Marula Case Considers Trading Stock and the Matching Principle

By Semole Matlhoma, Tax Consultant

CSARS vs Marula Platinum Mines (218/2015) [2015] (Marula) was decided in September 2016. The court considered whether the extraction of mineral bearing ore which was processed into a powder concentrate amounted to manufacturing and whether the ore and concentrate comprised trading stock for tax purposes. The court also considered whether the general deduction formula (section 11(a) of the Income Tax Act) is subject to a limitation.

Marula is a platinum group metals producer and its operations comprised two distinct phases. The first phase involved underground ore extraction (containing platinum group and base metals) brought to the surface. The second phase involved crushing and milling the ore to extract the minerals to derive a mineral-bearing concentrate powder by using a froth floatation process.

Marula never intended to sell the ore in original form and, since inception, intended to sell the platinum group metals in concentrate form to a sister company. Marula allowed for payment in five months from date of sale.

Marula, in its tax returns for the 2007 to 2009 years of assessment, excluded unquantified amounts of income from its gross income and deferred those amounts to when it became quantifiable. SARS agreed to this exclusion. However, SARS limited Marula’s general deduction of trading stock to the amount actually received or accrued in terms of trading stock, where the full proceeds did not accrue to Marula in a particular year of assessment. The Income Tax Act delays the deduction of trading stock to the year of assessment in which the income is included in the taxpayer’s gross income. Trading stock deductions are therefore matched to income accrued. Marula objected to SARS’ assessment which SARS disallowed. Marula appealed to the tax court. Marula objected and appealed on the basis that the expenditure related to its mining activities and not to the production, manufacturing, purchasing or acquisition of trading stock.

The court held that phase 1 comprised mining and that SARS was not entitled to limit the deductions as the ore did not comprise trading stock. SARS appealed to the Supreme Court of Appeal (SCA) and the SCA found in favour of SARS. The SCA held that Marula mined to manufacture the concentrate, which resulted in the ore being trading stock. As a result, Marula sold trading stock and SARS was entitled to limit the expenses relating to both phases.

It is important to note that this limitation applies only to the general deduction formula and that expenses claimable in terms of other sections are not limited by this limitation.

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