• FINANCE
Act . Without relocating the residential community and the thirdparty infrastructure , the mining company would not have been able to execute its undertaking to the Minister to adhere to the material terms and conditions of its mining right and the Mining Work Programme in compliance with its obligations under the Safety Act and the Safety Act regulations . The court should have found that the relocation of the residential community was necessary , and sufficiently closely connected with the mining company ' s obligation to conduct its mining operations and exploit its mining right over the mining area actively and optimally , in terms of its mining right .
The court should also have found that the relocation expenditure was not incurred in respect of ' infrastructure ' as contemplated in section 36 ( 11 )( e ) of the Income Tax Act because :
• On the proper interpretation of the construction of section 36 ( 11 ), using the principles laid down in the Natal Joint Municipal Pension Fund v Endumeni Municipality [ 2012 ] ZASCA 13 ; 2012 ( 4 ) SA 593 ( SCA ) judgment , the word ' infrastructure ' is intended to refer to assets which constitute part of the income-earning structure belonging to or controlled by the taxpayer for the purposes of conducting its mining operations – not third-party infrastructure .
• An interpretation that includes assets purchased for third parties as compensation for their damaged or lost infrastructure would frustrate the purpose of the provisions .
• If the court agreed that the expenditure incurred was not in respect of the mining company ' s own infrastructure , then it ought to have found that the expenditure was deductible . It appears that the court overlooked the words " other than " in section 36 ( 11 )( e ).
On the mining company ' s alternative claim , the Tax Court held : " Our legislation requires that [ the mining company ' s ] expenditure should have been in terms of exercising its mining right . In other words , it must have been in the process of exercising its mining right … As I have concluded above that [ the mining company ' s ] expenditure was not in terms of exercising a mining right it is difficult to know how the alternative claim under s 11 ( a ) would have been a revenue generating expense in respect of a mining activity in a mining area . The expense was in … compensating third parties for damages that could ensue if [ the project ] proceeded without relocating their infrastructure . The expenditure was not money used in the employ of a method or process to extract the income-earning ore from the soil . The alternative claim is unsustainable . There is no sufficiently close link to the act of producing income as envisaged in Port Elizabeth Electric Tramway . The statutory compliances , before , during or after operations have started are capital expenditures on behalf of third parties , not income generating ."
The court appears to have conflated the requirements to qualify for a deduction under section 36 ( 11 )( e ) and section 11 ( a ) of the Income Tax Act in finding that the expenditure must have been incurred " in terms of a mining right ". Section 11 ( a ) of the Income Tax Act does not require this .
Longstanding principles relating to the general deduction formula and expenditure incurred in accordance with statutory obligations have been laid down in a number of cases : Secretary for Inland Revenue v Cadac Engineering Works ( Pty ) Ltd [ 1965 ] 2 All SA 547 ( A ) at 556-557 ; Warner Lambert SA ( Pty ) Ltd v Commissioner for South African Revenue Service 65 SATC 346 ; Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241 , 8 SATC 13 ; Commissioner for Inland Revenue v Genn & Co ( Pty ) Ltd 1955 ( 3 ) SA 293 ( A ); Commissioner for Inland Revenue v Nemojim ( Pty ) Ltd 1983 ( 4 ) SA 935 ( A ); Joffe & Co Ltd v Commissioner for Inland Revenue 1946 AD 157 ; and Commissioner for the South African Revenue Service v Mobile Telephone Networks Holdings ( Pty ) Ltd 2014 ( 5 ) SA 366 ( SCA ). Based on these principles , the ocurt should have found that statutorily imposed expenditure , such as the relocation costs ( incurred in terms of the Mineral Act , the Safety Act and its regulations , and the company ’ s approved Mining Work Programme ) constituted expenditure sufficiently closely connected to the mining company ' s income-earning operations and was therefore deductible under section 11 ( a ) of the Income Tax Act .
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 in relation to the obligations in their mining work programmes , particularly their environmental , social and governance ( ESG ) obligations . An opportunity has been missed to clarify the interpretation of the relevant provisions .
We are waiting to see whether the mining company will appeal this judgment to the Supreme Court of Appeal for a clearer interpretation of the law . •
40 • African Mining • September 2023 www . africanmining . co . za