What is "income" to a mineral miner?

(Clause 13)

Summary of proposed amendments

Under the proposed new rules, a mineral miner can derive income from four main sources:

1. amounts derived from their mining operations or associated mining operations;
2. amounts derived from the disposal of land;
3. consideration from disposing of a mineral mining asset; and
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.

Application date

The amendments will apply from the beginning of the 2014–15 income year.

Key features

Amounts from mineral mining operations (sections CU 1 and CU 7)

As mentioned previously in “Who the rules apply to”, the definitions of “mining operations” and “associated mining operations” are consistent with the current legislation. “Mining operations” covers exploring for minerals, performing development work, extracting minerals and other work directly related to mining. It is important to note that work done on a “service for reward” basis for a mineral miner will not be covered because the person performing the service will not be a “mineral miner” and is therefore outside the ambit of these rules.

“Associated mining operations” covers activities carried on in association with mining operations and include accumulation, initial treatment and transport of minerals up to a saleable form or to a stage where they are ready to be used in a manufacturing operation.

Disposal of land (section CU 2)

Under the proposed rules, land will effectively become revenue account property of a mineral miner. This means the miner will be allowed a deduction for the relevant land in the year of disposal and the amounts derived from disposal will be treated as income also in the year of disposal. This will give rise to either a net gain or loss on disposal that will be reflected as either income or a deduction.

Disposal of a mineral mining asset (section CU 3)

Consideration received from the disposal of a “mineral mining asset” will be treated as income to a mineral miner. “Mineral mining asset” is defined in section CU 9 as a mining or prospecting right, an exploration, prospecting or mining permit or a share or partial interest in any of these. It does not include land. “Mining or prospecting right” is broadly defined to effectively include any authority related to exploring, searching or mining for minerals and includes any interest in such authority.

It is important to note that proposed section CU 3 is over-ridden by proposed section CX 43, which relates to farm-out arrangements. A “farm-out arrangement” is defined in section YA 1 and is being modified so that it applies to a mineral mining context. At its most simplistic level, 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 CX 43 provides that farm-in expenditure under a farm-out arrangement is excluded income of the mineral miner that is the farm-out party. The intention behind the interaction between these sections is that a person who sells an interest in, a permit will be treated as having disposed of a mining asset and the proceeds will be treated as income. By contrast, if the “farm-in party” instead agrees to incur costs in relation to the permit area, the amount spent by that person will be treated as excluded income of the first party.

Proposed section CU 5 also clarifies that:

• a partner is treated as having the relevant share of assets owned by the partnership; and
• reference to a disposal of an asset includes the disposal of a part of an asset.

Claw-back rule (section CU 4)

The deductions available to a mineral miner under the proposed rules are discussed in more detail below. However, as a general rule, “exploration expenditure” will be deductible to a miner, whereas “development expenditure” must be capitalised and spread over the life of the mine created. This arguably creates incentives to a miner to prefer an “exploration expenditure” categorisation because of the immediate deduction available. It is also recognised that there will be expenditure incurred that, at the time, may be “exploration” or may be “development” – with its true categorisation only becoming apparent in hindsight.

To deal with these situations, a recovery or claw-back rule will apply to expenditure that is deducted as exploration expenditure, but which actually results in an asset that is used for commercial production. In order for the claw-back rule to apply, the following criteria must be met:

• the expenditure is treated as exploration expenditure;
• the mineral miner is allowed a deduction for it;
• the year is later than the 2013−14 income year;
• the expenditure results in an asset; and
• the miner uses that asset for or in relation to the commercial production of a mineral.

The amount of income is the amount of expenditure that produced the asset, but is capped to the amount of the deduction taken, and is allocated to the income year in which the relevant asset is used in commercial production.

Appropriated income

Under the current rules, a mining company can deduct amounts appropriated for future development or exploration expenditure. This ability to deduct for future expenditure is one of the more concessionary aspects of the current rules and is being repealed as part of these changes.

It is recognised that mining companies may have appropriated significant amounts under the appropriation rules. Therefore, the repeal of these rules could result in those companies having larger than expected income tax liabilities for the 2014–15 income year when the appropriated amounts are added back as income. To alleviate this, proposed section CZ 28 allows a mineral miner with an income tax liability as a result of this repeal to allocate the income equally over the 2014–15 and 2015–16 income years.