On 18 September 2019, Renmere issued a Tax Flash regarding the Benhaus Mining v CSARS (165/2018) [2019] ZASCA 17 judgment, where the Supreme Court of Appeal confirmed that contract miners may in certain circumstances be entitled to the favourable accelerated mining capital expenditure allowance (‘the mining capex allowance’) in terms of section 15(a) read with section 36 of the Income Tax Act, No. 58 of 1962 (‘ITA’).
The mining capex allowance is reserved exclusively for miners as a class privilege, in order to encourage mining as a key industry in South Africa, by aiming to compensate miners for the significant and unique risks inherent to their business. Currently, to qualify for the mining capex allowance, a taxpayer must earn income from mining operations (as defined). Put differently, the taxpayer must simply be engaged in mining operations on a producing mine and there is currently no requirement to be a mining right holder to qualify.
The 2020 Draft Taxation Laws Amendment Bill (‘DTLAB’) was published for comment on 31 July 2020. In line with the announcements made during the National Budget Speech on 26 February 2020, it is proposed in the DTLAB that the mining capex allowance should only be available to holders of a ‘mining right’ as defined in section 1 of the Mineral and Petroleum Resources Development Act, 2002, in respect of the mine where those mining operations are carried on. Should this proposed amendment be enacted, contract miners would effectively be excluded from the favourable mining capex regime.
The proposed amendment could have far-reaching, unintended consequences in its current form. For example, where application has been made to transfer a mining right from one group company (‘Old Mining Co’) to another (‘New Mining Co’) and New Mining Co incurs mining capex in the interim, it may no longer qualify for the mining capex allowance, until such time as the mining right is transferred to it.
The proposed amendments are anticipated to apply to capital expenditure incurred on or after 1 January 2021. Should a contract miner historically have claimed the mining capex allowance and be left with a balance of unredeemed capex on 31 December 2020, it appears that the contract miner will arguably be entitled to continue to set off the balance of unredeemed capex against mining income, in accordance with the provisions of section 36 of the ITA, until such time as the full balance of unredeemed capex has been extinguished.
Capital expenditure incurred from 1 January 2021 onwards may qualify for the accelerated section 12C manufacturing allowance, depending on the nature of the contract mining services rendered and provided that certain technical amendments be made to the proposed legislation.
Should you be a miner who stands to be excluded from the mining capex allowance regime as a result of the proposed amendment, contact us to discuss the impact to your operations and how best to navigate it.
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