HOW SHOULD EMPLOYEE HOUSING EXPENSE BE TREATED ON BALANCE SHEET?
Mining companies will be interested in the recently published SARS binding private ruling (BPR 239) which confirms that expenses incurred by mining companies for employee housing can be claimed in terms of mining capital expenditure (“capex”) rules. BPR 239 also clarified the tax treatment of an obligatory capital contribution which the two mining companies had to make to a special purpose vehicle (SPV) created to build houses for their employees who were mine workers.
Mine workers often live in informal settlements where crime, substance abuse and unhealthy living conditions prevail. Mining legislation obliges their employers to provide adequate housing to employees, in terms of their social and labour plans:
- The Mineral and Petroleum Resources Development Act No. 28 of 2002 (MPRDA) obliges the Minister to grant a mining right if, inter alia, “the applicant has provided financially and otherwise for the prescribed social and labour plan”.In other words, a mining right will not be granted to an applicant which has not developed and provided for a Social and Labour Plan (SLP).
- The MPRDA not only obliges a holder of a mining right to develop and implement a SLP, but also requires the holder of a mining right to “comply with the requirements of the prescribed social and labour plan”.
- The Mining Charter obliges stakeholders to undertake to “establish measures for improving the standard of housing including the… promotion of home ownership options for mine employees”.
- The Regulations to the MPRDA prohibit the amendment or variation of a SLP: “a social and labour plan may not be amended or varied without the consent of the Minister after the granting of the mining right to which such social and labour plan pertains”.
- In other words, any expenditure in terms of a SLP is necessary expenditure in terms of the MPRDA.
BPR 239 describes a mining joint venture (JV) which was created by two mining companies. The SLP of the mining companies, who were partners to the JV, obliged them to implement a housing scheme for the benefit of their employees. In this case the cost of the employee housing scheme was such that loan funding had to be obtained from a third party financier, who agreed to provide the funding on the following conditions:
- a property SPV had to be established in order to implement the housing scheme;
- the property SPV had to be capitalised by the JV with a prescribed capital amount which was neither equity nor a loan;
- restrictions were imposed on the ability of the property SPV to make future distributions to its shareholders; and
- the memorandum of incorporation (MOI) of the property SPV had to contain a clause recording that any surplus profits (after completion of the housing scheme and repayment of the loan) would be used to improve the social conditions of the communities in which the JV partners carry on their business.
BPR 239 confirmed that –
- the capital contribution by the JV to the property SPV would qualify as capital expenditure in terms of section 36(11)(e) of the Income Tax Act, but only to the extent that the cash contribution related to housing for employees of the JV;
- the capital contribution made by the JV to the property SPV would not be treated as the disposal of an asset by the JV;
- in the property SPV’s hands, the capital contribution would constitute a receipt of a capital nature and not “gross income”;
- the receipt of the capital contribution would also not give rise to a capital gain in the hands of the property SPV.
SARS confirmed that the the capital contribution by the JV to the property SPV would qualify as capital expenditure in terms of section 36(11)(e) of the Income Tax Act (ITA”), but only to the extent that the cash contribution related to housing for employees of the JV.
Section 36(1)(e) of the ITA allows the deduction of “Any expenditure incurred in terms of a mining right pursuant to the MPRDA, other than in respect of infrastructure or environmental rehabilitation (emphasis added)”. This section refers to “any expenditure”, in other words the section should be interpreted widely. BPR 239 confirms that SARS agreed that this section of the ITA has wide application and applied to the facts of BPR 239.
If the property SPV had developed housing to sell to its employees, the capex deduction provided for in another section, section 36(11)(d) of the ITA would not be available. Although section 36(11)(d) includes, “Expenditure in respect of the acquisition, erection, construction, improvement or laying out of housing for residential occupation by the taxpayer’s employees ….and furniture for such housing” it expressly excludes “housing intended for sale”. (emphasis added).
The parties to the JV are obliged to comply with the SLP. The JV implemented the housing scheme in terms of its SLP and the contribution of the capital contribution by the JV is therefore expenditure incurred to comply with the SLP and to maintain its mining right. SARS was prepared to agree that section 36(1)(e) was applicable and that the expense could be treated and deducted as capex in terms of that subsection.
Capital contribution – not a disposal by the JV and not gross income in the property SPV’s hands
The BPR held that the capital cash contribution did not result in a disposal of an asset by a member of the JV. Although this is most probably because the contribution was made in cash, BRP 239 did not provide any reasons.
BPR 239 also held that the capital contribution received by the property SPV would be a receipt of a capital nature in the hands of the property SPV and would not be treated as gross income in its hands. The technical aspects of this ruling as it relates to capital contributions are not dealt with in this article, but would make for an interesting discussion, elsewhere.
Although the facts of BPR 239 are unique, the confirmation by SARS of the treatment of expenses incurred for the erection of housing for mine workers should be of assistance to mining companies.