Case CCT 209/22
[2024] ZACC 01
Hearing Date: 05 September 2023 (Tuesday)
Judgement Date:12 April 2024
Post Judgment Media Summary
The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On Friday, 12 April 2024 at 10h00, the Constitutional Court handed down judgment in an application for leave to appeal a judgment and order of the Supreme Court of Appeal (hearing an appeal from the Tax Court sitting in Cape Town) dated 21 June 2022.
As part of its business model, the applicant, Capitec Bank Limited (Capitec), lends money to unsecured borrowers. According to the terms of its standard lending contract, Capitec does not charge fees for the provision of loan cover. It does, however, charge interest, initiation and service fees. In line with this approach, Capitec does not charge value-added tax (VAT) on interest but it does charge VAT on the fees it levies and claims input tax deductions attributable to the charging of those fees. To protect itself against the risk that unsecured borrowers might be unable to repay loans upon retrenchment or death, Capitec took out insurance policies. In terms of those policies, the amount of cover was slightly more than the sum which Capitec would lend to unsecured borrowers.
For the tax period of November 2017, Capitec submitted its VAT return to the respondent, the Commissioner for the South African Revenue Service (SARS). In its return, Capitec deducted the tax fraction of the full amount of the fees it levied, relying on section 16(3)(c) of the Value-Added Tax Act (VAT Act). That section provides that a vendor may deduct, from its output tax, the tax fraction of any amount made to indemnify another person in terms of a contract of insurance, provided that the supply of the insurance contract constitutes a taxable supply. SARS disallowed the deduction on the basis that the supply of the loan cover did not constitute a taxable supply. SARS took the view that the loan cover was provided for no consideration and thus had no value; and in the alternative, that the loan cover constituted an exempt supply. Consequently, SARS issued an additional assessment. Capitec objected to the additional assessment. Following SARS’ disallowance of the objection, Capitec noted an appeal to the Tax Court.
The Tax Court upheld the appeal and set aside SARS’ additional assessment. It reasoned that the service fees charged by Capitec were part of the consideration payable for the provision of credit. As such, the provision of loan cover was made for a consideration and in the course or furtherance of an enterprise that involved the making of taxable supplies. It concluded that the requirements of section 16(3)(c) were satisfied.
Aggrieved by the Tax Court’s decision, SARS successfully appealed to the Supreme Court of Appeal. The Supreme Court of Appeal found that Capitec was in the business of providing credit, not insurance, and the provision of credit was an exempt supply. Further, that although a minor component of Capitec’s business was a taxable supply (the charging of fees), this did not convert the exempt supply into a taxable supply. Since the loan cover was provided for no consideration, Capitec was not entitled to rely on section 16(3)(c). The Court found that unpaid fees charged by Capitec were capitalised and added to the balance of the loan, rendering them exempt. It further held that there was no basis to allow apportionment since Capitec had failed to plead this.
In the unanimous judgment penned by Rogers J (Zondo CJ, Maya DCJ, Kollapen J, Mathopo J, Mhlantla J, Theron J and Tshiqi J concurring), the Constitutional Court held that its jurisdiction was engaged in terms of section 167(3)(b)(ii) of the Constitution as several points of law of general public importance were raised. These points of law include the correct characterisation of supplies made free of charge; the legal significance, if any, of the fact that unpaid fees have been capitalised; the proper interpretation of section 16(3)(c) of the VAT Act; and whether apportionment was available in circumstances where the supply of an insurance contract was made in the course or furtherance of an activity which was partly exempt and partly taxable. The Court granted leave to appeal on the basis that Capitec enjoyed reasonable prospects of success and the importance of the points of law raised.
On the merits of the case, the Court found that the provision of loan cover by Capitec was free of charge and thus made for consideration having a nil value. Although the loan cover was supplied free of charge, this did not disqualify it from being a taxable supply. In order to determine whether the loan cover was an exempt, taxable or mixed supply, the purpose of supplying the loan cover is an important consideration. On the undisputed evidence, the Court found that by providing free loan cover, Capitec was making its credit offering more attractive, the credit offering being one in which Capitec earned exempt interest and taxable fees. Accordingly, the Court found that the loan cover was a mixed supply, made in the course or furtherance of Capitec’s exempt activity of lending money for interest and its taxable activity of lending money for fees.
The Court reasoned that unpaid fees do not lose their character as fees when capitalised and that the capitalisation had no legal significance on the question whether the supply of loan cover was a taxable supply in terms of section 16(3)(c). On apportionment, the Court held that section 17 was inapplicable but that a reasonable apportionment was nevertheless mandated by the Act. SARS should not have disallowed the deduction in full and should have permitted a partial deduction. Although Capitec did not plead partial deduction as an alternative, the Court found that it should not be penalised for its failure to do so, as SARS should not seek to exact tax which is not due and payable.
For these reasons, the Constitutional Court upheld the appeal and set aside the orders of the Tax Court and Supreme Court of Appeal. The Court remitted the matter to SARS for further assessment. It ordered each party to pay its own costs in this Court and the Tax Court. Capitec was ordered to pay SARS’ costs in the Supreme Court of Appeal, including the costs of two counsel.
The Full judgment here
