The Department of Mineral Resources (‘the DMR’) recently published proposed regulations pertaining to financial provisioning for mining rehabilitation (‘the Proposed NEMA Regulations’), which are due to be published in final form in October 2019. The Proposed NEMA Regulations provide for inter alia the following categories of rehabilitation provisioning vehicles:
- A closure rehabilitation trust fund or company; and
- A financial guarantee from an institution regulated by the financial sector legislation (typically issued by banks or, more recently, by insurers).
From a tax perspective, there is currently disparity in the tax treatment of the different financial provisioning vehicles. For example, whereas contributions to a section 37A rehabilitation trust or company are fully tax deductible (provided that the strict requirements of section 37A of the Income Tax Act No. 58 of 1962 (‘the ITA’) are met), contributions in respect of financial guarantees are typically not tax deductible. In other words, despite the fact that the Proposed NEMA Regulations provide for a variety of financial provisioning vehicles, the ITA in essence currently only incentivises rehabilitation by way of a section 37A vehicle.
Despite the tax benefits of section 37A vehicles, the disadvantages include the punitive measures that may apply should the provisions of section 37A be contravened, as well as severe cash flow constraints. These constraints arise from the fact that these vehicles are required to be fully cash backed. Also, in practice, the funds may not be accessed for rehabilitation until after the rehabilitation has been completed (and first funded from the miner’s own pocket),
subject to the DMR’s approval. Due to the abovementioned disadvantages of section 37A vehicles, miners tend to favour options which offer more cash flow flexibility, despite stricter access controls and oversight by a third party, most notably financial guarantees issued by insurers.
Should one opt for a financial guarantee vehicle, it may make commercial sense to fund the guarantee by way of funds already held in a section 37A vehicle. Given the punitive provisions of section 37A, a withdrawal from such a vehicle needs to be carefully considered against the miner’s particular circumstances, as well as the terms of the financial guarantee. Withdrawals of this nature will soon be required to be reported under the Reportable Arrangement provisions in the Tax Administration Act No. 28 of 2011.
To manage the abovementioned risks appropriately, it is key that the withdrawals from a section 37A vehicle be supported by a detailed tax opinion.
Contact us should you wish to discuss the best option for your financial provisioning from a tax perspective. Perhaps some rehabilitation is in order.
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