Chapter 1 - Introduction
1.1 Currently the Income Tax Act 2007 differentiates between specified minerals (which include gold, iron sand and silver) and other minerals (including oil, gas and coal).
1.2 The specified mineral mining tax rules effectively allow immediate deductions for expenditure that would normally be capitalised and depreciated over the useful life of the asset, and in certain circumstances allow expenditure to be deducted in anticipation of it being incurred.
1.3 The overall effect of the rules is that a miner’s income tax liability can be deferred for significant periods of time. This is concessionary compared with the tax treatment of most other forms of investment.
1.4 This issues paper suggests repealing the current specified mineral mining tax regime and replacing it with rules that are more aligned with general tax principles. The paper seeks readers’ views on the suggested rules and how the suggested rules might work in practice.
Purpose of the review
1.5 The purpose of the review is to align the tax rules that apply to specified mineral miners with general tax principles. This review was announced as part of the Government’s Tax Policy Work Programme in March 2012.
1.6 Tax concessions are generally inconsistent with the Government’s general broad-base, low-rate tax policy framework. Not only do concessions narrow the Government’s tax base, they also tend to reduce capital productivity. In this case, they do so by subsidising investment in specified minerals, which encourages investment in this activity ahead of other investment which may have higher pre-tax rates of return.
1.7 The changes suggested in this paper are broadly consistent with the tax rules applying to most other business activities, and from a tax prospective, are intended to make investment decisions more efficient.
Summary of suggested new rules
1.8 The key changes discussed in this issues paper are:
- Continue to allow immediate tax deductions for prospecting and exploration expenditure. However, on the establishment of an operational mine, exploration expenditure on items used for the extraction of minerals will be clawed back and be deductible over the life of the mine.
- Tax deductions for development expenditure will be deferred and allowed over the life of the mine on a unit-of-production basis.
- Expenditure incurred in the extraction of minerals will be subject to ordinary capital/revenue tax rules.
- A tax deduction for restoration expenditure will be allowed in the year it is incurred. However, a tax deduction will be allowed for payments made to Inland Revenue in advance for expected restoration costs.
- So-called “revenue account treatment” will apply to land acquired for specified mineral mining. That is, sale proceeds will be taxable and the cost of acquiring and disposing of the land will be deductible.
- Tax deductions for expenditure on assets whose economic life is tied to the life of the mine (excluding expenditure incurred in the prospecting and exploration phases) will be spread over the life of the mine, on a unit-of-production basis. When these assets are sold or disposed of, the consideration will be taxable in the year of disposal, less the balance of the miner’s costs associated with the asset.
- General tax depreciation rules will apply to expenditure on assets with a useful life independent of the life of the mine. Normal depreciation recovery rules will apply to the sale or disposal of these assets.
Points for submissions
- Are there any aspects of the mining process that are not covered adequately by the suggested new rules?
- Are there any aspects of the suggested new rules that will create unwarranted compliance costs?
- In relation to the suggested claw-back rule for exploration expenditure, what exploration expenditure is likely to be clawed back, and is the scope of the claw-back rule appropriate?
- Will the unit of production method for spreading deductions over the life of the mine result in undue compliance costs for certain mineral miners?
- When considering the unit of production method is there a more appropriate method of accounting for additional development expenditure or changes in mineral reserves?
1.9 Submissions will be taken into account when officials report to the Government on recommended changes. Any resulting legislative changes are likely to be included in a future tax bill.
How to make a submission
1.10 Submissions should be addressed to:
Specified minerals tax review
C/- Deputy Commissioner Policy
Policy Advice Division
Inland Revenue Department
P O Box 2198
Alternatively, submissions can be made by e-mailing [email protected] with “Specified minerals tax review” in the subject line.
1.11 The closing date for submissions is 7 December 2012.
1.12 Submissions should include a brief summary of major points and recommendations. They should also indicate whether the authors are happy to be contacted by officials to discuss the points raised, if required.
1.13 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason will be determined in accordance with that Act. You should make it clear if you consider any part your submission should be withheld under the Official Information Act.