Resource
rent taxes are taxes which only become effective at such a time as a
pre-determined rate of return has been achieved by an operation. Resource Rent
Taxes have from time to time been considered for implementation in bothAustralia and New
Zealand. The
offshore petroleum industry in Australia is already subject to RRT as is the
Roxby Downs (Olympic Dam) Mine in South
Australia. Both the mining and petroleum
taxation regimes in Papua New Guinea
include a resource rent tax component called Additional Profits Tax.

The implications of the current form of additional
profits tax for shareholder cash returns are that the tax burden on the
operation may suddenly increase at some stage in the life of the mine if and
when the threshold level of profitability for the tax to be triggered is
exceeded. From that point in time onwards the cash return to the shareholders on
the capital invested is greatly diminished. For mining companies in
Papua New
Guinea, the effective tax rate increases from
35% to 57.75% as a result of the onset of additional profits tax. This tax rate
penalty is so severe that there appears to be merit in considering the concept
of managing profitability through time rather than purely maximising annual
pre-tax profits as is currently the case in most mining operations. This would
have the benefit of deferring or perhaps preventing altogether the onset of the
tax. One possible method for the effective management of profitability is
through the control of average mining grade by cutoff grade manipulation.

Traditional cutoff grade theory has usually considered
taxation as a direct cost at a fixed or variable percentage of annual profits.
As a result of this most analyses are conducted on a pre-tax basis. If tax is
included in analyses it is usually present as a time independent function of
gross profit. Additional profits tax is both time, and rate of return dependent
and therefore not adequately accommodated by currently accepted cutoff grade
theory.

A
review has been made of the effects of resource rent taxes on both the
investment decision-making process as well as possible development and mining
strategies which may be employed by mining companies faced with resource rent
taxes. The review includes examples based on the structure of additional profits
tax which is levied in Papua
New Guinea.