MINING REHABILITATION FUNDS – WHAT IF THEY ARE NO LONGER NEEDED? THOUGHTS ON SECTION 37A OF THE INCOME TAX ACT

Mining companies are obliged to perform environmental rehabilitation of mining sites upon the decommissioning or termination of mining activities. Section 37A of the Income Tax Act, 62 of 1968 (“the ITA”) aligns tax policy with environmental regulation. It regulates mining rehabilitation funds (“rehabilitation fund”) created with the sole object of applying their property for the environmental rehabilitation of mining areas and grants a tax deduction for payments made to such dedicated rehabilitation funds. Section 37A requires the assets of rehabilitation funds to be strictly utilised in accordance with their objects.

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 a rehabilitation fund?

Section 37A of the ITA was introduced in 2006 – it grants 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 ;
• once the rehabilitation has been completed to the satisfaction of the Minister of Minerals and Energy, (“the Minister”) the rehabilitation 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”); and
• should the rehabilitation fund meet all its liabilities and have sufficient assets to perform the required rehabilitation, it may transfer any surplus assets to another company or trust approved by the Commissioner.

Section 37A does not appear to contemplate a situation where the rehabilitation fund has completed its rehabilitation work and has surplus assets, and the mining company does not have similar funds to which the assets of the rehabilitation fund can be transferred, or where the mining company wants to transfer the assets of the rehabilitation fund to a similar fund, for value.
Non-compliance with section 37A carries penalties - income tax is imposed on the mining company and/or the rehabilitation fund, if section 37A is contravened. In some instances, the South African Revenue Service (“SARS”) has a discretion in regard to reduce the income tax so imposed.

If the rehabilitation fund distributes its property for purposes other than the prescribed rehabilitation, section 37A(7) states that an amount equal to the market value of the property that was so distributed, isdeemed to be taxable income of the rehabilitation fund for that year of assessment. The inclusion of the market value of the property so distributed is peremptory and SARS has no discretion to waive the inclusion.

Section 37A(8) is a catch all provision that applies to any contravention of section 37A. Where section 37A has been contravened in any manner, the Commissioner may –

• include an amount equal to twice the market value of all property held in the rehabilitation fund, on the date of contravention, in the rehabilitation fund’s taxable income, and
• include the amount that the mining company contributed to the rehabilitation fund (and claimed a tax deduction for), in the mining company’s income, to the extent that the property in the rehabilitation fund was directly or indirectly derived from cash paid to the rehabilitation fund.

Both the rehabilitation fund and the mining company pay tax where section 37A (8) is triggered, but the Commissioner has a discretion to reduce the taxable income as he deems fit. An inclusion in income tax in terms of section 37A (7) is not discretionary, whereas the Commissioner has a discretion in respect of imposition of tax in terms of section 37A (8).

So, what needs to be taken into account if a mining company wants to terminate or amend the objects and rules of the rehabilitation fund (for example to allow for the transfer of funds to a fund which is not a section 37A fund)? Firstly, the additional tax that will be triggered by any contravention or non-compliance with section 37A, has to be taken into account. Also, the contents of the constitutional documents of the rehabilitation fund (which is normally a company or a trust) will probably have to be amended. Typically the trust deed or company’s articles of association or memorandum of incorporation, would have been drafted to comply with section 37A, and these documents may have to be amended to change the objects of the rehabilitation fund and the purpose for which the rehabilitation fund was established.

The directors or trustees of a rehabilitation fund are obliged to act in accordance with the constitutional documents in order to legally effect an amendment or termination. If the rehabilitation fund is a trust, for example, the trustees will have to take care to act in terms of the trust deed. This principle was entrenched in the authoritative South African case on the law of trusts, Land and Agricultural Development Bank of SA v Parker and others [2004] 4 All SA 261 (SCA), which provides commentary on the invalidity of trustees’ actions which are not in line with the provisions of the trust instrument:

“It [the trust] vests in the trustees, and must be administered by them – and it is only through the trustees, specified as in the trust instrument, that the trust can act. Who the trustees are, their number, how they are appointed, and under what circumstances they have power to bind the trust estate are matters defined in the trust deed, which is the trust’s constitutive charter. Outside its provisions the trust estate cannot be bound.”

Since the constitutional documents of the rehabilitation fund would have been drafted to comply with section 37A, it can be assumed that any amendment or termination of the rehabilitation fund needs to be made with the approval of the Commissioner. Questions arise about whether the Commissioner will consent to an amendment of rehabilitation funds. The Commissioner should not be legally precluded from approving such an amendment to the constitutional documents, but this will depend on the facts of every case.

Any amendment of the constitutional documents which places the objects and assets outside the ambit of section 37A of the ITA, could result in a contravention of sections 37A(3) and (4) (which specify to whom assets can be transferred to upon termination or closure) and the trustees or directors will have to take the tax and/or penalties imposed by section 37A, into account.
On a practical level, the following should be taken into account in respect of amendments to section 37A rehabilitation funds:

• submissions will have to be made to the Commissioner advancing reasons why the additional tax referred to in section 37A(8) should not be imposed. The Commissioner is obliged to apply his mind and consider any submissions made, fairly and he should take into account the income tax imposed in terms section 37A(7) as well as the fact that the company had enjoyed the benefit of a tax deduction in terms of section 37A, before exercising his discretion in terms of section 37A(8);
• furthermore, it is likely that the Commissioner may request that the assets in the rehabilitation fund be transferred to a similar account specified by the Minister (as contemplated in section 37A(3)(b) of the ITA). However, if the mining company is not prepared to agree to such a transfer, it is unlikely that SARS can insist on this.

It would be prudent to approach the Commissioner for prior approval to amend the constitutional documents of the rehabilitation fund and for a decision on how he will exercise his discretion in terms of section 37A (8), before making a final decision about the assets in the rehabilitation fund.