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From 2014 the concessionary rules that applied to 'specified mineral' miners (now known as 'listed industrial minerals') have largely been repealed and replaced.

Subpart CU, section CZ 28, subpart DU, sections EJ 20B to EJ 20E, FM 31(2)(b), GB 20, IA 7, ID 1, IS 1, IS 2, IS 6, subpart LU and section YA 1 of the Income Tax Act 2007

The concessionary rules that previously applied to "specified mineral" miners (now known as "listed industrial minerals") have largely been repealed and replaced with rules that more closely align the tax treatment of these miners with that of taxpayers more generally, while accommodating some of the more unique aspects of the mineral mining industry.

Key features

The key features of the new rules relate to the deductibility of expenditure. The rules separate a mine's life into various phases and allow deductions based on the phase in which the expenditure occurs. In essence, the rules treat mines as large revenue account projects and seek to ensure that the allocation of income and deductions is broadly in line with orthodox tax principles.

Concessionary rules that allow the losses of mining companies to survive a breach in shareholder continuity have been retained. However, these concessions are buttressed by rules that limit the ability of mining companies to form consolidated groups and offset mining losses.

A refundable credit has been created to recognise that certain types of expenditure are likely to result in deductions being available only after the income-earning activity of a miner has ceased.

Application date

The changes apply from the 2014-15 income year.

Detailed analysis

Who the rules apply to

The rules will apply to all "mineral miners". Because the new rules are less concessionary, it is expected that miners will adopt different structures to carry out their operations. The definition of "mineral miner" in section CU 6 therefore applies to all forms of legal entity:

  • whose only or main source of income is the mining of a listed industrial mineral in New Zealand; or
  • whose only or main activity is:
    • exploring, searching or mining for a listed industrial mineral in New Zealand; or
    • performing development work for exploring, searching or mining for a listed industrial mineral in New Zealand; or
  • who proposes that their only or main activity is as set out in the previous point.

The relevant sources of income or activities are unchanged from the previous rules. To ensure consistency, the new rules also largely retain the previous definitions of "mining operations" and "associated mining operations" in section CU 7. The definition of "listed industrial minerals" in section CU 8 is identical to the previous definition of "specified minerals".

A miner does not include a person that engages in the relevant activity only as a service for reward, unless the reward is wholly or mainly dependent on the production of minerals or wholly or mainly arises through participation in profits from the mining operations. This is to exclude "ordinary" contractors who are not in some sort of profit-sharing arrangement as part of the mining activities.

Section CU 5 clarifies that if mining is carried out through a partnership, each partner is treated as having a share or interest to the extent of their interest in the income in the partnership. The rules related to income and deductibility of expenditure apply according to those shares.


Under these rules, a mineral miner can derive income from four main sources:

  • Under section CU 1, amounts derived from their "mining operations" or "associated mining operations".
  • Under section CU 2, amounts derived from the disposal of land. The land in question must be acquired for the purposes of current or intended mining operations and must either:
    • constitute a mining permit area, or be adjacent to it; or
    • be part of a mining permit area, or be adjacent to it.
  • This is intended to ensure that only land directly relevant to the mining activity is captured by the new rules, rather than other land interests that a mineral miner may have (such as an office building in a nearby town).
  • Under section CU 3, consideration derived from disposing of a mineral mining asset. "Mineral mining asset" is defined in section CU 9 to mean a mining or prospecting right, an exploration permit, a prospecting permit or a mining permit or any share or interest in any of these assets.
  • Under section CU 4, amounts recovered under a special "claw-back" rule that applies if deductions are taken when, in hindsight, those deductions should not have been taken immediately, but spread over the life of the mine. For this rule to apply, the following criteria must be met:
    • The miner must incur "exploration expenditure" (discussed below), for which they are allowed a deduction under section DU 1(1)(b).
    • The income year in question must be after the 2013-14 income year (to avoid retrospective application of the claw-back rule).
    • The expenditure must have been incurred in a year for which the miner is required to keep records under section 22 of the Tax Administration Act 1994 (to avoid imposing additional compliance costs on a miner by making them keep records for longer than they would otherwise need to for tax purposes).
    • The expenditure results in, produces or generates an asset for the miner that they then use for, or in relation to, the commercial production of minerals.

The previous specified mineral rules allowed a mineral miner to provision for future anticipated expenditure – a concessionary feature that has not been carried over into the new rules. This means miners that have these provisions will need to add them back as income in the 2014-15 income year, being the year the new rules take effect. This may result in some miners having an unexpectedly large income tax liability in that year. To ease any cashflow concerns that may arise, section CZ 28 allows a miner to allocate this income equally over the 2014-15 and 2015-16 income years.


The special deduction rules are set out in subpart DU. These rules break mining activity down into its main phases and allow deductions broadly in accordance with orthodox tax principles.

The main phases, and types of expenditure, are:

  • Prospecting expenditure
  • Exploration expenditure
  • Development expenditure
  • Operational expenditure
  • Rehabilitation expenditure
  • Land expenditure.

The definitions of these types of expenditure are mutually exclusive, so expenditure can only fall into one category.

Also excluded is "residual expenditure", for which deductions are allowed under ordinary principles. Residual expenditure" is expenditure:

  • for which the miner is allowed a deduction under section DB 33 (Scientific research);
  • on an application fee payable to the Crown for a permit;
  • on insurance premiums or royalties paid under the Petroleum Act 1937 or the Crown Mineral Act 1991, land tax under the Land Tax Act 1976, or rates;
  • on a lease of land or buildings;
  • on a financial arrangement to which the old financial arrangement rules apply; or
  • on interest.

Prospecting expenditure

Under section DU 1, mining prospecting expenditure is always deductible. "Mining prospecting expenditure" is defined in section DU 9 as expenditure that a miner incurs directly in relation to the acquisition of a prospecting right under the Crown Minerals Act or "mining prospecting information". It also includes prospecting activities undertaken through various methods, but does not include land, plant or machinery costs, which must be treated under ordinary principles.

Exploration expenditure

Mining exploration expenditure is also immediately deductible under section DU 1. However, this is subject to the "claw-back" rule in section CU 4, discussed above. Expenditure clawed back under that rule is subject to the spreading rules that apply to development expenditure, discussed below.

"Mining exploration expenditure" is defined in section DU 10 to mean expenditure incurred in searching or exploring in New Zealand for a listed industrial mineral. It includes expenditure incurred directly in relation to:

  • acquiring an exploration right or permit under the Crown Minerals Act;
  • geological mapping and geophysical surveys;
  • systematic searches for areas containing minerals; or
  • searching by drilling or other techniques.

Again, expenditure on land, plant and machinery is excluded.

Development expenditure

"Mining development expenditure" is defined in section DU 11. This type of expenditure is generally capitalised and then deducted over the life of the mine. This treatment approximates the depreciation rules that generally apply to capital assets. For these purposes "development expenditure" includes exploration expenditure that has been clawed back under section CU 4.


"Mining development expenditure" is defined as expenditure that a miner incurs in preparing a permit area for mining and expenditure on operations carried on by a miner on a permit area for the purposes of deriving income and consists of:

  • mining;
  • performing work directly related to mining; or
  • undertaking earthworks necessary for the working of the mine.

The definition also specifically includes the following:

  • acquiring a mining right or permit under the Crown Minerals Act;
  • obtaining resource consents;
  • establishing mine infrastructure (including plant and machinery, production equipment or facilities, or storage facilities); and
  • providing communication equipment, fuel, light, power or water in relation to their mining operations in a permit area.

This definition is deliberately broad to capture all expenditure that is conceptually part of the creation of the capital asset – in this case a mine. However, it has the potential to overreach and capture expenditure that is properly operational in nature. This is particularly so for expenditure incurred after commercial production of the mine has begun. The definition therefore specifically excludes the following:

  • "operational expenditure" (discussed below); and
  • other expenditure that is incurred on property after the start of commercial production and that has an estimated useful life that does not depend on the remaining assumed life of the mine. An example might be a digger acquired after commercial production has begun to shift rock for mining purposes. That digger could, if the mine closed, be used for other purposes. Its useful life as a digger is not dependent on the particular mine in question. It is therefore not "development expenditure" and can be depreciated at the appropriate rate for that type of digger.

The definition of "operational expenditure" in section DU 11(4) expands and clarifies this second limb of excluded "development expenditure". "Operational expenditure" means expenditure that meets the following criteria:

  • it is incurred in operations by the miner in a permit area;
  • it is incurred after the start of commercial production; and
  • it does not create an asset that has an estimated useful life of longer than one year.

This is designed to clarify that "running costs" of the mine, such as administrative costs incurred after the start of production, are not required to be capitalised. They can instead be treated in accordance with ordinary taxation principles.

Spreading methods

Sections DU 6 and DU 7 set out the two spreading methods that may be available to a miner in respect of their development expenditure. One is time based and the other operates on a "reserve depletion" basis (sometimes referred to as a "unit of production" basis).

Under either method deductions are denied except to the extent allowed under the spreading rules (sections DU 6(2) and DU 7(2)).

Reserve depletion

The reserve depletion method is available only to miners that either:

  • use IFRS rules to prepare their financial statements; or
  • keep records that are sufficient for the Commissioner to verify their calculations.

The miner must also make an irrevocable election in the first year of commercial production from a permit area to apply the reserve depletion method (sections DU 7(1)(d) and EJ 20E(2)). To transition into the new rules, section EJ 20E(7) allows an existing miner to make this irrevocable election in the 2014-15 income year.

Deductions under the reserve depletion method are only available after the miner starts to use the permit area to derive income (section DU 7(1)(b)). The deductions are then spread according to the rules set out in section EJ 20E – in particular, the formula set out in subsection (3).

That formula is:

(reserve expenditure - previous expenditure) x (reserve depletion for the year ÷ proven and probable reserves)

"Reserve expenditure" is the total development expenditure for the current and previous income years (in effect, all development expenditure).

"Previous expenditure" is the expenditure that has been allocated to earlier income years.

"Reserve depletion for the year" is the amount of mineral produced in the year.

"Proven and probable reserves" are the proven and probable reserves set out in the reserve statement for the area, provided the reserve statement is prepared in accordance with a classification recognised under the Crown Minerals (Mineral other than Petroleum) Regulations 2007.

For the purposes of "reserve depletion" and "proven and probable reserves" the amount must be set out using an appropriate unit of measure (as set out in the reserve statement) and used consistently.

A simple example of how the formula might work is shown below.


Miner A is in year 3 of commercial production of a permit area and its total development expenditure to date has been $50 million. In the previous two years, Miner A has deducted $10 million under the reserve depletion method. The latest reserve statement estimates that 1,000 proven and probable units of the mineral remain in the permit area. In year 3, Miner A produces 250 units.

Using the formula, Miner A will be allowed a deduction in year 3 of:

($50m - $10m) x (250 ÷ 1,000)

$40 x 0.25 = $10m

To recognise that sometimes expenses might be allocated on the basis of a "mine" rather than a permit area, section EJ 20E(6) allows a miner to allocate expenditure to a mine – but only if the miner:

  • uses International Financial Reporting Standards (IFRS) rules to prepare their financial statements; and
  • allocation to a mine is permitted for the purposes of those statements.

Time basis

The time basis of allocating development expenditure is the default method for miners that either do not qualify to elect into the reserve depletion method (for example, if they do not keep the requisite records) or they do meet the criteria but fail to, or chose not to, elect.

As with the reserve depletion method, deductions under this method are only available after the miner starts to use the permit area to derive income (section DU 6(1)(b)). The spreading rule is set out in section EJ 20B to EJ 20D.

The calculation formula is set out in section EJ 20B(2) as:

rate x value

"Rate" is, at the choice of the miner:

  • the straight-line rate set out in schedule 12, column 2 that is nearest to the rate calculated under section EJ 20D(2) (discussed below); or
  • the diminishing value rate set out in schedule 12, column 1 that corresponds with the straight-line rate in the point above.

"Value" is the adjusted tax value or diminished value of the expenditure (as appropriate).

Whether the miner is using the straight line or diminishing value method, the following formula in section EJ 20D is needed to determine the appropriate rate.

100% ÷ assumed life

The assumed life is the lesser of:

  • the period that the miner uses for accounting purposes as the amortisation period for the area or, if the miner is not required to use an amortisation period for their accounts, the commercial production period for the area that miner reasonably estimates; and
  • 25 years from the later of the date that commercial production starts or the date that the expenditure is incurred.

This rule effectively puts a 25-year cap on the amortisation period for development expenditure under this method.

For these purposes, the expected life of the mine must be reassessed at the end of each year, to determine whether the previous estimate is still accurate.

Section EJ 20C sets out the length of the spreading period. It starts on the later of the first day in the income year that commercial production commences and the first day of the income year that the expenditure is incurred. It finishes on the last day of the income year in which the expiry of the assumed life of the mine occurs.

A simple example of how this rule works is shown below.


Miner B is in year 1 of commercial production and has incurred $50,000 in development expenditure on the permit area. Miner B is not required to use an amortisation period for its accounts. Using the information at its disposal, Miner B considers that it will be commercially producing minerals from the site for 3 years. Miner B wants to use a straight-line depreciation method.

Using the formula:

100% ÷ assumed life

Miner B must calculate the depreciation rate in schedule 12 using the rate closest to 33.33%. The closest rate in the schedule is 30%.

Using the formula in EJ 20B: rate x value

Miner B's deduction in year 1 is: 30% x $50,000 = $15,000

Again, this method allows a miner to allocate expenditure to a mine, rather than a permit area if the criteria described in the "reserve depletion" section above are met (section EJ 20B(b)).

Tax credit

A tax credit may be available in some instances for "trapped" development expenditure (which may arise using either spreading method) – see the section on tax credits, below.

Operational expenditure

As set out above, "operational expenditure" is essentially an exclusion from the "mining development expenditure" definition. There are no specific rules related to such expenditure, so general principles apply to determine its deductibility or otherwise.

Rehabilitation expenditure

"Rehabilitation expenditure" is deductible in the year it is incurred (section DU 2).

The term is defined in section DU 12 to mean expenditure incurred in New Zealand directly in relation to rehabilitation of land in a permit area, carried out as a result of:

  • permit requirements;
  • the requirements of access arrangements under the Crown Minerals Act 1991 or regulations made under that Act;
  • a miner's obligation under the Resource Management Act 1991 or regulations under that Act;
  • a concession under the Conservation Act 1987; or
  • an authority under the Historic Places Act 1993.

The definition also clarifies that rehabilitation expenditure can be incurred either during or after the operational phase of mining.

Tax credit

To recognise the fact that rehabilitation expenditure (though deductible) may only be incurred in years after the miner's income-earning activities have ceased, a tax credit may be available in some instances. The section on tax credits later in this report sets out the criteria.

Land expenditure

As mentioned in the section on income from land sales and section CU 2 above, a miner's income includes amounts derived from the disposal of land. However, that section only applies if the land in question was acquired for the purposes of current or intended mining operations and either:

  • constitutes a mining permit area, or is adjacent to it; or
  • is part of a mining permit area, or is adjacent to it.

Section DU 3 contains the corresponding deduction provision. It broadly applies to the same categories of land, to provide symmetry between the income and deduction rules. It does not cover land expenditure for which the miner has a deduction before disposing of the land. This is most likely to occur if the miner has a deduction under one of the other provisions of the Act that allow for land acquisition costs to be deductible.

Land expenditure covered by section DU 3 is deductible in the year the land or interest in land is disposed of. This broadly provides for land to be treated as revenue account property, with a deduction available if a loss is made on disposal and any gains form part of the miner's income.

Tax credit

Land interests may be one of the last things a miner disposes of. To recognise that any losses incurred on sale may therefore be incurred after the income-earning activity has ceased, a tax credit may be available. The section on tax credits later in this report sets out the criteria.

Mining asset expenditure

Mining asset expenditure is separately provided for in the legislation, although it is not as easily categorised as a "phase" in the same way as the expenditure types described above. As mentioned above, section CU 3 treats consideration derived from disposing of a mineral mining asset as income of the miner.

Section DU 4 sets out how the acquisition cost is treated. If a mining permit for the relevant permit area has not been obtained, the purchaser is allowed an immediate deduction for the expenditure. This reflects the fact that any expenses incurred by the seller at that point were probably deductible as well, either as prospecting or exploration expenditure. If a mining permit has been obtained, the purchaser must treat the expenditure as mining development expenditure, so it is deductible over the life of the mine. The fact that a mining permit has been obtained indicates that the decision has been made to attempt commercial production, so the "development" phase will have started.

Section DU 4(3) clarifies that "expenditure incurred" on a mining asset does not include the cost of applying for a mining right or permit – it is only the purchase of those assets after they have been granted.

Farm-out arrangements

A "farm-out arrangement" is defined in section YA 1 and has been modified so it applies to a mineral mining context. In simple terms, a farm-out arrangement is one where a person (the farm-in party) agrees to incur expenditure in doing work in a permit area and, in return, the existing permit holder (the farm-out party) agrees to surrender part of their interest in that permit.

Section DU 5 clarifies that expenditure by the farm-in party is to be treated as if it were the applicable class of mining expenditure. If, for example, the expenditure was classified as development expenditure, the farm-in party would only be allowed a deduction for that amount over the life of the relevant mine using the appropriate spreading method. As the existing rights holder is not getting any money from the farm-out arrangement, the expenditure of the farm-in party is excluded income to the farm-out party under section CX 43 (which overrides section CU 3 in these circumstances).

This can be contrasted with the situation when the existing permit holder sells an interest in the permit outright – in which case section CU 3 will apply to treat the proceeds as income.

Anti-avoidance rules

Section GB 20 contained the existing specific anti-avoidance rules that applied to the petroleum mining sector. Because the phases of both mineral and petroleum mining are broadly comparable, and these new rules more closely align the tax treatment of these sectors, the anti-avoidance rules have been expanded to cover the activities of mineral miners too.

Tax credits

As mentioned above, the new rules provide instances where miners may be entitled to deductions, but will be unable to use them because their income-earning activity has ceased. This can occur, for example, when a miner incurs rehabilitation expenditure. To recognise the undesirability of this type of "black-hole" expenditure, subpart LU creates a refundable credit that will be available if the following criteria are met (section LU 1):

  • the expenditure is of a certain type (set out below); and
  • the mineral miner has a net mining loss for the permit area for the income year that is greater than the net income of the mineral miner for the income year from all other sources. For these purposes, the net mining loss is calculated as if the miner's only income was derived from the permit area. The net income from other sources is calculated as if there were no income from the permit area. This avoids double counting of the relevant income. The difference between these figures is called the "excess amount".

The types of expenditure are:

  • rehabilitation expenditure;
  • a loss on the disposal of mining land;
  • development expenditure for which a deduction has not been available and the relevant permit has been relinquished, revoked, surrendered or has expired and the miner has no existing privilege for the permit area.

The amount of the credit reflects the fact that the credit is intended as the economic equivalent of a loss carry-back rule. It is calculated using the following formula:

expenditure or loss x tax rate

"Expenditure or loss" means the "excess amount" referred to above, but only to the extent that it includes one of the relevant expenditure types. This means the "excess amount" is an effective cap on the amount but may not always be able to be used. For example, if there is an excess amount of $100,000 but the relevant categories of expenditure only amounted to $50,000, it is the $50,000 figure that would be the basis of the calculation. Equally, if the excess amount was $100,000 but the relevant categories of expenditure amounted to $150,000, it is the $100,000 that would be used for the calculation.

"Tax rate" is the relevant basic rate of income tax set out in schedule 1, part A of the Income Tax Act 2007.

Cap on credit

To reflect its equivalence to a loss carry-back rule, section LU 1(4) provides that the credit is capped at the lesser of:

  • the result of the formula; and
  • the total amount of income tax paid by the miner in all previous tax years to the extent that it relates to the permit area.

Trustees and individuals

If a simple tax rate to calculate the tax credit was used (for example, the company rate), this may result in inappropriately high or low credits being available to miners that are individuals or trustees of a trust.

For individuals, the amount of tax paid in previous years is calculated on a year-by-year basis and aggregated as if their only income from previous years was mining income from the permit area.

For trustees, the amount of tax paid in previous years is calculated on a year-by-year basis and aggregated:

  • first, by reference to the amount of income tax paid as an agent of a beneficiary under section HC 32; and
  • second, by reference to the amount of tax paid as trustee income.

The following examples illustrate these rules.

Example Individual

Dave is a "mineral miner" who is also employed as an accountant. In each of years 1, 2 and 3, Dave earned taxable income of $90,000 in total from his mining activities and $70,000 from his job. At the end of year 3, Dave's mining activity ceases and in year 3 Dave incurs $250,000 of rehabilitation expenditure and derives no other income.

Because the $250,000 is rehabilitation expenditure, Dave is entitled to a tax credit, calculated by looking back at the total tax paid in the previous years. The first year to consider is year 3. Dave derived $90,000 in taxable income from mining that year (his salary income from his accounting job is not counted for these purposes and the $90,000 is treated as the first income he earned in that year). Dave's tax liability on that $90,000 was $20,620.

Dave still has $160,000 of rehabilitation expenditure that has not been offset, so that is carried back to year 2. Dave's $90,000 of taxable mining income from that year again produced a tax liability of $20,620.

Finally, Dave carries back the remaining $70,000 to year 1. The tax on his first $70,000 in that year is $14,020.

Dave's total tax credit on his $250,000 rehabilitation expenditure is $20,620 + $20,620 + $14,020 = $55,260.


Example Trust

The trustee of the Golden Trust is a "mineral miner". The trust has three beneficiaries: Rex, Nick and Daisy. In year 1, the trust earned $80,000 taxable mining income from the relevant permit area. It distributed $20,000 to each of the beneficiaries as beneficiary income (and paid tax on that income as agent for the trustees under section HC 32) and retained $20,000 as trustee income. The beneficiaries are in the following situations for the year:

  • Rex has carried forward losses of $20,000;
  • Nick has no income other than that received from the trust;
  • Daisy is employed on an annual salary of $50,000.

At the end of year 1, the trust's mining activity ceases and in year 2 it incurs $80,000 of rehabilitation expenditure and derives no other income.

Because the expenditure is rehabilitation expenditure, the trustee is entitled to a tax credit. The beneficiary income from year 1 is required to be counted first. For each $20,000 distribution, the tax liability was as follows:

  • Rex paid no tax because the distribution simply absorbed his carry-forward losses;
  • Ben paid tax on $20,000 at $2,520;
  • Daisy earned a total of $70,000 but this distribution is treated as her first income, meaning her tax liability on the $20,000 is also treated as being $2,520.

This makes a total credit from the $60,000 distributed of $5,040. There is still $20,000 of rehabilitation expenditure required to be offset at the trustee tax rate, making an additional credit of $6,600.

The trustee's total tax credit is therefore $5,040 + 6,600 = $11,640.

Relationship with other rules

Section LU 1(8) clarifies that a loss that is able to generate a credit does not form part of a tax loss component or net mining loss for the miner. This is to avoid the loss being double counted (that is, used to generate a credit and then used again to offset other income).

Continuity and loss-offset rules

The previous concession that allowed losses in a company that is a mineral miner to survive a breach in shareholder continuity has been retained (section IA 7(7)). In a set of rules which are not as generous as they were, this concession could still pose a revenue risk which could result in inappropriate loss trading. To mitigate this risk, the existing rules that prevent mining companies from forming a consolidated group with companies that are not mineral miners (in section FM 31) have also been retained, as have the specific loss-offset rules in subpart IS. Sections IS 3 and 4 have been repealed because the ability to offset mining income against losses by holding companies was largely only relevant in the concessionary rules, when losses could be relatively easily accumulated in holding companies. Given there is no restriction on the activities that a holding company can undertake, there is a risk that allowing this offsetting to continue (coupled with the ability of losses to survive a continuity breach) could result in mining losses being inappropriately offset against income from other sources.