By Evádne Bronkhorst, senior manager at Forvis Mazars in South Africa

In the Medium Term Budget Policy Statement 2024 published by the National Treasury on 30 October 2024 in South Africa, part of the weaker revenue outlook was attributed to a decrease in fuel levies. The National Treasury also noted that net fuel levy collections contracted by 3.9% compared to the same period in 2023/24. Despite this decline, it is projected that tax revenues from fuel levies will increase by 32.6% by the 2027/28 period.1

Image by Kadzo 1111 on Freepik

The consolidated budget deficit for the 2024/25 period is 5% of GDP.2 One of the mechanisms that can be used to decrease a deficit is to increase tax revenues or to decrease tax incentives, such as the quantum of diesel refunds paid.

A reduction in diesel refunds would also align with the South African government’s drive towards increasingly building a green economy. Since the Minerals Council Of South Africa is expecting an increase in the prices of distillate fuel, thereby increasing mining input costs, this may be detrimental to the future well-being of the mining sector.3

 

Diesel refund scheme requirements

The diesel refund scheme was introduced in 2000 to support primary sectors, such as the mining sector, to become globally competitive. This is achieved by granting full or partial relief for the general fuel levy and the Road Accident Fund (RAF) levy.

While the administration of diesel refunds is currently done through the value-added tax (VAT) system, Note 6 in Part 3 of Schedule No. 6 to the Customs and Excise Act No. 91 of 1964 (the Act) governs the diesel refund scheme.

On a high level, to qualify for the diesel refund scheme the mining entity should be registered for VAT and diesel refunds, and:

  • Purchase distillate fuel for own use.
  • Use the distillate fuel at the place where the mining operation is carried on.
  • Be the holder of the mining license.
  • Use the distillate fuel for own primary production activities.
  • Be in possession of compliant tax invoices issued by diesel supplier.
  • Systematically maintain separate Diesel Storage, Diesel Usage and Diesel Losses logbooks for each qualifying asset. The logbooks should reflect the journey of the distillate fuel from the point at which it was dispensed for use and details regarding the actual consumption of the distillate fuel. Consumption should be classified as consumption for eligible or non-eligible purposes.
  • Be in possession of user source documentation and appropriate additional information that include manufacturer specifications of equipment, particulars of operator, intensity of use (e.g. distance, duration, route, speed, rate) and other incidents, facts and observations relevant to the measurement of eligible diesel use.

Challenges

There has been a notable increase in diesel refund verifications and audits conducted by the South African Revenue Service (SARS) recently. The focus appears to be on whether or not the distillate fuel is being used for the diesel refund claimant’s own primary production activities, and whether or not logbooks comply with the requirements of Note 6 in Part 3 of Schedule No. 6 to the Act.

In Commissioner, South African Revenue Service v Glencore Operations SA (Pty) Ltd (Case no 462/2020) [2021] ZASCA 111 (10 August 2021) (the Glencore Case), SARS disallowed diesel refunds claimed by Glencore, based on the contention that the distillate fuel was used in secondary mining activities. Secondary mining activities are generally those activities that take place after the mineral has been extracted, such as crushing and screening. Only those activities included in Note 6(f )(iii) in Part 3 of Schedule No. 6 to the Act are regarded as primary mining activities.

The Supreme Court of Appeal found in favour of SARS, and noted that Glencore’s evidence regarding its mining processes was lacking and negatively impacted Glencore’s argument.

 

The scales may have tipped

In February 2017, the National Treasury published a discussion paper regarding the reform of the diesel refund scheme.4 Affected sectors were hopeful that the discussion paper would result in legislative amendments to reflect recent industry developments, as well as the provision of clear and comprehensive guidance.

Currently there are no indications that the diesel refund scheme will be considered as part of the technical Annexure C tax proposals for the 2025 budget.5 Poor rail and port performance, strikes, illegal mining, and crime continues to put strain on the mining sector. It appears that government’s focus is shifting to the construction industry, which is said to create more jobs for every R1-million spent.6

In addition to the outdated legislation, lack of guidance, no special dispensations provided for smaller scale operations, and the perceived subjective approach being applied by SARS, it may be more difficult to succeed in claiming diesel refunds.

It is therefore advisable that mining entities invest more time and resources in designing and maintaining record-keeping systems that are aligned with the requirements of the Act. Where necessary, it may be beneficial to reach out to knowledgeable advisors to support them with this process. This may very well just tip the scales in favour of the diesel refund claimant.

 

Taking a proactive approach

A whole-of-business approach is essential to ensure that individuals responsible for compiling logbooks and attending to SARS verifications and audits are familiar with the detailed mining processes of the entity.

To prevent a subjective approach by SARS during verifications and audits, it is imperative that logbooks adhere strictly to the legislative requirements. Any ambiguities should be resolved through thorough legislative analyses and with reference to interpretative materials, such as case law.

Regular logbook health checks performed by an independent advisor, may also be valuable to ensure that all the relevant requirements have been met.

References:

  1. The National 2024. 2024 Medium term budget policy statement. Accessed: 2024-11-19. Available [online]: chrome- extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.treasury. gov.za/documents/mtbps/2024/mtbps/FullMTBPS.pdf.
  2. Ibid
  3. Minerals Council of South 2024. Mining input costs eased further in September 2024. Accessed: 2024-11-19. Available [online]: ile:///C:/Users/ evadne.bronkhorst/Downloads/sept_2024_update_mining_input_costs.pdf.
  4. The National 2017. Review of the diesel fuel tax refund system Accessed: 2024-11-19. Available [online]: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.treasury.gov.za/comm_ media/press/2017/20170215001%20-%20REVIEW%20OF%20THE%20 DIESEL%20FUEL%20TAX%20REFUND.pdf.
  5. For Annexure C go to https://www.africanmining.co.za/research-papers/ [We will upload the document to our website for reference]
  6. The National 2024. 2024 Medium term budget policy statement. Accessed: 2024-11-19. Available [online]: chrome-extension:// efaidnbmnnnibpcajpcglclefindmkaj/https://www.treasury.gov.za/ documents/mtbps/2024/mtbps/FullMTBPS.pdf.

About: Evádne Bronkhorst

Bronkhorst is a senior manager:

Tax at Forvis Mazars in South Africa. She provides corporate tax advisory services and is experienced in direct and indirect taxes. Her areas of specialisation include value- added tax, mining taxes, M&A tax and employment tax incentives.

She qualified as a Chartered    Evádne Bronkhorst, senior manager Accountant in 2009. Prior to joining Mazars South Africa, she was a corporate tax specialist at Nubis.tax, an assistant manager: Audit Technical at Ernst & Young and a senior lecturer at the Department of Taxation at the University of Pretoria, where

she lectured taxation at postgraduate level. Her qualifications include CA(SA); LLM (International Revenue Administration) (AUS); LLM (International Customs Law and Administration) (AUS); MCom with specialisation in Taxation (RSA).

Evádne Bronkhorst, senior manager at Forvis Mazars in South Africa.

Evádne Bronkhorst, senior manager at Forvis Mazars in South Africa.