TAX FAQ: VAT Treatment of a PBO’s Aircraft Rental and Insurance Payouts
Background of the Query
My client, a registered welfare organisation conserves and protects wildlife, fauna, and flora. The organisation is also registered for VAT and claims VAT on all input expenses.
The organisation owns a small aircraft that is hired out to local veterinarians who assist in wildlife conservation, treatment, and protection. The welfare organisation claims VAT on the insurance premiums paid for the aircraft. The income generated from the aircraft rental is considered exempt as per the exemption granted by the South African Revenue Services to the public benefit organisation (PBO).
Recently, the aircraft was written off in an accident. I understand that the insurance payout should attract output VAT because input VAT was claimed on the insurance premiums. However, my client disagrees.
My Questions:
1. Am I correct in exempting the income generated from aircraft rental as it falls within the scope of the exemption in the PBO?
2. Am I correct to declare the output VAT on the insurance payout for the aircraft?
Our Responses
Exempting Income from Aircraft Rental as a PBO
You are correct in noting that the PBO exemption applies under Section 10(1)(cN) of the Income Tax Act. This provision allows certain receipts and accruals of an approved PBO to be exempt from normal tax, provided they relate directly to approved public benefit activities (PBAs).
Key Considerations:
The exemption granted by SARS applies to activities listed in Part I of the Ninth Schedule or those approved by the Minister of Finance as being of public benefit. Your client’s exemption letter states that the PBO’s purpose is conservation and specifically includes:
• Engaging in conservation, rehabilitation, or protection of the environment (including flora and fauna).
• Caring for animals, including rehabilitation and prevention of ill-treatment.
Based on this, the rental income could be considered exempt if the aircraft is exclusively used for conservation-related purposes.
Additional Considerations:
To ensure that the PBO’s exemption is not compromised, the organisation must:
1. Demonstrate that the aircraft rental does not compete with private-sector services.
2. Keep accurate records of flight logs to confirm that the aircraft is solely used for conservation activities.
3. Ensure that revenue from leasing is strictly related to the PBO’s objectives.
4. If the hangar location is near conservation sites (not at a major commercial airport), this could strengthen the case for exemption.
Conclusion
If the aircraft is solely used to aid conservation, and the leasing aligns with the PBO’s approved exemption activities, then the income is exempt from normal tax. However, if the aircraft is also used for unrelated private or commercial purposes, the income may be subject to tax.
Output VAT Payable on the Insurance Payout
You are correct that the insurance payout should attract 15% VAT.
Section 8(8) of the VAT Act states that where a vendor receives an indemnity payment from an insurer, it is regarded as consideration for a deemed taxable supply. This applies to insurance payouts related to enterprise assets for which input VAT was claimed, such as the aircraft in your case.
The SARS VAT 414 Guide for Associations, not for Gain and Welfare Organisations, states that certain transactions are deemed taxable supplies, even when no actual supply of goods or services occurs. Paragraph 4.2.2 of the Guide specifies that:
"Short-term insurance claims that have been paid in connection with the enterprise are deemed supplies and generally subject to VAT at the standard rate."
Consequently, the insurance payout received upon the aircraft being written off is subject to output VAT. In the VAT 414 Guide, SARS provides an example (example 9 on indemnity payments) of how insurance payouts linked to a VAT-registered enterprise are subject to VAT.
Conclusion
The insurance payout must be declared as output VAT because input VAT was previously claimed on the insurance premiums. The PBO should account for VAT at the standard rate on the insurance compensation received.
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