By Barry Garven
On the 22nd of September 2016 the Supreme Court of Appeal determined in favour of the South African Revenue Service (SARS), that the operations of extracting mineral-bearing ore from the land and subjecting it to a process resulting in a mineral bearing concentrate, was a manufacturing process, and that both the ore and concentrate constituted “trading stock” for tax purposes. This startling tax case may have broad ramifications for the tax treatment of the mining industry, applicable both to future and all past “non-prescribed” tax periods.
Briefly, the case concerned the interpretation and application of section 23F(2) of the Income Tax Act, 1962 (Income Tax Act) to Marula Platinum Mines (Pty) Ltd (Marula), a producer of platinum group metals (pgms). As described by Fourie AJA, its operations consisted of two distinct phases:
Phase 1: The extracting of the ore from the underground rock and bringing it to the surface, such ore containing pgms as well as base metals.
Phase 2: The crushing and milling of the mineral-bearing ore to expose the mineral elements and then subjecting it to a froth floatation process from which a mineral-bearing concentrate in powder form was derived.” (para 5)
Marula’s business was to mine the ore and after the completion of phase 2, to sell the concentrate.
The consideration for the concentrate was only properly determined five months later ie. potentially during the following tax year, and Marula accordingly deferred a portion of the selling price in terms of section 24M of the Income Tax Act (unquantified amount provision). It also claimed the expenditure incurred in respect of the sales of the concentrate as deduction in terms of section 11(a) of the of the Income Tax Act in the year that it was incurred.
Marula argued that the expenditure incurred by it in relation to both Phases 1 and 2 of its operations related to its mining activities and not to “the production, manufacturing, purchasing or acquisition of trading stock.” (para 10). In contrast, the court held that:
- “the process utilised by Marula to derive the concentrate from the raw ore, did not constitute the ‘mining’ of the concentrate, but its manufacture”; and
- “the mineral-bearing ore [was] extracted by Marula for the purpose of manufacture of the concentrate” and was therefore trading stock for tax purposes.
- The mining process may end earlier than previously anticipated, resulting in mining capital allowances being claimable over four or five years instead of up-front mining capital expenditure;
- Re-characterisation of certain income as non-mining income, with the result that mining capital expenditure cannot be deducted against this income;
- Understatement penalties on “misstated” unredeemed mining capital expenditure (even where this has no net impact on cash taxes paid to date);
- A requirement to count and value “trading stock”, for ore and/or mine dumps present at year end, as an “add-back” for income tax purposes; and/or
- Disallowance of certain costs relating to ore and/or concentrate sold but where the income has not yet been realised.
Barry Garven is Head of Tax, and Patricia Williams, partner, Tax, Bowmans Johannesburg