deduction.

“Just because you have this policy, it doesn’t automatically mean you qualify for a deduction or you don’t qualify, you actually have to go and look at what your policy says.”

SOURCE: Dialy Investor

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