Confirmed legislative changes for the taxation of mining.
In October last year Inland Revenue completed its review of the income tax rules that apply to the mining of specified minerals and released a discussion document which proposed to remove certain tax concessions. The proposed changes have now been included in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill introduced to Parliament on 20 May 2013.
The changes are largely as outlined in the original discussion document with a few changes resulting from submissions received.
Under the Bill, the current rules that apply to companies that mine specified minerals will be repealed and replaced. The new rules will apply to all persons (to be known as “mineral miners”), not just companies. A mineral miner is a person whose only or main source of income is from mining related activities or whose only or main activity is mining related.
The term “specified minerals” has been dropped and replaced with “listed industrial minerals”, but the composition of the list remains unchanged and currently includes just under 50 minerals – including most metals (such as gold, silver and platinum).
One of the key tax benefits of the existing specified mineral mining regime is that a mining company is able to claim a deduction for all of its prospecting, 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 new rules a mineral miner will still be able to claim these deductions for the prospecting and exploration phases, but exploration deductions will be clawed back and treated as development expenditure once a mine is developed for items which continue to be used to extract minerals.
A deduction will 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 minerals which are not listed industrial minerals.
Profits may currently be deferred for up to two years provided the taxpayer intends to reinvest the profits in further exploration or development. Under the new rules this concession is being removed. However, Inland Revenue have recognised that some mining companies may have significant amounts already appropriated under these rules and could end up with large unexpected tax liabilities on their repeal. As such a transitional rule has been introduced allowing the resulting income to be allocated evenly between the 2015 and 2016 income years.
A further 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. Other mineral mining assets (such as mining or prospecting rights and exploration, prospecting or mining permits) will also be treated as being revenue account property.
There are also changes for rehabilitation expenditure incurred to restore or make safe land once mining activities have ceased, or where land is sold for a loss. To the extent that the mineral miner is in overall losses a refundable tax credit will be created. This credit is capped at the amount of tax payable in relation to the land or permit in prior years. This mechanism essentially allows an unusable loss to be cashed up and is in effect a loss carry back mechanism. The new rule is more favourable than the approach in the discussion document which was similar to environmental restoration accounts and required payments to be made in earlier years.
There are currently specific anti-avoidance rules that relate to petroleum miners. These will be expanded to include mineral miners, in recognition of the similarities between the two industries.
A number of changes have also been made to how farm-out arrangements are treated for income tax purposes.
The new mineral mining rules, once enacted, will apply for the 2014-15 and later income years.
Tax Alert June 2013 contents:
- Tax Alert June 2013
- Further Reforms to the Tax Treatment of Land-Related Lease Payments: Shifting the Capital-Revenue Boundary?
- Do your facts stack up? Don’t Google it!
- New foreign super and mineral mining bill introduced
- Foreign superannuation rules overhauled
- Clarifying the acquisition date of land: Certainty please
- Confirmed legislative changes for the taxation of mining