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Mining industry in the dark about capex write-off for contract miners

In a proposed amendment only mineral rights holders carrying on mining operations would qualify for accelerated capital expenditure deductions.
Image: Shutterstock

The proposed amendment to the Income Tax Act to exclude contract miners from claiming accelerated capital expenditure deductions was put on hold at the end of last year.

However, no further discussions have taken place with industry players, who had pleaded with National Treasury and the South African Revenue Service (Sars) to engage in discussions – before the new year.

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The amendment, which has been described as “devastating” for the mining industry, would have been effective from January 1 this year.

Treasury proposed in the October draft response document on the Taxation Laws Amendment Bill that government and industry be given more time to investigate and find solutions “that may have less negative impact on the mining industry before amendments are made to the tax legislation”.

In terms of the proposed amendment only the holder of the mineral rights who is carrying on mining operations would have qualified for the accelerated capital expenditure deductions.

This has been seen as a “misalignment” with business models in the mining sector where contract mining has become quite prevalent, with contract miners being present on “any mine in South Africa at any given time”.

Sword of uncertainty

George Trollope, Vice president of taxation at AngloGold Ashanti and vice chair of the South African Institute of Tax Professionals’ (Sait) mining committee, says the sword of uncertainty continues to hang over the industry.

This certainly does not bode well for investments on top of existing prohibiters such as unreliable electricity supplies, labour issues and policy and political uncertainty.

Trollope says the Sait committee has been pleading with the legislator to engage with it before making further proposals in the February budget that will have severe implications for the mining industry and potentially for future employment.

“We are willing to talk. We have had no response yet. What worries me is that Treasury is now entering the budget preparation phase and there has been no engagement with us.”

Treasury explained in the draft response document that the intent behind the full expensing of capital expenditure in the year of investment was to recognise the long lead times and risk taken on by mining companies when deciding to invest.

“Since companies engaged in mining activities for a fee (contract mining) are not exposed to equivalent risks, the accelerated capital allowance for mining expenditure . . . should not be made available to them,” Treasury argued.

“Their revenue base is certain and so they should not be given the same benefit afforded to companies with an uncertain revenue base,” it added.

Trollope says this argument shows there is not sufficient understanding of the industry. Contract miners are taking major risks.

“It is important for Treasury and Sars to understand contract mining because the risk is born by both the contractor and the mineral rights holder.”

The sector has evolved

The amendment comes with a bit of history. In 2019 the Supreme Court of Appeal found that a contract mining company, Benhaus, was involved in “mining activities” and that it was entitled to the same capital expenditure allowances available to mining companies.

Then in 2020 Treasury proposed the amendment to the Income Tax Act to read that only the holders of the mineral rights who are engaged in “mining activities” will qualify for the accelerated capex deduction.

Trollope says the mining industry has evolved over the years, and contract mining has become quite prevalent, mainly because of these companies’ expertise in the development of mining infrastructure.

They have the required plant and machinery to excavate and extract minerals from the soil on behalf of the mineral rights holder for a fee. There are various reasons why the company holding the rights does not engage in the mining activity itself.

One reason is the massive delays to obtain consent from the Department of Mineral Resources for the transfer of a mineral right when it was sold to another company.

Adel de Jager, partner at Bowmans, said in an earlier interview the transfer can take anything between six months to 10 years.

While the purchaser waits for the consent it enters into an interim mining arrangement with the holder of the rights. It then has the ability to mine legally without being the owner of the rights yet.

Unintended consequences

Sait CEO Keith Engel says one of the main problems with the amendment was that the failure to hold a direct mineral right often is not indicative of contract mining. There are many joint venture relationships where only one party holds the right but all the parties to the joint venture fully share in the mining profit and loss. The main concern was only about contract miners who essentially received service income, regardless of mining profitability.

Oddly enough, the proposed amendment directly hits BEE joint ventures.

In many instances the BEE partner holds the mining rights, but does not have the capital to mine. It has led to the formation of joint ventures where the BEE partner makes the rights available to the mining company in the joint venture who then operates the mine and provides the financing.

Another unintended consequence, says Trollope, is on the processing of tailings. This does not require a company to obtain mineral rights. Some mining companies are figuring out ways to turn tailings to profits with novel reprocessing technologies to extract valuable metals from the waste.

Trollope says it has been processing mine dumps to produce gold from the tailings.

With this new proposal the mine will not get its 100% capital expenditure write-off because there is no mineral right attached to these mining activities.

“These tailing operations are very important as they form part of the environmental rehabilitation process”, says Trollope.

Sait says the current concerns regarding the “disjunction” between contract- and wholescale mining offers an opportunity for a comprehensive overhaul of the entire mining tax regime.

“The mining industry as a whole is critical to South Africa’s history and future success, and we are confident that the various role players would be willing to come together to advise on a more cohesive regime,” it says.

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The mining industry in SA has become uninvest able due to government ineptitude and its socialist interference.

Yep.government destroying everything

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