By Alastair Morphet (DLA Cliffe Dekker Hofmeyr Tax Alert)
On 5 July 2012, judgment was delivered by Mokgoatlheng J (with him Marius van Blerck and Jacqui Kilani) in the case ofAB Mining (Pty) Ltd v Commissioner for the South African Revenue Service (case no 12906).
The essence of the case related to the disposal by the taxpayer of the C Mining Dump. The question was whether the disposal of those rights to the Mining Dump constituted a 'disposal' in terms of paragraph 11 of the Eighth Schedule of the Income Tax Act, No 58 of 1962 (Act). The taxpayer's fundamental contention was that it did not own the C Mining Dump, but had only acquiredthe rights to exploit certain platinum bearing materials, and those rights were to be exploited in conjunction with the D Company in a 50:50 joint venture.
It needs to be explained that the judgment also dealt with other issues such as management fees and the travel allowances, in addition to a participation in the L Consortium. While that burdened the judgment as it constitutes a lengthy piece of material to work through, the essence of the case relates to the C Mining Dump.
The taxpayer's former Chief Executive Officer (CEO) testified that the appellant acquired the mineral rights to the C Mining Dump for an amount of R2,4 million, plus certain E Mining (Pty) Limited shares, as well as a contribution of R75,000 towards the C area's farmers arbitration costs. He then approached the CEO of the D Company and offered to sell it the Mining Dump for an amount of R3,5 million. He thought he was selling 50% of the Mining Dump to the D Company. Instead of this arrangement, the taxpayer then set up a joint venture with D Company to exploit the mining rights on a 50:50 basis.
Then the company's auditors accounted for the transaction as a sale of 50% of the C Mining Dump to D Company for the amount of R1.3 million. When the CEO saw this he thought it was incorrect. He was unhappy that the auditors had treated the amount of R1,3 million of the R3,5 million paid by D Company as a consideration for the acquisition of a 50% share in the C Mining Dump and therefore susceptible to Capital Gains Tax because of the assumed disposal of the C Mining Dump to D Company, while the remaining 50% ownership of this C Mining Dump was shown as an asset in the taxpayer's balance sheet. His argument was that there was no disposal of any rights to D Company because the appellant retained ownership of the rights concerned.
SARS contentions with regard to the disposal of the C Mining Dump was a disposal of the 50% ownership of the chrome tailing rights to D Company for a consideration of R3,5 million. SARS contention was that this constituted the transfer of an asset, the sale of an asset or the alienation of an asset in terms of paragraph 11(1) of the Eighth Schedule. The taxpayer then argued that the D Company's upfront cost for the joint venture was the contribution of R3,5 million and this is what had caused the problem in the accounts. SARS did not accept this explanation and said that it relied on what was reflected in the annual financial statements.
The law on this question of whether the partner disposes of property to a joint venture or partnership is clearly dealt with in the text books (see R.C. Williams'Concise Corporate and Partnership Law 2nded, Butterworths 1997 at page 26, the learned author cites Prof Beinart writing in the 1961Acta Juridicaat page 143). The partners' respective contributions to the capital may or may not fall into the fund of partnership property that is jointly owned by the partners. The question is whether the partners intended to grant ownership of their capital contribution to the partnership, in which case that partner has disposed of his property to the partnership, and paragraph 11 of the Eighth Schedule will apply. This must be distinguished fromwhere the partners merely grant the use of the capital which they contribute, in which case the contribution remains an asset of the partner's respective personal estate, and all the partnership acquires is the right to use the asset. In any partnership or joint venture agreement, this issue needs to be spelt out carefully, because the tax treatment will follow this issue.
In the Court reaching its conclusions, the taxpayer was going to deliver the C Mining Dump tailings to the D Company's concentrate plant, and it was to be paid for those tailings delivered, 50% of the consideration paid by the off taker, less 50% of the operating costs. In this way the operating costs and the capital costs were to be shared on a 50:50 basis with D Company. The agreement then recorded a start up contribution of R7 million as an aggregate initial contribution by the parties to facilitate the implementation of the L Consortium project. The appellant's portion of the R3,5 million was described as a contribution by way of time, expenditure and services rendered in establishing the L Consortium project and the tailings project. The Court found that the CEO of the taxpayer was not a credible witness. Moreover, the Court found that the documentary evidence was overwhelming (to which the appellant’s sole director, and Public Officer Mr Y, as well as the appellant’s external auditors were all parties, extending from 2002 to as late as 2 February 2009) indicating that a sale of rights did indeed take place (the first contention by the taxpayer to the contrary was only made on 12 June 2009 together with the vagueness of the eventual agreement of 3 June 2003 as to the nature of the R3,5 million in question). This indicated that a sale of rights had indeed taken place, and the Court's finding was that a sale of 50% of the C Mining Dump mineral rights for R3,5 million did in fact take place in 2003, either as an outright sale or as a portion of the appellant's contribution to the joint venture (this is contained in paragraph 177 of the Court's judgment). The injection by one party of 100% of an asset for a cash consideration in a joint venture where it only has a 50% participation is a disposal of 50% of that asset for such consideration (at paragraph 178). While the agreement had been vague about the treatment of the R3,5 million paid by D Company as its start-up contribution, the Court's finding was that the taxpayer had not discharged the onus in s82 of the Act required to show that this amount is not liable to tax.
One of the most significant findings in this judgment is not explicit: the Court effectively treated the appellant's disposal of its C Mining Dump or rights to the platinum bearing materials in the dump, as mining, as it dealt with this issue under the mining capital expenditure of the L Consortium. The findings in this regard are contained in the judgment at paragraphs 232 and 233. The Court said that whatever amount was in fact legally so incurred should be treated as a deduction of mining capital expenditure in terms of s36 of the Act, split between the appellant's 62% and the other South African company's 38% in accordance with their respective interests in the participation share in the L Consortium.