By: Semole Matlhoma, Tax Consultant,BDO Tax Services
The Commissioner for SARS (CSARS) v Marula Platinum Mines case deals with the tax treatment of deferred expenditure and the definition of trading stock. The court had to decide whether ore and the concentrate constituted trading stock and, if so, whether, the trading stock should to be treated as deferred expenditure. The enquiry also assessed whether the mining processes involving the extraction of mineral bearing from the land and the processing of ore into a mineral concentrate, constituted a process of a manufacture for tax purposes.
Marula is a producer of platinum group metals (PGMs) and its operations include the extraction of mineral bearing ore from land and processing it into a powder concentrate. The concentrate is then contractually sold to its subsidiary. The concentrate’s price is determined with reference to the ruling market prices of the different PGMs and payment to Marula can be made within five months from date of sale. Marula excluded the unquantified concentrate sales from its taxable income for the four months prior to the year-end (years of assessment – 2007 to 2009). All the expenditure was nonetheless claimed as a general deduction in the years of assessment in which the expenditure was incurred. This resulted in a mismatch of the income and expenditure.
SARS limited the deductions to match the income in terms of the income tax matching principle applicable to trading stock, which in effect deferred the deductions to the years of assessment in which the income was included in the taxpayer’s gross income. Marula argued that the expenditure related to mining activities and not the production, manufacturing, purchasing or acquisition of trading stock, and that it should not be subject to the matching principle applicable to trading stock.
The Court held that Marula mined to manufacture the concentrate and that, as a result, the ore comprised trading stock. As a result, SARS was entitled to limit the expenses claimed in both phases.
Importance of this case
CSARS v Foskor also considered trading stock in a mining environment. The processes of Foskor are somewhat comparable to those of Marula. In Foskor, the Court held that the ore stockpile held by the taxpayer at the year-end comprised trading stock as the stockpile was acquired for the purpose of manufacturing. Following Foskor, a new section was introduced into the Income Tax Act to guide mining taxpayers on the classification and treatment of trading stock.
The court did not have to decide whether the process followed by Marula was mining or manufacturing in order to determine whether the concentrate sold was trading stock. It would have sufficed to find that the proceeds on the sale of the concentrate was gross income and that the concentrate comprised, as a result, trading stock as defined. However, as Marula’s counsel argued against the matching principle applicable to trading stock, on the basis that Marula’s process is mining and not manufacturing, the court addressed this argument. Arguably, in doing so, it was simply countering the argument and not creating new precedent on what amounts to mining.
Although this case addressed the matching principle applicable to trading stock, it also distinguished between mining and manufacturing. As with Foskor, the Court in Marula, also did not give guidance as to when mining ends and manufacturing starts. Marula has, however, reiterated that minerals extracted from the soil comprise trading stock when the minerals are acquired for the purpose of manufacturing or conversion with the intention to sell.
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