Proposed changes to mining companies' tax regime may appear
to remove "concessions" unavailable to other companies, but
in reality, taxes will not necessarily be paid much earlier
if mines are in development phase.
Instead of holding a "stock" of losses from accelerated tax
deductions from development expenses, to later offset tax
liabilities, the value of each tax deduction would have to be
taken, incrementally, into account annually.
However, whether under the existing tax regime, or the new
proposed regime, no tax is paid anyway until a mine produces,
for example, gold.
Under the Government-proposed changes to mining company
taxes, in tandem with a separate royalty rates review, the
Income Tax Act includes a special regime for the taxation of
50 "specified minerals", associate director of tax at
Deloitte in Dunedin, Phil Stevenson said.
"The specified mineral regime is one of the last examples of
`low hanging fruit' in the tax system, ripe for picking," he
While the reforms, proposed in a Taxation of Specified
Mineral Mining paper, are not a revenue-raising measure for
the Government, they will result in some money going to
Government coffers earlier.
"The major effect will be on existing operators who don't
have any tax losses and have a development programme under
way. They will get no [tax] shelter," Mr Stevenson said.
The special regime includes gold, ironsand and silver, while
oil, gas and coal are not specified minerals and are
excluded, he said.
"Businesses operating in this regime are subject to these
special rules, which are generally considered to be very
concessionary," Mr Stevenson said.
Some of the key concessions at present include immediate tax
deductions for expenditure, which would normally be
capitalised and depreciated over the useful life of the mine.
Also, there are tax deductions for money set aside for mining
exploration, or mine development, which will be applied for
those purposes within two years, Mr Stevenson said.
"For example, a miner extracting specified minerals may claim
immediate deductions for expenditure on land, plant or
machinery, production facilities and preparing the site for
mining operations," he said.
At present an existing gold mining company, installing $6
million of production equipment and announcing a separate $8
million drilling programme, can immediately build up $14
million "stock" of tax losses and carry that over,
indefinitely, through several financial years.
Once the mining area in question becomes productive, and the
company begins paying tax, the $14 million of tax losses can
be used to dilute the amount of tax owed on production.
"The overall effect of the [current] specified mineral tax
rules is that a miner's income tax liability can be deferred
for significant periods of time," Mr Stevenson said.
Under the proposed new rules, it appeared companies who have
tax losses from accelerated deductions under the current
rules; such as the $14 million example, would be able to
continue to carry forward those tax losses and use them
against income in future years, as they do at present, Mr
Mr Stevenson said for companies with existing mining
operations it would be "difficult if not impossible" to
recast tax positions taken in prior years, but fortunately it
appears the new rules apply to new expenditure only, meaning
the impact would be minimal on existing miners.
"It appears that the new rules will apply to new expenditure
only and there is no adjustment required on transition to the
new rules," he said.
For the existing miner developing a new area, who is paying
tax on existing gold production, they would not claim the tax
deductions until the new area produced gold, but they would
have to track spending on assets under both the old rules and
"This proposal is an `easy sell' politically. The Government
will not be seen as grabbing [more tax] revenue, while also
seen to be reviewing and correcting a perceived bias within
the tax system," Mr Stevenson said.
He cautioned that the mining-specific tax changes could
however have wider implications later, if for example they
migrated to other tax regimes, which covered farmers or
Should farmers build a fence for example, they could at
present write off the entire cost immediately, but under any
similar changes to their regime they would have claimed that
cost back over time.
Mr Stevenson noted that the mining and production of ore was
"hard on all its equipment" and the Government would have to
make allowances for that when considering depreciation rates.