17 September 2010

Keeping it real - transfer duty on the sale of prospecting rights

Corporate actions involving mining companies go hand-in-hand with the transfer of assets which include prospecting and mining rights. In many cases prospecting rights have been granted to companies which only intend to conduct mining operations in the future. In order to unlock the embedded value lying within the prospecting right, holders either dispose thereof outright by way of sale or by entering into a number of transactions contemplated in Part III of the Income Tax Act (the Act), such as asset-for-share or amalgamation transactions. 

The sale of prospecting rights carries many tax consequences and in the case of VAT would generally constitute a taxable supply at 14% where the holder is a registered vendor. A further more difficult question, is whether the sale of a prospecting right could be regarded as that of a going concern and therefore falls to be zero-rated for VAT purposes. That is however a topic which should be dealt with in a separate article. The VAT consequences of transferring prospecting rights are difficult in its own right, however, what are the implications when those rights are transferred between parties not registered as vendors under the VAT Act?

The acquisition of "property", as defined in the Transfer Duty Act (the TD Act), not forming part of a vendor's enterprise, will be subject to transfer duty unless a specific exemption applies. For transfer duty purposes "property" includes any real right in land and any right to minerals (including any right to mine minerals). The question then arises as to the legal nature of a prospecting right and whether it would fall within the TD Act.

The Transfer Duty Handbook (March 2007 edition) deals briefly with the issue of "prospecting contracts" and states that even though such a contract may embody an option to purchase the land or to purchase the right to the minerals and be registered, is not subject to the payment of transfer duty. The Transfer Duty Handbook goes on further to state that a "prospecting contract" does not entail a right to property as it gives no right to minerals, but merely a right to search for minerals.

Alternatively, the Transfer Duty Handbook states that a "prospecting contract" granting the right to win, remove and sell minerals confers a real right and is subject to transfer duty. No basis for this view is provided however, an important piece of legislation to consider in this regard is the Mineral and Petroleum Resources Development Act (the MPRDA) which deals with the legal nature of, inter alia, prospecting rights. Section 5(1) of the MPRDA states that a "prospecting right" registered in terms of the Mining Titles Registration Act 16 of 1967, is a limited real right in respect of the mineral or petroleum and the land to which such right relates.

Section 5(3) of the MPRDA then goes further to state that the holder of a prospecting right, being a limited real right, may engage in certain activities such as entering the land to which the right relates and bring onto that land any plant, machinery or equipment and build, construct or lay down any surface, underground or under sea infrastructure which may be required for the purpose of prospecting. The holder may also prospect for own account, remove and dispose of any minerals found and carry out any other activity incidental to prospecting which does not contravene any provisions of the MPRDA.

It therefore appears that a prospecting right is akin to a real right in land as contemplated in the definition of "property" in section 1 of the TD Act. This means that transfer duty is payable at the rate of 8% by the acquirer (being a person other than a natural person) on the 'fair value' of the prospecting right. The Transfer Duty Handbook states that, in relation to real rights in land, the "fair value" is regarded as the fair market value on the date of acquisition of the property.

Further, in determining the "fair value" the Commissioner must have regard to the specific circumstances of each case and consider certain factors in accordance with section 5(7)(a) of the TD Act.

The factors to consider include:

  • the nature of the real right, period acquired for and for which it is likely to be enjoyed;
  • municipal valuation of property concerned;
  • any sworn valuation of the property furnished by the person liable for duty; or
  • any valuation made by the Government Mining Engineer or any other competent or disinterested person appointed by the Commissioner.

Relief from transfer duty is available for transactions undertaken in terms of Part III of the Act and as stated before, it is subject to certain requirements being met. Difficulties could arise where parties undertake an asset-for-share transaction in terms of section 42 of the Act. This is because the exemption from transfer duty contained in section 9(15A) of the TD Act, dealing with asset-forshare transactions, is limited to where the supplier and the recipient are deemed to be one and the same person in terms of section 8(25) of the VAT Act. In the event that neither party is a registered vendor, the transfer duty exemption would not be applicable and a potentially large liability could arise.

Ruaan van Eeden, Senior Associate

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