On 31 July 2020, National Treasury and the South African Revenue Service ("SARS") published the 2020 Draft Taxation Laws Amendment Bill ("Draft TLAB") and the 2020 Draft Tax Administration Laws Amendment Bill ("Draft TALAB"), for public comment due by 31 August 2020. According to the media statement accompanying the publication of the bills, the Draft TLAB and the Draft TALAB provide for the necessary legislative amendments required to implement the more complex tax announcements made in Chapter 4 and Annexure C of the 2020 Budget Review that requires greater consultation with the public.
The Draft TLAB gives effect to a number of proposals announced in the 2020 Budget Review, but in this article we focus on National Treasury's proposed amendment to the mining tax provisions of the Income Tax Act, 1962 ("ITA"). More specifically we discuss the proposed additional requirement in order for mining companies to qualify for accelerated capital expenditure deductions on expenditure incurred by them in terms of section 15(a) read with section 36 of the ITA, as these changes have far reaching consequences on the mining industry.
In general, section 15(a) of the ITA allows for an upfront deduction of capital expenditure incurred by a mining company during a year of assessment. In terms of section 15(a), a taxpayer is permitted to deduct an amount to be ascertained under the provisions of section 36 from the income derived by it from mining operations. It follows that, for a taxpayer to fall within the ambit of section 15(a) read with section 36 of the ITA, a taxpayer must:
- carry on "mining" and "mining operations" as defined in section 1 of the ITA;
- earn income from a producing mine; and
- incur "capital expenditure" as defined in section 36(11) of the ITA.
National Treasury proposes to amend section 15(a) of the ITA to include an additional requirement in that the taxpayer must hold a mining right as defined in section 1 of the Mineral and Petroleum Resources Development Act, 2002 ("MPRDA") in respect of the mine where those mining operations are carried on.
The Explanatory Memorandum on the Draft TLAB, which was released with the Draft TLAB, states that this proposed amendment aims to address the "issue" in the definition of "mining" and "mining operations" for the purposes of claiming capital expenditure deductions, and whether both the contract miner that excavates minerals for a fee and a mineral right holder, should qualify for accelerated capital expenditure deductions on expenditure incurred by them in terms of sections 15 and 36 of the ITA. By proposing that the taxpayer needs to be the holder of a mining right in respect of the mine where those mining operations are carried on in order to fall into the mining class privileges of the ITA, National Treasury effectively proposed to exclude contract miners who excavates minerals from the soil on behalf of the mineral right holder for a fee from the ambit of section 15(a) read with section 36.
This proposed amendment is presumably proposed by National Treasury pursuant to the Supreme Court of Appeal ("SCA") judgment of Benhaus Mining (Pty) Ltd v CSARS 2020 wherein the SCA held that a contract miner that excavates mineral from the earth on behalf of the mineral right holder for a fee, conducts mining and mining operations for the purposes of the ITA and that it matters not whether that contract miner did or did not share in the proceeds of the sales of minerals.
The proposed manner in which National Treasury is seeking to amend the legislation to achieve the purpose of excluding contract miners is not feasible. Leaving the definition of "mining" and "mining operations" as is and amending section 15 as proposed will have unintended consequences for example:
- mining taxpayers conducting mining operations for their own benefit (i.e. not a contract miner) that are not required to have mining rights due to the technicalities of the MPRDA and the legal interpretation thereof;
- mining conducted by the parties of unincorporated joint ventures where mining rights and mining assets are pooled and shared;
- taxpayers conducting prospecting activities in terms of a prospecting right;
- the exclusion in section 12C of taxpayers carrying on the trade of mining. The definition of "mining" in section 1 remains unchanged, accordingly taxpayers that are conducting "mining" per the definition in section 1 of the ITA (which in terms of the recent case of Benhaus Mining (refer above) will include contract mining activities depending on the circumstances) will be precluded from claiming capital allowances in terms of section 12C and section 15(a) read with section 36. Leaving those taxpayers potentially without any capital allowance for capital expenditure incurred; and
- lack of transitioning rules in respect of companies that have rightfully been claiming capital allowances in terms of section 15(a) read with section 36 of the ITA up to 31 December 2020 and that will now have to apply other sections of the ITA. For example, do taxpayers continue to claim capital expenditure incurred prior to 1 January 2021 in terms of section 15(a) read with section 36? How will the balance of unredeemed capital expenditure as at 1 January 2021 be treated? Will it be lost? How will the ring-fencing provisions be affected in respect of mining activities conducted on a ring-fenced mine where the taxpayer does not have a mining right? These aspects, among other, are not clear from the current draft legislation.
With regards to other proposed amendments, it is proposed that the Commissioner for SARS (previously the Minister of Finance in consultation with the Minister of Mineral Resources and Energy) may on application by a taxpayer carrying on mining and mining operations on two or more mines, issue a directive in terms of section 36(7F) of the ITA that the said mines shall for the purposes of that section be deemed to be one mine and the "capex per mine ring-fencing" provision would not apply after taking into account proposed specific criteria. Unfortunately, the amendments do not make it clear whether the existing directives issued by the Minister of Finance would remain.
Furthermore, for the purposes of determining the "interest of non-resident property in immoveable property" in South Africa (the so-called "property rich" provision), certain changes are proposed. The proposal is to include any rights to variable or fixed payments as consideration for the working of, or the right to work mineral deposits, sources and other natural resources in the Republic when calculating whether more than 80% of the value of an interest held by a foreign resident relates to immovable property in South Africa (which will be subject to capital gains tax), .
Having regard to the material amendments proposed by National Treasury above and the far reaching consequences, we will be making submissions to National Treasury as a firm, but we also recommend that taxpayers submit their specific comments to National Treasury so that they would appreciate the impact of these changes. In this regard, we will be happy to discuss on how we can assist.
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.