Accelerated Capital Expenditure Allowances: Does it Apply to Contract Miners?

Written by: Daniel Hertog

Introduction[1]

South Africa’s mining sector has several unique features necessitating favourable tax treatment to attract investment. For instance, such features include the finite nature of resources, commodity price fluctuations, excessive capital outlay requirements, uncertainty as well as extensive periods between prospecting and production. That there must be favourable tax provisions to attract investment in South Africa’s mining sector was echoed in Benhaus Mining (Proprietary) Limited v C:SARS[2] (“Benhaus”) wherein the Supreme Court of Appeal (“SCA”) held that to develop South Africa’s mining sector, miners must be treated favourably.

The imperative to ensure the development of South Africa’s mining industry not only lies in effecting the transformative provisions underpinning the Constitution of the Republic of South Africa, 1996,[3] but also the state’s custodial duty to ensure equitable access to and sustainable development of mineral resources.[4] One of the ways to achieve such equitable access and development is through accelerated capital expenditure allowances (“capex”). Achieving such access and development through capex is possible not only because capex guards against certain unique features of the mining sector to attract investment, but also because such allowances could enable contract miners to effectively access the mining sector. Ensuring such access for contract miners is particularly important as they, unlike large-scale mining corporations, may have limited means to conduct mining operations.

However, the failure to include contract miners within the ambit of ss 15 and 36 of the Income Tax Act[5] (“ITA”) has created much uncertainty as to whether contract miners may benefit from capex in South Africa. Such uncertainty is compounded by whether the activities of contract miners fall within the definition of “mining” and “mining operations”, entitling them to claim capex. This blog explores how South African courts have pronounced on the above issues.

Do Accelerated Capital Expenditure Allowances Apply to Contract Miners?

 Section 15 of the ITA provides that:

“There shall be allowed to be deducted from the income derived by the taxpayer from mining operations an amount to be ascertained under the provisions of section 36…any expenditure incurred by the taxpayer during the year of assessment on prospecting operations…together with any other expenditure which is incidental to such operations…”.

This provision should be read in conjunction with s 36(7C) of the ITA, which provides that “…the amounts to be deducted under section 15(a) from income derived from the working of any producing mine shall be the amount of capital expenditure incurred”.  Furthermore, s 36(11) of the ITA makes provision for the different forms of capital expenditure.

Whether the above provisions apply to contract miners hinge on the following, namely: whether their activities fall within the definition of “mining” and “mining operations” as defined under the ITA; whether their income earned is from a “producing mine”; and whether they actually incur capital expenditure.

Section 1 of the ITA defines mining and mining operations as “…every method or process by which any mineral is won from the soil or from any substance or constituent thereof”. The seminal case expounding this definition and determining if income was derived from mining operations is the Benhaus case.

The issue before the court in this case was whether Benhaus, a contract miner, conducted mining operations for purposes of claiming capex.[6] One of the primary averments by the commissioner was that contract miners cannot claim capex because they merely earn a fee and not income generated throughout the lifecycle of mining operations.[7] Contrary to the commissioner’s assertion and similar sentiments expressed by Sutherland J in the court a quo, who held that one must be in the “trade” of mining to fall within the definition of “mining operations”, the SCA reached a different conclusion.[8]

The SCA held that to “win” a mineral for purposes of mining operations, there must be an extraction of minerals from the earth, notwithstanding the fact that the extractor may not share in the proceeds from selling such minerals (i.e. be in the trade of mining).[9] More particularly, whenever a contract miner is involved in the process of extracting minerals, they fall within the definition of “mining” or “mining operations”.[10] Such process extends to and commences when any work is carried out in mere preparation to extract minerals.[11] Therefore, a “mining operation” commences when one is on site, merely preparing for mineral extraction (i.e. long before mineral production).[12] Thus, the “working of any producing mine” does not mean there must be actual mineral production, but by being on site in preparation to extract minerals, one is invariably deemed to be working on a “producing mine”.[13] Consequently, the SCA concluded that Benhaus carried on mining operations and was therefore entitled to capex.[14]

From the above follows that contract miners do indeed fall within the ambit of ss 15 and 36 of the ITA, enabling them to claim capex. However, should the Draft Taxation Laws Amendment Bill of 2020 be promulgated in its current form, only those holding a mining right will be able to claim capex. Such amendment would be contrary to the SCA’s finding in Benhaus and preclude contract miners from claiming capex in future.

Conclusion

This blog explored how South African courts have dealt with the legal deficiency to address capital expenditure incurred by contract miners. It did so by considering the purpose and importance of accelerated capital expenditure allowances as well as whether and how contract miners are entitled to such allowances.