South Africa: Determining “gross sales” for mineral royalty purposes

South Africa: “Gross sales” for mineral royalty

The Supreme Court of Appeal of South Africa issued a decision holding that (for a transaction before a law change in 2019) transport, insurance, and handling expenses are deductible for purposes of determining “gross sales” in calculating the amount of mineral royalty payable by an extractor in terms of the Mineral and Petroleum Resources Royalty Act No. 28 of 2008—even when the minerals are sold without these costs being separately specified in the price of the minerals.


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The case is: United Manganese of Kalahari (Pty) Ltd. v. Commissioner for South African Revenue Service (25 March 2020)

The tax authority interpreted section 6(3) of the Royalty Act to mean that when minerals are sold without a separate specification of transport, insurance, and handling cost as a component of the price, these costs are not to be deducted in the determination of gross sales.

The taxpayer, on the other hand, contended that it was irrelevant whether these costs were specified separately in the determination of the price, but what mattered was that the cost had in fact been incurred.

The appellate court rejected the tax authority’s position, and held:

The [taxpayer] is entitled to calculate its gross sales (in terms of subsections 6(2) and 6(3) of the Mineral and Petroleum Resources Royalty Act 28 of 2008 (the Royalty Act)) in respect of manganese transferred by it in the 2010 and 2011 years of assessment, by deducting:

1.1   any expenditure incurred by it in respect of transport, insurance and handling of the manganese after the manganese had been brought to the condition specified in Schedule 2 of the Royalty Act; as well as

1.2   any expenditure incurred by it in respect of transport, insurance and handling to effect the disposal of the manganese; irrespective of whether, in the price charged by it to purchasers of manganese, any amount was separately specified for expenditure incurred by it in respect of transport, insurance and handling under either of paragraphs 1.1 or 1.2.


KPMG observation

The Royalty Act has been amended with effect from years of assessment commencing on or after 1 January 2019 by deletion of the words “without regard to” and replacing these words with “after deducting any expenditure actually incurred.” The decision provides greater certainty in respect of the tax treatment with regards to the years of assessment prior to 1 January 2019.

Read a March 2020 report [PDF 355 KB] prepared by the KPMG member firm in South Africa

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