New SARS Guide: How to Correctly Calculate Royalties on Coal Using Calorific Value (IN 138)

This article will count 0.25 units (15 minutes) of unverifiable CPD. Remember to log these units under your membership profile.

If you have clients in the mining sector, especially coal extraction, there’s a new SARS Interpretation Note (IN 138) that you need to know about. It clarifies how to correctly determine the calorific value (CV) of coal for calculating mineral royalties under the Mineral and Petroleum Resources Royalty Act.

This is a hot topic—literally—because the CV tells us how much energy coal produces when burned, and SARS uses this to determine how much royalty is owed to the State.

🔍 What’s IN 138 About?

The royalty system taxes mining companies when they transfer mineral resources, like coal, from within South Africa. But the royalty amount depends on the value of the mineral, and for coal, that value is tied directly to its calorific value.

Coal’s CV must fall between 19.0 MJ/kg and 27.0 MJ/kg, according to Schedule 2 of the Act. If it falls outside this range, SARS requires adjustments to the declared gross sales value — which directly impacts the royalty calculation.

💡 The Problem SARS is Addressing

Until now, there’s been confusion: should the calorific value be measured in the “as-received” (AR) state (wet coal, straight from the mine) or in the “air-dried” (AD) state (dry sample used for lab testing)? Different companies have been using different methods, and some have been underpaying royalties as a result.

✅ Key Takeaways from IN 138

1. Use the “As-Received” (AR) Condition
   SARS confirms that the CV used for royalty calculations must reflect the coal's condition at the time of transfer, usually after basic washing and crushing — not a perfectly dry lab sample.

2. What is AR Coal?
   It’s coal as it leaves the mine — with moisture still in it. This is the real-world version that gets sold, stockpiled, or delivered to buyers. It gives a more accurate picture of its energy value.

3. Why AD Can Be Misleading
   The “air-dried” method dries the coal sample to remove surface moisture, which artificially raises the CV — sometimes above 27 MJ/kg — and can lower the royalty payable. SARS is now tightening up on this.

4. Royalty Still Applies at the First Saleable Point
   That means right after initial beneficiation (like washing or crushing), but before any major upgrades or blending. That’s the moment SARS considers the coal “transferred” and royalty becomes due.

🧮 What Happens If CV is Too High or Too Low?

SARS applies Section 6A(1A) of the Royalty Act:

• If the CV is below 19.0 MJ/kg → SARS adjusts it up to 19.0 for royalty purposes.

• If the CV is above 27.0 MJ/kg → it gets adjusted down to 27.0.

• If it falls within the range → no adjustment is needed.

So yes, even if the contract with the buyer uses a different CV (like 28 MJ/kg AD), SARS uses the AR value at transfer — typically lower, and more reflective of actual conditions.

How IN 138 Affects the Annual Financial Statements

Although IN 138 deals with the tax treatment of royalties under the Mineral and Petroleum Resources Royalty Act, it can still impact the amounts reported in the annual financial statements (AFS). Here’s how:

1. Royalty Expense and Liability Provision
   Since royalties are a deductible tax expense, a change in the calculation method (using the AR calorific value instead of AD) may result in a higher royalty payable. This could affect:

   • The income tax expense in the statement of profit or loss

   • The current tax liability in the balance sheet

2. Disclosure of Estimates and Judgements
   The method used to determine gross sales for royalty purposes (based on AR CV) may require disclosure as a significant estimate or judgement under the tax section of the AFS.

3. Tax Reconciliation
   If the taxable gross sales differ from revenue recognised in terms of IFRS, this difference should be clearly explained in the tax reconciliation note.

📌 In summary: IN 138 affects the measurement of tax-deductible royalties, which in turn may influence tax provisions, disclosures, and reconciliations in the AFS — even though the note itself doesn’t change accounting standards.

📝 Final Word

SARS is clear: use the real-world, as-received calorific value at the point of transfer — not lab-enhanced values. This ensures consistent, fair, and accurate royalty payments across the coal sector.

Need help reviewing your client’s royalty reporting process or checking compliance with the new interpretation? Let’s chat — I can help you make sure everything aligns.