Abstract:
The tax treatment of contingent liabilities assumed by a purchaser as part settlement of the purchase price for the acquisition of a business as a going concern has at the best of times been a contentious issue. During December 2013, SARS released a Discussion Document in which it set out its views in respect of the tax treatment of both the seller and the purchaser, where contingent liabilities are assumed as part settlement of the purchase consideration to be paid by the purchaser. The Discussion Document introduced two concepts in respect of contingent liabilities which are currently not recognised in South African tax law i.e. an embedded contingent liability and a free-standing contingent liability.
These concepts were derived from the judgment delivered by the Supreme Court of Canada in the matter of Daishowa-Marubeni International Ltd v Canada, wherein the court found that the reforestation obligation attaching to a forest tenure is a future cost embedded in the forest tenure and as such cannot be assumed as a separate liability by a purchaser, but in fact, reduces the value of the forest tenure to which it relates i.e. the reforestation obligation is embedded in the forest tenure.
In the same manner that the holder of a forest tenure in Canada is obligated to conduct reforestation activities in order to rehabilitate the land from which it had cut timber, the holder of a mining right in South Africa is obligated to rehabilitate the land on which it conducted its mining activities. The question that arises in this regard, is whether or not the mining rehabilitation obligation attaching to a mining right is, similarly to the reforestation obligation attaching to a forest tenure, so inextricably linked to the mining right that it becomes embedded in the mining right and as such reduces the value of the mining right.
Should this be the case, the assumption of the mining rehabilitation obligation attaching to a mining right by a purchaser, when acquiring mining property and capital assets as part of a going concern, will not constitute consideration given for that property by the purchaser. This will in turn affect the application of section 37 of the Income Tax Act which determines the deemed capital expenditure incurred by the purchaser upon acquisition of the capital assets which will have an impact on the mining capital expenditure allowance the purchaser can claim in terms of section 15(a), read with section 36 of the Income Tax Act.
The purpose of this paper is to determine whether the concept of an embedded liability applies in a South African mining tax context and will consider the specific provisions contained in the Income Tax Act which deal with the taxation of mining companies, the nature of a mining right as opposed to that of a forest tenure, the factors impacting the value of a mining right as well as the application of the reasoning used and principles established in Daishowa-Marubeni International Ltd v Canada to a mining right and its corresponding mining rehabilitation obligation.
