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14 May 2024
BY Simon Weber AND Jean du Toit

Structuring of agricultural insurance products – the tax pitfalls of getting it wrong

The judgment in Taxpayer Boerdery v CSARS, 20 March 2024, serves as a reminder that taxpayers should carefully consider the substance of an arrangement, rather than the form in which it is wrapped. The subject of this case was an insurance contract with integrated investment features. The Tax Court (“TC”) disallowed the insurance premiums as a deduction in terms of section 11(a) of the Income Tax Act No. 58 of 1962 (“ITA”) and upheld the concomitant understatement penalties and interest.


Taxpayer Boerdery (the “taxpayer") conducts a farming operation from which it derives income from the sale of fruit and vegetables. The dispute turned on the interpretation of a “Multi-Peril Contingency Policy Contract” (“insurance contract”) concluded between the taxpayer and an insurance company (the “Insurer”).

The insurance contract requires the taxpayer to pay annual premiums, which would then be credited to a “Special Experience Account” (“experience account”). The experience account would also be credited with “notional interest” on the funds invested at the average ABSA money market rate less 65 basis points. The amounts in the experience account are reduced by the “Insurer’s Margin” of 2.25% of the premiums received and an “Investment Management Fee” of 65 basis points of the funds invested.

The Insurer compensates the taxpayer on the occurrence of defined events during the contract period, where any amount paid to the taxpayer is debited to the experience account. On expiry of the contract period, the Insurer refunds the taxpayer the full balance of the experience account. The taxpayer may, on 30 days’ notice, cancel the policy contract in which case the taxpayer will again be refunded the full balance of the experience account.

The annual premium in respect of the 2018 policy was R35 million and the total annual aggregate limit of indemnity was R41.5 million. The annual premium in respect of the 2019 policy was R35.4 million and the total annual aggregate limit of indemnity was R49.5 million. For the 2019 year of assessment, however, the taxpayer only paid R1.99 million as the balance constituted a “roll-over premium”.

The taxpayer deducted these premiums in terms of section 11(a) of the ITA. Save for a marginal portion of these amounts, SARS disallowed the deductions on the basis that they did not constitute “expenditure” incurred.


While agricultural insurance policies incorporate unique features, the current insurance contract exhibited markers that revealed a different character altogether. In this regard, the TC identified the following:

  • The investment management fee is anomalous in the context of a short-term insurance policy. During cross-examination, it was put to an executive of the Insurer (“Mr Tone”), testifying for the taxpayer, that this fee was in substance the premium charged to provide the insurance cover. This was particularly compelling given the fact that the “actual” premiums were charged at a rate of 85% of the insurance cover.
  • Despite Mr Tone’s suggestion that the “notional interest” did not constitute interest in the ordinary sense, the “notional interest” represented the return on the amount invested with the Insurer.
  • The taxpayer is entitled to cancel the contract on 30 days’ notice, in which case the Insurer will refund the balance of the experience account. The insurer will in any event refund the balance upon conclusion of the insurance period of 12 months.

As a whole, the arrangement purported to be an insurance contract that permits the investment of pre-tax amounts that would generate a return for the taxpayer, while the amounts invested ranked as a tax deduction to boot.

The TC assessed the features of the contract against the requirements of the general deduction formula under section 11(a) of the ITA:  

  • It was found that the taxpayer did not “expend” the insurance premiums. Save for the Insurer’s margin, the payment of the premiums did not result in a shift in the taxpayer’s assets. On the contrary, the premiums established a right in respect of the balance of the experience account.
  • Flowing from the preceding, the TC turned to question whether the premiums are of a capital nature. The distinction was drawn between expenditure incurred for purposes of acquiring a capital asset and expenditure which is part of the cost incidental to the performance of the income-producing operations. It was found that the premiums established a right to the balance of the experience account plus income in the form of interest i.e., an income-producing concern. And hence a capital asset.

It was thus held that the taxpayer did not discharge its onus to prove that the premiums ranked for a deduction under section 11(a) of the ITA and the appeal was dismissed.


When pressed to explain why this tax position was adopted, the accountant who filed the taxpayer’s return (“Mr One”) testified that he did not consider the substance of the insurance contract. Mr One testified that the tax position was based on the advice dispensed by the Insurer at a roadshow organised to sell the product to farmers.

The ubiquity of taxpayers in the agricultural industry that similarly heeded the tax advice offered by their insurance provider is a matter of speculation. Taxpayers are reminded that they remain responsible for their own tax affairs. Moreover, in the wake of this judgment, taxpayers, and specifically those in the agricultural industry, would be well advised to reconsider the design principles of their insurance coverage and the tax treatment thereof.  


Simon Weber

Executive | Tax


Jean du Toit |

Senior Associate | Tax