Modern Mining March 2020

previously thought to be reserved only for mining taxpayers directly deriving income from the sale of extracted minerals. Brief background Allan Reid, director – corporate, commercial and head of mining at Cliffe Dekker Hofmeyr, explains that Section 36(7c) of ITA provides a special exemp- tion to miners, which gives them the right to deduct the full amount of capital expenditure actually incurred in any tax year from their income, instead of having to depreciate the capital assets over time, as would be the case with other industries. “Mining by its nature requires large, risky initial capital outlays where it may be many years before the mine goes into production and the miner can derive income from its investment. This accelerated depreciation or redemption allowance was intended to incentivise miners to enter into the mining indus- try to exploit South Africa’s vast mineral reserves,” says Reid. Like many other contract miners, Benhaus Mining entered into contracts with third-parties that held mining rights to render various mining related ser- vices to them for a predetermined fee. Benhaus deducted its full capital expenditure from the income

it received in terms of section 15 of the ITA, read with section 36(7c). The Commissioner for the South African Revenue Service then issued additional assessments going back a number of years, together with interest and penalties on the basis that Benhaus was not a mining company for purposes of the ITA. The Commissioner argued that there was a difference between mining operations that take consid- erable time to earn income, and contract miners who earn a fee as soon as they mine the ore. The Supreme Court of Appeal (SCA) in the Benhaus case held that contract miners do in fact conduct ‘mining operations’ and ‘mining’ as defined in the Income Tax Act and were therefore, like mining companies, entitled to claim deductions of the full amount of capital expenditure on mining equipment in the tax year in which it is incurred. Need for clarity However, following the Benhaus Case, there has been uncertainty regarding the abil- ity of contract miners to access the benefits offered to mining companies, and whether such contract miners are permitted to claim the capital expenditure allowances offered to mining companies. It is for this reason that Annexure C pro- posals set out in the 2020/21 Budget have recommended that National Treasury consid- ers challenges in further detail with possible amendments to the capital expenditure regime contained in 36(11) of the Income Tax Act.

Allan Reid, director – corporate, commercial and head of mining at Cliffe Dekker Hofmeyr.

Louis Botha, senior associate – tax & exchange control at Cliffe Dekker Hofmeyr, tells Modern Mining that in terms of Annexure C of the 2020 Budget Review, the point of contention is whether a contract miner, who excavates for a fee, and the actual mineral rights holder, as principal, should both qualify for the accelerated capital expenditure allowance pro- vided for under section 36 of the ITA. “Prior to the SCA’s judg- ment in the Benhaus Mining matter, which was handed down in 2019, only the mineral

Louis Botha, senior associate – tax & exchange control at Cliffe Dekker Hofmeyr.

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