Royalties as Consideration

Ordinarily it is arguable the grant or transfer of a Royalty should not be subject to duty (though the terms and agreement should be considered before reaching that conclusion). 

The main concern dealing with Royalties is the market value and the granting as part of the consideration for other assets.  This is particularly so when the royalty is capped. We have seen the duty payable being more than the consideration or value given for the assets acquired – due solely to a capped royalty.

Commissioner’s Comments Under Practice Direction DA42 .

The terms of the royalty should be considered to see it needs to be capped or ascertainable.

Provisions may allow a refund if the capped amount is not paid. However the application needs to be made within 5 years and can be very restrictive.

Should this scenario be built into the terms of a royalty?

  1. An agreement to acquire mining tenements may require the purchaser to pay a royalty or to assume an existing third party royalty obligation.

  2. A royalty will either be:

    1. 26.1  limited to a specified amount (capped royalty); or

    2. 26.2  payable indefinitely or for a specified period of time based on the volume or value of minerals produced or the profit or economic performance of a project (uncapped royalty).

    In each case, the royalty payment is consideration for transfer duty purposes, but the transfer of an obligation or entitlement under a royalty agreement will not be a dutiable transaction.

  3. To adopt the amount of consideration as the dutiable value for a dutiable transaction, the Commissioner must be able to ascertain that amount at the date liability arose on the transaction. This means the Commissioner must be able to ascertain the amount of a royalty at this date as well as all other parts of the consideration.

  4. A royalty will be ascertainable where it is a capped royalty that is:

    1. 28.1  agreed to be paid as part of the consideration for the transaction; or

    2. 28.2  being assumed and the remaining amount payable under the royalty can be ascertained at the date of the transaction.

  5. Where a royalty is ascertainable, that amount will be included in the dutiable value for the dutiable transaction.


23 24

  1. 29.1  Where a capped royalty is agreed to be paid as part of the consideration for a transaction, the total royalty amount will be included for assessment purposes.24

  2. 29.2  Where a royalty obligation is joint and several, the maximum amount payable by the party assuming the royalty will be included in the dutiable value. There will be no reduction on the basis that the obligation is held jointly.

Example 4

A person agrees to acquire a mining project for consideration of:

  •   $50 million in cash; and

  •   once production reaches 10,000 tonnes, payment of a royalty of $0.50 per tonne up to a maximum of $10 million.

    The capped royalty is ascertainable at the date of the agreement and the total amount of $10 million will be included in the dutiable value. Duty will be assessed on a dutiable value of $60 million.

  1. A taxpayer may apply for a reassessment of duty if some or all of a capped royalty is not paid and it is not possible for it to become payable in the future. This will generally require all tenements over which a royalty may be payable to be surrendered. An application for a reassessment must be made within five years after the original assessment is issued.25

  2. A royalty will be unascertainable where:

    1. 31.1  it is uncapped; or

    2. 31.2  a capped royalty is being assumed and the amount that remains payable under the royalty agreement cannot be determined at the date of the transaction. For example, the amount will not be known until the transaction is completed because the vendor continues to pay the royalty until that time.

  3. Where the amount of a royalty is unascertainable at the date of liability, the value of the mining tenements will be the dutiable value for the transaction.

    1. 32.1  The Commissioner may accept evidence of the value of the royalty obligationin place of a valuation of the tenements if the parties are at arm’s length, theremainder of the consideration is ascertainable, and no value is allocated to non-dutiable assets.

    2. 32.2  Otherwise, unless paragraph 32 applies, a valuation of the tenements will be required in accordance with either section 21 of the TAA and CP TAA 23 or section 22 of the TAA.

  4. When consideration for a mining transaction includes a royalty that is unascertainable at the date of the transaction, the Commissioner will not usually obtain a valuation of the tenements if:

    1. 33.1  all tenements the subject of the transaction are prospecting licences or exploration licences;

    2. 33.2  there is other ascertainable consideration for the transaction, for example, cash or cash equivalents; and

    3. 33.3  the Commissioner is satisfied it is unlikely any royalty amount will be paid.

  5. Examples of factors the Commissioner will take into account when considering if any royalty amount is likely to be paid include:

34.2 the amount or value of the ascertainable portion of the consideration; and

34.3 any public statements from the parties to the transaction regarding the tenement.

35. For completeness, it is noted that where a third party royalty is assumed as part of a dutiable transaction or a relevant acquisition, the value of the royalty is taken into account by the valuer when determining the unencumbered value of the mining tenements to which the royalty relates.page9image394853136page9image394853392


34.1 the amount of money spent on exploration of the tenement before the transaction;

TAA s 17(4).