Taxation of Mining Companies: The Legal Ramifications of Amending Section 15(a) of the Income Tax Act

Abstract

It is often said that mining companies are a privileged class of taxpayer. This is because mining companies with mining rights are entitled to claim a section 15(a), read with section 36, of the Income Tax Act, capital expenditure allowance that is unique to taxpayers involved in the mining industry. The Income Tax Act does not, however, take into account the mutually beneficial collaboration between mining companies and contract miners in practice. Contract miners do not own mining rights, but play an important role in the stages of mining to the extent that it can be probed whether or not they are involved in ‘mining activities’ for purposes of the Income Tax Act. The current Income tax legislation does not expressly include nor exclude contract miners from claiming a capital expenditure allowance, yet these deductions sought by contract miners have been disallowed by SARS. As a result, the Courts have had to adjudicate on the meaning of the terms “mining” and “mining operations” to give effect to mining tax laws and essentially uncover the intention of the legislature. Contract miners are currently not governed by mining legislation, and instead their existence is heavily based on the contractual agreements entered into to provide mining services for and on behalf of mining companies with mining rights. This research studies the tax treatment of contract miners and the compatibility of the current definition of ‘mining’ within the mining tax regime and the evolving mining industry practices. The Supreme Court of Appeal judgement, Benhaus suggested that Parliament amend the Income Tax Act so as to clarify who exactly is entitled to the allowance to avoid an unintended class from benefitting to the detriment of the fiscus. The National Treasury in its 2020 Draft Tax Laws Amendment Bill proposed that the Income Tax Act be amended to specifically enable only taxpayers with mining rights to claim the full accelerated deduction of capital expenditure in respect of mining operations. At the time of writing, this section 15(a) amendment had not yet been promulgated. This research recommends amending the Income Tax Act and corresponding mining legislation to incorporate contract miners and that a standard contract between mining right holders and contractors be formulated. This way, SARS will be better positioned to accept that contract miners do perform mining activities and allow the capex allowance in equal treatment as mining right holders.