Tutorial Questions on Taxation of Miners

Questions 1
a) Explain how the treatment of assessed losses and recoupment of mining concern
differs from other taxpayers. [4 marks]
b) What is ring fencing and thin capitalisation in respect of taxation of mining
companies? [4 marks]
c) What specific fiscal incentives are available to miners? [2 marks]
d) At what rate of tax are special mining leases levied? [2 marks]
Question 2
Zhang Zhii is a platinum mining company operating in Lower Gweru. The company is
owned by 3 three directors, one of which, Mr Zhuwei is based in Zimbabwe with full
time responsibility with the company. The other directors are based in China. The
company showed the following details for the year ended 31 December 2015.
Note $
Income
Sales of platinum ore 2 436 000
Sale of mining claims 200 000
Profit from sale of front-end loader 1 15 300
Interest from Tetrad Investment Bank 10 000
Expenses
Management and administration expenses 450 000
Interest payable to parent company 2 150 000
Depreciation 120 000
Lease expenses 6 10 000
Management fees payable to a parent company 2 24 000
Crushing of platinum ore 134 000
Renewal and replacement 14 000

Net profit 1 904 300

Additional information
1. Zhang Zhii (Pvt) Ltd sold a front-end loader on 1 October 2015, the truck had a
book value of $14 700.
2. Zhang Zhii (Pvt) Ltd is a subsidiary of Zhang Zhii Mining China and the Zimbabwean
mining company borrowed an amount of $1500 000 at 10% interest per annum at the
beginning of the year. The loan was meant to expand the mine operations, Zhang Zhii
Zimbabwe also paid $24 000 to the parent company for expertise hired for sinking of
mine shaft.
3. At 31 December 2015, the company had the following balance sheet extract;
$
Issued share capital 120 000
Retained profit 60 000
Loan from Zhang Zhii China 1500 000
4. The company incurred the following capital expenditure during the year ended 31
December 2015.

Clinic built 80 000

Mine equipment 20 000
House of mine nurse 50 000
House of a director 24 000
Mercedes Benz 26 000
30 tonnes haulage truck 60 000
Prospecting expenses 13 000

5. The unredeemed balance of capital expenditure at the beginning of the year was
$600 000 and the life of the mine was agreed to be 8 year at 1 January 2015. The
company had elected to claim capital redemption allowance on a life of mine basis.
6. The company signed a lease agreement with JK Mining Solutions for the use of a
Crimping machine, the company paid a lump sum amount of $10 000 and rentals of $1
500 per month payable in arrears beginning April 2015. Only the lump sum was
included in the accounts.
Required:
a) Calculate Capital Redemption Allowance (CRA) for the year ended 31 December
2015. [5 marks]
b) Calculate the taxable income of Zhang Zhii for the year ended 31 December 2015.
[15 marks]
Question 3
Chikorokoza Chapera Mining Corporation is a diamond mining company operating a
mine in the Chiadzwa area of Mutare. In support of its return it submitted the
following information for the year ended 31 December 2014.
US$ US$
Income
Operating income 3 000 000
Profit on disposal 2 000
3 002 000
Operating expenditure
Shaft sinking 20 000
Development costs 5 000
Boreholes, trenches and pits 15 000
Purchase of mining claims [z 1 100 000
Salaries and wages 200 000
Crushing and milling 80 000
Administration costs 150 000
Depreciation of fixed property 9 000
Goodwill written off 75 000
General expenses 100 000 (1 754 000)
Net Operating Income 1 248 000

Additional Information:
(i) The machinery disposed of was purchased in 2012 for US$5 000.
(ii) Included in administration costs are:
 Penalty for late payment of tax US$10 000
 Company formation expenses written off US$60 000
(iii) Included in general expenses are:
 Water reconnection fees US$5 000
 Tax consultation fees US$20 000
 Preparation of financial statements and audit fees US$50 000
(iv) During the year the following expenditure was also incurred:
US$
Office buildings constructed 550 000
Mercedes Benz S500 purchased 200 000
Mine Equipment 100 000
Prospecting and exploratory works 50 000
900 000
(v) The balance of capital expenditure from last year was US$450 000
(vi)The estimated life of the mine at the end of 2014 was 8 years.

Required:
Calculate the company’s tax liability by granting CRA in terms of paragraph 4 (2) of
the 5 Schedule to the Income Tax Act for the assessment year ended 31 December
th

2014. [30 marks]

Question 4
Miners enjoy better tax incentives than other general taxpayers. Explain [10]

Solution
Mining losses are carried forward indefinitely whilst; other companies cannot carry
forward losses for more than 6 years.
- The cost of staff housing in mining is not limited, but for other companies it is
limited to US$25 000.
- On sale of mining claims miners can elect to spread the income over 4 years (i.e.
prior to 1 January 2010)
- Recoupment in mining is not taxed, but to other taxpayers it is treated as income,
therefore taxable.
- Miners are not granted either SIA or Wear and Tear, instead they are granted Capital
Redemption Allowance which on election results in minimum tax liability or even
assessed losses, and thus tax liability is lesser to miners than other companies.
- Miners enjoy a replacement allowance on renewal/replacement expenditure on
buildings, works or equipment, which reduces their tax liability.

Question 5
N.A Mining Pvt. LTD is a gold mining company located 10km Northwest of Zvishavane.
It is controlled by three individuals. The mine has been in operation since 1 July 1996,
but has been making losses since inception. The total accumulated losses as at 1
January 2013 amounted to $1 050 000.
It submitted the following with its returns for the year ended 31 December 2013.

$ $
(a) Net profit as per accounts 14 000 000
After debiting total expenditure 19 500 010
This includes among others:
- Depreciation 1 500 000
- Shaft sinking 950 000
- lease premiums on Mazda 626 700 000
- Salaries and wages 10 900 000
- Depletion allowances 50 000
- Goodwill 6 500
The following items were credited
- Profit on sale of equipment (see note) 4 000
- Export incentive grant 100 000
- Sale mining claim (see note) 40 000
(b) Capital Expenditure
(i) Balance of capital expenditure B/F 62 400
(ii) Current capital expenditure
- Pajero for the General Manager 300 000
- Twin cab for the financial controller 250 000
- 50 medium density houses for Supervisory staff 5 000 000
- Renewal of plant 3 500
- Director (shareholder) house:
Constructed 30km from mine site 45 000
- Shaft sinking 70 000
- Plant and machinery 75 000

NOTES
-During the year equipment with a net book value of $16 000 was sold for $20 000
making a profit of $4 000 on the transaction.
- A mining claim was sold for $40 000 during the year.
- The taxpayer estimated the life of mine to be 22 years from 1 January 2014
Required:
Minimum tax liability at 31 December 2013

Question 6
Tropical Mines (PVT) Ltd is a mining company operating a gold mine in Mvuma in
Zimbabwe. 80% of the company’s issued share capital is owned by Broken Hill
Investments plc, an Australian company which has its head office in Alice Springs,
while the balance of 20% is held by Zhunde (Pvt.) Ltd, a Zimbabwean registered
company.

The financial year ended of Tropical mines (Pvt.) ltd is 31 October each year and in
respect of the financial year to 31 October 2001, the net accounting profit per the
financial statements was $8 500 000. The income statement was credited with
amounts, which included:
$
Export incentive grant 400 000
Interest on tax reserve certificates 50 000
Total debits were $12,000,000 and these include:
Interest on long term debt (see note) 3 500 000
Management fees (see note) 250 000
Depreciation 1 200 000

The following is an extract from the balance sheet of Tropical Mines (Pvt.) LTD as at
31 October 2001:
Issued share capital 4,000,000
Retained earnings 6,000,000
Shareholders’ equity 10,000,000
Long term debt 35,000,000
Current liabilities 6,000,000

The capital redemption allowance, which is tax deductible for the current year, is
$2,000,000.

NOTES:
(i) The interest expense is payable to an offshore bank (based in Brussels) which had
provided the long-term loan reflected in the balance sheet.
(ii) The management fees are payable to the Australian parent company but
arrangements for its payment have not yet been made.
(iii) The current liabilities as at 31 October included a proposed dividend of
$2,000,000.

The public officer of Tropical Mines (Pvt.) LTD has approached you in your capacity as
a tax consultant to assist with identifying all the tax liabilities associated with the
payment of interest, management fee and dividends. In addition she needs assistance
in computing the taxable income of the company for the 2001 tax year.
Required:
(a) Identify the taxes associated with the prospective remittances of interest,
management fees and dividends, qualifying them where possible and indicating when
these amounts should be paid to the Revenue Commissioner
(b) Explain and compute the tax-deductible portions of the interest and management
fees in accordance with the limitation provided for in the Income Tax Act (cap 23:06)
(c) Compute the taxable income and liability for tax year ended December 2001.

Question 7
Winox Investments Plc, a mining company with Head Office in London, submitted the
following information for assessment, for the year ended 31 December 2013.
The state of Winox Investments Plc at 1 January 2013 was as follows:
 Assessed loss brought forward $115 000
 The unredeemed balance of capital expenditure was $912 000
 Life of mine is 10 years from 1 January 2014
In respect of the tax year ended 31 December 2014 Windfall Investments plc’s
financial statements indicated:
$
i. Net Profit per accounts 19 900 000
ii After crediting among others:
Interest on tax reserve certificate 20 000
Profit on sale of mining claim 95 000
Sale proceeds of grinder 25 000
iii. After debiting among others:
Depreciation 15 000
Interest paid to Head Office 90 000
Purchase of a mine claim 250 000
Iv Current capital expenditure for the year:
Mining buildings 300 000
Constructed house for general manager 50 000
House for financial controller 95 000
House for new nurse for mine clinic 55 000
Twin cab for financial controller 30 000
Construction of mine clinic 105 0 000
Shaft sinking 50 000
V Balance sheet extract indicated:
• Shareholders’ equity 1400 000
• Long term loan from Head Office 5 500 000

Compute the taxpayer’s minimum tax liability for the year ended 31 December 2014
(it’s not a new mine)

Question 8
Peachy Mines (Private) Limited is a 70% subsidiary of an Australian mining
conglomerate Peach Holdings Limited Headquartered in Sidney, Australia. Peachy
Mines (Private) Limited operates a gold mine in the Shamva area of Zimbabwe.

During the year ended 31st December 2010, Peachy Mines (Private) Ltd borrowed Usd
$50 million from the holding company to finance an expansion programme for the
mine
The parent company seconded a mining engineer from Australia to oversee the
expansion programme.

The income statement for the year ended 31st December 2010 reflected a net profit
before tax figure of $500,000. The debits and credits to the income statement
included the following:

Credits:
$
Bank interest (net of withholding tax) 6,000
Exchange gains 120,000
Profit on sale of assets 35,000
Debits
Depreciation 26,000
General expenses 10,000
Interest payable to parent company 240,000
Management fees payable to parent company 200,000
Other allowable mine development expenditure 2,500,000
Total expenses claimed 2,976,000

Other information:
1. Debt to equity ratio
The equity of the company is $10million
2. Exchange gains
This amount was made up of $90,000 unrealised exchange gains and $30,000 realised
exchange gains relating to the mining operations.
3. General expenses
This amount was paid to the Bindura Mayor's Christmas Cheer Fund.
4. Profit on sale of asset
A generator which was purchased by the company for $5,000 in April 2009 was sold
during the year for $40,000
5. Interest payable to parent company
The amount was paid to the holding company through the company's foreign currency
account.
6. Management fees payable to parent company
This is a general management fee payable to the holding company in respect of
technical advice received on the mine. The amount was paid to the holding company
through the company's foreign currency account.
Additions to fixed assets
The following capital expenditure was incurred during the year ended 31st December
2010:
Extension to mine hospital 200,000
Construction of guest house 50,000
House for mine manager 60,000
House for nurse employed at mine hospital 65,000
House for school teacher employed at mine school 68,000
Mine office canteen 45,000
Mine school block constructed 120,000
Mine equipment 250,000
Nissan hard body double cab pickup truck for mine manager 12,000

REQUIRED
(i) Compute the capital redemption allowance the year ended 31st December 2010
using the new mine basis. 9 MARKS
(ii) Calculate the minimum tax payable by the company for the year ended 31 st

December 2010. 14 MARKS

(iii) Discuss the withholding tax implications associated with the payment of
interest and management fees to the holding company (2 marks)