BM (Pty) Ltd v Commissioner, South African Revenue Services
| Jurisdiction | South Africa |
| Judge | SE Weiner J (Mathibela and Mashanda, Assessors) |
| Judgment Date | 08 June 2017 |
| Citation | 2018 JDR 0273 (GJ) |
| Docket Number | 13863 |
| Court | Tax Court |
Coram Weiner J, with Mathibela and Mashanda, Assessors:
INTRODUCTION
The appellant conducts business as a "contract miner". It concludes contracts with third parties who hold mining rights and it undertakes to render certain services to such parties.
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Coram Weiner J, with Mathibela and Mashanda, Assessors
Prior to 26 September 2013, the appellant reflected the income received from the holders of the mining rights as mining income and was so assessed by the respondent. This entailed, inter alia, that capital allowances on equipment were deducted in full.
On 26 September 2013, the respondent raised additional income tax assessments in respect of the appellant's 2005 to 2009 years of assessment.
In terms of such assessments:
The appellant's income was assessed as non-mining income (and accordingly capital allowances were added back and wear and tear allowances were granted).
Other adjustments were made and understatement penalties were levied on the appellant.
Interest on underpayment of provisional tax was levied pursuant to the adjustments.
The issues to be decided are:
Whether the appellant conducted mining operations and mining as defined in section 1 of the Income Tax Act during its 2005 to 2009 years of assessment and accordingly whether the
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Coram Weiner J, with Mathibela and Mashanda, Assessors
appellant derived income from "mining operations as contemplated in section 15 of the Act". ("the main issue")
If the appellant is held not to have conducted mining operations and therefore only wear and tear allowances are allowed, as opposed to the full capital allowance, the issue is whether the allowances allowed in terms of section 11(e) of the Act should be R267 528 904,00 as calculated by the respondent or R469 815 843,00 as contended for by the appellant. i.e whether they should be allowed over a period of two or three years.
Secondly, the issue of recoupments. The issue is whether the proceeds from the disposal of assets in the amounts and in the years of assessment had already been included in the appellant's mining income or not, and accordingly, whether the respondent correctly included the amount in the appellant's income as recoupments in terms of paragraph (j) of the definition of gross income in section 1 of the Act. The appellant treated same under mining operations and therefore recoupments were treated as part of the capex. If it is not mining operations, one has to determine whether, when the assets were sold, the depreciation should be part of gross income in terms of section 8(4)(a) of the Act.
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Coram Weiner J, with Mathibela and Mashanda, Assessors
Thirdly, the question of understatement penalties: whether the respondent has discharged the burden of proving the facts on which the respondent based the imposition of the understatement penalties and, if so, whether such penalties should be remitted or reduced.
Fourthly, section 89quat interest levied by the respondent in terms of section 89quat(2) of the Act should be remitted in whole or in part in terms of section 89quat(3) of the Act.
MAIN ISSUE
The main issue in this appeal is whether the appellant derived income from mining operations which would have entitled it to the mining capital allowances. The decision on this issue will affect the remaining issues referred to above. Miners are subject to the ordinary provisions of the Income Tax Act No 58 of 1962 ("the Act"). There are however certain provisions which grant certain beneficial dispensations. For the purposes of the present appeal the following sections of the Act are relevant:
Section 15 of the Act provides:
"There shall be allowed to be deducted from the income derived by the taxpayer from mining operations:
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Coram Weiner J, with Mathibela and Mashanda, Assessors
an amount to be ascertained under the provisions of section 36 in lieu of the allowances in section 11(e)."
Section 36(7C) provides that:
"The amounts to be deducted on the section 15(a) from income derived from the working or any producing mine shall be the amount of capital expenditure incurred."
The definition of "capital expenditure" in section 36(ii) referred to in 15(a) refers to "expenditure …on shaft sinking and mine equipment …".
Section 11(e) of the Act allows a "wear and tear deduction" of such sum as the Commissioner may think just and reasonable, which would represent "the amount by which the value of machinery, plant, implements, utensils and articles … has been diminished by reason of wear and tear or depreciation during the year of assessment".
The benefit of a section 15(a) and section 36 deduction, as opposed to a section 11(e) allowance, is that the former sections allow the expenditure on a capital asset to be deducted in full during the first year of the acquisition, whereas a section 11(e) allowance is generally determined by referring to the expected life of the particular asset and the deduction takes place over that period of time.
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Coram Weiner J, with Mathibela and Mashanda, Assessors
In regard to the main issue as to whether or not the appellant was engaged in mining operations and was deriving income therefrom, the following facts are common cause:
The appellant carries on business by contracting with clients to provide mining-related services to its clients in the mining sector.
The appellant does not hold any mining rights itself.
The mining-related services in question are in respect of open cast mining and include the following activities:
Site establishment including the fencing of the lay down and the workshop.
Construction and maintenance of access roads.
Construction and maintenance of primary and secondary
haul roads.
Removal of topsoil and stock piling it all at designated areas.
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Coram Weiner J, with Mathibela and Mashanda, Assessors
Excavation and stock piling of the overburdened material at the designated areas.
Removal of waste.
Construction of storm water culvert sections.
Dwelling and blasting of overburdened and mineral-bearing ore.
Delivering the mineral-bearing ore to the client's designated premises for processing; rehabilitation of the mining area upon completion including concurrent rehabilitation in the form of backfilling, dewatering of open pits.
Rehabilitation of the mining area.
("the services").
The essence of the contracts is that the appellant extracts mineral-bearing ore from the ground, on behalf of a client, in return for a fee calculated at a rate per ton of mineral-bearing ore which is delivered to the client's processing plant. The ore extracted by Appellant was run-of-mine ("ROM") chromite ore or chrome-bearing ore
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Coram Weiner J, with Mathibela and Mashanda, Assessors
During the relevant tax years most of the appellant's clients conducted chrome mining businesses and the ore extracted by the appellant was /chrome-bearing ore.
The clients derived their income from the sale of the minerals extracted from the ore delivered by the appellant. The appellant in most instances derived a fee income from rendering the services in question.
The appellant based its income tax returns on the fact that it was carrying on mining operations. Accordingly, its fee income constituted "income derived from mining" and it claimed the capital allowances in respect of the cost of equipment. In terms of the additional assessments, the respondent disallowed the capital allowances claimed and added it back to taxable income for the relevant tax years and instead allowed wear and tear allowances.
The appellant either in its current name, or as it was previously known that is BN (Proprietary) Limited, alternatively through its BEE subsidiary BM (Proprietary) Limited entered into contracts with several companies to perform contract mining.
WHAT IS CONTRACT MINING
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Coram Weiner J, with Mathibela and Mashanda, Assessors
Van Blerk Mining Tax in South Africa [1] stated as follows:
"It sometimes occurs especially in the case of open cast mining that the mine owner subcontracts all or a portion of the mining operations to a third party. For example a contracting arrangement could require a third party to use earthmoving equipment to win ore by open cast methods and transport this ore to a processing plant. In these circumstances can it be said that the subcontractor is conducting mining operations."
Van Blerk answers as follows:
"Since the right to mine precious stones and precious metals vests in the State and since all those who wished to undertake these activities must obtain a lease from the State it can be said that the major portion of mining conducted in South Africa is on a 'contract' basis. Quite obviously lessees mining in these circumstances are conducting mining operations."
In dealing with a situation such as the present Van Blerk states:
"Can it be said that the same principles apply when the contract operates on the basis of a charge which relates to his inputs and efforts rather than receiving a share of the profits. … If the contractor undertaking mining operations where he effectively conducts such operations for the benefit of another and receives no share in the results and profits other than a negotiated fee related to his efforts and costs. … This must be so as the contractor is conducting a process by which a is one from the earth; as a consequence the income which he derives will be taxed in accordance with mining tax rates and the expenditures will be deductible in accordance with the special...
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