Miners – assessed losses and interest - order is everything

Assessed losses

Order is everything, whether in life or in tax, and especially when it comes to miners, assessed losses and unredeemed capital expenditure.

With the corporate tax rate being lowered to 27%, the annual limitation of assessed losses available for set off against taxable income becomes effective for years of assessment ending after 31 March 2023. An assessed loss available for set off against taxable income will then be limited to the higher of either: 80% of the taxable income for that year before considering the assessed loss brought forward, or R 1 million.

When determining the taxable income of a miner, what should be applied first: unredeemed capital development expenditure (capex) or an assessed loss carried forward? Furthermore, how will this new limitation rule affect the miner’s tax liability?

In the National Budget Speech, the Minister of Finance, Enoch Godongwana, indicates that clarity on this order will be provided in the tax legislation.

Miners will not escape the limitation of the assessed loss rule and will be required to calculate the limitation at the higher of either: 80% of the taxable income for that year before considering the assessed loss brought forward and before the deduction of any unredeemed capex, or R 1 million.

Following the deduction of an assessed loss, whether limited or not, a deduction of any unredeemed capex follows in the order of determining a miner’s taxable income.

Should the miner have sufficient unredeemed capex, the unredeemed capex can be set off against the remaining taxable income resulting in a R nil tax liability. If, however, the miner does not have sufficient unredeemed capex, the miner will, similar to any other resident company in South Africa, be subject to tax on the remaining taxable income.

The assessed loss limitation rule will accelerate the utilisation of unredeemed capex in favour of a balance of assessed loss, the utilisation of which is decelerated.

Section 23M interest

Another matter addressed in the National Budget Speech is the effect on miners of the interest deduction limitation rule of section 23M, where the recipient of the interest is not subject to tax in South Africa. This typically applies where the funder is not a tax resident of South Africa.

During a period of non-production or a mine being in care and maintenance, otherwise deductible expenditure of a mine is regarded to constitute unredeemed capital expenditure as opposed to increasing or creating an assessed loss.

Section 23M effectively, subject to various factors, limit the deduction of interest paid predominantly to non-resident funders. In the National Budget Speech, the Minister clarified that the section 23M limitation will not apply to a mine during a period of non-production or care and maintenance.

Accordingly, and provided the normal interest deductibility requirements are met, all affected interest incurred during such a period will not be subjected to the section 23M limitation rules.

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