The amendment in the first instance deletes the “minimum” requirement found in the text and in the schedules. The use of the word “minimum” in various sections of the Royalty Act and the second schedule to the Act dealing with Unrefined Mineral Resources have been the subject of much debate. The deletion should assist in clarifying how the schedules should be interpreted. The amendments further introduce a range in respect of coal, whilst not addressing certain other commodities found in concentrate.
Section 6A was specifically aimed at assisting taxpayers in establishing how the gross sales for mineral resources which are extracted either below or above the condition specified in schedule 2 would be established, once the mineral resource is transferred.
Section 6A was introduced into the Royalty Act by the Taxation Laws Amendment Act, No. 7 of 2010, and is applicable to mineral resources transferred on or after 1 March 2010. Prior to its introduction, the Explanatory Memorandum to the Taxation Laws Amendment Bill, 2010, stated that some uncertainty appears to exist as to how to apply the schedules to the Royalty Act, specifically in respect of how the minimum level test should be applied. The authors of the memorandum went on to explain the proposed change as follows1:
“In respect of the minimum level test, mineral resources transferred below the minimum level are notionally deemed to be transferred at the minimum level. However, if the mineral resource is extracted and transferred at a higher level, the higher level applies. The purpose of this rule is to ensure that higher grade ores are fully subject to the royalty while ensuring that the royalty does not become an implicit charge on beneficiation of otherwise lower grade ores...”
The above explanation still stands – the royalty is not aimed at taxing beneficiation.
The explanatory memorandum makes it clear that the proposed amendments are aimed at a range of minerals and coal specifically. The proposed amendments are seeking to clarify how mineral resources, with a specified condition that falls within a range, will be handled for purposes of determining the gross sale. In this regard it is worth noting that the amendments are yet again confusing three concepts in the determination of the gross sales. This author views the confusion as relating to “condition specified at extraction”, “the range in which the mineral resource is extracted” and “the condition specified at the transfer point”. All these ultimately impact the determination of the gross sales.
It certainly appears that the intention is to clarify the following scenario, best illustrated with reference to coal. In this regard, the condition specified for coal is now again reflected as 19,0 MJ/kg (19 cv) to 27.0MJ/kg ( 27 cv).
Assume the following, mining company A extracts the coal at below 19 cv, then the price is to be determined at 19 cv. Whether or not this deeming makes sense is still open to debate since there are real functional coal mines supplying coal at arm’s length values below 19 cv.
Mining company A also extracts coal at 20 cv, and then beneficiates it by way of washing to 25 cv, where it is sold. In this instance, it would appear that the legislation is seeking to determine the royalty on the gross sales value of 20 cv, since the legislation does not seek to discourage beneficiation in the form of washing. However, the wording in the current draft of the legislation refers to the following:
“If any unrefined mineral resource with a range is transferred… (b) at or within the range of conditions specified in Schedule 2, the mineral resource must be treated as having been transferred at that condition...”
This could lead to the situation where gross sales are determined at 25 cv.
Clearly, this is incorrect since the explanatory memorandum alludes to the fact that the legislation should read, as follows:
“If any unrefined mineral resource with a range is transferred… (b) at or within the range of conditions specified in Schedule 2 (at which the miner resource was extracted), the mineral resource must be treated as having been transferred at (that) the condition (at which the mineral resource was extracted)...”
This would lead to the determination of the gross sales at 20 cv, the correct position.
If a taxpayer then extracts the mineral resource above the range specified, it would appear that the legislature is seeking to determine the gross sales at the extraction value which is beyond the range. In the coal example, an extraction of coal by mining company A, at say 29 cv, which might then be beneficiated to 35 cv, would have its gross sales determined at 29 cv.
Mining companies should ensure that this aspect is raised with Treasury.
Finally, it is worth noting that the interpretation of concentrates within the context of the amendments has still not been addressed and this will certainly form the subject of certain submissions.
1. Refer p97 the Explanatory Memorandum to the Taxation Laws Amendment Bill, 2010.