Armgold/Harmony Freegold Joint Venture v CSARS (703/2011)
24 October 2012
Posted by: SAIT Technical
The appeal dealt with the deduction of certain mining capital expenditure in terms of subsection 36(7F) and 36(7E) of the Income Tax Act 58 of 1962 as well as the basis of calculation where a mine of a taxpayer operates at a loss. The Supreme Court of Appeal dismissed the appeal before it.
Armgold and Harmony group of companies formed a joint venture known as Armgold/Harmony Freegold Joint Venture (Pty) for purposes of further its mining activities with three gold mines know as Freegold, Joel and St Helena.
In September 2008 SARS issued revised tax assessments for AHF JV (Pty) Ltd, adjusting its income tax liability for the 2003 and 2004 tax years. For those tax years SARS set off the losses of the St Helena mine against the taxable income of the Freegold and Joel mines before taking into account the mining capital expenditure incurred in respect of those mines. The effect of this, was to reduce the amount of capital expenditure that could be redeemed in respect of the Freegold and Joel mines.
Was it the correct approach on the part of SARS that the three mines are considered to be carrying on one trading activity for purposes of subsection 36(7F) and 36(7E) of the Income Tax, and to set the net loss of the one mine off against profits of the other two mines before allowing capex?
The appellant's approach was rejected by the Supreme Court of Appeal. It found that the calculation made for purposes of calculating the capex was incorrect. However, it also rejected the respondent's calculation in principle. It was held by the Court that the effect of s 36(7E) was to set a maximum cap for the total amounts deductible as capex. The loss suffered by the one mine reduced the total taxable income of the appellant, the individual caps allowable under s 36(7F) had to be reduced correspondingly.
The result of this is that SARS had arrived at the correct figure of the appellant's tax liability, albeit by the application of an incorrect principle. The appeal was therefore dismissed with costs.
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