How mine income, allowances and deductions are taxed

Simbarashe Hamudi

ZIMBABWE’S mining industry has long been one of the pillars of the national economy, producing gold, platinum, chrome, diamonds, coal and other minerals that feed both the domestic industry and export markets. Yet behind the heavy machinery, under­ground shafts and mineral output lies a complex tax framework that deter­mines how mining income is assessed, what expenses may be deducted, and how capital investment is treated.

One of the most important parts of that framework is the Fifth Schedule to the Income Tax Act made under section 15(2)(f), dealing with allowances and deductions in respect of income from mining operations and related provi­sions.

At the centre of the Fifth Schedule is the concept of capital expenditure. In mining, companies often spend heavily before earning any income. They may construct buildings, acquire equipment, sink shafts, conduct surveys, drill bore­holes, develop mining areas and incur administration costs before production begins. The schedule recognises this reality by allowing such expenditure to be deducted over time through what is known as a redemption allowance.

Capital expenditure includes spend­ing on buildings, works and equipment used in mining operations. It also in­cludes shaft sinking and expenditure incurred before production or during periods of non-production on prelimi­nary surveys, boreholes, development, administration, management and inter­est on loans used for mining purposes. Importantly, the definition has been modernised to include certain computer software acquired, developed or used in connection with mining operations. This reflects the increasing role of dig­ital technology in exploration, geologi­cal modelling, mine planning and pro­duction control.

However, not every cost is fully accepted. The schedule places limits on expenditure relating to certain resi­dential buildings and passenger motor vehicles, especially where a mine is owned, tributed or leased by a company controlled by not more than four indi­viduals. These provisions are designed to prevent private or excessive personal expenditure from being disguised as mining capital investment. For exam­ple, the schedule sets ceilings for dwell­ing houses used mainly by controlling individuals and for passenger motor ve­hicles. Amounts above the stated limits are disregarded for tax purposes.

The schedule also recognises the social infrastructure often associated with mining. Mines in remote areas may build schools, clinics, hospitals or nursing homes for workers and their families. Expenditure on permanent buildings used for such purposes may qualify as capital expenditure, subject to monetary limits. But the taxpayer must satisfy the Commissioner that the facil­ity is genuinely connected to the mining operation. In the case of a school, more than half of the pupils must be children of employees in the mining operations. For a hospital, nursing home or clinic, more than half of the persons treated must be employees or family members of employees.

A key mechanism in the Fifth Sched­ule is the calculation of the redemption allowance for mine-owning companies. A company that owns a mine may de­duct an annual allowance based on the unredeemed capital expenditure and the approved estimated life of the mine. The unredeemed balance at the start of the year, after deducting recoupments, is added to capital expenditure incurred during the year. The total is then divid­ed by the approved estimated life of the mine. The result is the deductible allowance for that year.

The “approved estimated life” of a mine is the estimate determined by the company, unless the Commissioner does not accept it and substitutes anoth­er estimate. The estimate must be based on certified ore reserves and supported by calculations. The schedule also im­poses maximum periods: 10 years for lead or zinc mines, five years for iron mines, and 20 years for other mines. This means that capital expenditure is not simply deducted at the taxpayer’s discretion; it is linked to the expected productive life of the mineral deposit.

Where a company operates a mine it does not own, or where a person oth­er than a company carries on mining operations, the deduction is calculated differently. In such cases, the Commis­sioner may allow a redemption allow­ance considered fair and reasonable. However, where an individual mine owner provides an estimate of the mine’s life, the calculation may follow the same approach used for mine-own­ing companies.

The schedule further provides for elections that may significantly affect tax treatment. Under paragraph 4, a taxpayer carrying on mining operations may elect that the annual deduction should include capital expenditure in­curred during the year, together with a proportion of the opening unredeemed balance. Once made, such an election is binding for subsequent years. For a new mine, a special rule allows the taxpayer to deduct, in the year production first commences, both current capital ex­penditure and the opening unredeemed capital balance. This can be especially important for new mining projects, which often face heavy upfront invest­ment and delayed revenue.

The meaning of “new mine” is also carefully defined. It includes an inde­pendent workable mining undertaking that first commenced regular produc­tion on or after April 1, 1968. It may also include a mine that had previously been in production but was closed and later reopened, or one that changed ownership and was reorganised with substantially new development and plant. The Commissioner’s opinion is central in determining whether a proj­ect qualifies.

Another practical provision con­cerns renewal or replacement of build­ings, works or equipment. If a taxpayer elects, expenditure on a single renewal or replacement may be deducted where the cost does not exceed the prescribed threshold. Recent amendments refer to a limit of US$10,000, while expen­diture on renewal or replacement of a dwelling used mainly by controlling in­dividuals is restricted to US$1,500.

The schedule also deals with chang­es in ownership of a mine. When a mine is transferred, the transferor and trans­feree must jointly provide the Commis­sioner with a written statement allocat­ing the consideration, or value where no consideration is given, to assets whose cost would qualify as capital expendi­ture. If accepted, that amount ranks as capital expenditure for the transferee and is treated as a recoupment for the transferor. If the Commissioner is not satisfied, or no statement is provided, the Commissioner may determine the appropriate amount. Special rules apply to transfers without valuable consider­ation, company reconstructions, group restructurings, mergers and transfers between spouses.

Finally, the schedule excludes cer­tain deductions otherwise available under section 15(2). Paragraph 10 provides that, for income from mining operations, deductions referred to in paragraphs (c), (d), (e) and (t) of section 15(2) are not allowed. This prevents overlapping claims and ensures that mining taxpayers use the specialised regime created for the sector.

l Hamudi is Tax Partner at Baker Tilly Central Africa, based in Hara­re, Zimbabwe. He can be contacted at +263 775 399 536 or simbarashe. hamudi@bakertilly.co.zw

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