ABC Mining (Pty) Ltd v C SARS

Facts

ABC is an underground coal mine.  In 2011, XYZ and ABC entered into a sale agreement in terms of which XYZ agreed to sell its prospecting rights to ABC.  After several amendments to the sale agreement, ABC finally commenced with prospecting operations in the areas subject to the sale agreement during or about August 2013.  Even though ABC included the R283,368,698.23 in its capital expenditure schedule, as is required in terms of section 36(11) of the Act, it relied on section 15(b) of the Act to deduct the said amount. 

Issues

In order to meet the requirements of section 15(b) the Act, any expenditure incurred by a taxpayer as a result of the taxpayer conducting prospecting activities, together with any other expenditure which is incidental to such operations, can be deducted against income derived from mining operations.  SARS raised the following issues:

Issue 1: ABC did not conduct the required prospecting activities and therefore did not meet the requirements of section 15(b) of the Act, and as a result, the deduction of R283,368,698.23 was disallowed.

Issue 2: ABC did not provide SARS with an opinion of a tax practitioner regarding the deductibility of the acquisition of the prospection rights.  SARS believed that ABC did not have reasonable grounds for the tax position taken and issued ABC with a 50 per cent penalty in terms of section 223(1) of the TA Act.

Issue 3:  SARS believed that the interest payable in terms of section 89quat(2) of the Act is not the result of circumstances beyond the control of ABC.   

Finding

Issue 1

The dispute between the parties ultimately crystallized into a very narrow legal issue, namely, the interpretation of section 15(b) of the Act.  However, before the court addressed the substantive grounds, it first addressed the erroneous approach adopted by SARS in the audit, as well as the pleadings.  In his judgement in paragraph [5], Windell J made the following statement: "But before I turn to the interpretation of section 15(b), it is necessary to first deal with the pleadings, the evidence and the case the taxpayer was asked to meet.  This is so because this appeal is a good example of what can go wrong when SARS adopts an erroneous approach in respect of the audit, the raising of the assessment, and the pleadings"

In the Rule 31 statement filed on 13 September 2018 in terms of the rules published in terms of section 103 of the TA Act, SARS asked the correct legal question, i.e whether ABC was entitled to deductions of the purchase of prospecting rights, amounting to R287,274,458, in terms of section 15(b) of the Act, in respect of the 2014 year of assessment?  However, SARS then proceeded to dispute the deduction and based its case on an incorrect and irrelevant factual basis.  SARS incorrectly stated that the issue in dispute depended on whether prospecting activities, at the time of the purchase of the prospecting rights, was carried out by ABC.

Evidence provided by ABC that it did conduct prospect operations during the 2014 year of assessment was largely left unchallenged by SARS.  ABC, therefore, argued that since SARS based its findings on an incorrect assumption, i.e, that it did not conduct prospecting operations during the 2014 year of assessment, the court should allow the deduction.  However, the Tax Court is a court of revision and not a court of appeal in the ordinary sense.  Even though the grounds used by SARS to raise the additional assessment were based on an incorrect assumption, the court should still address the legal question raised by SARS, i.e, whether ABC was entitled to a deduction in terms of section 15(b) of the Act?  However, in light of the erroneous factual basis for the issuing of the assessment in relation to the prospecting rights the court found that SARS should be held liable for the cost of the two counsel. 

In determining whether or not ABC was entitled to a deduction in terms of section 15(b) of the Act, the court stated that it is clear from the reading of section 15(b) of the Act, that the legislature intended to cater for two scenarios: Firstly, any expenditure incurred on prospecting operations, and secondly, any other expenditure which is incidental to prospecting operations. 

ABC interpreted the meaning of "expenditure incurred on prospecting activities" very wide, in order to include the purchase of prospecting rights.  The legislature identified what constitutes "activities carried on", including surveys, boreholes, trenches, pits and other prospecting work preliminary to the establishment of a mine.  By referring to the explanation of the meaning of ejusdem generis as provided for in Director of Education, Transvaal v McCagie and others, the court explained that there must be a distinct genus or category for the ejusdem generis rule to find an application and that the words "other prospecting work" is affected by the words preceding them, namely, surveys, boreholes, trenches and pits.  Accordingly, it was found that the approach to section 15(b) of the Act taken by ABC was too generous.

ABC also argued that if the cost is not an expense for prospecting operations, then the amount should at least be deductible since it could be incidental to prospecting operations.  The court found that for the cost to be "incidental" it must relate to a prospecting operations activity.  The incidental cost should follow, or be in connection with the prospecting operations activity.  The court already established that the purchase of prospect rights fall outside the scope as provided for in section 15(b) of the Act, and therefore also fall outside the provisions of incidental cost.  The court also noted that the Act does not allow the initial purchase of mineral rights to be deducted in terms of section 15(a), read with 36(11) of the Act.  This begs the question as to why would the initial purchase of prospecting rights be any different?

Issue 2

The court pointed out that the possession of an official opinion by a tax practitioner is only relevant when the understatement penalty is raised as a result of a "substantial understatement" as provided for in section 223(3) of the TA Act.  In this case, SARS raised an understatement penalty since SARS believed that ABC had no reasonable grounds for the tax position it took. 

The court then asked the following question: If a taxpayer adopts an incorrect tax position, does it constitute a bona fide inadvertent error as contemplated in section 222(1) of the TA Act?  The court stated that if a taxpayer, like ABC, intentionally adopted a certain tax position, albeit bona fide, it can never be "inadvertently".  Therefore, section 222(1) of the TA Act cannot apply.  The court then determined that when an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. 

There was also no evidence to suggest that ABC intentionally devised a plan to deceive the fiscus.  Accordingly, the court could find no factual basis for the imposition of an understatement penalty in terms of item (iii) (standard case) – "No reasonable grounds for 'tax position' taken".  Accordingly, SARS failed to discharge its onus in convincing the court that ABC had no reasonable grounds for the tax position taken.  The court then reduced the understatement penalty from 50 per cent to 10 per cent, as the court believed the correct understatement penalty was item (i) (standard case) – "Substantial understatement".

Issue 3

Section 89quat(3) of the Act state that where the Commissioner having regard to the circumstances of the case is satisfied that the interest payable in terms of subsection (2) is a result of circumstances beyond the control of the taxpayer, the Commissioner may direct that interest shall not be paid in whole or in part by the taxpayer. 

In the judgement at [106], it was stated that the court is satisfied, on the facts in the present matter, that ABC's reliance on section 15(b) of the Act was reasonable, and that no interest should be charged in terms of section 89quat(2) of the TA Act.  It is therefore suggested that if a taxpayer receives advice from an accountant or attorney on a matter of tax law, even if it is not presented as a formal opinion, and the taxpayer relies on such advice, a taxpayer would act reasonably.  If the outcome of this case is understood correctly, a taxpayer acting under such advice and as a result of such a tax position taken by the taxpayer, SARS levy interest in terms of section 89quat(2) of the Act, then it could be seen as circumstances beyond the taxpayer's control, and interest should be remitted.   

In conclusion, the court addressed several issues.  The court explained that ABC took too wide a view on the interpretation of section 15(b) of the Act, and the purchase of the prospecting rights could not be seen as expenditure incurred as part of prospecting operations.  The court also explained that it is reasonable for a taxpayer to act upon the advice of accountants and attorneys.  Since the court believed that ABC acted reasonably, it amended the understatement penalty levied in terms of section 223(1) of the TA Act, and remitted the interest levied in terms of section 89quat of the Act.  The court also pointed out the dangers if SARS adopts an erroneous approach when conducting an audit, raising the assessment as well as the pleadings.

The appeal was dismissed in respect of the acquisition of the prospecting rights.

The imposition of understatement penalties in relation to the prospecting rights in terms of section 221 and 223 of the TA Act was amended to reflect a 10 per cent penalty.

The levying of interest in terms of section 89quat(2) of the Act was remitted.

SARS was ordered to pay the cost of the appeal, including the costs of two counsel, but excluding the cost incurred in relation to the documents concerning the ADR process.

ABC was ordered to pay the cost incurred in relation to the abandonment of its appeal on the donations.

Find a copy of the court case [here].​

04/06/2021