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Income Tax Act, 1962 (Act No. 58 of 1962)

Department of Finance

Practice Note No. 10

Short-term Insurance Business: Contingency Reserve


Date: 14 July 1989


1) Section 13A of the Insurance Act, Act No. 27 of 1943, which was inserted by section 7 of the Financial Institutions Second Amendment Act, Act No. 54 of 1989 ("the Amendment Act") provides, inter alia, that—
a) an insurer carrying on short-term insurance business shall maintain a contingency reserve ("the reserve"), colloquially called the "catastrophe reserve", at the end of his fifth financial year following the date of commencement of the Amendment Act;
b) the reserve shall, subject to certain exceptions, at the end of the fifth financial year in question, not be less than 10%(or another prescribed percentage) of the greater of his premium income (after the deduction of the defined approved reinsurance) in the previous financial year or the expired portion of the current financial year;
c) the insurer shall create the reserve as follows—
i) 20% at the end of the first financial year;
ii) 40% at the end of the second financial year;
iii) 60% at the end of the third financial year;
iv) 80% at the end of the fourth financial year;
v) 100% at the end of the fifth financial year following the date of commencement of the Amendment Act;
d) the reserve may be drawn upon only with the approval of the Registrar of Insurance ("the Registrar") and if he is satisfied that the contingencies in respect of the short-term insurance business carried on by such insurer justify such a withdrawal;
e) in the case of a contingency referred to in (d), the insurer shall submit a business plan to the Registrar, together with the prescribed revenue accounts, in which is set out the proposed action to reinstate the reserve referred to in (b) to that level within the three years following the financial year in which a withdrawal referred to in (d) has been made.


2) In terms of the discretionary powers vested in the Commissioner for Inland Revenue by section 28(2) of the Income Tax Act, 1962, it has been decided to take the reserve into account in the determination of the taxable income of any taxpayer from the carrying on in South Africa of short-term insurance business. The reserve will be phased in for income tax purposes on the same basis as it is created under section 13A of the Insurance Act with effect from years of assessment ended or ending on or after 31 January 1989.


3) In the event of the Registrar giving his approval to the drawing upon the reserve, the deduction in arriving at taxable income during the years immediately following the year during which the reserve was drawn upon until the full reserve had been reinstated, may only be made to the extent to which the reserve is reinstated as shown in the prescribed revenue accounts submitted to the Registrar.