Commissioner for the South African Revenue Service v Capitec Bank Limited

Capitec Bank Limited is a registered bank providing retail banking services including unsecured lending. As part of its loan contracts, Capitec provided customers with "loan cover" - insurance that would settle the outstanding loan amount in the event of the borrower's death or retrenchment. The loan cover was underwritten by Guardrisk Life Limited (and previously Channel Life Insurance Limited), to whom Capitec paid premiums. Crucially, Capitec did not charge customers any fee for this loan cover - it was provided free of charge, as expressly stated in the loan contracts. During November 2014-2015, Capitec received insurance payouts totaling R582,383,753.66 and claimed R71,520,811.85 (the tax fraction of the insurance payouts) as a notional input tax deduction in its November 2017 VAT return under section 16(3)(c) of the Value-Added Tax Act 89 of 1991. SARS disallowed the deduction and issued an additional assessment, also imposing a 10% penalty. Capitec appealed to the Tax Court, which upheld the appeal and ordered SARS to refund the amount. SARS then appealed to the Supreme Court of Appeal.

• Whether the tax fraction of loan cover payouts qualified for deduction as notional input tax under section 16(3)(c) of the Value-Added Tax Act
• Whether the loan cover constituted a 'taxable supply' as required by the proviso to section 16(3)(c)(i)
• Whether the loan cover was supplied for consideration
• Whether the loan cover was supplied in the course of making taxable supplies or exempt supplies
• Whether fees charged by Capitec (initiation and service fees) constituted consideration for the loan cover
• Whether the provision of credit is an exempt supply under the VAT Act
• Whether apportionment under section 17 of the VAT Act applies to notional input tax deductions
• Whether the penalty imposed under section 213 of the Tax Administration Act should be remitted

The appeal was upheld with costs, including costs of two counsel. The Tax Court's order was set aside and replaced with an order dismissing Capitec's appeal with costs and confirming the assessment for the November 2017 VAT return. The penalty imposed under section 213 of the Tax Administration Act read with section 39(1) of the VAT Act was ordered to be remitted to Capitec Bank Limited.

The binding legal principles established are: (1) For a supply to qualify for notional input tax deduction under section 16(3)(c) of the VAT Act, the supply of the insurance contract must be a "taxable supply" as required by the proviso to section 16(3)(c)(i). (2) A supply made for no consideration is not made in the course or furtherance of an "enterprise" as defined in section 1 of the VAT Act, and therefore cannot be a taxable supply chargeable with tax under section 7(1)(a). (3) The definition of "enterprise" requires that goods or services be supplied for consideration; in the absence of consideration, there is no enterprise and no taxable supply. (4) The provision of credit is an exempt financial service under section 2(1)(f) of the VAT Act. Supplies made in the course of providing credit are made in the course of making exempt supplies, not taxable supplies. (5) Where a vendor's activity is predominantly exempt with a minor taxable component (mixed supply), the activity does not become entirely taxable. Following Tourvest, only the portion attributable to taxable supplies may be deducted as input tax, with apportionment required under section 17 of the VAT Act. (6) Fees charged under the National Credit Act framework (initiation fees and service fees) are consideration for the provision of credit services and cannot constitute consideration for separate supplies such as insurance cover, particularly where the loan contracts expressly state no charge is made for such cover.

The Court made several non-binding observations: (1) On apportionment: The Court noted that even if apportionment might theoretically be available for mixed supplies, Capitec had not pleaded apportionment as a ground of objection or appeal and adopted an "all or nothing" approach. The Court observed that where the taxpayer bears the onus and adopts such an approach without raising the issue of mixed supply in the tax court, the appellate court cannot decide the apportionment issue on appeal. (2) On section 10(23): The Court observed that this valuation rule merely determines that the value of a supply will be nil in certain instances, but "cannot be used to characterise a supply as being taxable or non-taxable" and does not change the character of a non-taxable supply into a taxable supply. (3) On SARS Interpretation Note 70: While Capitec sought to rely on this as establishing a "practice generally prevailing", the Court noted the interpretation note itself stated that "when exempt or other non-taxable supplies are made for no consideration, no output tax is declared and no input tax is deducted" and specifically excluded exempt supplies. (4) The Court provided helpful explanation of the "matching principle" in VAT - that outgoing supplies on which VAT must be collected must be matched with incoming supplies on which input tax is levied, with input tax only deductible where acquired for making taxable supplies. (5) On penalties: The Court noted that reasonable grounds existed for Capitec's position (senior counsel opinion obtained) and "the only way Capitec could reasonably test the issue was to claim the deduction in its tax return", providing guidance on when penalties should be remitted under section 217(3) of the TAA even where the substantive claim fails.

This case is significant for clarifying the requirements for notional input tax deductions under section 16(3)(c) of the VAT Act, particularly the requirement that the supply of insurance must be a "taxable supply". It reinforces that: (1) Supplies made for no consideration are not made in the course or furtherance of an "enterprise" and therefore are not taxable supplies. (2) The provision of credit is an exempt financial service, and supplies made in the course of providing credit (even if ancillary like loan cover) are supplied in the course of making exempt supplies and do not qualify for input tax deductions. (3) The principle from Tourvest applies: where a vendor's activity is mainly exempt with a minor taxable component, the activity does not lose its exempt character entirely - only the taxable portion can be carved out. (4) Fees charged under the National Credit Act for credit provision cannot be characterized as consideration for separate supplies like insurance. (5) The matching principle in VAT requires proper correlation between input tax deductions and the making of taxable supplies. The case provides important guidance on the VAT treatment of financial services, particularly in the banking sector where mixed supplies (taxable and exempt) commonly occur.