Abstract
One of the consequences of the change in the mineral policy of South Africa with the promulgation of the Mineral and Petroleum Resources Development Act 28 of 2002 was the increase in junior exploration companies. Junior exploration companies are mainly involved in prospecting activities. No definition exists for either prospecting or exploration in the Income Tax Act 58 of 1962 (Income Tax Act). The lack of research and case law on the tax treatment of prospecting expenditure by junior exploration companies may result in various interpretations for the treatment of prospecting expenditure. Through critical analysis of specific sections in the Income Tax Act, applicable case law and relevant literature, it is evident that there are different interpretations by junior exploration companies of the treatment of prospecting expenditure from an income tax perspective. The perceived challenges with interpretation of the tax treatment of prospecting expenditure by junior exploration companies create an opportunity for further research.
Highlights
IntroductionWith the promulgation of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) the mineral rights policy of South Africa changed from a dual private- and stateowned mineral rights policy to a state-owned mineral policy
A junior exploration company is prospecting for speculative purposes when the prospecting right was obtained with the intention of selling the right at a profit, that is, a scheme of profit making, the prospecting expenditure incurred will be of a revenue nature for taxation purposes (Van Blerck, 1992)
It may be argued that if a junior exploration company has the objective of establishing a mine in the future, the prospecting expenditure is being incurred for the purpose of producing income in the future (Van Blerck, 1992)
Summary
With the promulgation of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) the mineral rights policy of South Africa changed from a dual private- and stateowned mineral rights policy to a state-owned mineral policy. The objectives of the MPRDA are to give the state the right to exercise sovereignty over and custodianship of the nation’s mineral and petroleum resources (Republic of South Africa, 2002). One of the consequences of this change was that a large number of junior exploration companies applied for and received prospecting rights. Junior exploration companies are involved exclusively in prospecting activities (KPMG, 2006). Junior exploration companies are either prospecting for speculative purposes, that is, selling a viable proposition, or they are prospecting with the aim of establishing a mine (KPMG, 2006)
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