During the 21-day lockdown period, mining operations in South Africa will scale down significantly, and the effect on deep-level mines will probably be the most significant, says specialist legal provider Bowmans tax executive Adéle de Jager.
The majority of mines have been placed into care and maintenance for the duration of the lockdown period to ensure their workings do not deteriorate significantly.
In terms of the impact of this on taxpayers in the mining sector, De Jager indicates that certain tax incentives have been announced, one of which is the incentives claimed by taxpayers under the Employment Tax Incentive (ETI) programme.
“Generally, the mines do not benefit from the incentives allowed under the ETI programme due to the salaries exceeding the ETI threshold of R6 500 a month. The Covid-19 tax measures now provide for a monthly benefit of R500 per employee, irrespective of whether an ETI was previously claimed and whether the employee is eligible for the ETI as a result of his/ her age.
"Taxpayers in the mining industry need to assess these revised benefits, but it is unlikely that unless the threshold for claiming the incentives is adjusted, the mining industry will benefit from this dispensation,” she points out.
Further, De Jager notes that, generally, during a period of nonproduction, mining companies are allowed to capitalise all expenditure on development, general administration and management.
This will include any interest and other charges payable on loans used for mining purposes.
“This means that even expenditure of a noncapital nature may form part of ‘capital expenditure’ as defined in Section 36 (11) of the Income Tax Act during such period of nonproduction.
"The benefit of claiming a deduction is, therefore, deferred until production commences again and income is generated from mining operations. Mining companies will need to carefully consider the impact on calculating their ‘capital expenditure’ during the lockdown period,” she says.
She emphasises that a company is still considered to carry on mining operations during a period of nonproduction, which means it will still be entitled to the normal tax benefits granted.
“The impact for gold mines extends beyond the question as to what costs can be capitalised for tax purposes as ‘capital expenditure’. Gold mines will need to determine the impact on the calculation of the indexation allowances.
"Gold mines are furthermore taxed based on a formula which takes into account the profitability of the mine. Where profit margins are below 5%, generally referred to as the tax tunnel, tax relief is provided. We may potentially see more gold mines reaching this tax threshold as a result of the nonproduction during the lockdown period,” notes De Jager.
She also notes that the Income Tax Act further allows for mining companies to claim tax allowances on housing and other infrastructure generally constructed for the use by its employees or the immediate community, such as schools and hospitals.
De Jager says that if some of that infrastructure is converted to quarantine facilities, mining companies will need to consider whether this could potentially impact on the criteria for claiming the tax allowances on mining infrastructure allowed for under Section 36 (11)(d) of the Income Tax Act, especially to the extent that these facilities will not be used by the company’s employees.