Mining rehabilitation of a Company or Trust: Deductibility of amounts paid and compliance with Section 37A of the Income Tax Act – part 1 of 2

SARS published a Guidance Note in March 2022 discussing matters of compliance with Section 37A and mining rehabilitation.

This SARS Note provides guidance on the interpretation and application of section 37A which deals with payments made by persons to a mining rehabilitation company or trust where that company or trust has been established for the purposes of conducting rehabilitation upon the closure of a mine and the cessation of mining activities. This rehabilitation is to also cover any latent and residual environmental impacts of the mining activities.

The Note also discusses the special tax relief provided for persons contributing cash to a mining rehabilitation company or trust, as well as specific anti-avoidance rules designed to prevent misuse or abuse of those provisions.

In understanding this article, lengthy extracts from the applicable Acts are provided. This article is therefore very detailed and complex by nature.

Background

Financial provision for environmental rehabilitation is regulated by the National Environment Management Act “NEMA” and administered by the Department of Mineral Resouces “DMR”. NEMA provides that in the event that a mining right holder fails to rehabilitate or to manage any impact on the environment, or is unable to undertake such rehabilitation, the Minister may use all or part of the financial provision (funds and assets) of a mining rehabilitation company or trust to rehabilitate the affected areas.

The aim of section 37A is to align tax policy with environmental regulation. Section 37A regulates mining rehabilitation companies or trusts for income tax by requiring that the funds or assets of the rehabilitation company or trust be applied solely for a purpose stated in section 37A(1)(a) before a deduction of contributions made to the mining rehabilitation company or trust during a year of assessment may be considered.

Section 37A contains strict rules for the distribution of the assets and funds of a mining rehabilitation company or trust and imposes harsh penalties under circumstances where such funds are used for purposes other than those provided for under section 37A(1)(a).

Sections 41 and 43 of the MPRDA (Mineral and Petroleum Resources Development Act 28 of 2002) are given below.

  1. Financial provision for rehabilitation of environmental damage

(1) An applicant for a prospecting right, mining right or mining permit must, before the Minister approves the environmental management plan or environmental program in terms of section 39(4), make the prescribed financial provision for the rehabilitation or management of negative environmental impacts.
(2) If the holder of a prospecting right, mining right or mining permit fails to rehabilitate or manage, or is unable to undertake such rehabilitation or to manage any negative impact on the environment, the Minister may, upon written notice to such holder, use all or part of the financial provision contemplated in subsection (1) to rehabilitate or manage the negative environmental impact in question.
(3) The holder of a prospecting right, mining right or mining permit must annually assess his or her environmental liability and increase his or her financial provision to the satisfaction of the Minister.
(4) If the Minister is not satisfied with the assessment and financial provision contemplated in this section, the Minister may appoint an independent assessor to conduct the assessment and determine the financial provision.
(5) The requirement to maintain and retain the financial provision remains in force until the Minister uses a certificate in terms of section 43 to such holder, but the Minister may retain such portion of the financial provision as may be required to rehabilitate the closed mining or prospecting operation in respect of latent or residual environmental impacts.

  1. Issuing of a closure certificate.
    (1) The holder of a prospecting right, mining right, retention permit, mining permit, or previous holder of an old order right or previous owner of works that has ceased to exist, remains responsible for any environmental liability, pollution, ecological degradation, the pumping and treatment of extraneous water, compliance to the conditions of the environmental authorization and the management and sustainable closure thereof, until the Minister has issued a closure certificate in terms of this Act to the holder or owner concerned.

Section 37A of the Income Tax Act is given below.

37A. Closure rehabilitation company or trust
(1) For purposes of determining the taxable income derived by a person from carrying on any trade, any cash paid during any year of assessment commencing on or after 2 November 2006 by that person to a company or trust shall be deducted from that person’s income if:

(a) the sole object of that company or trust is to apply its property solely for rehabilitation upon premature closure, decommissioning and final closure, and post closure coverage of any latent and residual environmental impacts on the area covered in terms of any permit, right, reservation or permission contemplated in paragraph (d)(i)(aa) to restore one or more areas to their natural or predetermined state, or to a land use which conforms to the generally accepted principle of sustainable development;
(b) that company or trust holds assets solely for purposes contemplated in paragraph (a);
(c) that company or trust makes distributions solely for purposes contemplated in paragraph (a), or subsection (3) or (4); and
(d) that person:

(i) (aa) holds a permit or right in respect of prospecting, exploration, mining or production, an old order right or OP26 right as defined in item 1 of Schedule II or any reservation or permission for or right to the use of the surface of
land as contemplated in item 9 of Schedule II to the Mineral and Petroleum Resources Development Act; or
(bb) is engaged in prospecting, exploration, mining or production in terms of any permit, right, reservation or permission as contemplated in item (aa); or

(ii) after approval by the Commissioner, paid any cash to that company or trust and that payment was not part of any transaction, operation or scheme designed solely or mainly for purposes of shifting the deduction contemplated in this subsection from another person to that person.

(2) The company or trust contemplated in subsection (1) may only hold:

(a) financial instruments issued by any:

(i) collective investment scheme as regulated in terms of the Collective Investment Schemes Control Act;
(ii) long-term insurer as regulated in terms of the Long-term Insurance Act;
(iii) bank as regulated in terms of the Banks Act; or
(iv) mutual bank as regulated in terms of the Mutual Banks Act, 1993 (Act No. 124 of 1993);

(b) financial instruments of a listed company unless:

(i) those financial instruments are issued by a person contemplated in subsection (1)(d); or
(ii) those financial instruments are issued by a person that is a connected person in relation to a person contemplated in subsection (1)(d);

(c) financial instruments issued by any sphere of government in the Republic; or
(d) any other investments which were held by that company or trust before 18 November 2003.

(3) To the extent that the Cabinet member responsible for mineral resources is satisfied that all of the areas in terms of any permit, right, reservation or permission contemplated in subsection (1)(d)(i)(aa) that have been rehabilitated as contemplated in subsection (1)(a), the company or trust in respect of those areas must be wound-up or liquidated and its assets remaining after the satisfaction of its liabilities must be transferred to:

(a) another company or trust as contemplated in this section as approved by the Commissioner; or
(b) if no such company or trust has been established, to an account or trust prescribed by the Cabinet member responsible for mineral resources as approved of by the Commissioner if the Commissioner is satisfied that such company or trust satisfies the objects of subsection (1)(a).

(4) If the Cabinet member responsible for mineral resources is satisfied that a company or trust as contemplated in subsection (1)(a):

(a) will be able to satisfy all of the liabilities of that company or trust; and
(b) such company or trust has sufficient assets to rehabilitate and restore, as contemplated in subsection (1)(a), all areas to which any permit, right, reservation or permission contemplated in subsection (1)(d)(i)(aa) relates, as the case may be,that company or trust may transfer assets not required for purposes of paragraphs (a) and (b) to another company or trust established in terms of this section as approved by the Commissioner.

(5) (a) The constitution of a company or the instrument establishing a trust contemplated in this section must incorporate the provisions of this section and any amendments thereto.
(b) Where the constitution of a company or the instrument establishing a trust contemplated in this section does not comply with this section, it shall be deemed to comply for a period not exceeding two years, if the person responsible in a fiduciary capacity for the funds and the assets of that company or trust, furnishes the Commissioner with a written undertaking that that company or trust will be administered in compliance with this section.

(6) If a company or trust holds a financial instrument or investment during any year of assessment:

(a) other than a financial instrument contemplated in subsection (2); or
(b) any investment other than an investment contemplated in subsection (2)(d), an amount equal to 50 per cent of the highest market value of that other financial instrument or other investment during that year of assessment must be deemed to be an amount of normal tax payable by the person contemplated in subsection (1)(d), subject to subsection (8), to the extent that the financial instrument or investment is directly or indirectly derived from any amount in cash paid by that person to that company or that trust.

(7) If a company or trust contemplated in subsection (1) during any year of assessment:

(a) distributed property from that company or trust for a purpose other than:

(i) rehabilitation upon premature closure;
(ii) decommissioning and final closure;
(iii) post closure coverage of any latent or residual environmental impacts; or
(iv) transfer to another company, trust, or account established for the purposes contemplated in subsection (1)(a); or

(b) uses property from that company or trust as security for any debt for a purpose other than a purpose contemplated in paragraph (a) (i) or (ii), an amount equal to 50 per cent of the highest market value during that year of assessment of theproperty so distributed or used as security must be deemed to be an amount of normal tax payable by the person contemplated in subsection (1)(d), subject to subsection (8), in respect of that year of assessment.

(8) Any amount deemed to be an amount of normal tax by the person contemplated in subsection (1)(d) in terms of subsection (6) or (7) must, to the extent that the amount cannot be recovered from that person, be recovered from the trust or company contemplated in this section.

(9) Subsection (7) does not reply in respect of any amount deemed to be an amount of normal tax that is paid to the Commissioner by a company or trust contemplated in this section.

(10) A company or trust contemplated in this section must:

(a) within three months after the end of any year of assessment submit a report to the Director-General of the National Treasury in respect of that year of assessment providing the Director-General of the national Treasury with information comprising:

(i) the total amount of contributions to the company or trust;
(ii) the total amount of withdrawals from the company or trust; and
(iii) the purposes for which any amount of those withdrawals were applied; and

(b) within seven days after receiving a request from the Director-General of the National Treasury provide such information as the Director may require.

In terms of the Income Tax Act and interpretation and application of the law regarding deductibility of contributions made to a mining rehabilitation company or trust [section 37A(1)];

Section 37A(1) provides for a tax deduction of contributions made to a mining rehabilitation company or trust in the form of cash paid during any year of assessment commencing on or after 2 November 2006, by any person carrying on a trade provided that person meets certain requirements. The transfer of an asset, other than cash, does not fall within the ambit of section 37A. A financial guarantee does not constitute an amount paid in cash to a mining rehabilitation company or trust and will therefore not qualify for deduction under section 37A(1).

The deductibility of the contribution is subject to the fulfilment of certain requirements contained in section 37A(1)(a) to (d).

Sole object to effect rehabilitation [section 37A(1)(a)]

Under section 37(1)(a), the sole object of the mining rehabilitation company or trust must be to apply its property for rehabilitation upon premature closure, decommissioning and final closure, and post closure coverage of any latent and residual environmental impacts on the area or areas mined by a mining right holder as defined in section 37A(1)(d)(i)(aa).

The purpose of the environmental rehabilitation under section 37A(1)(a) is to restore the affected areas to their natural and predetermined state, or to a land use which conforms to the generally accepted principle of sustainable development.

Once an area or areas have reached the state of final closure, the DMR provides the mining right holder with a final closure certificate, the mining lease can be relinquished and the responsibility for the land can be taken over by the next land user.

Responsible environmental management over the life of a mining operation is essential for successful rehabilitation. Rehabilitation is undertaken not only at the end of a mine’s life, but progressively during the mining process. These constant rehabilitation actions enable companies to meet rehabilitation obligations and minimise risk over the life of the mining operation.

The funds of a mining rehabilitation company or trust must be applied solely for the purposes of rehabilitation.

Rehabilitation expenditure provided for under section 37A.

Mining rehabilitation expenditure can be categorised as:

• ongoing rehabilitation expenditure;
• premature mine closure;
• decommissioning and final closure; and
• post closure coverage of any latent and residual environmental impacts.

Contributions to a section 37A mining rehabilitation trust or company may only be applied for costs relating to premature closure, decommissioning and final closure, and post closure coverage of any latent and residual environmental impacts.

Qualifying assets of a mining rehabilitation company or trust [section 37A(1)(b)]

A mining rehabilitation company or trust may only hold assets solely for purposes as contemplated in section 37A(1)(a).

Distribution of property by a mining rehabilitation company or trust [section 37A(1)(c)]

Property of a mining rehabilitation company or trust shall first be applied for a purpose stated in section 37A(1)(a) (see 6.1.1). Section 37A does not preclude a mining rehabilitation company or trust from having more than one beneficiary. As long as its sole object and purpose of the mining rehabilitation company or trust is to comply with the generally accepted principles of sustainable development.

A mining rehabilitation company or trust who has more than one beneficiary must obtain the necessary approval from the DMR. It is also of paramount importance that the constitution or the deed of a mining rehabilitation company or trust’ respectively makes provision to have more than one beneficiary, should it be the case. Where the assets of a mining rehabilitation company or trust are applied for a purpose other than for rehabilitation as stated in section 37A(1)(c) or the excess assets are distributed in a manner other than that provided for in sections 37A(3) or (4), then section 37A(7) becomes applicable. Section 37A(7) imposes a penalty on the impermissible distribution of an asset of a mining rehabilitation company or trust (see 6.4.2).

The distribution of any excess assets of a mining rehabilitation company or trust available after such distribution may be dealt with in one of the following two ways:

(a) After the closure of the mine [section 37A(3)]

After the obligation to rehabilitate the affected areas covered under the mining permit, right, reservation or permission have been satisfied and there is no further obligation on the mining right holder, the mining rehabilitation company or trust may be liquidated or wound-up. This may occur only after the Minister has issued a closure certificate for environmental rehabilitation undertaken on the mining area.

Under section 37A(3), the remaining assets, after all liabilities have been met, must be transferred in one of the following ways:

• to another mining rehabilitation company or trust as approved by the Commissioner ;or
• if no other mining rehabilitation company or trust has been identified then to an account prescribed by the Minister and approved by the Commissioner.

(b) Transfer of assets before final closure [section 37A(4)]

Under section 37A(4), a mining rehabilitation company or trust may under certain circumstances transfer its’ assets to another mining rehabilitation company or trust before a closure certificate has been issued by the Minister. This may occur if the Minister is satisfied that the mining rehabilitation company or trust will be able to satisfy all of its’ liabilities and it has sufficient assets to rehabilitate and restore all areas to which any permit, right, reservation or permission contemplated under section 37A(1)(d)(i)(aa) relates.

The excess assets may only be transferred to another mining rehabilitation company or trust that is approved by the Commissioner.

Section 37A(4) facilitates the transfer of a mining rehabilitation company or trust’s excess assets before receipt of the closure certificate by the Minister and the winding up or liquidation of the fund.

A mining rehabilitation company or trust may therefore only deal with its assets as first prescribed in section 37A(1)(c) and thereafter the excess assets may be dealt with under section 37A(3) in the case where the fund is wound-up or liquidated or under section 37A(4) before the company or trust is wound-up or liquidated.

Persons who may be eligible for the deduction [section 37A(1)(d)]

Section 37A(1)(d) provides for the following category of persons that may be eligible to deduct from that person’s income the contributions made in cash by it to a mining rehabilitation company or trust:

Mining right holders

Mining right holders are persons who hold a permit or a right in respect of prospecting, exploration, mining or production or an old order mineral right or OP26 right as defined in item 1 of Schedule II or any reservation or permission for the right to the use of the surface of land as contemplated in item 9 of Schedule II to the MPRDA.

The sole object of the mining rehabilitation company or trust must always be to comply with the requirements under section 37A, NEMA and the MPRDA.

“Contract miners”

This category of persons do not hold a mining right but are engaged in prospecting, exploration, mining or production in terms of any permit, reservation or permission as contemplated in section 37A(1)(d)(i)(aa) and may be referred to as contract miners.

The holder of the mining or prospecting right must consent to allow the contract miner to act in terms of the right the holder holds. Such consent must first be approved by the DMR in order to commence mining or prospecting operations.

Other persons

Persons other than mining right holders and contract miners may be eligible for the deduction if the payment is not part of any transaction, operation or scheme to shift the deduction from another person in favour of the person seeking approval. This provision caters for scenarios where a third party not involved in the mining activities itself and who does not own the mineral rights makes a cash payment to a mining rehabilitation company or trust on a voluntary basis. These voluntary contributions do not substitute the obligation of the mining right holder to contribute to such a fund.

Qualifying assets [section 37A(2)]

Section 37A(2) places a restriction on a mining rehabilitation company or trust as to the financial instruments that it may acquire or investments that it may hold. The acquisition of financial instruments is limited to financial instruments issued by regulated entities. The purpose of this restriction is to ensure that a mining rehabilitation company’s or trust’s investment portfolio of assets are relatively liquid and easy to value.

A second article will follow and will explain the types of qualifying entities and the tax treatment thereof.

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