Mining tax
September 2012

Armgold/Harmony Freegold Joint Venture v CSARS (703/2011) [2012] ZASCA 152, delivered on 1 October 2012, deals with the treatment of capex when one taxpayer operates several mines, some of which make profits and others losses.

In particular, it provides guidance as to the application of aspects of section 36 of the Income Tax Act 1962 (the Act).

Section 15 of the Act provides that capex incurred by a mining taxpayer may be set off against mining profits. Section 36(7E) limits the deduction to the mining taxable income of the taxpayer after setting off any balance of assessed loss in any previous year. Section 36(7F) goes further and limits the capex per mine to the mining taxable income of that mine. Any capex not deducted is carried forward to the next year.

The taxpayer reflected the result as set out below for the three mines is operated in 2003, the year of assessment in question: Freegold and Joel made profits while St Helena made a loss. Freegold and Joel incurred capex while St Helena did not.  The figures in round R millions were:

Based on this approach, the taxable income for the year was 156-51 = 105.

SARS, on the other hand, contended that the loss incurred by St Helena had first to be set off against the losses of the profitable mines, thus reducing the amount available against which capex could be deducted. Thus:

Based on this approach, the taxable income for the year was 156.

In other words, the St Helena loss served to reduce the amount of capex available for deduction.

The court rejected both interpretations of sections 36(E) and 36(F). It then applied its own interpretation and came to the same result as SARS but by a different route.

In order for the taxpayer’s approach to succeed, each mine had to be treated as a separate trade, an argument that the court was not prepared to accept. The court then considered the two sections in turn. Before quoting each section in full, Leach JA characteristically stated that the reader would be well advised to take a deep breath; given that 36 (E) consists of a single 10 line sentence and 36(F) of one sentence 14 lines long, his advice was well founded.

In essence, section 36(E) limits the deductible portion of capex to what one might describe as a taxpayer’s “gross mining taxable income” for the year, consisting of the aggregate results of all the mines. Put differently, the amount of capex deductible is limited to the overall mining profits of a taxpayer. In the present matter this was (1177 + 20 – 51) = 1146.

Section 36(F) limits the deductible portion of capex per mine to the taxable income of that mine. In other words, section 36(F) requires a taxpayer to determine the deductible portion of capex for each mine. And where a mine has a loss for the year it may not deduct any capex. Moreover, even though the mines with taxable income might have capex sufficient to absorb all that income, they may not collectively claim more than the overarching limit determined in terms of section 36(E). Thus, although the potential capex deductions by Freegold and Joel were 1 177 and 20 respectively, in terms of section 36(F), for a total of 1 197, they were limited to 1 146 under section 36(E).

The only remaining question was how to apportion the disallowed portion of 51 (1197 – 1146). The court found that the correct approach was to apportion the difference according to the respective taxable incomes of Freegold and Joel. For Freegold the amount was 1146/1197 x 51 = 50 (rounded up) and for Joel 20/1197 x 51 = 1 (rounded up).

The result was as follows:

Based on this approach, the taxable income for the year was 156.

Thus the final result was the same as that of SARS but by a different route and one that has clarified the application of sections 36(E) and 36(F).

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