DREADFUL TAX CLARIFICATION FOR THE CONTRACT MINING INDUSTRY
The Benhaus judgment in 2019 caused many unresolved questions over the definition of ‘mining operations’, especially in the context of determining whether contract miners can benefit from the tax allowances offered to mining companies.
During March 2019, the Supreme Court of Appeal delivered its judgment wherein it was held that Benhaus (a contract mining company) did indeed undertake mining operations and earn mining income. On this basis, it was held that the company qualified for the same capital expenditure allowances available to mining companies.
For contract mining companies, this was a big win given the uncertainty over the interpretation and application of the tax legislation.
National Treasury issued the 2020 Draft Taxation Laws Amendment Bill on 31 July 2020. It is proposed that the tax legislation be clarified that only the taxpayer that holds a mining right issued under the Mineral and Petroleum Resources Development Act in respect of the mine where those mining operations are carried out, qualifies for accelerated capital expenditure deductions in terms of sections 15 and 36 of the Income Tax Act.
This proposed amendment is expected to have a significant impact on the contract mining industry.
The proposed amendment will be effective from 1 January 2021 and will apply in respect of any expenditure incurred on or after that date. Unclaimed capital expenditure (i.e. unredeemed capex) as at 31 December 2020 in the hands of the contract mining company is now at risk of being forfeited as the proposed amendment impacts both sections 15 and 36.
Therefore, taxpayers who have relied on the Benhaus judgment to claim capital expenditure allowances under the provisions of sections 15 and 36 of the Income Tax Act, should be aware that the legislative position from 1 January 2021 will be different. Contract mining companies will no longer qualify for the accelerated capital allowances they have been able to claim in the past.