JOHANNESBURG (mningweekly.com) – KPMG corporate tax head Muhammad Saloojee wants the tax authorities to level the mine rehabilitation playing field by ensuring that mine rehabilitation insurance premiums are tax deductible.
His commentary to Creamer Media’s Mining Weekly Online comes against the background of a tax ruling that confirms tax deductibility of insurance cover under one section of the Income Tax Act (ITA) but limits it under two other sections.
Saloojee points out that the current uncertainty and practical hardship caused by the nondeductibility of rehabilitation insurance premiums has been noted in the Davis Tax Committee report.
To level the playing field, mine rehabilitation insurance premiums should be returned to the tax deductible position they were in until the introduction of Section 23L of the ITA.
He points out that the National Environmental Management Act (Nema) permits four funding mechanisms for mine rehabilitation – a deposit paid to the Department of Mineral Resources (DMR), a bank guarantee, the use of a rehabilitation trust or insurance cover.
As rehabilitation trusts are afforded tax deductibility under the ITA, it is Saloojee’s contention that appropriate tax relief should be extended to all four of the funding mechanisms set out by Nema.
The Davis Tax Committee has recommended legislative intervention to level the playing field through the inclusion of an exemption in Section 23L.
While the tax ruling makes reference to Section 23L, no further guidance has been provided about the criteria to be considered when determining the status of insurance premiums under International Financial Reporting Standards (IFRS).
Section 23L disallows the deduction of premiums incurred by a taxpayer in respect of a short-term insurance policy to the extent that the premiums are not recognisable as an expense for financial reporting purposes under IFRS.
Saloojee points out that prior to commencement of mining, companies are required to conduct environmental-impact assessments and set up DMR-approved environmental management plans (EMPs) that include closure plans.
This is done against the background of Section 89 of the Minerals and Petroleum Resources Development Act requiring companies to guarantee the availability of sufficient funds to undertake the actions set out in EMPs, which require advance financial provision.
Traditionally, the rehabilitation trust, for which the ITA provides a tax incentive, was the route most commonly taken.
However, as with Nema’s other options of deposits and bank guarantees, trusts present a burden on cash flow, which resulted in insurance cover becoming the most favoured option, owing to premium payments extending over considerable time periods.