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Changes loom for mining taxation

Author: Don MacKenzie

The Inland Revenue has completed its review of the tax rules which currently apply to specified minerals.  The output from this review is the release of a discussion document which proposes to remove certain tax concessions.  At the same time the Ministry of Business, Innovation & Employment released a discussion document which proposes to increase royalties payable to the government by mining companies.

Specified minerals are defined in the Income Tax Act and currently include 46 minerals – including most metals (such as gold, silver and platinum).  The current regime is essentially unchanged since the 1970’s and is very concessionary to taxpayers.

The Government’s motivation for the reviews was that not enough revenue is collected from those involved in the industry.  The mining industry is an easy target for the Government as it has proven itself to be reasonably recession proof during the recent global financial crisis.

One of the key tax benefits of the current regime is that a mining company is able to claim a deduction for all of its exploration and development expenditure in the year it is incurred.   A deduction is even available for what would normally be considered capital expenditure.  Under the proposed changes a mining company will still be able to claim these deductions for the exploration phase, but exploration deductions will be clawed back once a mine is developed for items which continue to be used to extract minerals.

A deduction will also still be allowed for mine development expenditure, but this will be spread over the life of the mine.  This is consistent with the approach currently used for the mining of non-specified minerals.

Profits may currently be deferred for up to two years provided the taxpayer intends to reinvest the profits in further exploration or development.  There is also the ability to defer the tax impact of insurance receipts and the ability for tax losses to be carried forward after a change in shareholding.  Under the proposed changes all of these concessions will be removed.

A further proposed change applies to land acquired for prospecting, exploration or mine development.  This land will be deemed to be revenue account property, meaning that any gain derived on disposal will be taxable, and any loss incurred on disposal will be deductible.

Changes are also proposed for expenditure incurred to restore or make safe land once mining activities have ceased.  A deduction will be allowed for this expenditure, and where a company makes payments to the Inland Revenue in earlier years for the tax effect of expected restoration expenditure there will effectively be a mechanism for carrying these deductions back to profitable periods.

The Government doesn’t just collect corporate tax from mining; it also collects royalties for the minerals extracted.   The royalty discussion paper proposes a number of changes to the current system of mineral royalties.  The current system is a mixture of fixed amounts per tonne and a percentage of annual net sales depending on the mineral being mined. 

The proposed changes will move to the higher of 2% of annual net sales (1% for underground coal gasification) or 10% of accounting profit.  The accounting profit will only be used for coal if it exceeds $2m or for gold and silver if it exceeds $5m.  These changes would only apply to new permits with the existing rates continuing to apply for existing permits.

The discussion document compares the proposed increased royalties and tax rates against those charged in a range of other countries and concludes that New Zealand would still generally have the most competitive mining regime.  In addition the analysis concludes that the increased royalties would only prevent new mining activity in the most marginal of sites.

Submissions on both discussion papers closed on 7 December 2012. 

Acknowledgement: This article was first published in the November issue of NZ Mining. It was written by Don Mackenzie who is a partner in the Christchurch office and is republished here in Tax Alert with due permission.

Tax Alert December 2012 Contents 

 

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