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[2012] ZASCA 152
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Armgold/Harmony Freegold Joint Venture (Pty) Ltd v Commissioner for the South African Revenue Services (703/2011) [2012] ZASCA 152; 2013 (1) SA 353 (SCA); [2013] 1 All SA 253 (SCA); 74 SATC 351 (1 October 2012)
Links to summary
THE SUPREME COURT
OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Reportable
Case No:
703/2011
In
the matter between:
ARMGOLD/HARMONY FREEGOLD JOINT VENTURE
(PROPRIETARY) LIMITED
..............................................................................
Appellant
and
THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE
...................................................................................
Respondent
Neutral
citation:
Armgold/Harmony Freegold Joint Venture v CSARS
(703/2011)
[2012] ZASCA 152
(1October 2012)
Coram:
Navsa, Cloete, Heher, Leach and Pillay JJA
Heard:
06 September 2012
Delivered:
01 October 2012
Summary: Income tax – deductions of mining
capital expenditure under sub-sections 36(7F) and
36(7E) of
the Income Tax Act 58 of 1962 – method of calculation to be
adopted where a mine of a taxpayer operates at a loss.
___________________________________________________________________
O R D E R
___________________________________________________________________
On appeal from:
Tax Court, South Gauteng High
Court, Johannesburg (Coppin P sitting as court of first
instance):
The appeal is dismissed with costs, such costs to
include the costs of two counsel.
_________________________________________________________________
J U D G M E N T
__________________________________________________________________
LEACH
JA (NAVSA, CLOETE, HEHER AND PILLAY JJA CONCURRING)
[1] At the heart of the debate in this appeal is the
method by which deductions for capital expenditure and assessed
losses are
to be applied in the calculation of the taxable income of
a mining company which owns and operates more than one mine, not all
of which operate profitably, and which also receives income from
non-mining activities. As its name implies, the appellant,
Armgold/Harmony
Freegold Joint Venture (Pty) Limited, is a company
with limited liability established as a joint venture between the
Armgold and
Harmony groups of companies. The appellant's mining
income is derived from working its three gold mines, respectively
known as
Freegold, Joel and St Helena. It acquired the Freegold and
Joel mines from the Anglo-American group with effect from 1 January
2002 and the St Helena mine the following year.
[2] In September 2008, the respondent, the Commissioner
for the South African Revenue Service, (who for convenience I intend
to
refer to as ‘SARS’), issued revised tax assessments
for the appellant, adjusting its income tax liability for the 2002
to
2005 tax years. Although SARS did so on various grounds, only one is
relevant to this appeal and it relates solely to the 2003
and 2004
years of assessment. For those tax years SARS set off the losses of
the St Helena mine against the taxable income of the
Freegold and
Joel mines before taking into account the mining capital expenditure
incurred in respect of those mines. The effect
of this, for reasons
more fully explained below, was to reduce the amount of capital
expenditure that could be redeemed in respect
of the Freegold and
Joel mines.
[3] On 25 March 2009, the appellant objected to the
revised assessment but, on 13 July 2009, its objection was
disallowed. The appellant
appealed to the Tax Court, Johannesburg
which, on 1 August 2011, dismissed the appeal. With leave of the Tax
Court, the appellant
appeals now to this court.
[4] It is useful at the outset to consider the general
scheme of assessing liability for tax under the Income Tax Act 58 of
1962
(‘the Act’). As a starting point, a taxpayer's
‘gross income’ is defined as the ‘total amount, in
cash or otherwise, received by or accrued to or in favour of’
the taxpayer during the period of assessment. From such gross
income
are deducted any amounts that are exempt from normal tax in order to
calculate the taxpayer’s ‘income’
(in the present
case no such deductions are of any relevance). Further deductions are
permitted under both s 11
(a)
of the Act and any further
provisions in Part 1 of Chapter II of the Act. In that regard I
should mention that s 11
(a)
contains what is commonly referred
to as ‘the general deduction formula’ which allows the
deduction of expenditure
and losses actually occurred in the
production of income ‘provided such expenditure and losses are
not of a capital nature’.
This would include what are generally
referred to as a mine’s operating expenses. In any event, the
taxpayer’s gross
income, less these deductions, is the amount
of the taxpayer’s ‘taxable income’ to which the
appropriate tax
rate is applied to determine the taxpayer’s tax
liability for that year of assessment.
[5] Turning to the question of deductions other than
those under s 11
(a)
, I
should mention at the outset that the relevant part of s 20(1) of the
Act, upon which the appellant placed reliance as I shall
indicate
below, provides as follows:
‘
For
the purpose of determining the taxable income derived by any person
from carrying on any trade, there shall ... be set off against
the
income so derived by such person –
(
a
)
any
balance of
assessed loss
incurred
by the taxpayer in any previous year which has been carried forward
from the preceding year of assessment ...
(
b
)
any
assessed loss
incurred by the taxpayer during
the same year of assessment in carrying on any
other
trade
...’.
[6] Two important factors arise from this:
First, as I have mentioned, ‘income’ as
defined in the Act is the amount after the deduction from gross
income of
any amounts exempt from normal tax but before further
allowable deductions under Part I of Schedule II are made to arrive
at
the taxpayer’s taxable income. However, it was held by this
court in
Conshu (Pty) Ltd v Commissioner for
Inland Revenue
[1994] ZASCA 104
;
1994 (4) SA 603
(A) at 613C
that the word ‘income’ is used in the
introductory part of s 20(1) not in its defined sense but, rather,
as the income
of the taxpayer which would be taxable but for the set
off; ie the amount of the taxpayer's gross income less the
deductions
allowable under the Act but before any set off of an
assessed loss or balance of assessed loss.
Second, s 20(1)
clearly
distinguishes between a
balance of assessed
loss
in sub-section (a) and an
assessed
loss
in sub-section (b), the latter being a
loss incurred by the taxpayer in the same period of assessment
in
the conduct of another trade
. A balance of
assessed loss, however, is incurred before a current period under
assessment and ‘can only be set off when
it is carried forward
from the preceding year of assessment’.
1
In
New Urban Properties Ltd v
Secretary for Inland Revenue
1966 (1) SA 217
(A) this court held that the section ‘envisages a continuity
in setting off an assessed loss in every year succeeding the
year in
which it was originally incurred, so that in each succeeding year a
balance can be struck . . . which can then be carried
forward from
year to year until it is exhausted.
’
2
[7] While s 11
(a)
contains the general deduction formula, further
deductions are allowed under the remaining provisions of s 11. As
this court observed
in
Western Platinum
Limited v Commissioner for the South African Revenue Service
67 (2005) SATC 1
(SCA) para 1, the
fiscus
has historically favoured farmers and miners (presumably
due to their national and economic significance) and, despite the
limitation
in the general formula, in the case of mines the
legislature has permitted the deduction of certain mining capital
expenditure
as a ‘class privilege’. This it achieved by
way of s 11
(x)
–
which
authorises the deduction of ‘any amounts which . . . are
allowed to be deducted from the income of the taxpayer’
–
as read with s 15
(a)
and
s 36, which authorise the deduction of mining capital expenditure as
more fully set out below.
[8] The operation of the scheme of the Act in relation
to the deduction of mining capital expenditure lies at the heart of
this
appeal. Section 15
(a)
authorises a deduction from the income derived by a
taxpayer from its mining operations of ‘an amount to be
ascertained under
the provisions of section 36’ in lieu of
certain other allowances (those allowances are of no relevance in the
present case).
Section 36(7C) in turn prescribes that subject to
sub-sections 36(7E), (7F) and (7G), the amounts to be deducted under
s 15
(a)
‘
from
the working of any producing mine shall be the amount of capital
expenditure incurred’. In this somewhat tortuous way
the
legislature has allowed for the deduction of capital expenditure
incurred in respect of any producing mine. As s 36(7G) is
of
relevance only to an alternative argument advanced by the appellant,
I intend for the moment only to deal with the other two
sub-sections,
the interpretation and application of which are crucial to the
outcome of this appeal.
[9] It must be stressed that sub-sections 36(7E) and
(7F) allow only a deduction of mining capital expenditure. They do
not impinge
upon the ambit of s 11
(a)
which allows the deduction of mining operating
expenditure as an expense ‘not of a capital nature’
incurred in the production
of income: see
Palabora
Mining
Company Ltd v Secretary for Inland
Revenue
35 (1973) SATC 159
(A) at 178.
[10] Section 36(7E), which was enacted in 1983 and
amended in 1990, provides as follows (as with so many sections in the
Act, the
reader would be well advised to take a deep breath):
‘
The
aggregate of the amounts of capital expenditure determined under
subsection (7C) in respect of any year of assessment in relation
to
any mine or mines shall not exceed the taxable income (as determined
before the deduction of any amount allowable under section
15(
a
)
,
but
after the set-off of any balance of assessed loss incurred by the
taxpayer in relation to such mine or mines in any previous
year which
has been carried forward from the preceding year of assessment)
derived by the taxpayer from mining, and any amount
by which the said
aggregate would, but for the provisions of this subsection
,
have
exceeded such taxable income as so determined, shall be carried
forward and be deemed to be an amount of capital expenditure
incurred
during the next succeeding year of assessment in respect of the mine
or mines to which such capital expenditure relates
.
’
As stated in
Silke
On South African Income Tax
,
3
s 36(7E) limits ‘the deduction of the
aggregate of capital expenditure determined under s 36(7C) in a
particular year of assessment
in relation to any mine or mines to
what is here referred to as the “gross mining taxable income”
derived by the taxpayer
from mining [and] thus sets a
general
cap on a taxpayer’s deductions of capital
expenditure.’
[11] Section 36
(7E)
was in due course followed by the promulgation in 1985 of s
36
(7F).
The author of
Mining Tax in South Africa
,
Marius van Blerck, explains the rationale behind the introduction of
s 36(7F) as follows:
‘
Until
1984, where a company owned more than one mine, unredeemed capital
expenditure on one of the mines could be set off against
mining
income of another. . . . Although set-offs of this nature had
occurred in previous decades, some major mergers and takeovers
in the
early ’80s (along with unexciting dollar gold prices) caused
the authorities to express some concern that vast new
capital
expenditures could substantially erode the mining tax base.
’
4
[12] In order to address this
concern,
the legislature clearly felt that
s 36
(7E)
did not go far enough and that further protection of the tax base was
required in the event of a mining company owning more
than one mine
.
This led to the promulgation of
s
36
(7F),
which was subsequently amended in 1990. It provides as follows (I
again advise the reader to take a deep breath):
‘
The
aggregate of the amounts of capital expenditure determined under
subsection (7C) in respect of any year of assessment
in
relation to any one mine
shall
,
unless
the Minister of Finance
,
after
consultation with the Minister of Mineral and Energy Affairs and
having regard to any relevant fiscal, financial or technical
implications, otherwise directs
,
not
exceed the taxable income (as determined before the deduction of any
amount allowable under section 15(
a
),
but after the set-off of any balance of assessed loss incurred by the
taxpayer
in
relation to that mine
in
any previous year which has been carried forward from the preceding
year of assessment) derived by the taxpayer
from
mining on that mine
,
and
any amount by which the said aggregate would
,
but
for the provisions of this subsection
,
have
e
x
ceeded
such ta
x
able
incom
e
as
so determined
,
shall
be carried forward and be deemed to be an
amount
of capital expenditure incurred during the next succeeding year of
assessment in respect of that mine: Provided that where
the taxpayer
was on 5 December 1984 carrying on mining operations on two or more
mines
,
the
said mines shall for the purposes of this subsection be deemed to be
one mine.
’
(My
emphasis.)
[13] Thus s 36(7F) introduced what is commonly called a
‘capex per mine ring-fence’ (a description which I intend
to
use where convenient), a restriction that ‘provides that
deductible capital expenditure in relation to any one mine cannot
exceed the taxable income . . . derived by the taxpayer from mining
on that mine.’
5
In the explanatory memorandum issued at the time of the
enactment of the section, it is stated that the section ‘. .
will have the effect that
where more than one mine is operated by the same person the capital
expenses relating to any one mine
may be set off only against
the income from that mine unless the Minister of Finance, in
consultation with the Minister of
Mineral and Energy Affairs and
having regard to the relevant fiscal
,
financial and
technical implications
,
otherwise decides
.
’
In
Silke,
the operation of
the section is described thus:
6
‘
It
limits the deduction of the aggregate of capital expenditure
determined under s 36(7C) in a particular year of assessment in
relation to any particular mine to what is again referred to here as
the “gross mining taxable income” derived by the
taxpayer
from mining
on
that mine
.
The excess that is as a result not deductible in that year must again
be carried forward, and will again be deemed to be an amount
of
capital expenditure incurred during the next succeeding year of
assessment on the mine concerned. Section [36(7F)]
7
thus
sets a
particular
cap
on a taxpayer’s deductions of capital expenditure.’
[14] Despite this statutory matrix being somewhat
complex, its operation appears to be clear. Take for example a mining
company
operating two mines, A and B. Mine A has a taxable income
after the set-off of any balance of assessed loss, but before the
deduction
of capex, of R10 million while the taxable income of mine B
at that stage is R3 million. During the course of the tax year, while
capital expenditure of R15 million was incurred in respect of mine A,
no such expenditure was incurred in respect of mine B. The
total
taxable income before capex of the two mines is thus R13 million, ie
R2 million less the total amount of the capital expenditure.
Accordingly, under s 36(7E), but prior to the promulgation of s
36(7F), R13 million would have been allowed as a capex deduction
with
a balance of R 2 million being carried forward to the following year.
[15] However, that position changed after the
promulgation of s 36(7F). Applying the regime under that sub-section
to the same facts,
mines A and B are ‘ring-fenced’ for
the purpose of the calculation of capex, the amount of capital
expenditure in respect
of each mine being capped at no more than the
taxable income derived from each mine. In this scenario, as mine A’s
taxable
income is R10 million, its capex deduction is capped at that
amount notwithstanding an additional R5 million in fact having been
incurred on that mine. The R5 million of mine A’s unredeemed
capital expenditure would have to be carried forward and deemed
to be
an amount of capital expenditure incurred in respect of that mine
during the following year. As there was no capital expenditure
incurred in respect of mine B, ring-fenced as it is from mine A, no
capex deduction would be allowed to reduce its taxable income.
The
effect of this is that by reason of s 36(7F), no more than R10
million (the maximum cap in respect of mine A) would be deductible
in
respect of capital expenditure whereas, before it was introduced,
capex of R 13 million was deductible.
[16] This is all straightforward enough where a
taxpayer’s mines earn a taxable income. The problem in the
present case is
that one of the appellant’s three mines
operated at a loss, as appears from the set of agreed facts placed
before the Tax
Court. The background facts relevant to the
appellant's 2003 and 2004 years of assessment may be briefly stated
as follows:
(a) The appellant derived an income from carrying on
gold mining operations through its three mines: Freegold, Joel and St
Helena.
(b) During both years of assessment, before any
deduction for capital mining expenditure was made but after the
deduction of operating
expenses, both the Freegold and Joel mines
produced a taxable income whereas the St Helena mine operated at a
loss.
(c) The capital expenditure incurred in respect of both
the Freegold and Joel mines, if deducted from the amount of their
taxable
incomes, was sufficient to reduce their taxable incomes to
nil.
(d) Neither the Freegold mine nor the Joel mine had a
balance of assessed loss carried forward from the preceding year of
assessment.
(e) The appellant derived a taxable income from
non-mining operations, the amount of which exceeded the operating
loss of the St
Helena mine in each year.
[17] To place the arguments of the parties in their
factual context, I intend to refer for illustrative purposes Figure 1
below.
Reproduced from the appellant’s heads of argument, it
summarises the income that accrued to the appellant from its mining
and non-mining activities, the deductions it claimed and the manner
in which it sought to assess its tax liability for the 2003
tax year.
The figures reflect the relevant amounts in rand terms, rounded off
to the closest million.
8
Figure 1
St Helena
Freegold
Joel
Non-min
1 Balance of assessed loss nil nil nil nil
2 Taxable income (before capex) (51) 1 177 20 156
3 Capex deductible in 2003 n/a 1 177 20 n/a
4 Taxable income (2-3) (51) nil nil 156
5 Assessed loss (current year) (51) n/a n/a n/a
Accordingly, the appellant argued that its overall
taxable income for the year should be assessed at R105 million, being
its taxable
income of R156 million from its non-mining operations
less the R51 million loss made by the St Helena mine.
[18] On the other hand, the SARS assessment proceeded as
follows:
Figure 2
St Helena
Freegold
Joel
Non-min
1 Balance of assessed loss nil nil nil nil
2 Gross taxable income before capex (51) 1 177 20
3 Set off St Helena loss (50) (1) n/a
4 Nett taxable income before capex nil 1 127 19
5 Redemption of capex nil 1 127 19 nil
6 Taxable income for year nil nil nil 156
[19] As is apparent from this, the main point of
departure between the two sides lies in SARS having deducted the St
Helena loss
for the year in question – such loss being arrived
at by deducting its operating expenses from its gross income under s
11
(a)
–
from the
taxable income before capex of the two remaining mines after
apportioning such loss between them, thereby reducing the
taxable
income before capex of each profitable mine and, at the same time,
reducing their capex deductions.
[20] The appellant submitted that the loss of the St
Helena mine effectively amounted to its ‘assessed loss’
as envisaged
by s 20(1)
(b)
.
It therefore argued that in order to assess the appellant’s
taxable income, each mine should be regarded as being a separate
trade and that, doing so, in order to calculate the appellant’s
final taxable income the ‘assessed loss’ of the
St Helena
mine could only be deducted under s 20(1)
(b)
once the taxable incomes of the other mines (trades) had
been determined. In addition, the appellant submitted that as s
36(7F)
required the taxable incomes of each individual mine to be
determined separately, approaching the assessment in the manner SARS
had done resulted in the operating expenses of the St Helena mine
being used to reduce the Freegold and Joel mines’ taxable
incomes before capex. This, it submitted, was impermissible, both as
it offended s 20(1)
(b)
and
as the Act, by ring-fencing those mines, intended their pre-capex
taxable incomes to be determined by each individual mine’s
gross incomes and deductions.
[21] The appellant argued that support for this
was to be found both in s 36(10) of the Act and in para
2
(d)
of the Schedule
of Rates of Normal Tax and Rebates – as the former stipulates
that where ‘separate and distinct mining
operations are carried
on in mines that are not contiguous’ (and it is not suggested
that any of the appellant’s mines
are contiguous) then ‘the
allowance for redemption of capital expenditure
shall
be computed separately
’
(my emphasis) ─
and the latter refers to the taxable income derived by any company
from mining for gold ‘on any gold
mine’ and provides for
a rate of tax for gold mines which may vary from mine to mine, such
rate to be applied to a mine’s
taxable income ‘before the
set-off of any assessed loss or deduction not attributable to the
mining for gold from the said
mine’.
[22] The appellant argued that all of this showed that
it was impermissible to allow the St Helena loss, incurred by
deducting its
operating expenses from its gross income, to be
deducted from the taxable income of the Joel and Freegold mines as,
to do so, would
amount to setting off of St Helena’s operating
expenses against the other two mines’ incomes to determine
their taxable
incomes before making their capex deductions.
[23] Compelling though this argument is in certain
respects, I do not see how the mining activities conducted by the
appellant at
each one of its three mines can be said to be a separate
‘trade’ – defined in s 1 of the Act as including,
inter
alia, ‘every profession, trade, business, employment,
calling, occupation or venture . . .’ – from that
conducted
at the other mines. A company which carries on mining
operations certainly carries on the ‘trade’ of mining,
9
but it would be both fanciful and artificial to regard
its mining operations at the St Helena mine as being a different
trade from
the operations it conducts at its other two mines. Had the
legislature intended each mine’s operations to be regarded as a
separate trade, it could easily have said so. Not only did it not,
but the provisions of s 36(7E) in which reference is made to
the
‘aggregate of the amounts of capital expenditure . . . in
relation to any mine or mines,’ clearly exclude different
mining operations being regarded as different trades. The appellant’s
argument based upon the necessity to regard its operations
at its
different mines as different trades must therefore fail.
[24] On the other hand, however, much of the appellant’s
criticism of SARS’s method of assessment has merit. Section
36(7F) envisages the capex deduction of each mine to be determined by
having regard to the taxable income derived from that mine,
an
objective that will be defeated if the operating expenses incurred of
one mine are to be taken into account in respect of another.
In
addition, in ITC 1420 Kriegler J held in regard to the variable tax
rate levied against different mines, that the effect of
the formula
‘is to tax richer mines at a higher rate than poorer mines’
10
.
That effect would be nullified if the operating expenses of a poor
mine could be used to reduce the tax liability of a rich mine,
and it
is not surprising that it was stated in the Explanatory Memorandum on
the Income Tax Bill, 1990 ‘that the profitability
of each mine
must determine the tax rates of the relevant mine and that it should
not be influenced by losses and expenditure of
other mines or from
other sources.’
11
Finally, but most importantly, s 36(7C) provides for the
amount to be deducted under s 15
(a)
to be the capital expenditure on a particular mine,
determined by the income derived from working that mine. Violence
would be done
to this if the operating expenses of one mine were
set-off against the income of another, and I have therefore concluded
that it
is impermissible to do so.
[25] That does not mean that the appellant correctly
calculated its taxable income. My
principal
concern with its method is that it effectively excludes the operation
of s 36(7E). This is apparent from the summary set
out in the
appellant’s heads of argument, which reads:
‘
To
summarise, the capex deductible by the appellant in respect of any
individual mine was in terms of s 36(7C) and (7F) limited
only to the
taxable income (before capex) derived from that mine, reduced by any
“balance of assessed loss” in relation
to that mine
carried forward from the preceding year. It was not otherwise
limited.’
In terms of s 36(7C), however, the amount of capital
expenditure which may be deducted under s 15
(a)
is made subject to both sub-sections 36(7E)
and 36(7F), and the appellant’s argument essentially ignores
the former. But as
pointed out by Silke:
12
‘
Section
36(7E) sets a general cap on a taxpayer’s deductions of capital
expenditure under s 36(7C) for all mines by limiting
them to his
taxable income from mining; while s 36(7F) sets a particular cap on a
taxpayer’s deductions of capital expenditure
under s 36(7C) for
any one mine by limiting them to his adjusted taxable income from
mining on that mine . . . . In other words,
capital expenditure
incurred is deductible in the year in which it is incurred
but
only to the extent permitted by these various caps’
(My
emphasis.)
[26] It must be remembered that s 36(7E) sets the
maximum amount of capital expenditure that may be deducted in respect
of the aggregate
of the appellant’s taxable income before capex
derived from its various mines (the so-called ‘general cap’).
This does not mean that its full cap must necessarily be allowed. As
not all of the appellant’s mines have produced a taxable
income
at that stage, it must of necessity mean that the aggregate mining
taxable income will be less than the combined taxable
incomes of just
those that have been profitable. Consequently, the general cap under
s 36(7E) must of necessity be less than the
aggregate of the taxable
incomes of the profitable mines ─ and the taxpayer will not be
entitled to deduct the full amount
of each particular cap calculated
in respect of those profitable mines as would have been the case had
the St Helena mine not operated
at a loss. To hold otherwise would be
to permit the deduction of an amount exceeding the general cap
prescribed by s 36(7E).
[27] This may be demonstrated in the present case by
reference to Figure 1 above. As set out therein, the appellant seek
to deduct
a total of R1 197 million in respect of its 2003 capital
expenditure in respect of the Freegold and Joel mines, that sum being
assessed with reference to the taxable incomes of R1 177 million
derived from the Freegold mine and R20 million derived from the
Joel
mine. However, a total of R1 197 million cannot be allowed as a
capital deduction as the appellant’s aggregate capex
deductions
for the year is limited to R1 146 million under s 36(7E), being its
taxable income from mining before any capex deduction
(the total of
the taxable incomes of the Freegold and Joel mines less the loss of
R51 million incurred by the St Helena mine).
Accordingly, although
the combined taxable income, before capex, of the Freegold and Joel
mines exceeds R1 146 million, no more
than that sum may be allowed as
a total capex deduction under s 36(7E).
[28] The appellant sought to meet this by arguing that
its aggregate taxable income from mining before capex was in fact R1
197
million. This was based on the submission that as the St Helena
mine had incurred a loss, it had earned no taxable interest and
that,
rather than taking its loss that year of R51 million into account in
calculating the appellant’s taxable income before
capex, it
should merely be treated as having a taxable income of nil. The
effect of this, if accepted, would be that the loss actually
incurred
by the St Helena mine would not be deducted from the combined incomes
of the Freegold and Joel mines.
[29] This cannot be accepted. The amount to be
determined under s 36(7E) is the taxable income to the appellant’s
mining operations
from all its mines, and in determining that amount
the gross incomes and the operating expenses of all three mines have
to be taken
into account. The taxable income of a taxpayer is, after
all, determined by deducting operating expenses from gross income,
and
the St Helena loss therefore cannot just be left out of
reckoning. Accordingly, the appellant’s taxable income before
capex
derived from its mining activities must be assessed at the sum
of R1 146 million, ie R51 million less than the aggregate of the
capex the appellant wishes to have deducted in regard to its Freegold
and Joel mines.
[30] The end result of this is that, by reason of the
operation of s 36(7E), the appellant is not entitled to deduct the
full caps
of the capex it calculated in respect of the Freegold and
Joel mines but, rather, lesser amounts. The issue then becomes, how
should
the individual amounts of capex in respect of the Freegold and
Joel mines be reduced?
[31] SARS purported to do so by setting off the St
Helena loss from the taxable incomes of the Freegold and Joel mines.
But in principle
that is impermissible, doing violence to the scheme
already described which requires the taxable incomes of mines to be
assessed
separately and without the operating expenses of one mine
being used to reduce the taxable income of another.
[32] Although s 36(7F) provides for a maximum (or
particular cap) that may be deducted for capital expenditure in
respect of each
of the Freegold and Joel mines, it does not
necessarily entitle the appellant to deduct the full amount of each
such cap. Thus,
the answer seems to me to be for the individual capex
caps of the Freegold and Joel mines to be reduced so that their total
does
not exceed the general cap imposed by s 36(7E). In this way the
two sub-sections will work in tandem, setting a maximum total
deduction
and reducing the Freegold and Joel mines maximum caps
proportionally (an exercise similar to that adopted by the respondent
in
prorating the St Helena loss of R51 million between the Freegold
and Joel mines). This is similar to what is done when it becomes
necessary to apportion between trades a balance of assessed loss
brought into reckoning from a previous year, the process of which
is
described by
Silke
as
follows:
13
‘
It is
submitted that the assessed loss must be apportioned among the
different trades in proportion to the income derived from each.
For
example, if in one year a company had an assessed loss of R100 000
and in the next year it derived an income from mining
of R200 000
and an income from manufacturing of R300 000, the assessed loss
must be apportioned between the two trades,
R40 000 being
apportioned to mining and R60 000 to manufacturing. In practice
SARS accepts this view.’
[33] Adopting that approach, the simplest method of
calculating the amount of the allowable capex deduction is to deduct
the amount
of the appellant’s taxable income from its mining
operations (R1 146 million) from the total of the taxable
incomes
of the Freegold and Joel mines (R1 197 million) and to
apportion the difference (R51 million) between the two mines in the
manner just described. Doing so, using the same ratio of
approximately fifty to one used by the respondent (that is the
approximate
ratio between the incomes derived from the two mines: and
the appellant did not quarrel with such a ratio – merely that
it
was impermissible to set the amounts off against the taxable
incomes of those mines) reduces the Freegold mine’s capex
deduction
by R50 million to R1 127 million and that of the Joel
mine by R1 million to R19 million, with the balance of capital
expenditure
in respect of those two mines standing over to the
succeeding year under s 36(7F) being increased accordingly.
[34] In the light of these conclusions and the reduction
of capex mentioned above, the correct treatment of the appellant’s
taxable liability for the 2003 year is set out in Figure 3 below.
Figure 3
St Helena Freegold Joel Non-min
1 Balance of assessed loss nil nil nil nil
2 Taxable income before capex (51) 1 177 20 156
3 Capex deductible nil 1 127 19 n/a
4 Taxable income after capex (51) 50 1 156
[35] This exercise shows that the appellant had no
taxable income from mining (the loss of the St Helena mine being
offset by the
aggregate of the taxable incomes after capex of the
Freegold and Joel mines), resulting in the appellant’s taxable
income
being limited to R156 million, being its income from its
non-mining activities. I appreciate it that this is the same result
arrived
at by SARS, but that is a matter of arithmetic, not of
principle. The underlying principles giving rise to the calculations
differ.
In Figure 3, the general cap capex deduction is reduced by
reason of the St Helena mine having operated at a loss, and the
particular
caps of the appellant’s two profitable mines being
reduced as a result. In Figure 2, SARS made its calculations, in my
view
impermissibly, by setting off the St Helena loss against the
respective taxable incomes before calculating the capex deduction of
the two profitable mines. The result may be the same, but the route
followed to reach it is different.
[36] It is clear from this that the appellant’s
principal argument cannot succeed. That makes it necessary to deal,
albeit
briefly, with the appellant’s alternative argument based
upon s 36(7G).
[37] That section relates to the deduction of capital
expenditure in respect of mining operations commenced by a taxpayer
after
14 March 1990. However, it was correctly common cause that the
section is only of application in the event of a taxpayer having
a
taxable income from mining after deduction of whatever capex may be
allowable for each of its mines. In the present case that
does not
arise as after applying the provisions of sections 36(7E) and (7F)
the appellant was left with no taxable income from
mining. Section
36(7G) therefore does not apply.
[38] Be that as it may, the appellant’s appeal
cannot succeed. There is no reason for costs not to follow the event.
[39] The appeal is dismissed with costs, such costs to
include the costs of two counsel.
______________________
L E Leach
Judge of Appeal
APPEARANCES:
For Appellant: T S Emslie SC
Instructed by:
Cliffe Dekker Hofmeyr Inc, Sandton
Naudes, Bloemfontein
For Respondent: A R Bhana SC (with him G D Goldman)
Instructed by:
State Attorney, Pretoria
State Attorney, Bloemfontein
. . . .
1
Per
Centlivres CJ in
SA Bazaars (Pty) Ltd v Commissioner for Inland
Revenue
1952 (4) SA 505
(A) at 510F.
2
At
224D-E.
3
Alwyn
de Koker and R C Williams
Silke on South African Income Tax
vol 2 at 16-10 to 16-11.
4
Marius
Cloete van Blerck
Mining Tax in South Africa
at 12-30.
5
Van
Blerck
Mining Law
at 12-30 para 12.11.
6
At
§ 16.3 page 16-11.
7
Reference
is made in
Silke
to s 36(7E) but that is clearly a
typographical error.
8
In
the heads of argument the taxable income (before capex) in respect
of St Helena is reflected as ‘n/a’. In fact,
after
deductions the mine had incurred a loss of R51 million and I have
used that figure reflected in brackets to convey that
it is a loss.
9
Compare
ITC
1420
, 49 (1987) SATC 69.
10
At
74.
11
Silke
§ 16.11 page 16-21.
12
At
§ 16.3 page 16-9.
13
§
8.127C.