Benhaus Mining (Pty) Ltd v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Citation: 2020 (3) SA 325 (SCA)

Benhaus Mining (Pty) Ltd v Commissioner, South African Revenue Service
2020 (3) SA 325 (SCA)

2020 (3) SA p325

Citation	2020 (3) SA 325 (SCA)
Case No	165/2018; [2019] ZASCA 17
Court	Supreme Court of Appeal
Judge	Lewis ADP, Mbha JA, Mocumie JA, Makgoka JA and Davis AJA
Heard	March 22, 2019
Judgment	March 22, 2019
Counsel	PJJ Marais SC (with J Truter) for the appellant.; AR Bhana SC (with NK Nxumalo) for the respondent.

Flynote : Sleutelwoorde

Revenue — Income tax — Deductions — Capital expenditure in mining operations — Mining operations — What constitutes — Whether taxpayer, by excavating and digging mineral-bearing ore for fee on delivery to entity processing such ore, undertaking 'mining operations' — Income Tax Act 58 of 1962, s 1 sv 'mining operations'; ss 15(a) and 36(7C).

Headnote : Kopnota

The principal issue in this appeal (from the Tax Court to the Supreme Court of Appeal) was whether the appellant taxpayer (Benhaus) derived income from mining operations in the tax years 2005 – 2009, such that it was entitled to claim deductions of capital expenditure in those years in terms of s 15 read with s 36(7C) of the Income Tax Act 58 of 1968 (the Act). [*] Benhaus was a contract miner: it entered into contracts with third parties that held mining rights, rendering various services to them for a predetermined fee without itself trading in the mineral extracted. The essence of the contracts was that Benhaus would extract chrome-bearing ore on behalf of the client in return for a fee calculated at a rate per ton thereof delivered to the client's processing plant. Benhaus claimed that it was mining the ore, and claimed deductions in each year of the capital expenditure on the machinery used in extracting the mineral-bearing ore. (See [11] – [12].)

2020 (3) SA p326

The Commissioner issued additional assessments for the years in question on the basis that ss 15 and 36(7C) did not apply. This because, in the Commissioner's view, Benhaus was not engaged in mining as it did not itself process the mineral-bearing ore or trade in it; and its income was not derived from mining but from fees for related services (see [12] and [36]).

Held

It had long been recognised that the process of extraction amounted on its own to a mining operation, and that the processing of the ore was a different one (see [33]). And, it must be so that the expression 'mining operations' covered work done on mineral-bearing property in preparation for winning of the mineral, otherwise miners would not be able to recover expenditure on capital assets laid out before, even long before, a mine started producing (see [36]).

A company that excavated ground and dug up mineral-bearing ore for a fee on delivery to another entity that processed the ore, undertook mining operations within the meaning of ss 1 and 15(a). Benhaus was thus entitled to claim deductions in terms of s 36(7C) of the full amount of capital expenditure on mining equipment in the tax year in which they were incurred. The appeal would accordingly be upheld. (See [41] – [42].)

Cases cited

Southern Africa

Armgold/Harmony Freegold Joint Venture (Pty) Ltd v Commissioner, South African Revenue Service 2013 (1) SA 353 (SCA) ([2012] ZASCA 152): referred to

Burgess v Commissioner for Inland Revenue 1993 (4) SA 161 (A) (55 SATC 185): considered

Commissioner for Inland Revenue v BP Southern Africa (Pty) Ltd 1997 (1) SA 375 (C) (59 SATC 97): dictum at 379C – D applied

Commissioner for Inland Revenue v Lever Bros and Another 1946 AD 441: dictum at 450 applied

Commissioner, South African Revenue Services v Foskor [2010] 3 All SA 594 (SCA) ([2010] ZASCA 45; 72 SATC 174): applied

Commissioner, South African Revenue Services v Marula Platinum Mines Ltd 2017 (2) SA 398 (SCA) ([2016] ZASCA 121): considered

Gloucester Manganese Mines (Postmasburg) Ltd v Commissioner for Inland Revenue 1943 TPD 232 (12 SATC 229): considered

ITC 1907 (2017) 80 SATC 271: criticised

ITC 1455: considered

Richards Bay Iron & Titanium (Pty) Ltd and Another v Commissioner for Inland Revenue 1996 (1) SA 311 (A) ([1995] ZASCA 81): applied

Western Platinum Ltd v Commissioner for the South African Revenue Service (2005) 67 SATC 1): dicta in paras [1] and [6] applied.

Australia

Federal Commission of Taxation v Broken Hill Proprietary Company Ltd 1 ATR 40: applied.

Legislation cited

The Income Tax Act 58 of 1962, ss 15(1)(a) and 36(7C).

Case Information

PJJ Marais SC (with J Truter) for the appellant.

2020 (3) SA p327

AR Bhana SC (with NK Nxumalo) for the respondent.

An appeal from the Tax Court, Johannesburg (Weiner J).

Order

1.

The appeal is allowed.

2.

The additional assessments for the years 2005 – 2009 are referred back to the Commissioner so as to allow for the deduction of capital expenditure claimed in respect of mining equipment.

Judgment

Lewis ADP (Mbha JA, Mocumie JA, Makgoka JA and Davis AJA concurring):

[1] The principal issue in this appeal is whether the appellant, Benhaus Mining (Pty) Ltd (Benhaus), derived income from mining operations in the tax years 2005 – 2009, such that it was entitled to claim deductions of capital expenditure in terms of s 15 read with s 36(7C) of the Income Tax Act 58 of 1968 (the Act) in the tax years 2005 – 2009. The Commissioner for the South African Revenue Service had, since 1998, assessed Benhaus for income tax on the basis that it did fall within the ambit of s 15. But in September 2013 the Commissioner issued additional assessments for the years in question on the basis that Benhaus was not a mining company. Benhaus objected to these additional assessments, but the objection was not upheld. It appealed under the Tax Administration Act 28 of 2011. The Tax Court, Johannesburg (per Weiner J), dismissed the appeal. With her leave, Benhaus has appealed to this court.

[2] There are some ancillary issues that arise should Benhaus's arguments on the principal issue not succeed: the quantum of recoupments in respect of the sales of mining assets; the imposition of understatement penalties; the levying of s 89quat interest in respect of the underpayment of provisional tax; and the costs order made by the Tax Court against Benhaus.

[3] For many decades the income tax dispensation for miners (as well as for farmers) has been different from that governing other businesses. Miners are given privileged treatment, in order, we are told, to encourage the growth of the mining industry. As Conradie JA said in Western Platinum Ltd v Commissioner for the South African Revenue Service (2005) 67 SATC 1) para 1:

'The fiscus favours miners and farmers. Miners are permitted to deduct certain categories of capital expenditure from income derived from mining operations. . . . These are class privileges. In determining their extent, one adopts a strict construction of the empowering legislation.'

[4] The question that arises in this appeal is whether Benhaus carried on mining operations for the purpose of making those capital expenditure deductions in the years of assessment in which the capital expenditure was incurred. That depends on what is meant by 'mining' in the definitions of the Act (s 1) and in s 15(a), read with s 36(7C).

[5] The Act defines 'mining operations' and 'mining' as including 'every method or process by which any mineral is won from the soil or from any substance or constituent thereof' (s 1). Section 15 states:

2020 (3) SA p328

Lewis ADP (Mbha JA, Mocumie JA, Makgoka JA and Davis AJA concurring)

'Deductions from income derived from mining operations

There shall be allowed to be deducted from the income derived by the taxpayer from mining operations —

(a)

an amount to be ascertained under the provisions of section 36, in lieu of the allowances in sections . . . .'

[6] Section 36(7C) states:

'Subject to the provisions of subsections (7E), (7F) and (7G), the amounts to be deducted under s 15(a) from income derived from the working of any producing mine shall be the amount of the capital expenditure incurred.'

[7] The reasons for affording miners the right to claim the amount of capital expenditure actually incurred, instead of the asset being depreciated over time (as would be the case with other industries) are, in simple terms, to lessen the impact of deriving little or no income when a mine is being established, in some cases for years. It is notorious that a huge investment of capital is required for mining operations before any income can be earned. The accelerated depreciation regime provides incentives to miners to take on the risks of entering the mining industry which is volatile and inherently risky. In other industries, expenditure on capital assets is deducted over a number of years, depending on the expected life of the asset.

[8] The explanations for the special dispensation for miners are discussed in detail in various committee reports provided over the years, including the Davis Tax Committee: Second and Final Report on Hard-Rock Mining December 2016. I refer to this simply as background and because the Commissioner has placed much emphasis on the difference between mine operations that take considerable time to earn income, and contract miners who earn a fee as soon as they produce the mineral-bearing ore for the client which processes it. However, the report has no bearing on the issues on appeal, although...