THE UNDERLYING STATUTORY FRAMEWORK
The Income Tax Act, 58 of 1962, as amended (“ITA”) specially permits mines to deduct certain expenditure of a capital nature from their income as they derive their income from mining operations. Furthermore, a mine may generally deduct expenditure incurred in the production of income provided that such expenditure is not of a capital nature.
THE SISHEN CASE
Sishen Iron Ore Company (Pty) Ltd (“Sishen”) conducts open cast mining for iron ore in the Northern Cape province in terms of a converted mining right granted under the Mineral and Petroleum Resources Development Act, 28 of 2002, as amended (“MPRDA”). Sishen’s mining operations are required to comply with both the requirements of the MPRDA, including the associated Mine Work Programme (“MWP”), as well as other applicable legislation, such as the Mine Health and Safety Act, 29 of 1996, as amended. Failure to comply with these obligations could jeopardise Sishen’s right.
A MWP is a detailed operational plan that outlines how a mining company intends to conduct its operations. Importantly, a MWP forms part of the mining right itself. Sishen’s approved MWP required the progression of its mining pit westward, necessitating significant ancillary actions to enable continued operations.
BACKGROUND TO THE DISPUTE
Sishen sought to claim deductions for various expenses from its taxable income for the 2012 to 2014 tax years. These expenses included the costs of relocating the neighbouring Dingleton township, the relocation of certain infrastructure associated with the Sishen Western Expansion Project (“SWEP”), legal fees related to the Dingleton relocation, and the cost of relocating a 66kV power line that supplied electricity to the mine equipment.
The Commissioner for the South African Revenue Service (“CSARS”) rejected these deductions and imposed understatement penalties, as well as interest under section 89quat (2) of the ITA.
Upon appeal, the tax court disallowed the deductions for relocation and legal expenses but allowed the deduction for the 66kV line costs. The tax court also set aside the understatement penalties and interest. Sishen appealed the disallowance of the relocation and legal expenses, while CSARS cross-appealed the tax court’s decision allowing the 66kV line deduction and disallowing the interest. Both the leave to appeal and cross-appeal were granted by the tax court.
THE TAX COURT’S FINDINGS
The Tax Court ruled that the costs of relocating Dingleton and the SWEP infrastructure were not deductible under section 36(11)(e) of the ITA, as they were not incurred in relation to the exercise of a mining right nor did they qualify as capital expenditure for mining operations. However, the court allowed the deduction for the 66kV power line costs, as it was essential for mine equipment and met the criteria of section 36(11)(a) and section 11(a). The legal expenses incurred for assisting Dingleton residents were disallowed because they were not sufficiently related to Sishen’s business activities. The court also set aside the understatement penalties, finding them unjustified, and the interest imposed under section 89quat (2).
THE SUPREME COURT OF APPEAL’S RULING
The key issues for the Supreme Court of Appeal (“SCA”) to address were whether the relocation expenses were deductible under section 36(11)(e); whether the 66kV power line expenses qualified for deduction under section 36(11)(a) or section 11(a); whether the legal fees were deductible under section 11(a) or alternatively 11(c); and whether the interest imposed under section 89quat (2) should have been waived under section 89quat (3).
Relocation of Dingleton and SWEP Infrastructure: Deductible under Section 36(11)(e) – The SCA ruled that the relocation expenses were deductible under section 36(11)(e), determining that the costs were incurred as part of a mining right and were crucial for the continuation of mining operations. The court explained that without relocating the SWEP infrastructure and the Dingleton residents, the progression of the mine pit to the west, as permitted under the mining right, could not proceed. This finding rejected CSARS’ contention that the expenses were merely statutory compliance costs, emphasising that the MWP (forming an integral part of the mining right) necessitated these relocations to enable optimal mining operations. The SCA further clarified that the term “infrastructure” in section 36(11)(e) pertains to assets owned by the taxpayer (Sishen), not third-party infrastructure such as that owned by Transnet or Eskom, thus excluding the SWEP relocation costs from the provision’s limitation.
66kV Power Line Relocation: Deductible under Section 36(11)(a) – The SCA upheld the tax court’s allowance of the 66kV power line relocation costs, affirming their deductibility under section 36(11)(a). The court found the power line qualified as “mine equipment”, essential for powering mining operations and thus directly tied to income production. While ascribing a wide meaning to “mine equipment,” the SCA stopped short of a detailed interpretation, leaving some ambiguity in the absence of recent judicial guidance beyond Union Government v Nourse Mines Ltd (1912). Nonetheless, the court noted that, alternatively and in the event that the line was not considered mine equipment, the expense would qualify under section 11(a) as a revenue expenditure, given its recurring necessity as mining progressed.
Legal Expenses: Not Deductible under Section 11(c) – The SCA denied the deductibility of legal fees incurred in advising Dingleton residents, ruling that they did not satisfy section 11(c). This provision permits deductions only for legal expenses arising in the ordinary course of a taxpayer’s trade. The court held that Sishen’s trade was mining iron ore, not providing legal assistance, and that the expenditure (though paid by Sishen) was for the residents’ benefit, lacking a sufficiently close nexus to Sishen’s income-producing activities. This underscores the burden on taxpayers to demonstrate a direct link between such costs and their trade.
Penalties and Interest – The SCA confirmed the tax court’s setting aside of understatement penalties, noting CSARS abandoned its cross-appeal on this point. The interest under section 89quat (2) was set aside and remitted to CSARS for reconsideration under section 89quat (3), with the court directing an assessment of whether external factors beyond Sishen’s control contributed to the tax shortfall.
OUTCOME AND COSTS
The SCA partially upheld Sishen’s appeal, allowing deductions for the Dingleton and SWEP relocations and the 66kV power line, while denying the legal expenses. CSARS’ cross-appeal was dismissed. The court ordered CSARS to pay two-thirds of Sishen’s appeal costs (including two counsels where employed) and one-half of its cross-appeal costs (also including two counsel where applicable).
CONCLUSION
The SCA’s decision affirms that expenditure mandated by a MWP, and therefore in accordance with the exercise of a mining right, qualifies for deduction under section 36(11), offering a significant tax boost to the mining sector. However, its treatment of section 11(a) versus section 36(11) raises interpretive challenges. Mining taxpayers must strategically navigate these provisions, ensuring deductions align with their operational realities and statutory intent, to optimise tax outcomes and minimise disputes with CSARS.
