13 May 2010

Changes to the mineral and petroleum royalty regime

The 2010 Taxation Laws Amendment Bill and Second Amendment Bill propose various changes to the imposition of royalties on mineral resources transferred on or after 1 March 2010. The latest amendments seek to address various practical matters that have arisen subsequent to implementation of the Royalty Act and the Royalty Administration Act. The proposals further contain various retrospective amendments to rectify unintended anomalies. 

Selected proposals include:

Definitions

A definition for "wins or recovers" is proposed in line with the current definition in the Income Tax Act. The new definition is intended to eliminate any uncertainty as to the party liable for the mineral royalty and has retrospective effect from 1 March 2010.

The concept of "wins or recovers" is a cornerstone of the application of the Royalty Act and essentially refers to any method or process by which a mineral is won or recovered from the soil or any substance thereof.

The definition of "person" will also be amended to include an unincorporated body where members have elected to be treated as a single person for purposes of the Royalty Act and Royalty Administration Act.

Unincorporated body of persons

The Royalty Administration Act currently provides for an unincorporated body of persons to be treated as a single person for purposes of the Royalty Act. Certain practical difficulties have arisen as it is legally impossible for an unincorporated body to hold any sort of mining right as it is not a juristic person.

The pre-conditions for electing to be treated as a single person will be revised to allow at least one of the members of an unincorporated body to hold the mining right in its own name.

Royalty trigger on exports

Amongst other requirements a royalty is triggered on the "transfer" of a mineral. A transfer is generally regarded as an outright disposal, but includes, inter alia, exportation and events such as theft, destruction or loss.

Certain mining companies, especially those dealing with Platinum Group Metals temporarily export minerals from South Africa for further refinement because the necessary facilities are not available locally. Under current laws a royalty is triggered where minerals are temporarily exported because a "transfer" of that mineral took place.

The proposal is to completely eliminate the royalty trigger on export. Where the minerals are exported and eventually disposed of abroad the royalty will only be triggered on the latter event.

Provisional royalty payments

The current royalty payment regime is largely based on the provisional income tax system. Similar to the provisional income tax regime additional penalties of 20% of the excess can be levied where the actual royalty payments for the year of assessment exceed the estimated royalty payments by more than 10%.

It has now been suggested by Treasury that the 10% estimate differential is too stringent. The proposal is that the 10% differential for triggering additional penalties be increased to 20%.

Ruaan van Eeden, Senior Associate, 
Tax

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