A (Pty) Ltd v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Coppin J
• Judgment Date: 01 August 2011
• Docket Number: 12856
• Court: Tax Court

Coppin, J:

[1]

This is an appeal against the assessment by the respondent of the appellant's liability for income tax for the 2003 and 2004 years of assessment.

[2]

There are no factual disputes and the issues between the parties were further narrowed by the time the matter was presented in court. The only

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issues remaining for determination are questions of law. In terms of s 83(4c) of the Income Tax Act 58 of 1962 ("the Act") when an appeal before the court involves a matter of law only the court shall consist of the President of the court sitting alone. [1]

[3]

It is common cause that at least during the years of assessment the appellant owned three goldmines, namely, B Mine, C Mine and D Mine. B Mine and C Mine, for the years under consideration, made a profit while D Mine made a loss. The appellant also derived an income from non-mining activities. The main question for determination is whether the loss of D Mine could be set-off against the taxable income derived by the appellant from its non-mining activities, or whether the loss, being a current or operating loss of D Mine, had to be deducted (and on a pro rata basis) from the income of the profitable mines, namely B Mine and C Mine.

[4]

In its income tax returns for the years in question the appellant did not deduct the loss from the income of C Mine and B Mine, but deducted the loss from the taxable income derived by it from its non-mining activities, thus substantially reducing the taxable income in respect of its non-mining activities. The taxable income of B Mine and C Mine, respectively, was taken up by the redemption of capital expenditure (capex), which was deducted from such income up to the limit of such income, effectively leaving the profitable mines with no taxable income for the respective years. The only taxable income the appellant had was the reduced income from its non-mining

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activities. The effect of the appellant's approach was to effectively reduce the tax payable by it and to maximise the amount of capex it redeemed in respect of C Mine and B Mine.

[5]

In its assessment the respondent applied a different approach. It deducted D Mine's operating loss from the income of the B Mine and C Mine on a pro rata basis, before redeeming capex against the respective taxable incomes of those mines. The respondent did not set-off D Mine's loss against the taxable income derived from the non-mining activities, but left that income intact. The effect of the respondent's assessment was to reduce the capex that the appellant could redeem, in the relevant years in respect of the B Mine and C Mine mines, and to, effectively, increase the appellant's tax liability in respect of its income from non-mining activities.

[6]

Central to the differences in approach was the interpretation of, inter alia, ss 11(a), 15(a), 20(1)(b), 36(7E) and 36(7F) of the Act. [2]

[7]

Much of the argument presented by the parties related to the interpretation of ss 36(7E) and 36(7F) and, in particular, to whether the approach of either the appellant, or that of the respondent, results in the mischief which those sections were intended to overcome. There were counter-submissions that the approach of the other gave rise to the very mischief which those sections were aimed at. As background, the meanings

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of those sections, including the mischief they were intended to overcome, shall be considered first. They are central to the appellant's approach. The other sections relied upon by the parties are dealt with in the course of the judgment.

[8]

Section 36(7E) provides:

'The aggregate of the amounts of capital expenditure determined under subsection (7C) in respect of any year of assessment in relation to any mine or mines shall not exceed the taxable income (as determined before the deduction of any amount allowable under section 15(a), but after the set-off of any balance of assessed loss incurred by the taxpayer in relation to such mine or mines in any previous year which has been carried forward from the preceding year of assessment) derived by the taxpayer from mining, and any amount by which the said aggregate would, but for the provisions of this subsection, have exceeded such taxable income as so determined, shall be carried forward and be deemed to be an amount of capital expenditure incurred during the next succeeding year of assessment in respect of the mine or mines to which such capital expenditure relates.'

[9]

Section 36(7F) provides:

"The aggregate of the amounts of capital expenditure determined under subsection (7C) in respect of any year of assessment in relation to any one mine shall, unless the Minister of Finance, after consultation with the Minister of Mineral and Energy Affairs and having regard to any relevant fiscal, financial or technical implications, otherwise directs, not exceed the taxable income (as determined before the deduction of any amount allowable under section 15(a), but after the set-off of any balance of assessed loss incurred by the taxpayer in relation to that mine in any previous year which has been carried forward from the preceding year of assessment) derived by the taxpayer from mining on that mine, and any amount by which the said aggregate would, but for the provisions of this subsection, have exceeded such taxable income as so determined, shall be carried forward and be deemed to be an amount of capital expenditure incurred during the next succeeding year of assessment in respect of that mine: Provided that where the taxpayer was on 5 December 1984 carrying on mining operations on

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two or more mines, the said mines shall for the purposes of this subsection be deemed to be one mine."

[10]

The respondent relied on various memoranda that accompanied the bills that introduced these subsections into the Act as well as comments and opinions of the Margo Commission of Enquiry Into The Tax Structure Of The RSA 1986 ("the Margo Commission"), press releases of the then Minister of Finance and commentary of academic writers, to elucidate the mischief that these sections were intended to deal with and prevent. The appellant was critical of this approach.

[11]

The admissibility of reports of commissions of enquiry, preceding legislation, and of explanatory memoranda, that accompanied bills introducing such legislation, was considered by the Constitutional Court, for the purpose of interpreting the Constitution, in S v Makwanyane and Another [3] , and for the purposes of interpreting legislation, in Minister of Health v New Clicks SA (Pty) Ltd and Others [4] .

[12]

In New Clicks, where certain medicine pricing provisions in the Medicines and Related Substances Control Act 101 of 1965, introduced by an amending Act of 1997, and pricing regulations, were being considered, Chaskalson CJ stated the position on their admissibility as follows:

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'[200] In S v Makwanyane and Another I had occasion to consider whether background material is admissible for the purpose of interpreting the Constitution. I concluded that

"where the background material is clear, is not in dispute, and is relevant to showing why particular provisions were or were not included in the Constitution, it can be taken into account by a Court in interpreting the Constitution".

[201] Although it is not entirely clear whether the majority of the Court concurred in this finding, none dissented from it. I have no reason to depart from that finding and, in my view, it is applicable to ascertaining 'the mischief' that a statute is aimed at where that would be relevant to its interpretation. This would be consistent with the decisions of the Appellate Division in Attorney-General, Eastern Cape v Blom and Others and Westinghouse Brake & Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd and the cases from other jurisdictions referred to in Makwanyane's case.'

In New Clicks it is similarly not entirely clear whether the majority agreed with what Chaskalson CJ stated. However, none of the other members of the court expressed any disagreement with that view.

[13]

Material that is not background material, such as the report of the Margo Commission and the views of commentators, are not admissible for the aforementioned purpose, but may be used in argument in an effort to persuade. I should add that the appellant did not dispute the authenticity of the materials and both parties, in argument, referred to certain sections of the report of the Margo Commission.

[14]

Subsections 36(7E) and 36(7F) apply to mining and introduced a ring- fencing in respect of mining income (details of which will be considered below). In their report the Margo Commission stated the following about the position before and after the introduction of those subsections:

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'14.20

The capital expenditure ranking for redemption is deducted from income in accordance with special rules, which have been changed twice since the beginning of 1984 by the addition of section 36(7E) and 36(7F) to the Income Tax Act. The reduction itself is, of course, what is referred to as the redemption allowance.

14.21

In years of assessment ending before 1 January 1984 redemption was allowed in full against income from mining operations. Any balance represented an assessed loss which qualified as a deduction against income from any other source. There was, in short, no ring fence.

14.22

For years of assessment ending on or after 1 January 1984 the deduction of the redemption allowance is limited to taxable income from mining. Any excess is carried forward to the next year. In short, a ring fence, impenetrable to capital expenditure, but not to revenue losses, is placed around the company's mining operations. This is the effect of section 36(7E) of the Act.

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