Chapter 2 - Background

2.1 The Income Tax Act 2007 differentiates between specified minerals (which include gold, silver and iron sands) and other minerals (including oil, gas and coal). The current tax rules that apply to a specified mineral miner allow an immediate tax deduction for:

  • prospecting, exploration and development expenditure, including expenditure on capital items like plant, machinery and production facilities; and
  • an amount set aside (appropriated) for mining exploration or mining development, if it is to be applied for these purposes within the next two years. The amount that can be appropriated is limited to the company’s net income for the year.

2.2 The current tax rules for specified mineral mining are therefore concessionary compared with most other sectors, including petroleum mining which also has a concessionary regime. This is because the current rules essentially allow an immediate deduction for capital expenditure and expenditure that has not yet been incurred. Under general tax principles, deductions for this expenditure should be deferred and allowed over the economic life of the asset that is being created (that is, a productive mine).

2.3 The objective of this review is to create a more neutral tax treatment for specified mineral miners by aligning those activities with general tax principles.

2.4 This objective is consistent with the Government’s Revenue Strategy outlined in Budget 2012, which states that:

The tax system should be as fair and efficient as possible in raising the revenue required to meet the Government's needs. The Government supports a broad-base, low-rate tax system that minimises economic distortions.[1]

2.5 New Zealand’s broad tax bases and relatively low tax rates make the tax system among the most coherent in the OECD. This promotes efficiency and fairness. Industry-specific tax concessions are inconsistent with a broad-base, low rate tax system.

2.6 Specifically, the current tax concessions for specified minerals may bias investment into the sector and away from other investments that offer higher pre-tax rates of return. When this happens, New Zealand’s capital stock becomes less productive and economic performance could be adversely affected.

2.7 The Government also wishes to ensure that the Crown is receiving a fair financial return from the development of the nation’s mineral resources. This return primarily comes from income tax and royalties.

2.8 Aligning the tax rules that apply to specified mineral miners with general tax principles should help ensure, from a tax perspective, that the Government receives a fair rate of return from the specified mineral mining sector and that investment decisions are made more efficiently.


1Budget 2012, Fiscal Strategy Report, pg 17.