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Opinion: 'Punitive' proposed mining legislation tilts the playing field in favour of the tax collector

Opinion: 'Punitive' proposed mining legislation tilts the playing field in favour of the tax collector
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By David Haywood*

The government’s proposed changes to the tax regime for the mining of gold and other “listed industrial minerals” are impeccably timed.

Just when these miners are down and suffering from a large fall in the price of minerals, they are about to get clobbered by tax changes. The new rules will apply from the income year beginning 1 April 2014. The major minerals affected include gold, silver and iron sand (but not coal which is subject to different tax rules).

The current regime is highly concessionary. It allows an immediate tax deduction for most capital expenditure and, even more generously, a deductible appropriation from taxable profits for expenditure that will be incurred within two years of the tax balance date.


The stated objective of the reform is to achieve a neutral regime which is broadly consistent with the general rules applying to other business activities. However, the proposed legislation actually tilts the playing field in favour of the tax collector and is more punitive than that which applies to most taxpayers.

Two examples:

• A claw back on the deduction for exploration expenditure where it produces an asset that is used by the miner for commercial production. Exploration (and prospecting) spending for a miner is analogous to feasibility expenditure for an ordinary taxpayer. Feasibility expenditure is generally deductible under ordinary tax rules until the point where a commitment is made to go ahead with the relevant project. From then on, expenditure is capitalised. The proposed claw back is unfair and does not promote tax neutrality.

• The deduction for expenditure on rehabilitating a mine site (once the mining phase has concluded) is available only on a “paid” basis rather than the “incurred” basis that applies to the expenditure of most taxpayers (subject to the unexpired expenditure rules). Expenditure will be deductible under the incurred test when there is a definite commitment and it can be reasonably estimated, even if it is not yet payable.

Significant compliance burden

The proposed legislation appears to have been drafted with little regard to either the Australian mineral mining rules or financial reporting principles. Both have been developed over many years of practical experience. The end result of very different rules for tax and accounting purposes will be a significant compliance burden on major mineral mining companies.

Financial reporting principles usually require amortisation of mining development expenditure on an individual mine and resource extraction basis. Broadly, the estimated ounces of ore to be recovered from each physical mine are allocated over the relevant years, based on annual production. By contrast, the proposed legislation adopts a mining permit and life-of-mine basis.

This creates several difficulties. Amortising mining development costs on a permit area basis is problematic if a mining company has multiple mines on a single mining permit or one mine spanning multiple permits.

And a time- based amortisation will produce a fair result only where the extraction amount is at the same level throughout each year of the mine’s life. This will be the exception rather than the rule because the level of extraction depends on many factors such as geology, technology, price, exchange rate, labour, weather, productivity and capital availability.

A big potential problem for the mining industry is “stranded losses” – those with no future income to be used against.

These may arise towards the end of a mining project when there is little income but lumpy outgoings such as rehabilitation of the mine site. In an effort to ameliorate this problem, there will be a mechanism that allows a refund of tax paid on income in relation to a permit area, to the extent that a mineral miner is in a loss position due to rehabilitation expenditure or a loss on disposal of mining land.

But stranded losses can still arise from other aspects of the tax regime such as the proposed amortisation of mining development expenditure on a permit and life of mine basis (as discussed above).

Absurd results

The way mining development expenditure is defined also presents potential difficulties. All costs related to developing a mine permit area up to the date of commercial production will be amortised over the life of the permit area (prospecting and exploration expenditure prior to the development phase are immediately deductible). Mine infrastructure for this purpose includes plant, machinery and vehicles.

This will lead to absurd results as a vehicle acquired the day before commercial production begins must be amortised over the life of the mine permit area while a vehicle acquired the following day will be subject to ordinary depreciation based on the economic life of the asset.

A practical approach is needed so normal depreciation rules apply to assets whose life is not linked to the life of the mine permit even if they are acquired prior to commercial production.

Defer the implementation date

The Finance and Expenditure Select Committee is considering submissions about the proposed legislation.

It is expected to be passed into law early next year and prior to the 2015 income year which starts on 1 April 2014. But for early balance date taxpayers, the legislation will have retrospective effect - for example, the regime will apply from 1 November 2013 for a taxpayer with a 31 October balance date.

The implementation date should be deferred, given the fundamental nature of the changes, the need to implement systems to capture information at source, and the related compliance costs associated with the new regime.

*David Haywood is a tax partner at Ernst & Young.

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It gets worst for the smaller miners. The economic life of the mine combines recoverable reserves with  correlations to gold price and costs of recovery. Recoverable reserves for small concerns are subject to the costs of contracting in Geological experts against reality.

Accordingly there are no degrees of certainty in the new method with real additional costs. Perhaps IRD will be able to forecast gold prices, USD/NZD exchange rates and the cost of diesel  for the next say ten years, as well as a reliable cheap sampling method that exactly determines alluvial gold reserves in say a 200 hecatre permit. Yeah Right!

One wonders what the consequences of this law will be to economic activity (besides the 30 million dollar extra tax that policy advise group stated that they would get out of this)!

One can't help thinking that the 2015 mothballing of gold mines of the West Coast might have to do with the increase in costs that this will produce.