A government paper proposes to reform the tax regime for specified mineral mining, with the main change being the introduction of limitations on claiming upfront deductions for mining costs.
This paper has been released at the same time as another reviewing the royalty arrangements for minerals from the Ministry of Business, Innovation & Employment.
The tax proposals will apply to miners of copper, gold, iron sands, silver and platinum metals (and other minerals included in the current definition of "specified mineral" in the Income Tax Act 2007), with effect from the start of the 2014-15 income year.
They will not apply to miners of oil, gas and coal.
The current regime and its perceived problems
The current tax regime permits the claiming of upfront deductions for prospecting, exploration, development and reinstatement expenditure, as well as for amounts which are set aside by taxpayers for such expenditure within a two-year period.
The entitlement to upfront deductions is said by the officials to result in specified mineral miners being able to defer tax payments to a greater extent than all other taxpayers.
The government justifies reforming the rules on the basis that the concessionary treatment may distort investment decisions, and that they are necessary for the government to obtain a "fair" level of tax revenue from the mining sector.
The proposed regime
The paper proposes a new regime which generally puts an end to the ability to deduct mining costs upfront.
Under the proposed regime:
- The ability to deduct prospecting expenditure upfront will continue.
- Exploration expenditure will also continue to be deductible upfront, but those deductions will be clawed back in the income year in which an operational mine is established. That clawed-back expenditure would then be deductible over the life of the mine based on the proportion of the total estimated production of the mine which occurs in each income year (ie, a "unit of production" basis).
- Expenditure incurred in extracting specified minerals during the operational phase will be deductible when incurred, subject to ordinary deductibility criteria being satisfied. In particular, capital expenditure will not be deductible, absent a tax depreciation entitlement.
- Reinstatement expenditure will only be deductible when incurred, although a deduction may be claimed earlier if such amounts are paid to the IRD ahead of that expenditure being actually incurred.
The proposed regime will also deem all land acquired in the prospecting, exploration and development phase to be held on revenue account.
If the value of the land falls below cost because of the extraction of underlying minerals, that loss in value will be deductible in the income year in which the land is disposed of. Equally, any gain realised on disposal of the land will be taxable in the year of disposal.
Expenditure on capital assets during the operational phase (ie, after the prospecting and exploration phases) will be deductible over time. In particular, expenditure on assets with a life that is tied to the life of the mine will be spread over the life of the mine, most likely on a "unit of production" basis.
Consideration derived from the sale of those assets will be taxable, with a deduction allowed in the year of sale for the unamortised portion of the cost of the asset.
For expenditure incurred during the operational phase on assets with useful lives that have no relationship with that of the mine (eg, motor vehicles, certain equipment), the general tax depreciation rules will apply.
The issues paper also proposes to repeal the current limitations concerning the use and grouping of tax losses. However, tax losses generated under the current rules will continue to be subject to the current restrictions.
The government is not proposing transitional rules for taxpayers affected by the changes and no grandparenting for existing mines is being offered at this stage.
Submissions on the proposal are open
The proposals are significant and will almost certainly result in specified mineral miners paying tax earlier than they currently do.
The cut-off date for submissions on the proposals is December 7, 2012.
Mathew McKay is a partner and Graham Murray a senior associate at law firm Bell Gully.