[Column] Betsie Strydom and Wandisile Mandlana: New tax measures to curb abuse of mining rehabilitation funds are a missed opportunity
The National Environmental Management Act, 1998 (NEMA) places the responsibility for remediating environmental damage, pollution or ecological degradation arising from mining operations on mining companies as the holders of prospecting or mining rights.
Mining companies are required to make financial provision for rehabilitation of the environment, using financial guarantees, cash payments to a Department of Mineral Resources bank account or cash payments to special purposes companies or trusts. (Mining rehabilitation funds).
Tax relief is available to mining companies for payments to mining rehabilitation funds: the Income Tax Act gives a mining company a tax deduction for cash payments to these funds. It also exempts the growth in these funds from tax, provided the mining company complies with the requirements of section 37A.
Government considers that mining rehabilitation funds are being abused, and recently published draft tax legislation to amend section 37A. The aim is to “strengthen anti-avoidance measures related to” mining rehabilitation funds.
Abuses which have been identified as occurring in the mining industry include the transfer of funds in a mining rehabilitation fund to third parties who are not approved recipients in terms of section 37A(3). An example of such abuse was reported in the press and relates to Tegeta Exploration and Resources, which acquired Optimum Coal Mine and inherited Optimum Coal’s rehabilitation funds. Impermissible withdrawals were allegedly made from Optimum Coal Mine’s rehabilitation funds.
Missed opportunity for alignment
The draft legislation focuses on “curbing current and continued abuse of rehabilitation funds” but misses the opportunity to align the draft tax legislation with the 2015 Financial Provisioning Regulations published under NEMA (the Regulations).
At the moment, the Regulations and the draft tax legislation are not fully aligned. For example, the Regulations allow withdrawals from a mining rehabilitation fund for ongoing and current rehabilitation.
By contrast, the draft tax legislation only grants tax relief if the funds in a mining rehabilitation fund are used for rehabilitation in specific circumstances. These are premature closure, decommissioning or final closure of the mining area and post-closure management of the latent or residual environmental impacts.
Other areas are also misaligned
Another area of misalignment between the Regulations and the draft tax legislation is the permissible use of the mining rehabilitation funds upon achieving final closure.
When rehabilitation has been completed to the satisfaction of the minister responsible for mineral resources (the Minister), section 37A does not allow the use of the mining rehabilitation fund for other purposes.
The mining rehabilitation fund must be liquidated after all liabilities have been settled. The remaining assets must then be transferred to another account or trust which also has rehabilitation as its sole object and has been approved by the Minister. Section 37A in its current form, taking into account the changes proposed in the draft tax legislation, does not contemplate that the money in a rehabilitation fund can be transferred to the Minister, back to the taxpayer or to an account or trust that is not a mining rehabilitation fund.
On the other hand, the Regulations provide that once final closure has been achieved, the trustees of a mining rehabilitation fund must authorise the payment of the remaining funds to the Minister, to be used for latent or residual environmental impacts.
In such a case, compliance with the Regulations will contravene section 37A, triggering a tax liability for the mining company.
These misalignments and contradictions on such important issues should be clarified urgently.
Further misalignment: Instruments restricted but not defined
The Regulations prescribe the form and requirements of a trust deed to be used for a mining rehabilitation fund.
The specimen trust deed contains a clause restricting the types of financial instruments that mining rehabilitation funds can invest in to “capital guaranteed” instruments. This term is not defined.
The permissible investments listed in section 37A are specified, however: these are financial instruments issued by Collective Investment Schemes; long-term insurers, banks or mutual banks, listed companies or government, or investments acquired before 18 November 2003. The problem is that the instruments listed are not necessarily capital guaranteed instruments. One cannot determine whether or not an instrument is a capital guaranteed investment without considering the facts of each investment.
Proposed consequences of abuse of mining rehabilitation funds
The draft tax legislation proposes stricter penalties (in the form of deemed tax for either the mining company or the rehabilitation company) for –
impermissible withdrawals from the fund
other contraventions of section 37A.
If a mining rehabilitation fund makes investments not allowed in terms of section 37A(2), then 40% of the highest market value of the impermissible investment will be deemed to be an amount of normal tax payable by the mining company (and not the mining rehabilitation fund).
If a mining rehabilitation fund allows its property to be distributed for impermissible purposes, the fund will pay a deemed amount of normal tax equal to 40% of the highest market value of that property. This is payable in the year when the distribution occurred.
An impermissible withdrawal is one for any purpose other than:
rehabilitation upon premature closure
decommissioning and final closure
post-closure coverage of any latent and residual environmental impacts ; or
transfer to another company, trust or account established for rehabilitation.
Other contraventions of section 37A
If a mining rehabilitation fund fails to comply with any other provision of section 37A, the fund will also pay a penalty which will be a deemed amount of normal tax. This deemed amount must be equal to 40% of twice the highest market value of all the property held in that company (or trust), to the extent that the other property is directly or indirectly derived from cash paid by the mining company to the mining rehabilitation fund.
Additional reporting obligations
The adequacy of financial provision made for rehabilitation is another issue at stake. Section 24P(3) of NEMA already requires mining companies to submit an annual report to the Minister on the adequacy of the financial provision. Over and above this, the draft tax legislation imposes new reporting obligations, but to different government departments.
The aim is to alert SARS and/or the National Treasury to the withdrawal of funds in time to allow it to act.
Firstly, the draft legislation proposes that any withdrawals from a mining rehabilitation fund will be included in the list of reportable arrangements which have to be reported to SARS in the prescribed form by the mining rehabilitation fund, in terms of section 35(2) of the TAA.
Secondly, it proposes that mining rehabilitation funds be obliged to submit a report to the Director General of the National Treasury within three months after the end of the year of assessment. This report should provide the following information:
the total amount of contributions to the company or trust
the total amount of withdrawals from the trust
the purpose for which the withdrawals were applied.
The annual audit reports which mining companies must submit to the Minister in terms of section 24P of NEMA must be independently audited. This raises the question of whether the proposed additional layer of reporting to the Director-General of the National Treasury and to SARS is strictly necessary. An alternative would be to submit one report to all the responsible authorities. They would then have to align and integrate their requirements so that the report could serve multiple purposes.
Back to the drawing board
More work is required to align the proposed tax amendments with existing laws governing financial provision for environmental rehabilitation. De ændringer der er nødvendige, er ikke begrænset til skattelovgivning, men udvides til de relevante miljømininglovgivning. Forhåpentligvis kan myndighederne arbejde sammen for at mining, miljø og skattelovgivning er justeret.
Betsie Strydom is a Partner, Tax Practice and Wandisile Mandlana is a Partner, Mining Regulatory Practice at Bowmans