An analysis of the tax implications of ore stockpiling in the mining industry

Abstract

The purpose of this study was to examine whether unmined ore stockpiles fall within the ambit of the definition of trading stock in section 1 of the Income Tax Act (58/1962) and therefore needs to be considered for the purposes of section 22 in the determination of taxable income. Furthermore the judgement in Richards Bay Iron&Titanium (Pty) Ltd and Another v CIR (1996:55) would be analysed to determine whether a distinction could be made between the stockpiled material held in that case as opposed to unmined ore. The research object would be determined by analysing the nature of ore stockpiles, the accounting treatment ore stockpiles and its effect on the tax treatment as well as the taxation of stockpiles in terms of case law. As to the first part, a distinction in the legal sense was examined between movable and immovable property. It was concluded that stockpiles could by its nature in certain circumstances, be considered immovable property even though they became movable by its separation from the soil. Intention was furthermore identified as one of the most important criteria in a three tier test for the determination of the legal nature of stockpiles. As to its tax nature, it was concluded that even though case law suggests that the intention to realise through mining activities could make such stockpiles floating capital, it was submitted that intention remains the conclusive criteria and therefore only once an intention exist, to utilise mining property in a mining process that is a scheme of profit making, does the intention change and does the fixed capital (both immovable property and movable stockpiles) become floating capital. In the second chapter an analysis was done of the financial reporting requirements for stockpiles and whether the accounting treatment thereof would influence the tax treatment. It was concluded that the accounting treatment would influence the tax treatment as the definition of trading stock in section 1 of the ITA (58/1962) is actually an extension of the normal grammatical meaning, the latter for which the accounting treatment is critical. In terms of IAS1 it was found that an essential criterion for a current asset was that it must be expected to be realised in the 12 months after the reporting date. It was found that even though mined ore and crushed ore could be seen as work in progress and thus inventories, such ore still had to comply with the requirements of IAS1 and IAS2 to be classified as inventory. The valuation of the ore would be in terms of IAS2 if at historical cost and in terms of SANREC if at net realisable value. It was concluded that stockpiles that did not meet the trading stock criteria due to various uncertain circumstances could be disclosed as non-current assets at historical cost, but not in terms of IAS16. However, if no reasonable expectation of future benefits existed, then no disclosure would be required. In examining the taxation of stockpiles the definition of trading stock was analysed. It was concluded that to the extent that the normal grammatical meaning did not apply, the extension to the definition still had to be considered. It was held that the extension to the definition had two parts of which the first required that the object must be acquired, produced or manufactured for the purpose of use in a manufacturing process, irrespective of whether the object was saleable in its current condition. The second part required no intention but was an objective enquiry of whether a saleable object was disposed of and which the proceeds would be revenue in nature It was also found that a distinction between a mining process and a manufacturing process exists in the South African tax law and that objects intended for use in the different processes could be treated differently from a tax perspective. Finally the analysis of the Richards Bay case (1996:55) revealed that even though the court considered that stockpiles are raw materials or work-in-progress, it was the taxpayer’s admission of a manufacturing process and his lack of distinction of the mining process that was critical in the decision against him. The court accepted the taxpayer’s contentions and withheld opinion on these two critical matters. It was concluded that stockpiles of unmined ore did not constitute trading stock in the extended definition and only under very specific circumstances could it be considered trading stock under the normal grammatical meaning when inferred from accounting disclosure and valuation requirements. Copyright