South Africa: Pitfalls Arising From The Financial Provision For Mining Rehabilitation

Last Updated: 22 October 2014
Article by Gerdus Van Zyl

Most Read Contributor in South Africa, September 2018

Mining companies generally make financial provision for rehabilitation by virtue of rehabilitation trusts or financial guarantees through a financial institution or lately, insurance policies. Although a deduction can be claimed for contributions to a rehabilitation trust and the income derived by such rehabilitation trust is exempt from tax, cash strapped mining companies in the current economic environment are finding it tough to contribute the required amount of cash to the rehabilitation trusts. Insurance policies therefore became a more lucrative option as it enables mining companies to spread the premiums, and therefore payment burden, over a longer period of time and even lead to some mining companies transferring the funds in rehabilitation trusts into the insurance policies. The potential pitfalls of these methods are firstly, the adverse penalties in excess of 200% of the value of the funds in the rehabilitation trust which could be imposed by the South African Revenue Service ("SARS") upon the transfer out of rehabilitation trusts and the potential non-deductibility of the premiums paid towards the insurance policies.

Mining companies in South Africa are required to make financial provision in terms of the Mineral and Petroleum Resources Development Act No. 28 of 2002 ("the MPRDA"), read with the National Environmental Management Act No. 107 of 1998 ("NEMA"), for the rehabilitation of the mining areas on which mining activities are conducted (this will in future solely be governed by NEMA). From an administrative and practical perspective, mining companies are required to re-evaluate their rehabilitation liabilities and ensure that they sufficiently cater for any shortfall in the provision for such rehabilitation liabilities. In this regard, the Department of Mineral Resources ("the DMR") insists that mining companies must be able to provide for any shortfall in the provision for rehabilitation liabilities upfront. For companies which merely provide for rehabilitation through a rehabilitation trust, this would imply that a cash contribution of the entire shortfall amount would need to be contributed towards the rehabilitation trust. Commercially, many mining companies (especially junior mining companies) are not in a position to make such contributions as this would lead to cash flow constraints for the already cash strapped mining companies.

As alluded to earlier, section 37A of the Income Tax Act No. 58 of 1962 ("the Act") provides for the deduction for income tax purposes of contributions made to a qualifying rehabilitation trust. This deduction would not necessarily benefit mining companies which are not in a tax paying position. Instead, additional funding would need to be obtained to firstly fund the operations and secondly fund the rehabilitation trust. As a result, mining companies have opted to provide for rehabilitation expenses through the various insurance products which are currently in the market (and have been for quite some time) as this is regarded by the mining companies as a more effective method to manage the cash flow constraints and provide the DMR with the required guarantee(s) for the future rehabilitation liabilities. The benefit of these insurance products is that although the guarantee is received upfront, the mining companies have a longer period during which the actual premiums can be paid as the insurance policies typically extend over 3 years (which could be extended further), thereby easing the cash flow constraints.

Due to the funds contributed to a rehabilitation trust being restricted and can only be withdrawn for rehabilitation purposes (or used for purposes set out in section 37A), many mining companies have opted to rather solely provide for rehabilitation through insurance policies than to establish rehabilitation trusts (i.e. mining companies regard the insurance products to be a more effective method to provide for future rehabilitation expenditure). In some instances, mining companies have gone so far as to transfer funds out of already established rehabilitation trusts into the aforementioned insurance policies. SARS does not favour such transfers and has indicated that the application of the penalty provisions provided for in section 37A (which would lead to a penalty in excess of 200% of the value of the funds in the rehabilitation trust) would be strictly applied to any transfer which contravenes the provisions of section 37A.

From an insurance policy perspective, National Treasury has inserted section 23L into the Act which came into effect on 31 March 2014. In essence, the purpose of section 23L is to disallow the deduction of any premiums incurred by a taxpayer with regard to short-term insurance policies, unless the required criteria are met. The required criteria include, inter alia, recognising the insurance premiums as an expense in the financial statements (and not capitalise the expense as many mining companies would typically do). In this regard, the question which should be considered by taxpayers is whether the specific insurance policy which has been entered into to provide for future rehabilitation expenditure would be regarded as a short-term insurance policy as envisaged in section 23L of the Act and, if so, would the criteria to not fall within the ambit of section 23L be met.

It is recommended that careful consideration be given and advice sought from tax advisors who also understand and are knowledgeable of the requirements of the MPRDA and NEMA before a taxpayer opts to transfer any funds out of an established rehabilitation trust into any other fund or policy not specifically mentioned in section 37A. This is to ensure that the adverse (and arguably draconian) penalty provisions contained in section 37A are not triggered. It is further advisable that tax advice be sought before any mining rehabilitation insurance policy is entered into by a mining company in order to ascertain whether there is not a more efficient manner in which the policy could be structured, thereby not falling within the ambit of section 23L.

It would be worthwhile to note how the newly established Davis Committee will approach the current tax incentives for mining rehabilitation and whether, going forward, insurance policies of the nature discussed above would be recognised by the Davis Committee and adequate provision be made in the Act for the treatment of insurance premiums paid on such insurance policies.

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”

Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions