The mining industry has experienced turbulent times and junior miners have felt this most. Apart from the real economic challenges, South Africa’s tax legislation has not made the operating environment for junior miners any easier.
Muhammad Saloojee, director and head of corporate tax at KPMG, explains that junior mining needs to take heed of lessons learnt from Canada and Australia on incentivising the junior mining sector.
The 2015 Junior Mining Indaba which took place from June 3 to 4 in Johannesburg dealt with some of the issues facing junior miners and exploration companies which include addressing the perceived red tape in the Mineral and Petroleum Resources Development Act (MRPDA) and understanding the fiscal and tax regimes.
“Not withstanding the fact that the mining industry in South Africa has experienced several ongoing challenges in recent times, opportunities abound for junior mining companies to participate meaningfully in the industry,” Saloojee believes.
Undoubtedly, the challenges facing these companies, including access to finance, a challenging outlook in terms of the current tax legislation and acquiring the relevant licences from the South African government, are significant.
Meanwhile, market entry is also often hampered by a lack of financing. Junior mining companies struggle to secure finance and the persisting decline in commodity prices has stemmed capital flow.
While the South African government has taken some steps toward creating an enabling environment for juniors and prospectors, there are some learnings we can take from Australia and Canada that would further incentivise junior mining companies to enter the sector, says Salooje. One key lesson can be taken from the Canadian flow-through model in terms whereof an investor receives 100% tax deduction on all Canadian Exploration Expenses; and when the investor sells shares in a qualifying flow-through vehicle, only 50% of the gain is subject to capital gains tax. In addition to this, additional provincial tax credits may apply for exploration undertaken in certain Canadian provinces, and because of income tax deduction, federal tax credit and provincial tax credit after tax cost of $1000 investment in a Canadian fl ow-through company could drop to anywhere between $519 to $319. Australia recently enacted an Exploration Development Incentive for junior miners, which enables greenfield mineral explorers who incur greenfi eld mineral expenditure to forgo tax losses on exploration expenditure. Moreover, Australian resident shareholders are entitled to refundable tax off set or franking credits if a corporate entity.
Whilst South Africa has a venture capital company (VCC) tax regime that seeks to include junior miners, the model has not really worked even though the government has recently increased the investee threshold to R500 million. One reason for this is that the VCC model is framed along the lines of an investment fund model which is highly regulated. Tweaking the VCC model could well be the trick for South Africa to align itself alongside…