MINING REHABILITATION FUNDS – WHAT IF THEY ARE NO LONGER NEEDED?
Mining companies are obliged to perform environmental rehabilitation of mining sites upon the termination or premature closure, decommissioning and final closure, of mining activities. Section 37A of the Income Tax Act, 62 of 1968 (“the ITA”) serves to align tax policy with environmental regulation and regulates mining rehabilitation funds created with the sole object of applying their property for the environmental rehabilitation of mining areas.
Section 37A of the ITA grants a tax deduction for payments made to a dedicated mining rehabilitation funds (“the rehabilitation fund”) and requires the funds to be strictly utilised in accordance with their objects. These rehabilitation funds are typically created as companies or trusts. What happens though, when the rehabilitation fund is no longer needed, or has fulfilled its purpose and has surplus assets? What are the tax implications of amending or terminating such a rehabilitation fund?
Section 37A of the ITA was introduced in 2006. The primary object of the “new” section 37A was to grant a deduction from income tax to mining companies that pay cash into a rehabilitation fund which complies with section 37A.
Section 37A imposes strict rules in respect of rehabilitation funds, for example:
- the rehabilitation fund may only apply its assets for prescribed rehabilitation purposes (section 37A (1)(a));
- once the rehabilitation has been completed to the satisfaction of the Minister of Minerals and Energy (“the Minister”), the Fund is obliged to transfer its assets to a similar company or trust, or to an account of a company or trust prescribed by the Minister and approved by the Commissioner for the South African Revenue Service (“the Commissioner”) (section 37A (3)); and
- should the rehabilitation fund meet all its liabilities and have sufficient assets to perform the required rehabilitation, the rehabilitation fund may transfer any surplus assets to another company or trust approved by the Commissioner (section 37A (4)).
Section 37A does not appear to cater for a situation where the rehabilitation fund has completed rehabilitation and has surplus assets, and the mining company does not have similar funds to which the assets can be transferred, or for the situation where the mining company wants to transfer the assets of the rehabilitation fund to a similar fund, for value.
Section 37A (6), (7) and (8) impose income tax for contraventions of, or noncompliance with, section 37A. In some cases, the South African Revenue Service (“SARS”) possesses a discretion to reduce the income tax so imposed.
If the rehabilitation fund distributes its property for purposes other than the prescribed rehabilitation, in terms of Section 37A (7), the rehabilitation fund will have an inclusion in its taxable income for that year of assessment, of an amount equal to the market value of the property that was so distributed. The inclusion of the market value of the property so distributed, in the taxable income of the rehabilitation fund, is obligatory and SARS has no discretion.Read further