A proposed amendment to the Income Tax Act to exclude contract miners from claiming accelerated capital expenditure deductions may have a devastating impact on the entire industry.
Several large mining houses, industry bodies and law firms are preparing submissions to National Treasury in an effort to ensure the proposal is not accepted in its current form.
Treasury published the proposal in the Draft Taxation Laws Amendment Bill in July, basically saying that tax legislation should be clarified to state that only the holder of a mining right will qualify for the accelerated capital expenditure deductions. The effective date for this proposal is January 1 next year.
According to industry players the proposal stems from the Benhaus judgment delivered last year. The Supreme Court of Appeal (SCA) found that Benhaus (a contract mining company) was in fact involved in “mining activities” as it extracted minerals and was earning mining income.
The court held that it qualified for the same capital expenditure allowances available to mining companies.
The proposal is seen as a knee-jerk reaction from the South African Revenue Service (Sars) because the outcome of the SCA case was not its favour.
Pieter Janse van Rensburg, director of the boutique tax firm AJM Tax, says agricultural activities and mining operations have a favourable tax dispensation. Taxpayers in these sectors are allowed to deduct certain expenses of a capital nature and have accelerated capital allowances. They are allowed to claim 100% of the expense in the year it was incurred.
“Given that mining contributes approximately R350 billion to the South African GDP, one can only assume that the consequence [of the proposal] will be far-reaching.”
Industry players note various reasons why the company holding the rights does not engage in the mining activity itself.
One reason is massive delays to obtain consent from the Department of Mineral Resources for the transfer of a mineral right when it’s sold to another company.
Adele de Jager, partner at law firm Bowmans, says this can take anywhere between six months and 10 years. While the purchaser awaits the consent, it enters into an interim mining arrangement with the holder of the right. The company that bought the right then has the ability to mine legally without being the owner of the mining right yet.
“The impact of the proposed change on these arrangements will be significant,” warns De Jager. “This is not beneficial to investments into the mining industry.”
Another major effect on the industry is where, within a group of companies, the mining rights are held in one vehicle and another company in the group carries out the mining operations through a lease agreement. This is done for various commercial reasons or solvency issues, notes De Jager.
The proposed change will result in a situation where the company actually operating the mine is prevented from the benefits of the accelerated capital allowance simply because it is not the holder of the mineral right.
According to Birt Coetzer, a member of the mining work group at the South African Institute of Tax Professionals (Sait), the use of contractors in the mining industry is quite prevalent.
“You will find contract miners on any mine in South Africa at any given time. It is just a natural consequence of the scale of operations.”
He believes the proposal will not have a major impact on contract miners, since 90% of the contractors do not claim the mining capital allowance. “Most of the contract miners do not consider themselves miners.”
He adds that companies that are not involved in mining activities will still be able to deduct capital expenses by relying on other sections in the Income Tax Act. However, the deductions can only be claimed over three or five years, depending on the provision they rely upon.
Coetzer acknowledges that it will impact the cash flow position of contract miners who have been claiming the upfront deduction, since the tax saving will now be spread over three or five years.
Impact on BEE JVs
His major concern is around the impact on joint ventures (JVs) between mining houses and their BEE partners.
In many instances the BEE partner holds the mining right, but does not have the capital to mine.
This led to the formation of unincorporated joint ventures where the BEE partner makes the right available to the mining company in the JV, which then operates the mine and provides the financing.
In this case the ‘actual miner’ will not be able to claim the accelerated tax deduction.
In terms of legislation it is not permissible to split the mining right in the JV to allow the BEE partner to hold 26% and the mining company 74%. If that was allowed this entire proposal would have been just a rumour.
But, says Coetzer, the battle is not lost yet.
According to De Jager there was a desperate call on Treasury during a recent session with industry players to properly consider the impact of the proposed amendment.
The timing of the final draft is going to be critical since the effective date is just a few months away.
“It is extremely difficult to plan around legislation that is not final and enacted,” she says.
Janse van Rensburg, who is a Sait board member, is of the view that any proposed change to legislation should focus on the industry as a whole, as opposed to individual taxpayers operating in that industry.