New Zealand: Tougher tax regime for specified mineral mining

Brief Counsel

Fewer tax breaks and higher royalties are on the cards in the government's minerals review. Submissions are due by 7 December 2012.

We comment in this Brief Counsel on the tax changes. We will publish a companion commentary on the proposed royalty changes tomorrow.

Key changes

The tax changes are proposed to come into effect from the 2014/15 tax year. The only exception is that the special tax rules applying to the grouping and carrying forward of specified mineral mining tax losses would continue to apply to existing losses. The royalty changes would have effect only for new mining activity.

Removing concessions

The Tax Paper is up-front about the purpose of the proposals, which is to remove most of the concessionary elements of the specified minerals mining regime. This is consistent with a broad base low rate tax system, which endeavours to ensure that tax has as little effect as possible on the allocation of capital in the economy.

To that end, the Paper proposes to:

  • remove the ability for mining companies to deduct mining exploration or development expenditure up to two years before it is incurred
  • defer the deduction for expenditure on acquiring land for mining purposes until the land is sold
  • recapture deductions for exploration and development expenditure in relation to items which are used for development of an operational mine, and require the expenditure to be spread over the life of the mine on a unit of production basis
  • require mine development expenditure to be spread over the life of a mine, either on a unit of production basis (for items whose life is tied to that of the mine) or under the depreciation rules
  • apply ordinary capital/revenue rules to determine the deductibility of costs incurred in operating a mine – eg costs incurred in acquiring a depreciable asset would be deductible under the ordinary depreciation rules
  • repeal the special rules allowing a corporate shareholder in a mining company a deduction for losses on loans made to the company, if the loans are used to fund mining activities, and
  • remove the ability for a company which has not maintained 49% continuity of ownership to carry forward mining losses to offset mining income from the same permit area. Instead mining losses would have the same status as other losses.


In some respects, the proposals seem to go further than is required to put mining on a level playing field with other business activities. In particular, the Paper proposes that:

  • all land acquired for mining would be on revenue account, and
  • proceeds of sale of assets whose economic life is tied to the life of a mine will be fully taxable on sale. Usually, there is no tax on the proceeds of sale of a capital asset to the extent that they exceed the asset's original cost.

Remaining and new concessions

The Paper proposes that prospecting and exploration expenditure continue to be deductible as incurred, which is the same treatment as applies in the petroleum mining regime, and would be the case in any event for many taxpayers (though it is not necessarily the case for non-petroleum non-specified mining).

It also proposes that miners with remedial or restoration obligations be able to take a deduction for these obligations before they are incurred, in the same way as can currently be done for Environmental Restoration Accounts under subpart EK of the Income Tax Act.


Taxation of land

The proposal to put all mining-related land on revenue account is justified on the basis that land values may be affected by the discovery of minerals, or by their removal from the land. However, the proposals also mean that non-mineral related changes in value are also taken into account.

An alternative approach, which applies to forestry taxation, is to require transaction values to be apportioned between the value of the land minus the minerals, and the value of the minerals. Only the latter component is taxable or deductible.

Treatment of development-phase expenditure

The requirement for development-phase expenditure, including depreciation on assets used in the development, to be capitalised is sensible enough. However, miners will presumably not want this requirement to apply to interest expense, which is never required to be capitalised for tax purposes.

Units of production method

The "units of production" method for spreading capital expenditure may be difficult to apply, particularly for smaller miners. It might reduce compliance costs to allow taxpayers the alternative of applying either a "life of the permit" approach, or spreading over a fixed number of years, such as applies to petroleum mining (where the period is seven years).


While rehabilitation may occur on an on-going basis, in other circumstances it is very much back-ended. This can create an issue, in that if the tax system ignores a miner's rehabilitation obligations until they are actually paid:

  • income from current operations will be overstated and hence overtaxed, and
  • there may be no income against which to offset the rehabilitation expenditure when it is incurred.

Subpart EK already addresses this issue in relation to expenditure to deal with the discharge of contaminants. This allows a deduction for such expenditure before it is incurred so long as it is provided for in the person's financial accounts. However, it requires the person to pay to the Government an amount equal to the tax benefit of the deduction in the year it is claimed.

When the time comes to actually pay out the amounts provided for, the person claims back the amount deposited (plus interest at 3% pa). This gives rise to income, which is presumably counterbalanced by a deduction for the actual expenditure at that time.

An issue which the Paper fails to discuss in this context is when such expenditure is "incurred". The assumption appears to be that in this context, "incurred" will match up fairly closely with "paid". At the earliest, it seems to envisage that restoration expenditure will not be incurred until there is a legal liability to the provider of a particular good or service.

This assumption will not always be correct. If a miner has a statutory or contractual obligation to undertake remedial work, then it is likely that the cost of that remedial work is incurred as the mining work is undertaken which makes that remedial work necessary. This is a straightforward application of the principles illustrated by the Privy Council's decision in Mitsubishi Motors, where Mitsubishi was found to incur new car warranty costs at the time it sold the relevant vehicles.

While the ability to access deductions as proposed may be useful for some miners, it would also be useful to have some recognition from the government as to the conventional application of the "incurred" test in this area.


The proposal to require "current regime" losses to be ring-fenced imposes considerable compliance costs on miners. A reasonable quid pro quo for accepting these changes would surely be to allow such losses to become treated as ordinary losses, in the same way as new mining losses will be.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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