Mining Companies Attain Relief Through Deductions on Infrastructure Relating to Social and Labour Plans: A Case of the Cart Before the Horse?

"A recent amendment to Section 36(11)(e) of the Income Tax Act, 53 of 1968 (Tax Act) now extends the allowable deduction of ‘capital expenditure’ incurred by mining companies pursuant to the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA). In terms of the Taxation Laws Amendment Bill 2016 (TLAB 2016), the allowable deduction has been extended to include expenditure incurred on infrastructure in terms of Social and Labour Plan (SLP) requirements as per the MPRDA. Interestingly, what necessitated the amendment was the need to recognize SLP requirements and to circumvent administrative difficulties for mining companies and the South African Revenue Services (SARS) in differentiating the use of developmental infrastructure by employees or the community. The successful implementation of such a deduction hinges on a sound SLP system. However, given the challenges within the current SLP system, this amendment could be considered somewhat premature. IntroductionSection 36(11) of the Income Tax Act 58 of 1962 (Tax Act) enabled mining companies to deduct certain capital expenditure in lieu of its other sections. In particular, it made provision for mining companies to deduct capital expenditure incurred pursuant to the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), but excluding capital expenditure incurred in respect of infrastructure or environmental rehabilitation. As such, mining companies could only deduct such capital expenditure that related directly to their employees and not to the wider community (Clegg, 2018).In terms of the Taxation Laws Amendment Bill 2016 (TLAB, 2016) (South Africa, 2016a), the recent amendment to Section 36 extends the relief provided under section 36(11)(e) to include capital expenditure incurred on infrastructure in terms of the Social and Labour Plan (SLP) requirements of the MPRDA. In other words, the capital expenditure incurred by the mining company for the benefit of the people living in mining communities. To qualify for such a deduction, the infrastructure erected or developed by the mining company should reflect what was agreed between the mining company and the Department of Mineral Resources (DMR) as per the SLP requirements of the MPRDA (TLAB 2016)."