Abstract
The mining industry continues to play an important role in the development of the
South African economy. Over the past 20 year, there’s been an increase in mining
activities being outsourced to contact mining companies to conduct mining operations
that include a wide range of mining services from the extraction of minerals to
processing and refinery activities.
However, there has been some inconsistency in the application of the legislation by
contract mining companies when claiming capital allowances. Some taxpayers apply
section 11(e), while others apply section 36 of the Act when claiming capital
allowances on assets. The South African Revenue Service (SARS) view has always
been aligned with the notion that the services of contract mining companies do not
constitute mining operations. Therefore, income derived cannot be mining income.
The case of Benhaus Mining (Proprietary) Limited v Commissioner of South African
Revenue Service (165/218) (2019) ZASCA 17 (22 March 2019) (Benhaus case) was
the first to be tested in court on the opposing views between SARS and the taxpayer.
The ruling went in favour of SARS, however, the taxpayer appealed the ruling in the
Supreme Court of Appeal, where Judge Leach JA then considered the activities of the
taxpayer within the different stages of the mining process flow. The Judge concluded
that the taxpayer was involved in the first stage, which was basically the stripping
process of removing the topsoil where mining would commence and rock blasting in
order to access the mineral reef. This then led to the extraction of the ore, before
crushing and screening it. Based on this, the Judge ruled in favour of the taxpayer,
thus concluding that income earned by the taxpayer for charging a fee for services
rendered was mining income, and thus the taxpayer was conducting mining
operations.
Although the judgment is a significant development in the mining industry, more
specifically for contract mining companies, it only focused on the introductory
subsection of section 36 (section 36(7C)) of the Act and neglected to expand the
argument to further subsections 36(7E), 7(F) and (7G) of the Act. This is bound to
create huge uncertainties and inconsistency in the law application of these sections
(particularly the ring-fencing provisions) for contract mining companies engaged in
mining activities of more than one mine. The application of ring-fencing provisions is
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set out clearly in the Armgold/Harmony Freegold Joint Ventures v Commissioner of
South African Revenue Service (7032011) [2012] ZASCA 152 (1 October 2012)
(Armgold case) where Judge Leach JA elaborated on the allocation of losses and how
capital expenditure between the ring-fenced mines should be calculated when
determining the taxable income of the mining company.
Subsequent to the judgement, the National Treasury issued the 2020 Draft Taxation
Law Amendment Bill, where it proposed to amend the mining tax Act to limit the
entitlement of the mining capital expenditure allowance solely to mining right holders.
This research study aims to review the mining tax legislation as a whole and address
the current mining tax regime to the proposed amendments to establish the practical
method of taxing contract mining operations.