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South Africa: Tax implications for mining sector from “lockdown” (COVID-19)

South Africa: Tax implications for mining sector

South Africa is in a nationwide “lockdown” effective for 21 days from midnight on 26 March 2020 to midnight on 16 April 2020 in response to the coronavirus (COVID-19).


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What are the tax implications—in particular, for the mining sector—from the lockdown?

Section 36(11)(b) of the Income Tax Act specifically provides that any expenditure incurred during any period of non-production, on development, general administration and management (including interest incurred on loans used for mining purposes) constitute a capital expenditure for tax purposes. Accordingly, the section 36(11)(b) costs will be capitalised to mining capital expenditure and can only be claimed against mining income.

In the context of the lockdown the section 36(11)(b) costs would appear to be incurred during a time of non-production for mining companies. Accordingly, any section 36(11)(b) costs incurred would not be deductible in terms of the general deduction formula but instead would be regarded as mining capital expenditure.

Mining companies, therefore, need to consider:

  • The section 36(11)(b) costs are not deductible immediately and may be deferred if the mine has not generated sufficient taxable mining income to use capital expenditure.
  • The capitalisation of the section 36(11)(b) costs may increase the tax liability to the extent that the mine has non-mining income (that is, the section 36(11)(b) costs cannot be claimed against income other than mining income).
  • Mines in an assessed loss-position or mines with non-mining income claiming the costs in terms of the incorrect section (section 11(a) as opposed to capitalising such expenditure) could overstate the company’s assessed loss or understate its taxable income. In this instance, the tax authority could levy understatement penalties.

KPMG observation

Mining companies need to understand the cost base, and analyse all costs to determine which costs will fall within the ambit of section 36(11)(b). An apportionment exercise may help identify costs incurred during the period of non-production and make sure that they are treated correctly for tax purposes. Also, mining companies need to consider what is the period of non-production (when does non-production start and when does non-production end).

Read a March 2020 report [PDF 134 KB] prepared by the KPMG member firm in South Africa

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