The tax legislation contains several provisions for companies mining 'specified' minerals. The list of specified minerals includes gold and silver but not coal.

Specified minerals

For tax purposes, these companies are required to divide their income and expenses between mining and non-mining activities. The tax rate applicable to both types of income is 33%.

Where the mining activities result in a tax loss, this loss may be set off against income from non-mining activities, although the benefit of the mining loss is reduced by 50%; ie $300 of mining losses are required to be offset against $200 of non-mining income. The reasons for these unusual offset arrangements relate back to a period when mining companies paid a lower rate of tax than ordinary companies.

Mining companies are prohibited from grouping their profits or losses with other mining companies or with non-mining companies.

Despite these limitations, the tax regime for mining companies is generally regarded as concessionary. For example, it allows mining companies to immediately deduct their exploration expenditure and any expenditure incurred in the development of the mining licence. Thus buildings, mine-shafts, plant and machinery, production equipment and storage facilities, which would ordinarily be capitalised under standard accounting conventions, may be deducted immediately for income tax purposes.

These concessions extend to 'associated mining operations', a term which describes facilities situated in New Zealand for the accumulation, initial treatment and transportation of gold up to the stage where gold is in a saleable form and in a location suitable for sale.

Mining companies are also allowed to deduct their estimated expenditure for the next 2 years on exploration and development. The estimate is reversed in the following year and therefore is included as income in that year. The mining company can maintain its deferral however, provided it continues to budget for further exploration and development work.

There is also a concession for carrying tax losses forward. New Zealand companies are usually only permitted to carry losses to the extent that they have 49% continuity of shareholding. However, mining companies are permitted to carry forward their tax losses even where there has been a complete change of ownership, where:

• The losses have resulted from exploration expenditure or development expenditure incurred on licenses which are retained by the company;
• The losses are offset against assessable income arising from mining from the same or geologically contiguous licence areas.

Coal mining companies……

Unlike gold and silver mining, there is no specific tax regime for coal mining.

The IRD is currently reviewing the taxation of coal mining companies, although the Department has not announced a timetable at this stage. Hence, coal mining companies continue to be taxed under the same tax rules as ordinary companies.

Once exception is that special rules apply for the tax deduction mine development and similar expenditure, broadly referred to as 'cost of coal' deductions. Until 1 April 1993, the general practice was to capitalise mine development costs to a 'cost of coal' account and write them off over the life of the mine. These rules still apply, however since 1 April 1993 there has been some overlap with the new tax depreciation regime which generally became effective from this date.

There is now a wider range of assets which can be depreciated under the new depreciation regime, for example, land improvements such as roadways, bridges, tunnels, and reservoirs. The IRD has not yet announced whether coal mining companies can continue to claim 'cost of coal' deductions in respect of this type of expenditure or whether the new tax depreciation rules apply. There are however other technical problems which will need to be addressed by the IRD if the new depreciation regime is to replace the 'cost of coal' method.

In most cases the economic life of assets such as access roads would be the same as the life of the mine. Consequently there should be no difference between the total amount deduction under the 'cost of coal' method and the new depreciation regime. However, coal mining companies may need to apply for special rates of depreciation, which may prove problematic given the inherent difficulty in estimating the economic life of a mine at the outset.

Royalties……

The Crown Minerals Act 1991 contains the right to charge a royalty on any mining permits.

The Ministry of Commerce has recently imposed a royalty on minerals owned by the Crown. The royalty is the greater of 1% ad valorem (value of production) or 5% of accounting profits. The prescription for calculating the ad valorem royalty (AVR) and the accounting profits royalty (APR) is set out in minerals programmes issued by the Ministry in October 1996. Separate documents cover coal and other minerals, though the royalty provisions in both are very similar.

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