A Western Cape High Court judgment has drawn a line between insurance and self-insurance, holding that, on the facts before it, a Santam “structured insurance” arrangement used by a citrus exporter was, in substance, not an insurance policy but an interest-bearing investment account dressed in insurance clothing.
The ruling, delivered on 26 June 2026, provides guidance on how courts may assess deductions claimed for complex insurance and risk-funding arrangements. The Court made it clear that describing an arrangement as “insurance”, calling a payment a “premium”, or issuing a policy document is not enough. Courts will examine whether the arrangement has the essential features of genuine insurance – particularly whether risk has truly been transferred to the insurer and spread across a pool of insureds.
The consequences of getting this wrong can be significant. In this case, the South African Revenue Service was entitled to disallow most of the claimed deduction, re-open an assessment that would otherwise have prescribed, and impose a 10% understatement penalty.
How the arrangement worked
Meiring Citrus (Pty) Ltd carries on a citrus farming business in the Sundays River Valley in the Eastern Cape. It produces citrus fruit for export markets, including Europe, the Middle East, and Canada. According to the evidence summarised by the Court, its business was exposed to risks including drought, frost, wind, Citrus Black Spot, and False Codling Moth. If these pests or diseases were detected in fruit at a port of entry, the entire batch could be rejected and destroyed, causing loss of revenue.
Before entering the Santam arrangement, Meiring Citrus had absorbed crop-related losses from its own reserves. In 2017, while preparing its provisional tax calculations, the company was introduced by its accountant to a Santam product described as “structured self-insurance”. The Court recorded that Meiring Citrus was looking for about R10 million in expenses for that tax year, and the product was presented as involving tax-deductible premiums.
The policy was effective from 1 July 2017 to 31 December 2017. Meiring Citrus paid R10m, excluding VAT, in monthly instalments. In return, the arrangement provided a policy indemnity limit of R12m plus VAT.
A central feature of the arrangement was the “experience account”. Of the R10m paid by Meiring Citrus, R400 000 was described as an underwriting charge payable to Santam. The balance of R9.6m was credited to an experience account operated by Santam on behalf of Meiring Citrus. Claims would be paid from the balance in that account. The credit balance earned interest, referred to in the judgment as notional interest, and any positive balance was refundable to Meiring Citrus on cancellation or expiry of the contract. The policy could be cancelled on 30 days’ notice.
In its 2017 income tax return, Meiring Citrus claimed the full R10m as an insurance premium deduction. This reduced its taxable income from R13 583 747 to R3 585 747. During the period between the inception of the policy and the end of the 2017 year of assessment, Santam credited the experience account with R1 197.52 as notional interest.
The policy was renewed in later years. In June 2021, Meiring Citrus cancelled it because of an unexpectedly smaller crop, lower prices caused by the exchange rate, and a need for funds. The credit in the experience account at that time was R11 304 932.01, which was paid to Meiring Citrus in July 2021.
SARS challenges the deduction
SARS initially issued an original auto-assessment for the 2017 year based on the return filed by Meiring Citrus. SARS also issued verification requests and asked Meiring Citrus to explain the significant increase in insurance expenses from R220 527 in the 2016 tax year to more than R10m in the 2017 tax year.
Meiring Citrus responded that the increase was caused by self-insurance taken out from Santam. However, the Court recorded that what was provided to SARS at that stage was not the complete Santam structured insurance contract but an application form and debit order authority. SARS later finalised the verification without adjustment, while reserving its right to conduct further verification or an audit.
In December 2020, SARS notified Meiring Citrus that it would audit the company’s tax affairs for the 2017 to 2019 years. The audit included the insurance expenses and requested all relevant supporting documents, including experience account statements. In January 2021, Meiring Citrus provided the complete Santam structured insurance contracts and experience account statements for the first time.
SARS issued additional assessments in July 2021. It disallowed the insurance expense for the 2017 year, included the notional interest in gross income, and imposed a 10% understatement penalty. At objection stage, SARS allowed the R400 000 underwriting fee as a deduction but disallowed the remaining R9.6m.
Meiring Citrus appealed to the Tax Court, which found in its favour and allowed the deduction. SARS then appealed to the High Court.
The Full Court identified four issues:
- Whether the Santam structured insurance contract constituted insurance in law.
- Whether the deposit made under the contract qualified for deduction.
- Whether SARS was barred by prescription from issuing the additional assessment.
- Whether Meiring Citrus was liable for understatement penalties.
A central reason the Full Court interfered with the Tax Court’s decision was that, in its view, the Tax Court had started from the premise that the Santam contract was an insurance contract. The Full Court held that the Tax Court should first have analysed whether the agreement possessed the legal characteristics of insurance. It also found that the Tax Court had conflated two distinct questions: whether the contract was a sham, and whether, properly characterised, it was insurance in law.
The arrangement was not insurance in law
The Court started by considering the essential features of an insurance contract. These included an insurable interest, a risk of loss, the insurer’s assumption of that risk, the spreading of actual losses among a large group of people bearing similar risks, and the payment of a premium as a contribution to a general insurance fund.
Central to the Court’s reasoning was that genuine insurance depends on pooling and spreading risk across many policyholders, whereas the Santam arrangement largely left Meiring Citrus bearing its own risk through the experience account. The Court held that the arrangement did not satisfy the requirements of insurance in respect of the R9.6m credited to that account.
Several features were important to the Court’s conclusion. Claims were paid from the experience account, which consisted of Meiring Citrus’s own funds. The positive balance earned interest for Meiring Citrus. The balance was refundable on cancellation or expiry. The policy could be pledged as security. The policy also recorded that no risk analysis was conducted.
The Court found that the contract was not a sham in the sense that the parties intended it to operate according to its terms. But it held that the labels used by the parties were not decisive. The fact that the contract used terms such as “insurance” and “premium” did not make it an insurance contract in law. The Court concluded that the R400 000 underwriting charge related to Santam’s assumption of the additional R2.4m of risk; the remaining R9.6m was a deposit into what the Court characterised as a self-insurance investment account.
The deduction failed
The Full Court then considered whether the R9.6m was deductible under section 11(a) of the Income Tax Act. That provision allows a taxpayer carrying on a trade to deduct expenditure and losses actually incurred in the production of income, provided they are not of a capital nature. The taxpayer bears the onus of proving that the requirements for deduction are met.
The Court held that the R9.6m was not “expenditure actually incurred”. In substance, Meiring Citrus had not spent the money in the tax sense. Rather than diminishing its estate, it merely exchanged one asset, cash, for another: a recoverable, interest-bearing right against Santam.
The Court compared this to a deposit. A taxpayer who places money into an account from which it is entitled to recover an equivalent amount has not incurred expenditure merely because money has moved. The Court found that Meiring Citrus’s net asset position was unchanged, except for the R400 000 underwriting fee: it had parted with R10m in cash but acquired a R9.6m credit recoverable on demand, together with the right to interest.
In the alternative, the Court held that even if the R9.6m had been expenditure actually incurred, it would have been capital in nature. By making the payment, Meiring Citrus acquired an enduring interest-bearing asset: the experience account, the right to interest, and the right to recover the balance.
Prescription did not bar SARS
The original 2017 assessment was issued on 18 December 2017, and the additional assessment was issued in July 2021. The normal three-year period had therefore expired. SARS relied on section 99(2) of the Tax Administration Act, which permits an otherwise time-barred assessment where the full amount of tax was not assessed because of fraud, misrepresentation or non-disclosure of material facts.
The Full Court held that the misrepresentations and non-disclosures – including the incomplete disclosure of the Santam contract during verification, the non-disclosure of the experience account, and the omission of the notional interest – prevented SARS from assessing the correct tax within the ordinary three-year period.
The notional interest amount for 2017 was small, but the Court held that materiality did not depend only on the quantum. The important point was that the so-called premium earned interest for Meiring Citrus. The Court stated that “expenses do not earn interest” and found that the interest issue was linked to the true character of the arrangement.
The Court was satisfied, on a balance of probabilities, that SARS’s failure to assess the full amount of tax within the three-year period was caused by the misrepresentations and non-disclosures. SARS was therefore entitled to re-open the assessment.
The understatement penalty was confirmed
The Court also confirmed the 10% understatement penalty. It held that Meiring Citrus claimed a deduction to which it was not entitled and omitted income that should have been declared. This prejudiced the fiscus. The threshold for a substantial understatement was met because the tax in dispute exceeded R1m and was more than 5% of the tax properly chargeable for the 2017 financial year.
The Full Court upheld SARS’s appeal with costs, including the costs of two counsel where employed. It set aside the Tax Court’s order and replaced it with an order dismissing Meiring Citrus’s appeal, confirming the additional assessment for the 2017 year, and confirming the 10% understatement penalty.
Why the judgment matters
The judgment provides guidance on how courts may distinguish between genuine insurance and self-insurance when taxpayers claim deductions for payments made under complex risk-funding arrangements. The key lesson is that the legal and tax character of an arrangement depends on what the agreement does, not only on the terminology used in the contract.
For insurers, brokers, and advisers, the decision highlights the importance of the core insurance concepts of risk pooling, risk spreading and the insurer’s assumption of risk. A product may contain insurance-related language and may be issued in policy form, but if the policyholder’s own funds are used to meet its own claims, and the balance is refundable and interest-bearing, the arrangement may not be treated as insurance in law.
For taxpayers, the judgment illustrates the risks of claiming deductions for complex structures without carefully analysing whether the statutory requirements for deduction are met. The Court held that the R9.6m was not deductible because it was not expenditure actually incurred and, alternatively, because it was capital in nature.
The prescription finding is also significant. The Court’s reasoning shows that non-disclosure of features that reveal the true nature of a transaction can have consequences beyond the immediate deduction. In this case, SARS was allowed to re-open an assessment that would otherwise have been time-barred because the Court found that the non-disclosures and misrepresentations caused the full amount of tax not to be assessed within the prescribed period.
The practical message is clear: taxpayers should tread carefully. Simply labelling an arrangement “insurance” does not make it insurance in law, and getting the characterisation wrong can lead to disallowed deductions, audits, penalties, and re-opened assessments. For complex insurance and risk-mitigation arrangements with tax consequences, specialist tax advice should be obtained before the arrangement is implemented and before any deduction is claimed.
Click here to download the judgment.
