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In a significant judgment handed down on 5 September 2025 and published by SARS today, the Tax Court upheld an appeal by Taxpayer MPT against additional royalty assessments imposed by SARS for the 2015 and 2017 years of assessment. The dispute principally centred on the interpretation and application of sections 6(2)(b) and 5(2)(b)(ii) of the Mineral and Petroleum Resources Royalty Act No. 28 of 2008 (the "Royalty Act").
The Tax Court noted, seemingly as common cause, that section 6(2)(b) of the Royalty Act requires a notional adjustment to gross sales to determine the hypothetical amount that would have been received had the minerals been transferred, at arm's length, in the condition specified. This is often referred to as "deeming up" or "deeming down". Similarly, section 5(2)(b)(ii) permits an extractor, in calculating earnings before interest and taxes ("EBIT"), to deduct the notional costs that would have been incurred to bring the minerals to the specified condition where the mineral is transferred below that condition.
In this case, the taxpayer sold platinum group metals ("PGMs") concentrate at an average grade of 113.5 parts per million ("ppm"), whereas the condition specified in Schedule 2, which applies to unrefined minerals, is 150 ppm. On the common understanding that gross sales had to be deemed up, the core issue before the Court was the appropriate method for adjusting both gross sales and deductible costs in the circumstances.
SARS advanced a mechanical gross-up formula, multiplying the taxpayer's actual sales by 150/113.5 to reflect the hypothetical gross sales value at 150 ppm. The taxpayer, by contrast, led detailed evidence that its ore body and processing configuration – an integrated operation co-producing PGMs and chrome concentrate – made it unviable to produce concentrate at 150 ppm. Any attempt to do so would reduce recoveries, increase costs, and not result in higher sales prices, given the terms of its offtake agreement with a third-party refiner. The Court accepted the taxpayer's evidence that additional processing would in fact reduce the number of ounces available for sale due to the inverse relationship between grade and recovery; if the grade increases, the ounces recovered decrease.
Notably, the taxpayer had initially adopted a similar straight-line gross-up method in its 2016 and 2017 returns on the advice of its external tax advisers, PwC. The taxpayer later abandoned this approach, which it argued was "ill-advised". As the judgment confirms, this was for good reason too; the Court rejected the linear approach on the basis that it "oversimplifies" the applicable mining complexities (as proved by the taxpayer) and was contrary to the purpose of the Royalty Act when read in context. The proper context, the Court held, was the mining industry and any interpretation must be functionally appropriate and consistent with industry norms.
The Court confirmed that both gross sales and EBIT must be determined through "a method that reasonably approximates the notional gross sales and EBIT, taking into account the operational realities on recoveries and related costs". It is not sufficient to adopt a simplified linear adjustment that ignores the complex trade-offs between grade, recovery, and plant capacity. The appeal was accordingly upheld in full, the additional assessments (including penalties and interest) were set aside, and SARS was ordered to redetermine the assessments using a methodology that reflects the taxpayer's operational and commercial realities. SARS was also ordered to pay the taxpayer's costs, including the costs of two counsel.
The linear gross-up method adopted by SARS appears to have its origins in the (draft) 2008 Explanatory Memorandum to the Mineral and Petroleum Resources Royalty Bill ("2008 EM"), which noted that the deeming-up adjustment could be effected in one of two ways. However, as the Tax Court has now emphasised, an extractor's approach must be rooted in a purposive and unitary interpretation of the operative provisions. Interestingly, it does not appear from the judgment that SARS ever sought to justify the use of a linear adjustment on the basis of a proper interpretation of section 6(2)(b).
It remains to be seen how SARS, absent a successful appeal, will give effect to the judgment in redetermining the taxpayer's mineral royalty liability. If the deeming-up requirement is in fact applied in line with the judgment, it appears that gross sales will decrease while deductible costs increase, resulting in a materially lower royalty liability. Arguably, this produces an absurd outcome. While the legislative rationale for deeming down (i.e., not penalising beneficiation) is coherent, this judgment casts further doubt on the rationality of the so-called deeming-up requirement under the Royalty Act. That question may well invite future constitutional or legislative scrutiny. After all, while the National Treasury has explained that deeming up is necessary to prevent extractors from structuring their affairs to artificially reduce gross sales, this concern can be addressed by existing provisions. Specifically, the arm's length requirement in section 11 and the anti-avoidance provisions in section 12 provide adequate safeguards against extractors undervaluing mineral sales to reduce their royalty obligations.
The overarching purpose of the Royalty Act is to compensate the State for the depletion of non-renewable mineral resources. Conceivably, therefore, where parties agree at arm's length to sell minerals below the condition specified, the royalty ought, in principle, to be levied on the actual proceeds of that arm's length transaction.
Taxpayers who transfer minerals below the specified condition should carefully assess the possible impact of this judgment on their existing royalty calculations, past filings and audit risks. Given the complex landscape, extractors would be well advised to seek guidance on how best to approach these provisions in a manner that is both commercially supportable and legally defensible.
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