Are premiums paid in respect of self-insurance products deductible for income tax purposes? In C:SARS v Meiring Citrus (Pty) Ltd (A161/2025), the Western Cape High Court considered this question. I discuss the two elements on which the court decided on the merit of the deduction in this article.

The self-insurance product

The taxpayer was a citrus farming company. It took out a policy with Santam. The witnesses themselves described the product as self-insurance. The salient features of the product were them following:

• The taxpayer paid R10 million. Of that, R400 000 went to an underwriting fee and R9.6 million went to an experience account.
• The policy gave overall cover of R12 million. 
• A claim reduced the experience account balance first, so that account ran as a balance over the life of the policy. 
• On cancellation or termination, the taxpayer received the balance back together with a notional interest amount.

Meiring Citrus deducted the full R10 million under section 11(a) of the Income Tax Act (the ITA). SARS disallowed the deduction.

Deductibility

Section 11(a), read with section 23(g), requires expenditure actually incurred in the production of income, incurred for purposes of trade, and not of a capital nature to be deductible. The taxpayer bears the burden of proving the deduction on a balance of probabilities. 

SARS abandoned two further grounds during the dispute. The first was section 23(e), which deals with amounts carried to a reserve fund or capitalised. The second was section 23L. Section 23L interests me because the legislature created it specifically to deal with exactly this kind of premium. It denies the deduction based on the accounting treatment. The judgment does not indicate why this ground was not pursued. I suspect that the taxpayer may have applied IFRS for SMEs, whereas section 23L refers to IFRS, which arguably refers to full IFRS.

In the context of section 11(a), the deductibility depended on two questions: Did the taxpayer actually incur expenditure? If so, was that expenditure of a capital nature?

Was expenditure actually incurred?

The court took the meaning of expenditure from Commissioner for the South African Revenue Service v Labat Africa Ltd. In Labat, the taxpayer issued shares to acquire an asset. The Supreme Court of Appeal held that expenditure connotes the action of spending funds, and that there must be a diminution, even a temporary one, or at least a movement in the assets of the taxpayer. The court in Meiring Citrus took from this that not every passing of money from one hand to another amounts to expenditure.

The court then drew on several loan cases, even though those cases deal with the income question in relation to loans. If a person borrows money, the amount they receive is not an accrual or a receipt as contemplated in the gross income definition. The court reasoned that an amount placed on a deposit account is likewise not an expense. Meiring Citrus paid R9.6 million into the experience account, which on the court’s approach resembles a deposit account. The taxpayer’s assets stayed at R9.6 million: nothing diminished, the form of the assets merely changed. The court held that this mere movement in assets does represent expenditure.

I believe, however, that this conclusion creates problems elsewhere in the ITA. Paragraph 20(1)(a) of the Eighth Schedule gives a taxpayer base cost for expenditure actually incurred. If a person moves cash into a deposit account and incurs no expenditure, they hold rights (an asset) with no base cost. When they later withdraw the money, they dispose of those rights and receive proceeds. This, in turn, results in a capital gain if you apply the mechanics of the CGT rules. This is an outcome that obviously cannot be right.

I disagree with the court’s reasoning on the following basis: the Labat case dealt with a very different transaction than a cash acquisition of an asset. In that case the taxpayer issued shares as consideration for an asset. The existing shareholders paid for the asset through the dilution of their shareholding. Labat Africa’s own assets did not diminish, not even temporarily. A diminution of an asset (cash) to acquire another is distinguishable and is, arguably, the type of temporary movement in assets that the court referred to in Labat. I think the court conflated the expenditure requirement with the capital question. If a person buys an asset with cash, they cannot deduct the cost of that asset under section 11(a). The reason lies in the nature of what the person acquired, not in the absence of expenditure. 

The capital finding

In relation to the question whether the premiums were capital in nature, the court asked what Meiring Citrus acquired. Its view was that it received a credit of R9.6 million on the experience account, the right to interest on that balance, and the right to recover the balance plus interest on termination or on a loss event. An ordinary premium works differently. Once the period of cover passes, the money is gone. In this case the rights endured until 2021, when the taxpayer withdrew the amount. The court found this to be something of enduring value. 

It also considered this in light of the taxpayer’s stated purpose was protection against losses. The court considered the substance and took the positions that capital investments also provide protection against losses. So the question to answer when assessing whether expenditure is capital in nature or not : What did the taxpayer actually acquire, and is that capital in nature?

Take-home message

On the Western Cape High Court’s approach, self-insurance premiums structured in this way are not deductible under section 11(a). I don’t know whether the taxpayer appealed against the judgment. The judgment should signal to taxpayers who are considering such products to be very careful when considering the deductibility of these premiums. 

I discuss this topic in the linked episode of my podcast: