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Mining Capital Expenditure Deductions
Taxand South Africa summarises the case and the implications it will have on the mining industry.
AHF JV's income derived from 3 gold mines; Freegold, Joel and St Helena. In September 2008, SARS issued revised tax assessments for AHF JV, adjusting its income tax liability for the 2002 to 2005 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 was to reduce the amount of capital expenditure that could be redeemed in respect of the Freegold and Joel mines.
In terms of the Income Act, section 36(7E) limits the deduction of aggregated capital expenditure, while section 36(7F) states that the capital expenditure of a mine is ring fenced to that mine, which means capital expenditure incurred in a mine cannot be used to reduce the taxable income of another mine.
SARS had calculated the taxpayer's tax liability by setting off St Helena's loss from the taxable incomes of the Freegold and Joel mines. The Supreme Court of Appeal disagreed with this method in calculating AHF JV's tax liability.
The Court held that, the method is impermissible in principle in terms of section 36(7C) and section 36(7F) of the Act, as the taxable incomes of mines are required to be assessed separately and without the operating expenses of one mine being used to reduce the taxable income of another. The Court also held that 'although section 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 SARS to deduct the full amount of each such cap'.
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