Structured Self-insurance: A Win For SARS, But Questions Remain

Recently, the Western Cape High Court in C:SARS v Meiring Citrus (Pty) Ltd (A161/2015) [2026] ZAWCHC, handed down on 26 June 2026, overturned an earlier Tax Court decision and disallowed a citrus farmer’s ZAR9.6 million income tax deduction for what had been described as an insurance premium. The appeal succeeded and the additional assessment, together with a 10% penalty, was reinstated. Respectfully, the High Court’s judgment raises a number of questions that taxpayers and their advisers will want to keep in mind.

Meiring Citrus, a citrus farming company, paid ZAR10 million (excluding VAT) to Santam under a product marketed as “structured self-insurance” crop cover for a six-month period, with an indemnity limit of ZAR12 million. Of this, ZAR400,000 was an underwriting charge; the balance of ZAR9.6 million was credited to an “experience account” held in the company’s name. Claims were paid from that account. The account earned interest, could be pledged as security, and the balance was refundable with interest on 30 days’ notice. When the company cancelled in 2021, it received back ZAR11.3 million – more than it had paid in. The company claimed the full ZAR10 million as a tax deduction in its 2017 return. SARS later allowed the ZAR400,000 underwriting charge, so it was only the ZAR9.6 million that remained in dispute.

Two broad questions arose: first, whether the payment was a deductible expense; and second, whether SARS was entitled to reopen the 2017 assessment after the three-year prescription period had passed.

What the High Court decided

The High Court held that the arrangement was not insurance in the true sense: genuine insurance transfers risk from the insured to the insurer, spread across many policyholders. Here, claims were met out of the company’s own money in the experience account, which came back to it with interest. In substance, the Court found, this was closer to an investment or savings arrangement than a transfer of risk. On that basis the ZAR9.6 million was not “expenditure actually incurred” for purposes of section 11(a) of the Income Tax Act No. 58 of 1962 ("ITA") – the company had merely changed the form in which it held its own money – and, in the alternative, was capital in nature. The Court also found that SARS could reopen the assessment despite the three-year period.

The core reasoning in relation to section 11(a) is orthodox. Other aspects, however, merit closer attention.

The judgment raises three questions:

(1) Was this a “sham”, or not?

SARS expressly confirmed in the Tax Court that it was not arguing the contract was a sham or “simulated” transaction. Its case was the narrower one that the contract, properly interpreted, did not meet the legal requirements of insurance. The High Court’s language, however, moved between two positions: on the one hand accepting the contract was “not a sham” and that the parties intended to operate as written; on the other, it described the arrangement as “disguised”, “simulated” and “deliberately misleading”. These are difficult to reconcile. A simulation case turns on the parties not intending the contract to operate as written – a factual case that must be pleaded and proved. It was neither pleaded nor advanced here. The narrower “this is not insurance in law” route did not require the simulation language, and a further court may wish to consider whether that was necessary.

(2) Prescription and causation

Under section 99(2)(a) of the Tax Administration Act, to reopen a prescribed assessment SARS had to prove not only that the taxpayer made a “misrepresentation” or failed to disclose “material facts”, but that this conduct actually caused SARS’ failure to assess correctly within the three-year window. The burden of proof rested squarely on SARS.

SARS closed its case without calling a single witness on this point. In an earlier Supreme Court of Appeal case, SARS discharged a similar burden by leading detailed evidence about how its systems flag returns for audit. Here there was none. The causation finding rested largely on a proposition put to the taxpayer’s accountant, Mr van Zyl, in cross-examination: that had SARS been given the full contract, it “would have been able to scrutinise” it.

There are two difficulties. First, Mr van Zyl is the taxpayer’s agent, not a SARS official; he was not in a position to say what SARS would have done. When the proposition was put to him, he answered “I do not know”, and the taxpayer’s counsel objected that the question was speculative. Second, the ability to examine a document is not proof that an assessment would in fact have followed within the three-year period. Whether causation was established on this record is likely to be a central issue on any further appeal.

(3) Does a very small omission matter?

The company had also failed to declare ZAR1,197 of notional interest – about 0.02% of its pre-tax profit. The Tax Court, applying the established principle that the law does not concern itself with trifles, held this was not a “material” non-disclosure. The High Court disagreed, holding that materiality attaches to the fact omitted rather than the amount, because the interest revealed that the “premium” was earning a return.

There is, however, a more fundamental concern. The Tax Court had been careful to warn that a taxpayer who simply “gets it wrong” by claiming a deduction that turns out not to be allowable in law, does not for that reason alone lose the protection of prescription. If merely claiming an impermissible deduction were enough to reopen an assessment, the time limit would be stripped of any real effect, because almost every disallowed deduction could then be recast as a “misrepresentation”. For that reason, the Tax Court drew a careful distinction between a misrepresentation of fact and the expression of a legal opinion, which is what a claim that an amount is deductible really is. The High Court, by treating the deduction claim as resting on undisclosed features of the contract, arguably arrives at the very outcome the Tax Court had cautioned against. Whether that can be reconciled with the finality the time limit is designed to provide is likely to be a significant question on further appeal.

Section 23L(2)

There is one further dimension that deserves emphasis, precisely because the High Court did not deal with it. On appeal, SARS abandoned its alternative objection based on section 23L(2) of the ITA. Because the appeal succeeded on the more basic point that nothing had truly been “spent”, the High Court had no need to consider section 23L(2). On this issue, therefore, it is the Tax Court’s analysis that provides the guidance.

Section 23L(2) is a separate hurdle. The Tax Court held that even where an insurance premium clears all the usual requirements for deductibility, section 23L(2) denies the deduction to the extent that the premium is not recognised as an expense for accounting purposes under the International Financial Reporting Standards ("IFRS"). In short, the tax treatment follows the correct accounting treatment.

Two features of the Tax Court’s approach are important. First, what matters is the correct accounting treatment, not how the taxpayer recorded the item. Whether the premium is properly an “expense” (rather than an “asset”) under IFRS is a question of fact, to be established by expert accounting evidence. Second, the burden of proving that the amount qualifies as an expense under IFRS rests on the taxpayer.

That burden proved decisive in the Tax Court. Neither side led expert accounting evidence, and the Tax Court held that it could not determine the correct IFRS treatment of this unusual arrangement on its own. Because the taxpayer bore the onus and had not discharged it, the Tax Court held that, had SARS been entitled to reopen the assessment, the deduction would in any event have failed on the section 23L(2) ground. This is striking: the very court that allowed the taxpayer’s appeal on prescription would nonetheless have decided the merits against it on this basis.

For arrangements of this kind, deductibility may turn not only on whether money was genuinely spent, or whether it was capital in nature, but also on how the payment is properly classified under accounting standards.

What this means

Arrangements under which the bulk of the “premium” is recoverable, earns interest and can be pledged are vulnerable to challenge on deductibility. As the section 23L(2) discussion shows, they may also be vulnerable on a quite separate, accounting-based ground.

At the same time, the judgment leaves several questions open, particularly on prescription and causation, where the reasoning departs from the more cautious approach of the Tax Court. Taxpayers currently in dispute over comparable products should watch closely for any further appeal, as the higher courts may yet have the final word on how these principles apply.