South Africa: The Assumption Of Rehabilitation Liabilities As Consideration Given On The Acquisition Of Mining Property And Capital Assets

Last Updated: 22 October 2014
Article by Andre Vermeulen

Most Read Contributor in South Africa, September 2016

During December 2013, SARS released a draft discussion paper in which it set out its application of the relevant tax law, in relation to the tax treatment of the purchaser and seller, with regard to the assumption of contingent liabilities as part settlement of the purchase price of assets acquired as part of a going concern.

SARS states that the document was prepared in light of recent judgments delivered by local and foreign courts as well as numerous requests for clarity regarding the income tax treatment, of both the seller and the purchaser, in respect of the assumption of contingent liabilities as part settlement of the purchase price of assets disposed of and acquired.

A particular point of interest in the discussion document is the fact that SARS distinguishes between, what it calls, 'embedded' and 'free-standing' contingent liabilities. This distinction appears to be based on the judgment delivered by the Supreme Court of Canada in the matter of Daishowa-Marubeni International Ltd v Canada 2013 SCC 29in which the court distinguished between:

  1. a contingent liability which, in its view, is a future cost which depresses the value of the asset (i.e. embedded contingent liability); and
  2. an obligation which is a distinct existing liability which does not impact the market value of the asset (i.e. a free-standing contingent liability).

Although the Discussion Document only considers the tax treatment of the seller and purchaser with regard to the assumption of 'free-standing contingent liabilities', SARS does state that it "accepts that a distinction must be drawn between an embedded statutory obligation that depresses the value of an asset and a separately identifiable contingent liability". In SARS' view an 'embedded contingent liability' is so inextricably linked to the asset that should the asset be transferred the contingent liability will have an impact on the market value of the asset and the assumption of the contingent liability by the purchaser will not qualify as consideration given by the purchaser.

The application of the principles enunciated in Daishowa-Marubeni International Ltd v Canada could potentially have far reaching consequences in the South African mining sector to the extent that it is applied to the transfer of mining rights and the assumption of the corresponding rehabilitation liability by the purchaser. In Daishowa-Marubeni International Ltd v Canada the court had to determine the tax treatment of the seller in respect of a right to harvest timber (i.e. forest tenure) which it had disposed and whether or not the value of the reforestation liability assumed by the purchaser, which attached to that forest tenure, should be included in the seller's 'proceeds of disposition'.

The court found the reforestation obligations attaching to a forest tenure are not a distinct existing debt, the assumption of which would form part of the sales price of the forest tenure. Instead the SCC was of the view that the reforestation obligations are a future cost embedded in the forest tenure which serves to depress the value of the forest tenure (at paragraph 29). In its view, a forest tenure with a reforestation obligation attaching to it is more akin to a property in need of repair. The assumption by the purchaser of the cost of repairs would not form part of the sales price for the property but would in fact depress the value of the property and as such would not form part of the seller's proceeds of disposition.

As with the reforestation liability which attached to the forest tenure, a rehabilitation liability attaches to each mining right issued in South Africa with the effect that the Department of Mineral Resources ("DMR") will not transfer such a mining right unless the corresponding rehabilitation liability is also transferred to and assumed by the purchaser. A direct application of the decision in Daishowa-Marubeni International Ltd v Canada will result in the market value of the mining right decreasing and the assumption of the rehabilitation liability not constituting consideration given by the purchaser. From the purchaser's perspective this will affect the amount of capital expenditure the purchaser will incur and as such will affect the amount of capital expenditure it will be able to deduct in terms of section 15(a) read with section 36(7) of the Income Tax Act 58 of 1962 ("the Act"), in determining its taxable income from mining activities.

However, the Act makes specific provision for the allocation of cost and as such the amount of expenditure incurred in the situation where mining assets are disposed of. In this regard section 37 of the Act makes provision for the manner in which the capital expenditure incurred by the purchaser, upon acquisition of mining property, should be determined.

The basis upon which the application of section 37 is premised is the effective valuation of the mining assets and property by the Director-General of the DMR. The effective valuation serves to determine the value of the capital assets acquired by the purchaser on the effective date of the transaction. This value, as determined by the Director-General of the DMR, is deemed to be the amount of expenditure incurred by the purchaser in acquiring each of the respective mining assets and as such is deductible in determining the purchaser's taxable income from mining.

Should the values attributed to the respective assets by the Director-General of the DMR, in its effective valuation, exceed the consideration given by the purchaser in acquiring the assets, the deemed cost and deemed capital expenditure incurred by the purchaser is to be determined by apportioning the consideration given by the purchaser for each asset, to hold the same ratio to the total consideration given by the purchaser as the effective value of that asset, as per the effective valuation, holds to the total effective valuation of all the assets acquired.

From the above it is clear that the meaning of the term 'consideration given' is of vital importance with regard to the interpretation and application of section 37 of the Act. The amounts included and the amounts excluded from the meaning of the term will have a substantial impact on the amount of capital expenditure the purchaser will be deemed to have incurred upon acquisition of the assets.

The direct application of the judgment in Daishowa-Marubeni International Ltd v Canada to the transfer of mining rights and the corresponding rehabilitation liability in South Africa will undoubtedly impact the application of section 37 as the 'consideration given' by the purchaser will, according to SARS, not include the value of any rehabilitation liabilities assumed by the purchaser.

The Act currently does not make provision for the separate treatment of contingent liabilities in the form of 'embedded liabilities' and 'free-standing liabilities' nor are these concepts currently recognised in South African tax law. It must thus be determined if these concepts are in fact applicable in South African tax law and if so what the impact thereof is in respect of the transfer of mining rights and the corresponding rehabilitation liability as well as the consideration that the purchaser gives in return for the assets it acquires.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.