KUDYA
JA:
[1] The
delay in handing down this judgment is sincerely regretted.
[2] The
appellant seeks the vacation of the whole judgment handed down by the
Special Court for Income Tax Appeals (the court a
quo)
that was handed down on 23 December 2020. The court a
quo
set aside the amended income tax assessments issued to and the
penalty imposed against the respondent by the appellant on 30 October
2017 for the 2014 tax year and on 1 November 2017 for the 2015 tax
year.
THE
FACTS
[3] The
matter a
quo
was premised on a stated case. The appellant is a revenue collection
statutory body corporate established in terms of the Revenue
Authority Act [Chapter
23:11].
The respondent is a limited liability company registered under the
laws of Zimbabwe. It operates a mining lease title issued on 28 March
2001 and amended on 11 September 2001. It has the exclusive mining
rights to 28 diamond mining claims covering 23,716 hectares in the
Masvingo Mining District. It sells the diamonds outside Zimbabwe.
[4] In
October 2017, the appellant conducted a tax review of the
self-assessment returns submitted by the respondent in respect of the
2010 to 2015 tax years. The appellant recomputed the income tax
payable for the tax years ended 31 December 2014 and 2015. It added
back to taxable income, thereby disallowing, the deductions in
respect of mining royalties, which the respondent had paid pursuant
to section 244 of the Mines and Mineral Act [Chapter
21:05].
The basis for the disallowance was that the royalties were of a
capital nature and not of a revenue nature. The appellant reasoned
that the royalties were of a capital nature because they were paid to
secure an enduring benefit in respect of the diamond mining rights
conferred upon the respondent by the Government of Zimbabwe (GOZ). On
30 October 2017 and 1 November 2017, the appellant issued two notices
of additional assessments together with their respective additional
assessments. The appellant also imposed 100 percent penalties for
the resultant tax shortfall in the aggregate sum of US$2,558,692.50
for the 2014 tax year. The respondent objected to the additional
assessments on 24 November 2017. The objection was disallowed by the
appellant on 25 January 2018. The respondent appealed against the
determination disallowing the objection to the Special Court on 9
April 2018. The appeal was successful.
THE
CONTENTIONS A
QUO
[5] Mr
Zhuwarara,
who appeared for the respondent a
quo,
contended that as the royalties were chargeable on the minerals or
mineral products that had been disposed of in the year of assessment,
they would be deductible from taxable income pursuant to the general
deduction formula, viz,
section 15(2)(a) of the Income Tax Act [Chapter
23:06].
He submitted that the appellant incorrectly added back the royalties
to taxable income by treating them as being of a capital nature when,
in law, they were of a revenue nature. He strongly contended that
charging royalties would not result in the acquisition, establishment
or improvement of the mining location from which minerals or mineral
products would be won. Rather, they were paid ad
valorem
the disposed minerals. The purpose of the royalties was to preserve
the respondent's right to dispose of the extracted minerals. He
also submitted that the repeal of section 15(2)(f)(iii) of the Income
Tax Act with effect from 1 January 2014 did not abrogate the clear
and unambiguous text of the general deduction formula or the effect
of section 16 of the Income Tax, both of which remained extant.
[6] Mr
Bhebhe,
for the appellant, made the following contrary submissions. The
general deduction formula predated the introduction of section
15(2)(f)(iii) of the Income Tax Act. The latter provision was
introduced into the Income Tax Act by section 8 of the Finance Act
No. 10/2003 and took effect on 1 January 2004. The provision
permitted a payer of royalties to deduct them from its taxable
income. Section 7(a) of the Finance Act No. 1/2014
repealed section 15(2)(f)(iii) with effect from 1 January 2014. The
deduction of royalties was removed by legislative diktat.
Additionally, royalties constitute capital expenditure and are not
deductible under the general deduction formula. The deductions done
by the appellant in the two self-assessments returns were improper
and therefore properly disallowed in the impugned additional
assessments. The dollar for dollar penalty imposed by the appellant
was in accordance with the moral turpitude and demonstrable lack of
diligence of the taxpayer. In terms of section 46 of the Income Tax
Act the incorrect self-assessment return avoided the payment of the
correct tax and was done with the intention of defrauding the fiscus.
It could not properly be waived in any manner or form.
THE
FINDINGS OF THE COURT A
QUO
[7] The
court a
quo
held that the royalty payable under Part XIV of the Mines and
Minerals Act to the government by a miner is tax deductible because
it falls into the ambit of revenue and not capital. It also found
that the contemplated deduction disallowance specified in the
Minister of Finance and Economic Development's 2013 National Budget
Speech to Parliament and the resultant repeal of section
15(2)(f)(iii) of the Income Tax Act did not alter the underlying
revenue nature of the mining royalties in issue. The actions of the
Minister and Parliament were negated by the overarching reach of the
general deduction formula, which was unaffected by the two events.
The court a
quo
reasoned that the source of the royalty determined its nature. It
held that, as the royalty was paid from the income earned from the
disposal of the won minerals and mineral products, it constituted an
operational expense incurred in the production of income and not an
operational expense incurred in the establishment, creation,
acquisition or improvement of the mining location, mining equipment
or mining infrastructure.
[8] The
ratio
decidendi
of the court a
quo
is encapsulated in para. 25 of the judgment, which I reproduce below:
“[25]
Whilst it is paid in lieu
of the right to mine, nonetheless, it does not bring into being an
asset for the enduring benefit of a miner. It is an expense
associated with the operation of a business for the purpose of
earning income as opposed to a cost of performing the income-earning
operations or of establishing or improving or adding to the
income-earning machinery. So, I would set aside the respondent's
assessment on this basis”.
[9] The
court a
quo
further held that it was not necessary to resort to extrinsic aids
alluded to in section 15B(1) and (2) of the Interpretation Act
[Chapter
1:01]
where the text is clear and unambiguous. It therefore held that the
deduction of the royalties was governed by the general deduction
formula, which predated the repealed provision, and was therefore not
affected by the interposition of the repealed provision.
[10] Aggrieved,
the appellant appealed to this Court on the following grounds of
appeal.
THE
GROUNDS OF APPEAL
1. The
court
a
quo
erred in law in finding that royalties paid by the respondent in
terms of section 244 of the Mines and Minerals Act [Chapter
21:05]
are an allowable deduction in terms of section 15 of the Income Tax
Act [Chapter
23:06];
2. The
court a
quo
erred in law in finding as it did, or taken to have done, that the
amendments to section 15(2)(f)(iii) to the Income Tax Act [Chapter
23:06]
in 2004, 2014 and 2019 did not alter the deductibility of royalties
as a deductible expense for the relevant periods.
3. The
court a
quo
erred in law in setting aside the penalty in circumstances where the
appellant was empowered in terms of section 46(1) of the Income Tax
Act [Chapter
23:06]
to levy such a penalty.
The
appellant seeks the success of the appeal, the vacation of the
judgment of the court a
quo
and its substitution by a dismissal of the respondent's appeal in
the court a
quo.
THE
ISSUE
[11] Whether
notwithstanding the repeal of section 15(2)(f)(iii) of the Income Tax
Act, royalties payable under section 244 of the Mines and Minerals
Act constitute an allowable deduction under the general deduction
formula, section 15(2)(a) of the Income Tax Act.
THE
SUBMISSIONS BEFORE THIS COURT
[12] Mr
Bhebhe
for the appellant submitted that the royalties were not deductible in
the 2014 and 2015 tax years because of the repeal of section
15(2)(f)(iii) of the Income Tax Act. The provision in question
allowed the deduction of section 244 mining royalties between 1
January 2004 and 31 December 2013 before it was repealed on 1 January
2014. He contended that the court a
quo
manifestly erred in disregarding the clear intention of the
legislature that derives from the repeal of the formerly permissive
provision when it allowed the deduction of these royalties. He
strongly contended that the logical effect of the repeal was that the
royalties under consideration were no longer deductible. He also
contended that the royalties constituted a non-deductible expenditure
of a capital nature under the general deduction formula. He further
submitted that it was therefore remiss of the court a
quo
to allow their deduction in these circumstances.
[13] Per
contra, Mr Zhuwarara
for the respondent submitted that the court a
quo
correctly set aside the additional assessments issued by the
appellant on 31 October 2017 and 1 November 2017. He contended that
the repeal of section 15(2)(f)(iii) at the dawn of the 2014 tax year
did not automatically alter the essence of royalties as a deductible
revenue expense incurred to earn income. He argued that the continued
existence of the general deduction formula after the repeal of
section 15(2)(f)(iii) permitted the deduction of all revenue expenses
whose deduction was not disallowed by section 16 of the Income Tax
Act. He contended that royalties being deductions of a revenue nature
and not of a capital nature, which were also not precluded from
deduction by section 16, were properly deductible under the general
deduction formula. He relied on the dicta
in AS
School & Ors v Zimbabwe Revenue Authority
SC61/17 at p11 for the proposition that the mere repeal of a
permissive statutory provision would not necessarily erode the
targeted rights as long as they continued to be preserved by an
existing provision in the same or in a different enactment. He
contended that as the royalties were payable for the right to dispose
of won minerals or mineral products and not the right to mine these
minerals, they constituted expenses defrayed to raise or earn income.
He further argued that they did not constitute expenses incurred in
securing the right to mine and were therefore not of a capital
nature.
THE
LAW
[14] The
statutory provisions relevant to the determination of this appeal,
which govern the allowable deductions of mining expenditure in
general and mining royalties in particular during the 2014 and 2015
tax year were provided in section 2, 15(1), (2)(a), (f) and (4), 16
and the Fifth Schedule of the Income Tax Act [Chapter
23:06]
(the Act).
Mining royalties were specifically mentioned in Part XIV of the Mines
and Minerals Act [Chapter
21:05].
In tax law, section 15(2)(a) of the Act is often referred to as the
general deduction formula. This is because it is the general
provision which underpins all allowable deductions. The other 34
subsequent paras (b) to (ll), unlike the general deduction formula,
delineated specific deductions that were allowed a taxpayer under
section 15(2). The specific provision that related to mining
operations was section 15(2)(f). However, in terms of section 15(4)
of the Act, a taxpayer was obliged to choose a single provision to
make its allowable deduction, where such a deduction could be made
under more than one provision of the Act.
[15] In
terms of section 2, a mining location carries the definition embodied
in the Mines and Minerals Act. However, mining operations meant any
operations for the purposes of winning a mineral from the earth or
from a dump site. A tax is defined as “any tax or levy leviable
under this Act”. Trade is further defined as encompassing any
trade, business, activity, venture or lease carried on, engaged in or
followed for the purposes of producing income as defined in section
8(1) of the Act
and
anything done for the purpose of producing such income.
[16] The
general deduction formula stipulated that:
“15
Deductions allowed in determination of taxable income
(2)
The deductions allowed shall be —
(a)
expenditure and losses to the extent to which they are incurred for
the purposes of trade or in the production of the income except to
the extent to which they are expenditure or losses of a capital
nature;
(f)(ii)
where the taxpayer is a miner, any expenditure (other than
expenditure in respect of which a deduction is allowable in terms of
paragraph (a),
which is proved to the satisfaction of the Commissioner to have been
incurred during the year of assessment by the taxpayer on surveys,
boreholes, trenches, pits and other prospecting and exploratory works
undertaken for the purpose of acquiring rights to mine minerals in
Zimbabwe or incurred on a mining location in Zimbabwe, together with
any other expenditure (other than expenditure referred to in
paragraph (a)
of the definition of 'capital expenditure' in paragraph 1 of the
Fifth Schedule) which, in the opinion of the Commissioner, is
incidental thereto:
(iii)....[Subparagraph
repealed by Act 1 of 2014]”
[17] Section
16 provided that:
“16
Cases in which no deduction shall be made
(1)
Save as is otherwise expressly provided in this Act, no deduction
shall be made in respect of any of the following matters —
(d)
tax upon the income of the taxpayer or interest payable thereon,
whether charged in terms of this Act or any law of any country
whatsoever;”
[18] The
provisions of the Fifth Schedule that are relevant to the
determination of the appeal read as follows:
“FIFTH
SCHEDULE (Section 15(2)(f))
ALLOWANCES
AND DEDUCTIONS IN RESPECT OF INCOME FROM MINING OPERATIONS AND OTHER
PROVISIONS RELATING THERETO
Interpretation
1.
(1) In this Schedule —
'capital
expenditure' means —
(a)
expenditure, in relation to mining operations (other than expenditure
in respect of which a deduction is allowable in terms of subparagraph
(ii) of paragraph (f)
of subsection (2) of section fifteen)
—
(i)
on buildings, works or equipment, including any premium or
consideration in the nature of a premium paid for the use of
buildings, works, equipment or land, but excluding —
Deduction
not admissible in respect of income derived from carrying on of
mining operations
10.
No deduction shall, as regards income derived from the carrying on of
mining operations, be made in respect of the allowances or deductions
referred to in paragraphs (c),
(d),
(e)
and (t)
of subsection (2) of section fifteen.”
[19] Section
244 of the Mines and Minerals Act provided that:
“244
Royalty
(1)
Subject to this Part, the miner of a registered mining location shall
pay royalty
on all minerals or mineral-bearing products won from such location
which have been disposed of by him or on his behalf, whether within
or outside Zimbabwe, during any month, at such rate per unit of mass
as may be fixed in terms of section two
hundred and forty-five.”
In
terms of section 251, a miner was mandated to render to the appellant
a monthly return in the prescribed form in respect of the mineral
resources won from its mining location during the preceding month.
The miner was required to render separate returns, showing the output
and full details of the disposal of the minerals or mineral bearing
products on the one hand and a return with similar details for
precious stones on the other, won from its mining location. The
miner was however obliged to pay the royalty due to the mining
commissioner. Criminal and civil sanctions were provided for the
failure to render the return or to pay the assessed royalty. Section
253 of the Mines and Minerals Act, empowered the appellant to issue
the civil sanction prohibiting the offending miner
from disposing of any mineral resources won
from the particular mining location to which the failure related “or
from any other location which is being worked by the miner, whether
or not the miner has failed to pay any royalty due in respect of the
other location, until all outstanding royalty has been paid or until
an arrangement has been made which is acceptable to the
Commissioner-General or officer for the payment of such royalty”. A
deliberate defiance of the prohibition order attracted a further
criminal sanction. (my emphasis)
Section
254 conferred on the State President both the absolute power to remit
the payment of any royalty payable, prospectively or retrospectively.
It also preserved those continuing royalty remissions that had been
“granted or ordered before the 1st January, 1970, in respect of any
period extending beyond the 31st December, 1969.”
It
is noteworthy that, under the definition section (section 5) of the
Mines and Mineral Act “disposal” denoted the sale, donation or
other alienation of the mineral resource and is deemed to take place
at the dispatch of the mineral resource from the mining location.
[20] The
construction of fiscal legislation, in general, and of the general
deduction formula, in particular has been the subject of the
decisions of many superior courts the world over. It is premised on
the text, context and purpose of both the particular provision(s) and
the architectural design of the statute under consideration. See
Commissioner
for Inland Revenue v Simpson
1949 (4) SA 678 (A); Chegutu
Municipality v Manyora
1996
(1) ZLR 262 (S) at 264; Grey
v Pearson
(1857) 10 ER 1216 at 1234; and Tapera & Majachani: Unpacking
Tax Law and Practice in Zimbabwe,
2020 ed, Matrix Tax School, Harare at p9. This approach is further
entrenched in section 15B(1) and (2)(f) of the Interpretation Act
[Chapter
1:01],
which encourages the use of extrinsic materials in the interpretation
of statutes to either confirm the ordinary meaning of a provision or
determine its meaning where the ordinary meaning is incongruent,
inconsistent or repugnant with the context and object of the
enactment.
[21] The
interpretation of the general deduction formula has also been
traversed in numerous court decisions. The import of section 15(2)(a)
of the Income Tax Act is to allow deductions of a revenue nature and
disallow those of a capital nature. The differences between the two
deduction categories is premised on whether the deduction relates to
the creation, acquisition or improvement of the business income
earning structure or to its income earning capacity. The former would
constitute capital expenditure while the latter would be regarded as
revenue expenditure. This position was articulated in
CIR
v George Forest Timber Co Ltd
(1924) 1 SATC 20 in the following manner:
“Money
spent in creating or acquiring an income producing concern must be
capital expenditure. It is invested to yield a future profit while
the outlay did not recur, the income does. There is a great
difference between money spent in creating or acquiring a source of
profit and money spent on working it. The one is capital expenditure,
the other is not. The reason is plain; in the one case it is spent to
enable the concern to yield profit in the future, in the other it is
spent in working the concern for the present production of profit.”
See
also
SZ
(Pvt) Ltd v ZRA
HH142/20 at 12 where the Court stated that:
“The
distinction between revenue and capital expenditure has been stated
in such cases as Atherton
v British Insulated & Helsby Cables Ltd
[1925]
TC 155; CIR
v George Forest Timber Company
1 SATC 20; New
State Areas Ltd v CIR
1946
AD 610; and D
Bank Ltd v Zimbabwe Revenue Authority
2015 (1) ZLR 176 (H). The main principle derived from these cases is
that the money spent in creating or acquiring a source of profit
constitutes capital expenditure while the money spent in working it
or which is incurred as part of the cost of performing the income
producing operation constitutes revenue expenditure.”
[22] One
of the tests that is used to determine whether or not expenditure is
of a capital nature is the enduring benefit test. This test was
articulated by the House of Lords in British
Insulated and Helsby Cables Ltd v
Atherton
[1926]
AC 205 (HL), where it was held that an expenditure incurred for the
purpose of creating an asset or an advantage for the enduring benefit
of trade, constituted capital expenditure and not revenue
expenditure. See
also D
Bank v Zimra
2015 (1) ZLR 176 (H) at 187G-188B.
THE
APPLICATION OF THE LAW TO THE FACTS
[23] Mr
Bhebhe
impugns the finding of the court a
quo
that the royalties payable to the mining commissioner constituted
expenditure of a revenue nature, which was properly deductible in the
respondent's self-assessment returns. He submitted that the
royalties constituted non-deductible capital expenditure. Mr
Zhuwarara,
on the other hand, supported the court a
quo's
finding.
[24] The
reasoning of the court is captured in paras.21 to 23 of its judgment.
It stated that:
“[21]
Royalties are recognized across the globe as compensation for the
extraction of a mineral resource. They are a payment to the owner of
the mineral resource in return for the right to remove that mineral
from the land: see OTTO et
al: Mining Royalties: A Global Study of Their Impact on Investors,
Government, and Civil Society,
2006 ed., World Bank, at p41-42. In Zimbabwe, and in terms of section
2 of the Mines and Minerals Act, the rights to all minerals is vested
in the President. Royalties are a form of tax. In my view, it would
be anomalous for a miner to pay this kind of tax in terms of Part XIV
of the Mines and Minerals Act (as read with section 37A of the
Finance Act [Chapter
23:04])
but then not be able to deduct it when he computes his other tax
obligation in terms of Part III of the Income Tax Act. This would
seem to amount to double taxation.
[22]
As shown above, section 15 of the Income Tax Act allows for
deductions to be made to the taxable income of a taxpayer in general.
In respect of persons earning income from mining operations and other
trade in particular, section 15(1)(c) says that such deductions are
only to be claimed in respect of the income to which they relate.
Thus, the deductions may be restricted. Nonetheless, it is
permissible to make them. A miner can make them. He must just be
careful not to mix the deductions in respect of mining operations
with those of his other trade, if any. Then in respect of a trade or
the production of an income in general, section 15(2)(a)(i) says the
deductions allowed are in respect of expenditure and losses to the
extent that they are of a capital nature.
[23]
To regard a mining royalty as expenditure of a capital nature, as the
respondent does, is rather stretching it too far. I disagree with
such classification. A royalty payment by a miner in terms of Part
XIV of the Mines and Minerals Act cannot be deemed to be money spent
in creating or acquiring a source of profit. It is hardly the cost of
performing the income-earning operation or the cost of establishing
or of improving or adding to the income–earning plant or machinery.
It is hardly such a cost as intended to procure an advantage for the
enduring benefit of the appellant's business. Examples of costs
incurred by a taxpayer which are in the nature of capital expenditure
include such expenses incurred in acquiring fixed assets, share
capital, an income-producing unit, goodwill, intellectual property,
and the like: TAPERA & MAJACHANI, ibid,
at p151. Of course, no exhaustive list can ever be provided.”
[25] Mining
royalties were payable to the mining commissioner in this country in
terms of section 79 of the Mines and Minerals Act No.16 of 1935 and
section 139 of the Mines and Minerals Act No.18/1951. There were no
specific sections under which the royalty payable was deductible in
the corresponding Income Tax Ordinance
of
Southern Rhodesia No.20 of 1918
and the Income Tax Act No.16/1954. The term was not and has never
been statutorily defined in Zimbabwe. In the United States, a royalty
is defined as a fee imposed by local, state or federal governments on
either the amount of minerals produced at a mine or the revenue or
profit generated by the minerals sold from the mine.
Another online blog, Investopedia asserts that:
“Mineral
royalties also called mineral rights: are paid by mineral extractors
to property owners. The party that wants to extract the minerals will
often pay the property owner an amount based on either revenue or
units, such as barrels of oil or tons of coal.”
The
OECD
Glossary of Tax Terms at www.oecd.org
defines mineral royalties as follows:
“Mineral
royalties: regular payment, usually based on the volume or price of
minerals extracted, made by mining enterprises to national states or
other owners of mineral resources as consideration for the right to
exploit particular mineral resources.”
The
scope and purpose of a mineral royalty in South Africa are captured
in a White Paper entitled: A
Minerals and Mining Policy for South Africa
published in October 1998, at p13 thus:
“The
mineral rights owner is compensated by the exploiter of the minerals
for the depletion of the non-renewable resource through the payment
of royalties. It is generally accepted that in principle royalties
are charged on production or revenue.”
Again,
Boadway and Keen, wrote in the Economic
Analysis
of August 2013, in an article entitled Mining
Taxation - The South African Context
at p13 that:
“The
rationale for a mineral royalty is the payment to the resource owner
(typically the State) by the extractor in return for the right to
mine. The Mineral and Petroleum Resources Royalty Act No.28/2008
provides for the compensation to the State (as custodian) for the
permanent loss of non-renewable resources.”
[26] In
the Zimbabwean context, a mineral royalty payable in terms of section
244 of the Mines and Minerals Act constitutes a fee paid by the
holder of a mining right to the mining commissioner for the right to
dispose the mineral resources from a mining location. The royalty is
payable on the value (ad
valorem)
of the mineral resources extracted from the mining location.
[27] It
is common cause that in the 2014 National Budget Speech to Parliament
on 19 December 2013, the Minister of Finance and Economic Development
tabled the following proposal:
“Mineral
Royalty
1088.
Minerals are a depleting resource; hence, Government levies a royalty
as compensation for extraction rights.
1089.
Government has already emphasized that the contribution of the mining
sector to the fiscus is minimal, compared to other countries in the
region. This is exacerbated by the generous deduction of royalties
and other numerous expenses incurred in the extraction of minerals.
1090.
In order to enhance the contribution of the mineral resources to the
fiscus, I propose to disallow royalty as deductible expense against
taxable income.
1091.
This measure takes effect from 1 January 2014.”
[28] It
was further common cause that the proposal was effected by the repeal
of section 15(2)(f)(iii) of the Income Tax Act by section 7(a) of the
Finance Act No.1/2014. The repealed provision stipulated that:
“(iii)
where the taxpayer is a miner as defined in subparagraph (ii), the
amount of any royalty paid during
the
year of assessment in terms of section 245 of the Mines and Minerals
Act [Chapter
21:05];
[Subparagraph inserted by Act 10 of 2003].”
[29] The
main basis for Mr Bhebhe's
submission is that prior to 1 January 2014, mining royalties were
deductible under the specific provisions of section 15(2)(f)(iii) and
not under the general deduction formula. He contended that the repeal
of that provision on 1 January 2014 coupled with the Minister of
Finance's National Budget proposal evinced the legislature's
clear intention to disallow the deduction of mineral royalties from
the respondent's income during the 2014 and 2015 tax years. His
alternative submission was that the royalties constituted a capital
expense to the respondent and could not be properly deducted under
the general deduction formula.
[30] Mr
Zhuwarara,
on the other hand, submitted that the repeal of section 15(2)(f)(iii)
did not affect the efficacy of the general deduction formula and
could not therefore have precluded the respondent from deducting the
royalties as long as they constituted revenue expenditure. He argued
that the royalties were an allowable deduction as they were not
capital expenses.
[31] The
general deduction formula constitutes a catch-all provision for all
allowable deductions that are not of a capital nature. The mere fact
that an allowable deduction could be made under another provision of
the Act would not prevent a taxpayer from relying on the general
deduction formula. This position is postulated by the bracketed
opening words of section 15(2)(f)(ii) of the Act which state that:
“where
the taxpayer is a miner, any expenditure (other
than expenditure in respect of which a deduction is allowable in
terms of paragraph (a)),
which is proved to the satisfaction of the Commissioner to have been
incurred during the year of assessment by the taxpayer...” (my
emphasis)
The
same position is further envisaged by the provisions of section 15(4)
of the Act, which provides that:
“(4)
Where in respect of any amount, a deduction would but for this
subsection be allowable under more than one provision of this Act and
whether it would be so allowable in respect of the same or different
years of assessment, the taxpayer shall not be entitled to claim that
such amount shall be deducted more than once and, where the deduction
would but for this subsection be allowable under more than one
provision of this Act in respect of the same year of assessment, the
taxpayer shall elect under which one of those provisions he wishes to
claim such amount as a deduction.”
Section
15(4) recognizes that an allowable deduction can be based on more
than one provision of section 15(2) or of any other section of the
Act. The only thing that it does is to prevent a taxpayer from double
dipping. A taxpayer is precluded by this subsection from deducting
the same amount twice where an allowable deduction can be claimed
under two or more provisions of the Act.
[32] We
agree with Mr Zhuwarara
that the mere repeal of section 15(2)(f)(iii) of the Act, which
specifically provided for the deduction of royalties from the
respondent's income, did not necessarily mean that royalties could
not be deducted under the general deduction formula, provided that
they did not constitute expenditure of a capital nature.
[33] There
is a dearth of authority on whether mineral royalties are expenses of
a revenue nature or expenses of a capital nature. This is because the
tax legislation in most jurisdictions specifically provides for the
tax treatment to be accorded to mining royalties. The question of
whether royalties are revenue or capital expenses is dealt with in a
perfunctory manner in Gunn: Commonwealth
Income Tax Law and Practice,
7th
ed (1963), at para. [1595] thus:
“Royalties
are an allowable deduction, being an outgoing necessarily incurred in
carrying on a business for the purpose of gaining or producing
assessable income. Payments in the nature of instalments of
purchasing money should be distinguished from income payments such as
royalties.”
A
useful guideline for determining the nature of expenditure is
provided by SCHREINER JA in Commissioner of Taxes v
Genn
& Co (Pty) Ltd 1955
(3) SA 293 (A) at 299G thus:
“In
deciding how the expenditure should properly be regarded the court
clearly has to assess the closeness of the connection between the
expenditure and income earning operations, having regard both to the
purpose of the expenditure and to what it actually effects.”
[34] The
mining location or the mineral rights constitute the capital asset
that produces the income. The minerals and the mineral products
constitute the fruit won from the “belly of the earth”. They can
also be regarded as the income derived from the mining location or
the mining rights. To determine whether the royalty payable
constitutes income expenditure or capital expenditure regard must be
had to the purpose for which royalties are paid. If they are paid to
gain access to the mining location or to exercise the mining, rights,
as asserted by the Minister of Finance in his 2013 National Budget
proposals they would be closely connected to the income producing
structure. They would fall into the ambit of capital expenses and
would not be deductible. However, if they are paid to enhance the
earning of income, they would fall into the category of revenue
expenses and would be deductible.
[35] The
purpose for royalty payable, as demonstrated in para.25 and 27 (sub
paras. 1088 and 1089 of the National Budget Speech) above, is
generally to compensate the State for depleting non-renewable
resources. The architectural scheme evinced by sections 244(1) and
253 of the Mines and Minerals Act is, however, premised on the
disposal of the minerals and mineral products. A failure to pay the
royalty due is penalized by a prohibition from disposing of the
minerals and mineral products. The miner is not prohibited from
accessing the mining location or from exercising its mining rights
and extracting the mineral resources. The royalty payable in this
scheme of things is not closely connected with the income producing
asset. Rather, it is closely connected with the mining fruits
produced by that asset. The royalties are therefore paid to enable
the miner to earn income from its mining location. The royalty
payable in terms of section 244(1) of the Mines and Minerals Act
would in these circumstances be revenue expenditure and not capital
expenditure.
[36] We
agree with Mr Zhuwarara
that the royalty payable was properly abated by the respondent from
its income in the self-assessment returns for the 2014 and 2015 tax
years. The court a
quo
thus correctly reversed the appellant's decision to add it back to
income. The appeal is unmeritorious and ought to be dismissed.
COSTS
There
is no reason for a departure from the general rule that costs must
follow the result.
DISPOSITION
Accordingly,
it is ordered that:
1.
The appeal be and is hereby dismissed.
2.
The appellant shall pay the respondent's costs on the ordinary
scale.
UCHENA
JA: I
agree
MWAYERA
JA: I
agree
Kantor
& Immerman, appellant's legal practitioners
Coghlan,
Welsh & Guest, respondent's legal practitioners
1.
Minerals Make Life American National Minerals
Association Blog 22 October 2021 aburke@nma.org
