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Mineral Royalties

Overview

The mineral royalty scheme
The Mineral Royalty Act levies a royalty on recovery of mineral commodities from a mining tenement in the Northern Territory. It is not a tax but a charge for resource usage and is payable by the holder of a mining tenement to the Government as owner of the site or the mineral rights over the site. The overall objective of the Act is to maximise the contribution of the mining industry to the long-term welfare of the Northern Territory.

The Act is a profit based royalty regime that uses the Net Value of a mine’s production to calculate royalty instead of production value or tonnage. This approach results in a far more equitable regime than value and tonnage based royalties, which do not adequately allow for the fluctuating fortunes of the mining industry. Furthermore, other regimes generally do not allow for the high costs of remote deposits and low grade or hard-to-mine ore. The Northern Territory mining industry benefits from this system in several ways:

• Both prices and mining costs are taken into account in royalty calculations. If production costs rise or fall, royalty may decline or increase accordingly.


• Royalty will generally be payable in years when ability to pay is the greatest.


• Mines operating in isolated locations or with high costs of extraction may pay less royalty than mines in good locations or with simple operations.

If it is more costly to extract ore from deeper sections of an ore-body, less royalty will be paid. If low-grade core results in less production and less sales, then less royalty will be payable.

Minerals and mines that the scheme applies to
The Mineral Royalty Act applies to most mines and mineral commodities in the Northern Territory with the exception of quarries for extractive minerals, uranium mines (which have been exempted until the ownership of uranium is transferred from the Commonwealth to the Territory) and mines operating under specific royalty agreements.

Rate, calculation and payment of royalties

The Mineral Royalty Act levies royalty at a rate of 18 per cent of the Net Value of mineral commodities sold or removed from a production unit, regardless of the type of mineral commodity or whether the mine is situated on Crown, freehold, leasehold or aboriginal land. Net Value is calculated as follows:

Net Value = GR – (OC + CRD + EEE + AD)

where –

GR is the gross realisation from the production unit;
OC represents the operating costs of the production unit for the royalty year;
CRD is the Capital Recognition Deduction on eligible capital assets expenditure;
EEE is any eligible exploration expenditure; and
AD represents additional deduction as approved by the Minister.

A "production unit" is a mining tenement or two or more mining tenements operating as part of an integrated operation. It also extends to other facilities (whether or not adjacent to the mining tenements) that are essential for the production of a saleable mineral commodity.

Net value for royalty is thus defined as the value of minerals sold or removed without sale plus an adjustment for assets disposed of, less

	-	All operating costs directly attributable to the production of saleable mineral commodity including certain marketing and administration costs, except income tax, royalty and royalty-like payments;
	-	An allowance for capital investments called Capital Recognition Deduction (CRD). CRD is akin to depreciation and incorporates an interest rate factor (based on the Australian Federal Securities long term bond rate plus 2 per cent) over a CRD life category life category of 3, 5 or 10 years. The CRD life category is based on the period over which depreciation is allowed for income tax purposes. [Click here] for CRD factors

Eligible Exploration Expenditure

	-	Approved negative Net Value from previous years, which can be carried forward provided the production unit continues to operate, if approved by the Department; and
	-	Any additional deductions under section 4CA of the Act.

Furthermore, the first $50 000 of Net Value is not liable to royalty. This exempts a number of small mines from royalty payment entirely.

Royalty is payable by six monthly provisional payments. An annual return detailing the actual royalty payable together with payment for any additional liability must be lodged within three months after the end of each royalty year. Penalties apply if the sum of the provisional payments is less than 80 per cent of the actual royalty payable.

Eligible Exploration Expenditure (EEE)

Royalty payers may reduce up to 25 per cent of the royalty payable ("the deduction cap") by claiming eligible exploration expenditure (EEE) incurred on exploration work, whether performed in or outside of the Territory, on mining tenements that form part of their production unit. Expenditure incurred under an exploration retention lease that the tenement was derived from can also be claimed.

From 1 July 2003, EEE incurred in a royalty year that exceeds the deduction cap, or could not be claimed because of a negative Net Value position, can be carried forward and claimed in future royalty returns. Previously, excess or unused EEE (except that represented by an Eligible Exploration Certificate - see below) could not be carried forward.

Eligible Exploration Certificate (EEC) Scheme

Prior to 1 July 2003, miners and explorers that incurred EEE for work actually performed in the Northern Territory, whether on a mining tenement or an exploration licence could make application to Territory Revenue Management for an EEC. The certificate represented proof of the EEE incurred, which could then be claimed by, or traded to, a miner to reduce their royalty liability. There was no limitation on the period that a certificate could be used to reduce a royalty liability.

As from 1 July 2002, the EEC scheme was abolished with transitional arrangements to allow for certificates issued for worked performed up to that date to be claimed to reduce a royalty liability until 30 June 2010. However, miners that continue to incur such expenditure on their production unit can continue to claim such expenditure as detailed above.

Capital Recognition Deduction (CRD) Factors

 

Petroleum Royalties

Overview

The petroleum royalty scheme

Division 5, Part III of the Petroleum Act levies a royalty on the production of petroleum in the Northern Territory. Petroleum is defined as a naturally occurring:

	a.	hydrocarbon, whether in a gaseous, liquid or solid state;
	b.	mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or
	c.	mixture of one or more hydrocarbons, whether in a gaseous, liquid or solid state, with hydrogen sulphide, nitrogen, helium or carbon dioxide or any combination of them,

and includes a hydrocarbon as defined by paragraph (a), (b) or (c) that has been returned to a natural reservoir, but does not include a substance which, in its naturally occurring state, is not recoverable from a well by conventional means.

It is not a tax but a charge for resource usage and is payable by the licensee of a production licence to the Government as owner of the site or the petroleum rights over the site. The overall objective of the royalty is to maximise the contribution of the industry to the long-term welfare of the Northern Territory.

Rate, calculation and payment of royalty

Royalty is calculated at a rate of 10 per cent on the gross value at the wellhead of all petroleum products produced from the licence area. In general terms, this value is calculating by deducting allowable costs from the point that a market value can independently established for the product (usually the point of sale) back to the wellhead. Royalty is payable on monthly basis with a return detailing the actual liability to be lodged at the end of each royalty year.