The Supreme Court of Appeal ("SCA") has delivered a significant judgment in Sishen Iron Ore Company (Pty) Ltd v C: SARS (2025), providing clarity on the deductibility of mining-related expenditures under the Income Tax Act, 58 of 1962 ("ITA"). The case addressed whether various relocation costs, legal expenses, and infrastructure expenditures incurred by Sishen Iron Ore Company (Pty) Ltd ("SIOC") were deductible from its taxable income.
The judgment underscores key principles on capital vs revenue expenditure, special mining deductions, and the interpretation of section 36(11), which is critical for the mining industry and taxpayers involved in capital-intensive operations. Whilst the outcome of the case is welcomed, the SCA may have caused unnecessary confusion regarding the interplay between section 11(a) with section 15(a) read with section 36(11). We return to this point below.
SIOC, a major iron ore miner in the Northern Cape, operates under a mining right granted in terms of the Mineral and Petroleum Resources Development Act, 28 of 2002 ("MPRDA"). The dispute with the South African Revenue Service ("SARS") arose over deductions claimed for the 2012 to 2014 tax years relating to:
- The relocation of Dingleton township – a neighboring residential area that had to be moved to comply with mining safety legislation.
- The relocation of mining-related infrastructure (Sishen Western Expansion Project ("SWEP")) – essential to access ore deposits.
- Legal costs associated with the relocation of Dingleton residents.
- The relocation of a 66kV power line, which supplied electricity to mine equipment.
SARS disallowed these relocation costs, arguing that they were of a capital nature and did not qualify under the special mining deductions provisions of section 15(a) read with sections 36(7C) and 36(11). In addition, SARS disallowed the legal expenditure on the basis that it was not incurred in the production of income. SARS also imposed understatement penalties and interest arising from the disallowed deductions.
The SCA, in partially upholding SIOC's appeal and dismissing SARS' cross-appeal in part, made the following determinations:
Relocation of Dingleton and SWEP: Deductible under section 36(11)(e) of the ITA
The relocation costs were held to be deductible under section 36(11)(e), which allows deductions for "expenditure incurred in terms of a mining right" other than for infrastructure or environmental rehabilitation. The court found that relocation was necessary for SIOC to exercise its mining right optimally and was an integral part of the mining process. Without it, SIOC would not be able to mine the area effectively and would be in breach of its Mining Work Programme ("MWP") under the MPRDA. SARS had argued that these costs were incurred due to statutory compliance rather than for mining purposes. However, the court disagreed, dismissing SARS' "artificial" reasoning, stating that mining rights and work obligations must be viewed holistically – the relocations were required by law, but they also enabled continued mining operations. Importantly, the court clarified that the term "infrastructure" in section 36(11)(e) refers to infrastructure owned by the taxpayer, not third-party infrastructure. Since the relocated SWEP infrastructure remained the property of Transnet, Eskom, and other third parties, the exclusion did not apply.
Legal costs: Not deductible under section 11(c) of the ITA
The SCA upheld SARS' disallowance of the legal costs incurred in relation to advising the Dingleton residents on relocation. Section 11(c) allows for the deduction of legal expenses only where they arise in the ordinary course of a taxpayer's trade. To better understand the court's decision one must be mindful that the legal advice was obtained by the Dingleton residents, but the legal costs were paid by SIOC. On that basis the court held that the purpose of the legal expenditure was to provide the Dingleton residents with legal advice, concluding that it was not for the benefit of SIOC, but rather for the Dingleton residents. As such, SIOC's trade is that of mining and not to provide legal assistance to Dingleton and the expense was therefore not incurred directly, or naturally, to earn or produce income (i.e. there was an insufficient close nexus to the production of income in its trade). The court's conclusion and decisions are based on the fact that SIOC failed to discharge its burden of proving that the legal costs were incurred in the production of its income.
66kV power line relocation: Deductible under section 36(11)(a) of the ITA
The relocation of the 66kV power line was found to be integral to the mining process, as it provided electricity to mine equipment. The court ruled that the power line qualified as "mine equipment" under section 36(11)(a), thereby making the expenditure deductible. Other than stating that a wide meaning must be ascribed to the term "mine equipment" the court did not proceed to analyse and pronounce on the exact meaning of the term. This would have been valuable given the absence of recent judicial interpretation. The only useful case to has considered this term is Union Government v Nourse Mines Ltd (1912), which also interpreted the term widely. Therefore, while we agree that the relocation of the 66kV power line qualifies as mine equipment, a more explicit judicial pronouncement on its meaning would have provided greater interpretive certainty. The court also held that even if not considered mine equipment, the expenditure would still be deductible under section 11(a) as an ordinary revenue expense, given that the power line had to be continuously moved to new locations as mining progressed.
Understatement penalties and interest set aside
The understatement penalties imposed by SARS were set aside by the Tax Court as being unjustified. SARS abandoned the cross appeal in respect of the understatement penalties at the hearing, therefore it was not necessary for the SCA to consider the issue of understatement penalties. The interest charged under section 89quat(2) on the additional tax liability was referred back to SARS for reconsideration, with the court noting that SARS must reconsider whether the tax shortfall may have arisen due to circumstances beyond SIOC's control.
The interplay between section 11(a) with section 15(a) read with section 36(11) of the ITA
The SCA's reasoning regarding the interplay between section 11(a) with section 15(a) read with section 36(11) appears to be misconstrued and in contradiction with its own previous judgment in Palabora Mining Company Ltd v Secretary for Inland Revenue (1973) (confirmed by Armgold / Harmony Freegold Joint Venture (Pty) Ltd v C:SARS (2012)). The SCA in the SIOC v C:SARS case held that section 23B(3) mandates that, where both section 11(a) and a special deduction provision apply, the special deduction must be claimed first before considering section 11(a) and has proceeded its analysis on this basis. This conclusion, however, appears to be problematic for several reasons.
Section 36(11) merely ascertains the amount and scope of "capital expenditure". The actual deduction mechanism is contained in section 15(a), which provides for deductions "in lieu of" certain other sections – but crucially, section 11(a) is not included in this list. The SCA previously in Palabora Mining affirmed that the existence of a capital expenditure definition under section 36(11) does not preclude the possibility of the expenditure qualifying for deduction under section 11(a), and that section 15(a) read with section 36 does not override the application of section 11(a).
The purpose of section 23B is to prohibit double deductions in circumstances where an amount may qualify as a deduction under two or more provisions of the ITA. This is evident from the heading and the wording of section 23B(1). However, the question arises whether section 23B(3) dictates the order in which an expense must be claimed vis-à-vis if the expense qualifies for a deduction under section 11(a) as well as any other provision of the ITA. It would appear that the SCA's interpretation of section 23B(3) is that this section in fact does prioritise the special deduction over the general deduction. However, it does not appear from the reading of the judgment that the SCA considered that impact of its previous decision in the Palabora Mining case on the interplay of section 11(a) with section 15(a) read with section 36, namely that section 15(a) does not override section 11(a). This, in our view, creates a unnecessary uncertainty in terms of the ordering of deductions that qualify as a deduction under both section 11(a) and section 15(a) read with section 36.
The distinction between claiming a deduction of expenditure under section 11(a) versus section 15(a) read with section 36(11) is very important due to the differing restrictions and limitations imposed by these provisions. If expenditure is deductible under section 11(a), it is not subject to the ring-fencing provisions of sections 36(7E) and 36(7F), which limit the extent to which capital expenditure may be deducted against mining income. Conversely, if the expense is claimed under section 15(a) read with section 36(11), it falls outside the scope of the assessed loss limitation in section 20. The classification of an expense therefore has important implications for a taxpayer, reinforcing the necessity of correctly determining the applicable deduction provision.
A further critique of the SCA's reasoning is its acceptance that section 15(a) read with section 36 applies only to expenditure of a capital nature. This arguably contradicts its previous decision in the Palabora Mining case, which specifically held that the definition of "capital expenditure" in section 36(11) does not mean that it must be regarded as expenditure of a capital nature within the meaning of section 11(a).
Conclusion
Whilst the SCA may have left itself open to some criticism in its reasoning as detailed above, the SCA came to the correct conclusion, in our view, that the relevant expenditure is deductible. Whether it is in terms of section 11(a) or section 15(a) read with section 36(11), it remains deductible.
Taxpayers engaged in mining operations must take cognisance of the principles laid down in this case and carefully assess how these apply to their specific circumstances. Given the court's approach to the interplay between section 11(a) and section 15(a) read with section 36(11), taxpayers must ensure that deductions are claimed in a manner that aligns with the statutory framework to maximise their tax benefits while mitigating potential disputes with SARS. A correct and strategic application of these provisions is essential to avoid unnecessary limitations on deductions and to ensure compliance with the ITA.
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