AB Mining (Pty) Ltd v Commissioner of the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Mokgoatlheng J
• Judgment Date: 05 July 2012
• Docket Number: 12906/
• Court: Tax Court
• Hearing Date: 05 July 2012
• Citation: 2013 JDR 0355 (Tax)

Mokgoatlheng J:

(1)

The appellant a prospecting and mining enterprise has lodged an appeal against the respondent's tax assessment in respect of the years 2003 to 2006 for a tax liability in the amount of R12 889 189.00.

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Mokgoatlheng J

(2)

The essence of the appeal relates to:

(a)

The 2003 Tax Year – The Capital Gains Tax in the amount of R1 719 229 in respect of the alleged disposal of the C Mining Dump

(i)

The appellant contends that it did not dispose of the C Mining Dump, nor the rights thereto within the meaning of "disposal" as envisaged in Paragraph 11 of the Eight Schedule of the Income Tax Act 58 of 1962 (The Act); and

(ii)

the appellant contends that it did not own the C Mining Dump but only acquired the rights to certain platinum bearing materials thereon, which rights were to be exploited in conjunction with the D Company, in a 50% by 50% joint venture, consequently, the provisions of the Eighth Schedule of The Act are inapplicable to the transaction concerned, as are the penalties imposed in terms of the provisions of Section 76 of The Act;

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(b)

The 2004 Tax Year – The Fair Value Adjustment in the amount of R2 638 070

(i)

The appellant contends that the assessment insofar as the amount constitutes the disallowance of the deduction of the depreciated value of shares in E Mining (Pty) Ltd, which shares were purportedly written off, is factually incorrect, as E Mining (Pty) Ltd never issued shares to the appellant in lieu of any loans it advanced to it; and

(ii)

on the contrary the appellant asserts that the amount in question constitutes an allowable deduction under Section 11(a) of The Act, and is made up of office expenditure and salaries incurred by the appellant when it took over the staff and premises of E Mining (Pty) Ltd for its own purposes to raise capital from the public during a reverse take-over bid aimed at rescuing the latter to secure its listing on the Johannesburg Stock Exchange.

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Mokgoatlheng J

(c)

The 2005 Tax Year – Capital Gains Tax – The Alleged "Disposal" of Chrome Tailings Rights in the amount of R8 million;

(i)

The appellant contends that the assessment is based on the incorrect assumption that it acquired certain mineral rights from F Company and G Company for no consideration, and thereafter disposed off these rights between itself, the L Consortium, D Company and NO Company for a deemed consideration of R8 million;

(ii)

the appellant contends that this assumption is factually incorrect as no disposal of mineral rights per se occurred within the meaning of Paragraph 11 of The Eighth Schedule;

(iii)

the platinum bearing mineral rights were not acquired from the said entities on behalf of the L Consortium, but were previously acquired by the appellant from the C area's farmers on behalf of the L Consortium; and

(iv)

the appellant only obtained an undertaking from F Company and G Company to divert their chrome

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waste tailings pipelines to the processing plant of the L Consortium, consequently, this undertaking did not constitute a valuable right which can be considered as an "asset" for Capital Gains Tax purposes.

(d)

The 2005 Tax Year – Capital Gains Tax and Donations Tax – The "Disposal" of 38% income share held in the L Consortium

Ad Capital Gains Tax – R14 993 024)

(i)

The appellant contends that the respondent's application of Paragraph 38 of The Eighth Schedule to the transaction concerned, as being a disposal of an asset to a connected person in relation to itself for a consideration which does not reflect an arms' length price, is factually and legally incorrect;

(ii)

On the conclusion of the transaction in issue, the parties were totally unrelated, and the transaction was primarily aimed at severing their relationship with the least cost implications to each other, with each party retaining all existing rights and benefits;

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(iii)

the transaction constitutes a bona fide agreement concluded between parties acting at arms' length consequently, the provisions of Paragraph 38 to The Eighth Schedule are inapplicable, due to the fact that the undertaking by the appellant to pay 38% of its income to L Consortium (SA), is a mere contingency, which has no apparent market value and did not constitute the disposal of an "asset";

(iv)

furthermore, the respondent's determination of the transactions "market value" is flawed, because lacks a scientific basis and does not take cognizance of a number of important factors.

(e)

The Donations Tax (deemed donation – R5 586 607)

(i)

The appellant contends that the respondent's application of Section 58 of The Act to the transaction is flawed as no gratuitous "disposal" of "property" took place within the meaning of Section 58 of The Act;

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(ii)

the parties merely intended to sever their existing relationship as shareholders of Company UK, with the least cost implications for either party and with the retention of all their existing rights;

(iii)

the respondent failed in terms of Section 58 of The Act to make a proper valuation in determining the adequacy of the consideration, it merely relied on a totally unsubstantiated valuation by S Entity, which was not part of the transaction concerned;

(iv)

the respondent's calculation of the Rand value of the "donation" based on the selling price of L Company (UK) shares to S Entity is fundamentally flawed, because the respondent used the contractual conversion rate of R12.00 to a British pound sterling urged by S Entity, instead of an exchange rate of R11.481 to the pound in accordance with the respondent's published rates as at 1 February, 2005; and

(v)

consequently, insofar as the interest is calculated retrospectively on a penalty of R931 101, this amounts to the appellant being penalized twice for the same "offence".

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(f)

The 2006 Tax Year – The Accrual of Management Fees – R368 167

(i)

The respondent's inclusion of the relevant income in the 2006 tax year is contrary to the respondent's accepted practice in the previous tax years and goes against the accrual principle, namely that an accrual occurs only once the recipient has acquired an unconditional legal claim to the payment of a determinable amount;

(ii)

in casu, the Management Fees were calculated as a percentage of sales, were only determinable 4 calendar months after transaction date, consequently, there was no accrual prior to the date of the determination of such sales figures in the 2007 tax year confirming the correctness of the appellant's tax return for the tax year concerned;

(iii)

the respondent's view regarding the accrual of the relevant income, is disputed on the grounds firstly, that the income, on which the respondent bases its assessment argument, has accrued 4 calendar months

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subsequent to February 2006, namely in June 2006, which falls within the 2007 tax year, secondly, such income was disclosed in the appellant's interim financial statements for the six months ending 20 June 2006;

(iv)

the actual income on which the fees were based could, contractually, only be determined four calendar months subsequent to the delivery and processing date of the minerals concerned, when the quantities and quality of platinum bearing metal prices, penalties and exchange rates became known, consequently, the exact income in respect of February 2006 accrued in respect of the 2007 tax year;

(v)

the fact that the February 2006 management accounts of the L Consortium reflect the correct income in respect of that month, is due to the fact that the management accounts were prepared subsequent to June 2006, when the actual production figures for the month February 2006 became available for the first time; and

(vi)

further the relevant L Consortium accounts were prepared for management purposes only and

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consequently, have no formal legal standing outside that group.

(g)

The 2003 – 2006 Tax Years – Deduction of Overseas Travel Expenses – R393 725.00

(i)

The appellant contends that the expenditure concerned is deductible in terms of Section 11(a) of The Act as it was incurred by it in order to raise working capital for the company's operations inter alia, through loans from private investors and from public funds through a possible listing on the London Stock Exchange; and

(ii)

the expenditure claimed represents only about 10% of actual costs, as all private and capital expenditure as well as the major part thereof borne by Company UK was added back.

(h)

The 2003 – 2006 Tax Years – Penalties in terms of Section 76 of The Act – R1 895 590.00

(i)

the appellant contends that the respondent's imposition of penalties is based on the alleged non-

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disclosure of income or incorrect statements on the relevant tax returns, which allegedly resulted in the avoidance of tax; and

(ii)

in the present case no such non-disclosure or incorrect statements were made and no tax was raised in addition to what was properly declared in the relevant tax returns.

(i)

Ad Penalties and interest under Section 76 of The Act R5 024 2990

(i)

the appellant contends that the penalties in question are not applicable because it was not guilty of transgressing Section 76 of The Act;

(ii)

the respondent's decision to apply the provisions of Section 58 of The Act, regarding a so-called "deemed donation", does not entitle it to raise penalties for failure to submit a Donation's Tax Return in circumstances where the appellant on reasonable grounds, disagrees with the opinion of the respondent as to whether or not a donation had taken...