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Searching for gold and other minerals – proposed tax change
Mining has the potential to play an important role in the growth of New Zealand’s economy. Mining requires significant capital investment, and to attract capital, tax incentives are important.
The life cycle of a mining operation has 4 distinct phases (each with different cash and tax profiles):
- Prospecting – the preliminary search for minerals. This usually has low land impact.
- Exploration – quantifying the potential size and value of the minerals. It may include a feasibility study.
- Development and mining – constructing the mining and associated facilities, and operating the mine.
- Rehabilitation – once the mining is complete the land is restored for use by others.
On 31 October 2012, Inland Revenue and Treasury released an issues paper on the taxation of specified mineral mining. The list of “specified minerals” covers 50 minerals including gold, silver, iron sands and phosphates. Other minerals such as coal, and oil and gas are subject to different tax rules
The proposed changes will radically alter the current tax treatment of specified mining operations, and will broadly align the mineral mining, and oil and gas tax regimes.
We contrast the proposed changes below with the current mineral mining, and oil and gas tax regimes.
|Item||A. Specified minerals: Current tax treatment||B. Specified minerals: Proposed tax treatment||C. Oil and gas: Current tax treatment|
|Prospecting expenditure||Same as B||Deductible in year incurred|| |
Same as B
|Exploration expenditure||Deductible in year incurred||Deductible in year incurred. However, on the establishment of an operational mine, exploration expenditure on items used for the extraction of minerals is clawed back and is deductible over the life of the mine||Same as B|
|Development expenditure||Deductible in year incurred||Defer tax deductions and allow these over the life of the mine, on a unit-of-production basis||Same as B, although option to deduct over 7 years|
|Appropriated expenditure||Future planned exloration or development expenditure is deductible in advance||Not deductible in advance||Not deductible in advance|
|Mining operating expenditure||Deductible in year incurred||Normal/capital revenue tax rules||Same as B|
|Rehabilitation expenditure||Deductible in year incurred||Allow a tax deduction in the year the expenditure is incurred. However a tax deduction would be allowed earlier for payments made to Inland Revenue in advance for expected restoration costs||Deductible in year incurred. Ability to carry back to previous income years|
|Sale of land used for mining||Sale proceeds taxable, but immediate deduction in year land acquired||Sale proceeds taxable and the cost of land deductible in year of sale||Normal capital/revenue rules for land|
|Assets with a life tied to the life of the mine||Deductible in year acquired as either exploration or development expenditure|| Deductible over the life of the mine, on a unit-of-production bases (excludes prospecting and exploration expenditure). |
Sale proceeds taxable in year of sale less deduction for unamortised cost.
|Similar treatment to B, but option of deduct over seven years|
|Assets with a life independent of the mine||Normal tax depreciation rules apply|| |
Normal tax depreciation rules
During the development phase depreciation deductions would be capitalised and amortised over the life of the mine on a unit-of-production bases
|Normal tax depreciation rules|
|Tax losses||Losses from a permit area can be carried forward if shareholder continuity is breached||Normal rules||Normal rules, except for ring fence of foreign mining losses|
|Consolidation||Only consolidate with other minderal mining companies||Normal rules||Normal rules|
|Sale of share||Normal capital/revenue rules apply. Taxable revenue gains may be deferred if reinvested for mining purposes|| Normal capital/revenue rules |
No deferral available
|Sale of mining shares not taxable|
|Loans||Write off of loans to subsidiaries may be deductible by parent||Normal bad debt rules||Normal bad debt rules|
|Farm-out arrangements||No special rules||Special rules||Special rules. These arrangements involve one party undertaking certain exploration or development activities in exchange for an interest in the permit|
For queries relating to mineral mining please contact
Partner – Tax, Auckland
Tel: +64 9 300 7049
Senior Manager – Tax, Christchurch
Tel: +64 3 379 1870
For queries relating to oil and gas please contact:
Executive Director – Tax, Wellington
Tel: +64 4 470 0503