The recent judgment of the Supreme Court of Appeal in Western Platinum Ltd v C:SARS 67 SATC 1 provides a good example of the importance of the distinction between sine qua non and causa causans in the tax context. It is also of interest because it deals with the special tax regime for miners. Historically mining and farming, as pillars of the economy for nearly a century, enjoyed special tax benefits, which the courts have been at pains to protect against abuse by other taxpayers. The taxpayer, a mining company, earned interest income from various sources: local bank accounts, overseas bank accounts, money placed on overnight call, money on fixed deposit, customers, export incentives, the refund of mining lease rentals, and SARS in respect of tax refunded.
The taxpayer contended that the interest from all these sources qualified as mining income because it was sufficiently closely connected to its mining operations. The importance of this contention lies in the fact that the Income Tax Act permits miners to deduct certain items of capital expenditure from income derived from mining operations. It would therefore suit the taxpayer, if it had incurred substantial capital expenditure, for the interest to be categorised as mining income and therefore qualifying to be set off against the capital expenditure. C:SARS, on the other hand, contended that only the proceeds of the sale of minerals could properly be categorised as income from mining operations. In the special court, as reported in ITC 1753 65 SATC 310, each source of interest had been considered and the court found partly for the taxpayer and partly for SARS.
The taxpayer operated what was called a cash management system, in terms of which balances in the current operating accounts were collated overnight so as to maximise interest for the group. In respect of the interest on the local current accounts, the special court found that it was necessary for every mining company to have operating bank accounts and that any interest earned on such an account, even as a result of using the cash management system, was a necessary concomitant of operating such accounts and therefore mining income.
In addition the taxpayer had certain cash investments, consisting of cash that was surplus to immediate operational requirements. The special court found that the removal of such funds from the current accounts in order to invest them at a better rate of interest was an investment decision and the interest so derived was not directly derived from working a mine.
The taxpayer stated that amounts received into the foreign bank accounts were left there for short periods, partly because they could not be transferred on the same day and partly because the taxpayer preferred to transfer round sums. The interest earned during these brief periods was found to have been mining income until 1994 for the same reasons that the interest on local current accounts was so found, after which the taxpayer had begun to place the funds on daily call. This was found to be an investment decision, and the resultant interest therefore was not mining income.
Certain funds were placed on overnight call with foreign banks. Because the deposits had to be made in order to facilitate loans from the banks to finance the mining operation, there was a sufficiently direct connection with the mining operations and the interest on these accounts was found to be mining income.
Interest on certain fixed deposits was found not to be mining income as the funds invested were surplus to operational requirements.
Interest received from debtors who had paid their accounts late was found to be mining income, because it related directly to the sale of minerals, which was part of the business of mining.
The taxpayer had earned interest on incentives under the General Export Incentive Scheme ("GEIS"), and this was found to have been directly derived from mining operations.
Owing to a change in the relationship between the taxpayer and the government regarding certain mining leases, the taxpayer received a refund of rentals previously paid together with interest. The special court found that this interest was directly related to the mining operations.
Finally, the taxpayer had received interest from SARS in respect of a tax refund. This was found not to have been derived from mining operations because the fact that the earning of mining income was a sine qua non for the payment of tax did not provide a sufficiently direct causal link between the interest and the actual mining operations.
The case went directly to the Supreme Court of Appeal, where both parties appealed against this decision to the extent that it had gone against them. The taxpayer did not challenge the finding that the income had to be directly connected to the mining operation, but rather contended that the special court had applied the concept too narrowly. C:SARS, on the other hand, argued that the court had applied it too widely. Conradie JA summed up the respective submissions:
"The appellant’s counsel suggested that any income flowing from the trade of mining would be sufficiently closely connected to the mining operations to qualify as mining income. Counsel for the respondent on the other hand contended that only the proceeds of the sale of minerals would be sufficiently closely connected to the mining operations (the extraction and refinement of the minerals) to be properly characterised as mining income".
The learned judge described the approach of the taxpayer as too generous and that of C:SARS as too narrow and then addressed each category of interest income.
The operation of the cash management system meant that the current accounts ceased to be "mere repositories of the proceeds of metal sales". They were manipulated in order to maximise the interest income and this decision broke any direct connection the interest may have had with the mining source.
As for the interest on foreign accounts up to 1994, the court found that the taxpayer’s reasons for not transferring balances to South Africa immediately was unconvincing ("quirky" was the word he used). As a result, a decision to delay transfers for even a short period was in itself a conscious investment decision and thus too remote from the mining operations.
The decision of the special court that the interest from post-1994 foreign call accounts was not from mining operations was confirmed.
Similarly, the court confirmed the finding that interest from funds placed on call to facilitate loans to finance the mining operations was directly connected to the mining operations. It also confirmed that the interest on certain fixed deposits was not mining income as the funds invested were surplus to operational requirements.
In respect of the interest from debtors whose accounts were overdue, the court confirmed the finding of the special court that this income was directly related to the mining operations, as was the interest on the GEIS amounts.
As regards the interest on the tax refund, Conradie JA stated that "a tax is an impost on income; it bears none of the attributes of revenue. By virtue of the statutory intervention that allows the imposition of the tax it is already at one level removed from the mining income on which it is imposed". Therefore, although the earning of mining income was a sine qua non for the payment of the tax, the causal link with mining was not close enough to categorise the interest as derived from mining operations. The delay in repaying the excess tax payable had more to do with the complexities of the tax regime than with the extraction of minerals.
It is interesting, and important for taxpayers and their advisers, that both courts analysed each item of interest and tested its proximity to the mining operations. Whereas it was clear that none of the interest would have arisen had the taxpayer not engaged in mining operations, in other words, the mining operations were a sine qua non for the earning of the interest, it was necessary to go one step further by enquiring whether in each case the mining operations were the real efficient cause, the causa causans, of the interest income.
An earlier case in the Cape High Court, Stander v CIR 59 SATC 212, discussed the distinction. The taxpayer was the accountant at a Delta motor franchise. In recognition of the meticulous manner in which he had recorded the data and prepared the financial reports for his employer, Frank Vos Motors, over a period, Delta Motor Corporation awarded an overseas trip to Stander and his wife. The Commissioner sought to tax Stander on the value of the award as an amount received or accrued in respect of services rendered, but the court found that, although his employment by Frank Vos Motors was a sine qua non for receiving the award, the causa causans was that Delta considered his work to be excellent, and Stander had no relationship with Delta. Consequently, the award was not for services rendered to his employer and was not taxable.
The distinction between the two concepts will not always be important in the tax context if the trade requirement is met. However, particularly where there is a special concession to a class of taxpayer, such as miners or farmers, the courts will interpret the application of the concession strictly and, in order to do so, will distinguish between causa sine qua non and causa causans.
Prof Peter Surtees, Special Tax Consultant, Deneys Reitz Inc - Cape Town office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.