Last week the Advanced Tax Ruling Unit of SARS handed down Binding Private Ruling 100. The ruling dealt with the application by a short term insurer which issues what is described as "Guarantee Insurance" to liquidators and trustees who need to put up a surety bond for the Master of the High Court in terms of Section 56 (2) of the Insolvency Act 24 of 1936. The ruling describes this guarantee insurance as a surety ship which is provided on a prescribed form J468. Should the trustee fail to perform his or her duties in terms of the Insolvency Act and the said failure results in a loss or damage to the insolvent estate, a certificate issued under the hand of the Master of the High Court stating the amount of such loss or damage is then accepted as prima facie proof of such failure and/or the extent of such loss or damage.
The insurance company provides the trustee with a "Confirmation of Bond of Surety Details" Notice. The insurance company is at risk from the date on which the surety bond is issued. This period for which the insurance company is at risk is not known as there is an indefinite period until the insolvent estate is wound up. Only once the estate has funds and has made payment to the insurance company, or when the estate has been finalised and funds have become available, whichever is the earlier, does the insurance company issue a tax invoice for the appropriate premium to the trustee. This Notice is issued on an annual basis so that the Master may have an amended amount of a security bond as is required.
Although the insurance company reinsures its risks with a third party, no premiums are payable or accrued to the reinsurer until such time as a conclusion is reached as to the assets and liquidity within the estate. Only then is a tax invoice issued and payment made in the normal course.
The ruling dealt with both Income Tax and VAT. In my opinion the Income Tax was fairly straight forward given that the premiums which accrued to the insurance company cannot be determined until one can determine the size of the free residue in the insolvent estate. Similarly in respect of the sale of property, the premiums were held to only accrue on the date on which the proceeds of the sale of the secured assets received in terms of Section 89 (1) of the Insolvency Act are determined.
However from the perspective of the Value Added Tax Act, it was held that the "Confirmation of Bond of Security Details is not an invoice as defined in Section 1 of the VAT Act". Given the definition of an invoice (a document notifying an obligation to make payment) this was a finding which made the insurance company's application for the ruling very worthwhile. Secondly, despite issuing the Confirmation of Bond of Security Details Notice, the ruling held that the time of supply shall be the time an invoice is issued or any payment or consideration is received, whichever time is earlier.
Written by Alastair Morphet, Director, Cliffe Dekker Hofmeyr Tax Practice