Resource rent tax is a form of taxation or royalty, which only
become effective at such a time as a pre-determined rate of return
has been achieved by an operation. 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 (APT). 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 Additional Profits Tax. The review
includes examples based on the structure of Additional Profits
Tax which is levied in Papua New Guinea.