The Supreme Court of Appeal’s recent decision in Assmang (Pty) Ltd vs The Commissioner for the South African Revenue Service (SARS) has sent a clear and sobering message to taxpayers.
In tax law, substance always trumps form. While this principle is not new, its application in the context of diesel refunds highlights the immense peril taxpayers face. The Assmang diesel refund case illustrates this danger vividly.
This appeal concerned an entitlement to diesel refunds for fuel levies and the Road Accident Fund levy under the Customs and Excise Act 91 of 1964. The dispute culminated in SARS issuing an amended letter of demand dated 4 July 2014. It claimed repayment of diesel refunds, plus interest and penalties, amounting to ZAR 39,566,010.40.
To qualify for the diesel refund, Assmang had to prove three things. First, it was the purchaser of the eligible fuel. Second, the fuel was used in its own eligible primary activities. Third, its logbook system, the Liquid Automation System (LAS), could document that every litre of fuel was ultimately used in these activities.
In the course of its mining business, Assmang contracted with various mining services companies for drilling, loading and hauling of waste material. Although there were several contractors, the appeal was limited to claims related to three.
Wet and dry rate challenges
In the context of services provided by these contractors, the legislation required that the diesel be purchased by the mine, defined as the “user”, and supplied to the contractor without recovery of the cost. This arrangement is referred to as contracting on a “dry basis”.
The commercial difficulty with a strict dry rate is that the contractor would not care about diesel usage, since it was not directly liable for the cost.
By contrast, a “wet rate” meant that the contractor supplied both the plant and the diesel. This arrangement was commercially safer for the mine, as the contractor paid an agreed all-inclusive rate regardless of fuel usage. However, under a wet rate, the mine was no longer the purchaser and user of the fuel, which meant it could not claim a diesel refund. The Assmang diesel refund case revealed how this practical difficulty created legal exposure.
The contracts between Assmang and its contractors provided for both wet and dry quotes. Under a wet rate, the cost of diesel consumed by the contractor each month was deducted from the payment certificate or an Excel spreadsheet. The contractor then invoiced a net amount to Assmang. Under a dry rate, the cost of diesel was also deducted from the Excel calculation. The contractor then issued an invoice to Assmang for the net amount.
Assmang argued that because the wet rate quote contained both plant hire and diesel costs, the deduction meant it only paid for plant hire. It stressed that it purchased the diesel and supplied it to the contractor. At no point, it argued, did ownership of the diesel pass. Therefore, the services were provided on a dry basis.
Efficiency clauses and contractual structure
The contracts also capped diesel usage. Excessive use in a month by the contractor resulted in a penalty.
Conversely, a contractor could profit from fuel efficiency through a better hire rate. These clauses incentivised efficiency and discouraged waste. They also suggested that Assmang, not the contractor, was responsible for fuel supply.
Structuring the agreement this way reflected the economic reality of high operational costs. Without parameters around fuel consumption, the mine risked financial hardship.
Court findings and Canyon Resources comparison
Despite these arguments, the SCA was unconvinced. The court noted that the conversion of wet rates to dry rates was previously addressed by Judge Davis in Canyon Resources (Pty) Ltd vs The Commissioner for the South African Revenue Service. In that case, contractors attempted to convert wet rates to dry rates by passing credit notes for diesel used. Judge Davis ruled that this was only a bookkeeping exercise. The contractor was, in fact, purchasing the fuel.
The SCA found Assmang’s method to be similar. Instead of credit notes, Assmang used spreadsheets to calculate what contractors owed each month for fuel. The net effect was the same. The court held that contractors, not Assmang, carried the risk of fuel price fluctuations and efficiency. The financial reality was that a wet rate was contracted. The fuel was not supplied for free. Moreover, the capped system allowed contractors to profit from diesel supplied by Assmang.
Even more damaging was a gap in evidence. Assmang could not prove what the diesel was used for after it was dispensed. Proving use for “eligible purposes” is central to diesel rebate claims. Users must maintain meticulous records, tracking each litre of fuel to its final use.
Assmang contended that the LAS recorded key details: quantity of diesel dispensed, price, time and date, and recipient. Since each piece of equipment had a unique number, Assmang argued that diesel dispensed into a drill rig should reasonably be assumed to have been used for drilling.
The SCA disagreed. It found the LAS tracked fuel only up to the point of supply to contractors. There were no records beyond that point to prove the diesel was used in qualifying primary activities.
The court concluded:
The records relate to the dispensing of fuel, but no other information is provided on how and for what purpose the relevant vehicles and other equipment was used upon filling up. It is not sufficient to make ‘a reasonable assumption’. Note 6(q) of Part 3 of Schedule 6 of the Act requires specific detail which is essential to ascertain whether the fuel was utilised for an approved activity and the quantification thereof. In the absence thereof…
Broader implications
The Assmang judgment underscored a significant conflict between commercial prudence and rigid tax requirements. The very mechanisms a mine uses to control costs and incentivise efficiency are the same mechanisms that disqualify it from claiming a diesel refund. The Assmang diesel refund case demonstrates this tension clearly.
The decision effectively forces taxpayers into commercially less desirable “true dry” contracts to access the refund. This happens without regard for the economic and operational realities in which these laws function. The high standard of record-keeping set by the SCA creates a heavy compliance burden.
Mines must adopt close oversight and detailed records of contractors’ operations, which may be impractical. This also complicates the commercial relationship. Excessive oversight, although required by law, could cause retaliation from contractors and even fuel wastage.
A call for reform
Perhaps this situation calls for legislative or administrative reform. The focus should shift from the contractual form of diesel supply to the verifiable, substantive use of fuel.
If a taxpayer can prove through a robust and integrated electronic system that every litre of diesel was used in a qualifying activity, the contract type should be secondary. The Assmang diesel refund case makes this need for reform even more urgent.
 Joon Chong | Partner | mail me | |
 Nirvasha Singh | Partner | mail me | |
| | Webber Wentzel | | |
