In brief
A recent SCA judgment in Assmang v SARS is a sharp reminder that diesel refunds can turn on two make or break issues: whether your contractor pricing is truly "dry" in substance and whether your records give SARS a clean audit trail from purchase to use. The court looked past the paperwork to the real working arrangement and found the refunds could not stand, with big cost consequences, making this essential reading for any business relying on rebates or contractor structures.
In more detail
In Assmang (Pty) Ltd v CSARS and Others (311/2024) [2025] ZASCA 121, at the heart of the matter is an inquiry as to whether Assmang contracted with its service providers (Moolmans, Blue Sky and Blue) on a "wet" or "dry" basis – a distinction that would determine its eligibility for diesel refunds from The Commissioner of South African Revenue Services (SARS). "Eligibility" in this context also required demonstrating that Assmang's bookkeeping complied with the rebate provisions in the Customs and Excise Act 91 of 1964 ("Act").
Schedule 1 to the Act mandates fuel levies on diesel that is either imported or produced in South Africa. As per section 75(1A) of the Act, a refund claim on the levies is permitted if the fuel is utilised in the manner prescribed by section 75 and Note 6 of item 670.04 in Part 3 of the Schedule 6 of the act.
What are Wet and Dry Rates?
Dry Rate: The mine (Assmang) supplies diesel to contractors, and there is no recovery of diesel costs from the contractor. Only in this scenario can the mine claim a diesel refund.
Wet Rate: The contractor supplies its own diesel, and the mine pays a fixed rate for services, excluding diesel costs. No refund is available in this case.
The above restrictions have led to entities finding other means to convert "wet" rates to "dry" rates to claim a refund.
Background:
Assmang, carries out its mining business in the Northern Cape of South Africa. As part of its operations, the entity also engages various contractors who provide mining services. From time to time, some of the diesel used by the contractors for primary production activities was subject to a refund from SARS.
Before claiming the refunds, in 2011, Assmang approached SARS for a ruling on whether a diesel refund in respect of the contractors could be claimed in terms of rebate. After conducting a refund audit SARS issued an amended letter of demand on 04 July 2014 seeking repayment on diesel refunds, plus interest as well as penalties totaling R39 566 010.40. Assmang's appeal was dismissed in the High Court(HC), leading to the current judgement in the Supreme Court of Appeal (SCA).
SCA:
SARS noted that the refund process was set up to make mines internationally competitive by providing for the provision of refunds on diesel and to ensure that the refund system was not being abused. The legislation prescribes SARS to monitor the: (i) purchase, (ii) the dispensing, (iii) and the usage of the diesel to carry out primary activities. Assmang had to ensure that no more diesel than is actually used can be claimed. Thus, to prevent the abuse of the refund, a very strict bookkeeping requirement is placed on those who seek a refund.
The court noted that for Assmang to be able to claim the refund on the fuel levies, the following needs to be demonstrated:
- The fuel was for primary production
- It supplied the fuel from eligible purchases
- The contractors who purchased Assmang's fuel were contracted on a "dry basis"
- That Assmang complied with the record keeping requirements in respect of its logbooks which would enable SARS to ascertain whether Assmang was entitled to a refund.
How did the SCA analyse the Contracts?
The SCA looked beyond the contract and instead turned to the actual practice between Assmang and its contractors.
Fuel Supply and Invoicing: Assmang arranged for Engen to supply diesel at a discounted rate, which was dispensed at the mine. While Assmang paid Engen directly, the cost of diesel was then deducted from the contractors' invoices.
Contractual Caps: For Blue Sky, the contract capped diesel at 33% of the total contract price, with a fixed rate for non-diesel services and a fluctuating rate for diesel. The amount for diesel was deducted from payment certificates. Moolmans had a similar arrangement, with a 31% cap.
Incentives and Deductions: The contracts included mechanisms to penalise excessive diesel use and reward efficiency. If contractors used less than the cap, they benefited financially; if they used more, they were penalised financially.
Ownership and Recovery: Assmang argued that ownership of the diesel never passed to the contractors and that deductions were incentives, not payments for fuel. However, the court found that the deductions from contractors' invoices amounted to recovery of diesel costs, making these "wet" rate contracts in substance rather than "dry" rate.
Reyling on Canyon Resources (Pty) Ltd v The Commissioner for the South African Revenue Service (68281/2016) delivered on 27 March 2019 ("Canyon Resources"), the coal mine purchased diesel from the supplier directly and authorised its contractors to place orders from the supplier. The wet rate was then apparently 'converted' to a dry rate by the contractor passing credit notes in favour of the mine. However, the court in Canyon Resources found that the credit note was a bookkeeping exercise and that the contractor was essentially purchasing the fuel. Furthermore, this "conversion" from "wet" to "dry" was merely an attempt to claim a rebate.
Applying this reasoning, Assmang essentially purchased the fuel but received a credit or reduction from the contractors. This was contrary to the what the legislation states, if a contractor is engaged on a "dry basis", there should be no recovery. Thus, it was a non-eligible purchase. Ultimately, the SCA agreed with the HC's findings and concluded that Assmang contracted on a "wet basis" as opposed to a "dry basis".
Bookkeeping requirements:
A further issue was Assmang's bookkeeping. The SCA found that Assmang's bookkeeping system was insufficient and did not substantively comply with Note 6(q) of Part 3.
The record keeping requirements were amended on 01 April 2013 when the definition of a "logbook" came into operation. The provisions require systematic, detailed logbooks showing the source, use, and allocation of diesel, including eligible and non-eligible operations.
In this regard, Assmang relied on the Liquid Automation System (LAS). The issue with the LAS system is that once the fuel was dispended with, no further records were kept. The system only recorded the quantity of diesel supplied to the contractor and nothing more. Thus, it could not be said with certainty whether the fuel was used for an approved activity or not. Assmang argued that when the definition came into effect, it was in the last 7 months of its contract. The court disagreed and noted that, although there was no definition of a logbook at the time the operations were carried out, Assmang should have attributed the normal meaning of the "logbook" and there should have been sufficient details on the fuel from purchase to consumption. Assmang's records did not meet this standard, making it impossible for SARS to verify the legitimacy of the refund claims.
Constitutional challenge
On the note of the constitutional challenge, section 75(1A)(f) of the Act provides for the payment of interest on any outstanding diesel fuel levies. However, SARS is not liable to pay the interest on any outstanding diesel refunds due to taxpayers. Assmang disagreed, remarking that it is an arbitrary deprivation that imposes on the taxpayer's constitutional right to equal treatment before the law and their right to property. Assmang also sought an order that they should be entitled to interest regardless of whether its unpaid rebate claims were liquidated or unliquidated claims. To this end, the court relied on Prince v President, Cape Law Society, and Others 2001 (2) SA 388 (CC); 2001 (1) SACR 217; 2001 (2) BCLR 133; [2000] ZACC 28 and stated that a constitutional challenge cannot be raised years later without a factual foundation. It undermines the procedural integrity of the litigation and should have been raised at the time that legal proceedings were instituted.
The lack of evidence coupled with the late introduction of the amendment and failure to submit a supplementary affidavit setting out the factual basis on which the constitutional challenge was sought was detrimental to the constitutional challenge and thus failed. The court determined that Assmang was not entitled to the diesel refund and that the constitutional challenge was not pleaded properly before the SCA.
The appeal was dismissed and Assmang had to pay costs.
Possible relief?
Recently, SARS introduced a proposed Voluntary Disclosure Relief programme (VDR) specifically for the Act. Previously, entities wanting to come clean on Customs non-compliance had to rely on provisions under the Voluntary Disclosure Programme (VDP) in the Tax Administration Act, 2011, which was not tailored for Customs matters. The VDR aims to provide a more practical and focused mechanism for businesses to regularise their customs position. Importantly, SARS tends to be more lenient where an entity voluntarily discloses non-compliance using the relevant disclosure programme in the prescribed manner. Looking at the draft provisions, this relief could have been a lifeline for companies like Assmang, which faced significant penalties for non-compliance. While the VDR was not available at the time of Assmang's case, its introduction signals a shift towards encouraging transparency and proactive compliance. Businesses should take note: if you identify gaps in your customs processes, using the processes such as the VDR (once in force) early can mitigate risk and avoid severe financial consequences.
What does this mean for South African Businesses?
This judgment emphasises that compliance is not just a tick-box exercise—it is decisive. The case demonstrates the importance of adhering to SARS's strict documentation and procedural requirements. Anything less can be detrimental for businesses. Good record-keeping is imperative, as SARS can audit a business at any moment. Companies and advisors should make sure contracts and rebate claims are structured correctly and supported by complete records. SARS is particular about having a clear audit trail, so businesses should implement systems that track diesel from purchase to use and review contracts regularly.
Recently, SARS announced a comprehensive overhaul of the diesel refund system, the first major reform since its inception in 2001. This revamp is driven by long standing technical challenges and administrative inefficiencies that made the previous system onerous and difficult to comply with. Many businesses struggled to meet the strict logbook requirements demanded by SARS, which contributed to the compliance issues highlighted in the Assmang SCA judgement. With the introduction of a simplified logbook and a more accessible compliance framework, taxpayers may experience materially different outcomes in future diesel refund disputes when compared with the position in the Assmang SCA case.
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Limani Mangaliso, Trainee Solicitor, has contributed to this legal update.