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Ebook The Alluvial Diamond Industry: A Critical Analysis Of The Capital Cost Allowances

Submitted by wulan on Tue, 07/28/2009 - 03:34

The South African alluvial diamond industry has grown significantly in the past decade. With the adoption of a more formal marketing forum the miners have increased their revenues by realising a much higher and more market related price for the alluvial diamonds per carat that they extract.

Alluvial diamonds differs from the traditional kimberlite diamonds that is commonly associated with large companies like De Beers. Kimberlite diamonds are found in kimberlite pipes and one can in general geologically ascertain the lifespan, size, length and grade of the kimberlite prior to starting the mining operations with a fair amount of certainty. The kimberlite diamond mining operations are in general either large scale underground operations or large scale open cast mining operations.

This type of mining requires a significant amount of capital expenditure to establish the underground mining operations similar to that of gold/platinum mining on a reef. The mine is established based on the geological survey which is done on the kimberlite pipe. Due to the large amount of capital outlays these mines are only established on sites with an acceptable long term life of mine. And the mining operation is concentrated on the area containing the kimberlite.

Compared to the operation that is outlined above alluvial diamond mining is very different in nature. Alluvial diamonds are found either along current water flows (rivers) or in old river beds. In general the areas cannot be surveyed in a similar manner to that of the kimberlite diamonds due to the nature of the gravel that holds these diamonds.

The gravel along the same stretch of river might stop at any moment and only start a couple of hundred meters at any given point. The levels of the gravel might also differ significantly between the various points.

Due to the nature of the gravel that is mined the mining operations of an alluvial diamond miner differs significantly from that of a kimberlite diamond mining or gold/platinum mining operation which was the main focus of the legislature when drafting section 15 and 36 of the South African Income Tax Act.

The largest difference lies within the type of capital expenditure as well as the way in which capital expenditure is planned and executed. For alluvial diamond mining the largest portion of equipment that is utilized is movable plant and machinery also known as yellow metal assets.

The yellow metal assets is used, due to the nature of the gravel that is mined, as it would not be economical to establish underground operations, nor is there any need thereof as the gravel is normally found at acceptable levels.

Where it is found that there is diamond carrying gravel the portion is opened up in a similar manner as open cast mining only a lot more shallow. After the gravel is extracted and the portion has been successfully mined rehabilitation of the area is performed.

All of the above machinery is moved as the gravel is mined out and as new gravel is found in the area. None of the capital items are left behind due to the nature of the assets.

Similar to the United States Marines the alluvial diamond miners do not leave any machines or infrastructure behind.Economically due to the potential short lifespan of the different sites capital expenditure is not only incurred for a specific site but based on the whole operations capital needs. It is common practise for the equipment to be utilized at different sites.

In the past it was common practise by the assessors of the South African Revenue service to assess the alluvial diamond miners as if there was only one mine. In essence no ring fencing was applied to these operations.

SARS has started to analyze these operations to establish whether, from their point of view, the different sites should be regarded as a single mining operation (contiguous) or whether it should be regarded as different mines, and that ring fencing should then be applied.

From an alluvial diamond industry view point past precedent have been set by SARS and that the taxpayer can therefore reasonably expect to be assessed in a similar manner as what has been the past practise.

The alluvial diamond industry is also of the view point that their different sites should be viewed as a single mining operation due to the nature of the capital costs that has been incurred, and that current legislation does not take into account their unique nature of business.

CONTENT

CHAPTER 1
INTRODUCTION AND PROBLEM STATEMENT

    1.1 BACKGROUND
    1.2 NEED FOR THE STUDY
    1.3 RESEARCH OBJECTIVES
    1.4 SCOPE LIMITATIONS
      1.4.1 General and South African analysis: scope limitations
      1.4.2 Canadian analysis: scope limitations

    1.5 IMPORTANCE OF THE QUESTION BEING ASKED
    1.6 CURRENT STATUS OF THE TOPIC
    1.7 METHODOLOGY
    1.8 DATA ANALYSIS
    1.9 NATURE AND FORM OF RESULTS

CHAPTER 2:
THE SOUTH AFRICAN INCOME TAX ACT AND THE ALLUVIAL DIAMOND MINER
(DELWER)

    2.1 INTRODUCTION
    2.2 LEGISLATION
      2.2.1 Section 15. Deductions from income derived from mining operations..- 12 -
      2.2.2 Extracts from Section 36 of the Income Tax Act 58 of 1962:

    2.3 ANALYSIS OF LEGISLATION: SECTION 15

      2.3.1 Introduction
      2.3.2 Analysis of section 15

    2.4 ANALYSIS OF LEGISLATION: SECTION 36

      2.4.1 Introduction
      2.4.2 What is capital expenditure
      2.4.3 Limitation of deduction of capital expenditure
      2.4.4 Detailed example of the workings of section 36

    2.5 RING FENCING
    2.6 THE NATURE OF ALLUVIAL DIAMOND MINING CAPITAL EXPENDITURE
    2.7 APPLYING SECTION 15 AND 36 TO AN ALLUVIAL DIAMOND MINE
    2.8 COMMENT ON THE EFFECT OF THE APPLICATION IN 2.7
    2.9 CONCLUSION

CHAPTER 3
THE SOUTH AFRICAN INCOME TAX ACT COMPARED TO THE CANADIAN TAX
ACT

    3.1 INTRODUCTION
    3.2 THE CANADIAN INCOME TAX ACT AND REGULATIONS
      3.2.1 Extracts from the Canadian Income Tax Regulations
      3.2.2 Extracts from the Canadian Income Tax Act

    3.3 ANALYSIS OF THE CANADIAN INCOME TAX ACT

      3.3.1 Canadian exploration expenses (CEE)
      3.3.2 Canadian development expenses (CDE)
      3.3.3 Capital Cost Allowances (CCA) depreciable assets
      3.3.4 Ring fencing of CCA class 41 allowances
      3.3.5 Detailed example of the workings of the Canadian capital allowances

    3.4 COMPARISON TO THE SOUTH AFRICAN INCOME TAX ACT

      3.4.1 Exploration, prospecting and pre-production capital expenditure
      3.4.2 Capital expenditure during in production mining operations
      3.4.3 Ring fencing

    3.5 CONCLUSION

CHAPTER 4
THE SOUTH AFRICAN TAX ACT COMPARED TO THE NAMIBIAN TAX ACT..- 65 -

    4.1 INTRODUCTION
    4.2 THE NAMIBIAN INCOME TAX ACT
    4.3 ANALYSIS OF THE NAMIBIAN INCOME TAX ACT
      4.3.1 Mining exploration activities
      4.3.2 Mining development expenditure
      4.3.3 Ring fencing

    4.4 COMPARISON TO THE SOUTH AFRICAN INCOME TAX ACT

      4.4.1 Exploration, prospecting and pre-production capital expenditure
      4.4.2 Capital expenditure during in production mining operations
      4.4.3 Ring fencing

    4.5 CONCLUSION
    CHAPTER 5
    CONCLUSION

      5.1 INTRODUCTION
      5.2 ANALYSIS
      5.3 CONCLUSION AND RECOMMENDATIONS

    6. REFERENCES:
    7. ABBREVIATIONS USED

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