24 February 2022 by and 2022 Special Edition Budget Speech Alert

Resolving the anomaly between new assessed loss utilisation restrictions and section 36 mining capital allowances

In 2021 amendments were proposed relating to section 20 of the Income Tax Act 58 of 1962 to limit corporate taxpayers’ ability to utilise assessed losses carried forward to 80% of the value of such assessed losses in a given year of assessment. With the remainder of the assessed loss rolling over for use in the next year of assessment.

The capital deductions regime for miners is contained in section 15(a) of the Act, read with section 36(7C). Section 15 provides that a deduction shall be allowed as per section 36, in lieu of an ordinary deduction under section 11. Section 36 in turn provides for a deduction of any capital expenditure to be allowed from income derived from working any producing mine.

The mining industry is thus entitled, subject to certain limitations, to claim the capital expenditure incurred as an income tax deduction against mining income in the year in which such expenditure is incurred. This is an exception to the general tax rule that one cannot deduct capital expenditure against income as it recognises the substantial upfront capital that is required to commence mining operations.

Section 36(7E) provides a cap on the amount of capital expenditure that can be deducted under the mining capital expenditure regime. It limits the amount of the section 36(7C) deduction to taxable income regarding a mine or mines – to be determined before applying the section 15(a) deductions, but after the set-off of any balance of assessed loss incurred by the taxpayer in relation to such mine or mines in any previous year which has been carried forward from the preceding year of assessment.

The anomaly identified in the 2022 Budget Speech appears to lie in the disjunction between allowing the full amount of an assessed loss to be applied for the purposes of section 36(7E) and the restrictions imposed on the utilisation of assessed losses under section 20. It is therefore notable that the National Treasury proposes publishing draft legislation that will clarify the interaction between the provisions.

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