Output VAT

This article is based on tax law for the year ending 28 February 2025.

1. Background

A client purchased a truck in 2023 which was financed, and claimed input tax (capital) on the purchase of the truck. Unfortunately, the truck was involved in an accident in February 2024, resulting in it being written off by the insurance company. The insurance settlement covered R240,000 of the outstanding finance loan to the bank. Additionally, the insurance deposited an extra R24,000 into the client's bank account.

As a result, the client financed a new truck, and the client claimed input tax (capital input) on the purchase of the new truck.

2. The Facts / Problem

What are the VAT implications for the client in terms of the insurance settlement?

3. Applicable Law 

VAT Act Section 8(8)

4. Application of the Law to the Facts

In terms of the VAT Act, the insured vendor must account for output tax on the full settlement received from the insurance company as compensation for the loss of the vehicle. Therefore, the client must account for output tax on R264 000, which is the sum of R240 000 and R24 000.

The SARS guide VAT 421 - Guide for Short-Term Insurance states that even if the payment was not physically received by the insured, but rather, paid directly to a third party on behalf of the insured, the insured is still required to account for output tax on the full indemnity payment.

Input tax will be claimed on any new acquisition of a truck.

Click here to join Christo Theron on May 14 and 20 for a VAT Referesher.

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