FINANCE •
A MISSED OPPORTUNITY TO CLARIFY THE LAW ON DEDUCTIBILITY OF RELOCATION EXPENDITURE
A Tax Court judgment on the deductibility of relocation expenditure was a missed opportunity to clarify the law , writes Carryn Alexander , partner Webber Wentzel .
In a recent Tax Court judgment handed down on 31 March 2023 , the costs incurred by a mining company for relocating a residential community and third-party infrastructure required for the mining company to effectively and optimally mine in its designated mining area , was ruled to be nondeductible .
The Mineral and Petroleum Resources Development Act ( Mineral Act ) requires mining companies to conduct mining activities in the areas over which they hold mining rights , in accordance with their mining work programmes . In doing so , the mining company is required to comply with the relevant provisions of the Mineral Act and any other applicable law , including the Mine Health and Safety Act ( Safety Act ) and its regulations . The Mineral Act empowers the Minister of Minerals and Energy to suspend or cancel the company ' s mining right if it ( i ) conducts mining operations in contravention of the Mineral Act ; or ( ii ) breaches any material terms or conditions of its mining right ( which includes the mining work programme ).
Section 15 ( a ) of the Income Tax Act allows taxpayers deriving income from mining operations to deduct amounts determined to be ' capital expenditure ' in terms of section 36 of the Income Tax Act . Taxpayers engaged in mining operations on a producing mine are entitled to fully deduct related capital expenditure in the year of assessment that it is incurred . Section 36 ( 11 )( e ) of the Income Tax Act defines ' capital expenditure ' as any expenditure incurred in terms of a mining right pursuant to the Mineral Act other than in respect of infrastructure or environmental rehabilitation .
In the Tax Court case , the mining company incurred expenditure on a project designed to access minerals within its mining area to comply with its obligations under its approved mining work programme . These expenses included the costs of demolition , removal , and subsequent reconstruction of third-party infrastructure ( including roads , railways and electricity and water infrastructure ). They also included the costs of resettling a residential community located on the boundary of the buffer zone ( the 500m blasting radius that must be maintained for the health and safety of surrounding residential communities in terms of the Safety Act ).
The purpose of the relocation of the residential community and the third-party infrastructure was to realise the full mining area , which was inaccessible because of the buffer zone and third-party infrastructure . The mining company ' s mining work programme , read with the provisions of the Mineral Act , requires the relocation of third-party infrastructure and payment of compensation to third parties whose assets are affected by operations in the mining right area . This included the buffer zone and areas where the third-party infrastructure was located .
The mining company claimed a deduction for the relocation expenditure in terms of section 15 ( a ), read with section 36 ( 11 ) ( e ) of the Income Tax Act , alternatively section 11 ( a ) of the Income Tax Act . SARS disallowed the
Carryn Alexander , partner at Webber Wentzel . claim on the basis that the relocation costs were not incurred in terms of a mining right and were of a capital nature , respectively .
The Tax Court held that since the residential community was not within the mining area , its demolition and relocation " do not constitute employing a method or process of mining , the project was not in terms of exercising a mining right ." The Tax Court also held that "[ i ] n respect of other properties ( the thirdparty infrastructure ) the [ relocation ] project does not constitute a method or process of extracting a mineral in the exercise of a mining right . I find therefore that the [ residential community ] relocation and [ relocation ] project were not matters directly incidental or sufficiently closely connected to the mining operations relating to the act of mining . The expenditure was not in respect of [ the mining company ' s ] own infrastructure and therefore not as envisaged in [ section 36 ( 11 )( e )] ... Compensating third parties for their infrastructure which [ the mining company ] had to remove or relocate in order to conduct its own operations is not tantamount to expending on its own infrastructure . The third-party infrastructure was not being used in its own operations and therefore is not infrastructure contemplated in s 36 ( 11 )( e )."
A mining company must endeavour to take all necessary steps to mine minerals optimally in line with the Mineral Act and the Safety
The interpretation and application of section 36 ( 11 )( e ) and section 11 ( a ) of the Income Tax Act is relevant to the broader mining sector .
Webber Wentzel www . africanmining . co . za African Mining Publication African Mining African Mining • September 2023 • 39