Mineral resource rent tax

Articles Written by Jane Trethewey

Introduction

On 10 June 2011, Treasury released for public comment preliminary exposure draft (ED) legislation and accompanying explanatory memorandum (EM) for the mineral resource rent tax (MRRT).

The Federal Government announced that it would adopt an MRRT (in place of the originally announced mineral super profits tax) on 2 May 2010 and appointed a Policy Transition Group (PTG) to develop the detailed technical design of the tax.  The PTG provided its report to Government in December 2010, making 94 recommendations, all of which were accepted (as announced on 24 March 2011) and have been adopted in the ED.

In short, the MRRT will apply from 1 July 2012 to all new and existing projects for mining of iron ore and coal in Australia (with transitional arrangements for projects in existence on 1 May 2010).

In addition, the Petroleum Resource Rent Tax (PRRT), which currently applies only to offshore oil and gas projects in Commonwealth territorial waters and has been in existence since 1 July 1987, will be extended to cover all onshore and offshore oil and gas projects, including the North West Shelf. ED legislation for the expanded PRRT will be released 'in the near future'.

The ED is not exhaustive and the Government proposes to release a second and final ED later in the year.

Submissions on the ED are due by 14 July 2011. Legislation is expected to be introduced into Parliament towards the end of 2011.

Overview and key features

The EM describes the MRRT as 'a type of resource rent tax based on the Garnaut-Clunies Ross model', which 'taxes positive cash flows, or mining profits, and allows miners to carry forward and uplift losses for use in later years' and also provides a credit for royalties. The tax base is confined to realised profits attributable to the value of the resources at the 'taxing point' (usually when the resource leaves the 'run of mine' (ROM) stockpile or otherwise the point just before 'beneficiation' processes begin).  This is designed to tax only profits from 'upstream' operations in the mining chain (i.e. extraction of the resource and getting it to the taxing point).

Accordingly, as the EM points out the MRRT 's 'a tax on a relatively limited portion of profits, unlike, for example, the company tax, which seeks to tax all sources of company income comprehensively'.  Its key purpose is to 'tax rents from non-renewable resources after they have been extracted from the ground but before they have undergone any significant processing or value-add'.

Key features of the MRRT

Taxable resources

  • Taxable resources under the MRRT are: iron ore, coal, gas extracted as a necessary incident of coal mining and anything produced from the in situ consumption of iron ore or coal.

Calculating MRRT

  • MRRT will apply on a project by project basis - that is, the MRRT is calculated separately for each mining project interest of a miner.
  • The effective tax rate will be 22.5% (being a basic tax rate of 30% that is reduced in all cases by a 25% 'extraction factor').
  • The tax rate is applied to the mining profit less the MRRT allowances for the mining project interest for the MRRT year.
  • The MRRT year will be a financial year (i.e. year ending 30 June) or substituted accounting period (SAP) starting on or after 1 July 2012. It is proposed that any SAP will need to correspond with the taxpayer's SAP for income tax purposes and that, where the SAP starts before 1 July 2012 but ends after that date, MRRT will apply for the part of the period that occurs on and after that date.

Mining profit

  • The mining profit is the excess of the mining revenue over the mining expenditure for the project interest for the MRRT year. It is determined at the taxing point (which is the point closest to the point of extraction of the resource, usually just before it leaves the ROM stockpile).

Mining revenue

  • The mining revenue is determined by reference to the realised value (or equivalent thereof) at the taxing point, having regard to the particular circumstances of the miner and the project.
  • This is achieved by providing that mining revenue arises when a mining revenue event occurs. This will be when the miner first supplies or exports the taxable resourceor first supplies, uses or exports something produced using the taxable resource, whichever occurs first. A mining revenue event will only occur after the resource has been extracted and after the taxing point.
  • It is necessary to determine how much of the consideration from the mining revenue event is reasonably attributable to the value of the resource at the taxing point. The consideration for this purpose will be the actual consideration (for example, in the case of an arm's length sale) or the arm's length consideration (in the case of a non-arm's length transaction or an event that does not involve an actual transaction).
  • Both the process of determining the arm's length consideration (if applicable) and the process of working out how much of the consideration is reasonably attributable to the value of the resource at the taxing point may involve the application of transfer pricing principles. In each case, the method to be used is the one that produces the most reliable measure of the relevant value, having regard to the miner's circumstances. Specific valuation rules may be provided in the legislation or regulations (as under the PRRT).
  • A simple 'alternative valuation method' (based on a 'netback' method) is available for miners with small operations and miners with vertically integrated operations in existence on 1 May 2010.
  • Certain other amounts (such as amounts received by way of recoupment or offset of mining expenditure or royalties or compensation for loss of taxable resources or mining revenue and balancing charges) are included in mining revenue.

Mining expenditure

  • The mining expenditure is the expenditure (both capital and revenue) necessarily incurred in carrying on upstream mining operations (i.e. relating to extraction of the resources and getting them to the taxing point), subject to certain specific exclusions.
  • The exclusions include: the costs of acquiring the production right (other than the first such right granted); payments of royalties giving rise to royalty credits; financing costs; the capital costs of certain administration land or buildings not on or adjacent to the project area; as well as payments of income tax and GST.
  • In short, immediate deductions are available for most upstream capital and revenue expenditure from 1 July 2012, meaning that no MRRT liability will arise for new projects until the miner has derived sufficient profits from the project to pay off its up-front investment. Existing mining project interests (as at 1 May 2010) obtain starting base allowances in respect of their investment in the project's upstream mining operations prior to 1 July 2012 (see below).

MRRT allowances

  • The mining profit is reduced (but not below zero) by the MRRT allowances - these arise from royalty credits, mining and pre-mining losses, transferred losses and starting base losses. The allowances must be applied in a specified order.

Mining and pre-mining losses

  • A mining loss arises when the mining expenditure exceeds the mining revenue for the year. An unutilised mining loss in respect of a mining project interest is transferred (as a transferred mining loss allowance) to another mining project for the same kind of taxable resource, to the extent that the other project has sufficient profits to absorb the loss, subject to a common ownership test (which requires that the other mining project interest is held by the same miner or another member of the same wholly owned group at all times from the start of the loss year until the end of the transfer year).
  • Pre-mining losses can arise from pre-mining project operations in relation to a pre-mining project interest (i.e. an exploration and prospecting right) that has been replaced by the mining project interest. An unutilised pre-mining loss is transferred (as a pre-mining loss allowance) to another mining project for the same kind of taxable resource, provided the other mining project interest is held by the same miner or another member of the same wholly owned group at the end of the transfer year.
  • Losses and pre-mining losses that are not able to be transferred are carried forward (to become mining loss allowances or pre-mining loss allowances in a future year) and are uplifted annually at the long term government bond rate (LTBR) plus 7% (reduced to LTBR after 10 years in the case of pre-mining losses).

Royalties

  • State and Territory mining royalties (and payments by way of recoupment of such royalties) are allowed as a credit. Royalty credits are converted to royalty allowances by being grossed up by the MRRT rate (to replicate the effect of a tax offset).  Unused royalty credits are carried forward and uplifted at the LTBR plus 7%. They are transferable only in very limited circumstances.

Starting base losses

  • Existing mining project interests (as at 1 May 2010) obtain starting base allowances in respect of starting base assets relating to the project's upstream mining operations held as at 1 July 2012 (or when production begins, if that is later).
  • Starting base losses (which give rise to starting base allowances) are calculated each year by depreciating the base value of each starting base asset at specified rates over specified periods. Unutilised starting base losses cannot be transferred and are carried forward to later years and uplifted (with the uplift factor depending on which valuation approach is used).
  • Two alternative approaches to valuing the starting base assets are available at the miner's election, namely: the market value approach and the book value approach.
  • Under the market value approach, the initial base value of starting base assets held at all times from 1 May 2010 to 1 July 2012 (interim period) is equal to their market value as at 1 May 2010 plus certain interim expenditure incurred in that period. The base value is depreciated (using a 'declining balance' method) over the remaining effective life of the asset, up to a maximum of 25 years. Interim expenditure and base value are notuplifted under the market value approach, but unused starting base losses are uplifted by reference to the consumer price index to preserve their real value.
  • Under the book value approach, the initial base value of starting base assets (excluding the resource and the mining rights) held at all times in the interim period is equal to their value in the most recent audited accounts prepared on or before 1 May 2010 plus certain interim expenditure incurred in relation to them in the interim period. The initial base value of assets acquired during the interim period is equal to the interim expenditure incurred in relation to them. The base value is depreciated (again using a declining balance method) over 5 years. Under this approach, the base value, interim expenditure and unused starting base losses are uplifted at LTBR plus 7%.
  • Under both valuation approaches, the initial base value of starting base assets acquired during the interim period is equal to the interim expenditure incurred in relation to them (excluding expenditure in acquiring the mining project interest, if the book value approach is used). Certain mine development expenditure incurred during the interim period that does not give rise to an actual asset is deemed to be a starting base asset.
  • If no election is made, the book value approach applies if it is capable of applying. If the book value approach is not capable of applying, the value of all starting base assets at 1 May 2010 is deemed to be nil and only interim expenditure is included in the initial base value.

Combining, transferring and splitting mining project interests

  • Mining project interests are combined into a single interest if they satisfy certain integration criteria.
  • When a mining project interest is transferred, it is taken to continue in the hands of the new miner. The new miner inherits any current year mining revenue and expenditure and any royalty credits, mining and pre-mining losses (subject to a limit in the case of the pre-mining losses and the common ownership test for transfer of mining losses) and starting base amounts, as well as certain other attributes in respect of the interest. The new miner is liable for any MRRT in respect of the interest for the entire MRRT year in which the transfer occurs, as well as subsequent years.
  • When a mining project interest splits (e.g. because a part of it is disposed of or transferred, it is transferred to a number of purchasers or it is a combined interest that stops being integrated), any current year mining revenue and expenditure and any royalty credits, mining losses, pre-mining losses and starting base amounts are divided among the split project interests.

Small miners

  • A low profit offset will apply to reduce the MRRT to nil where the miner's group mining profit (i.e. the mining profit for all mining project interests of the miner and its related entities) for the MRRT year is less than $50 million. The offset phases outbetween $50 million and $100 million. A miner subject to the low profit offset still deducts its allowances and is still required to determine its starting base, calculate its mining revenue and track its mining losses and royalties.
  • Alternatively, certain miners with smaller operations may choose to use the simplified MRRT regime for a particular year. If a miner chooses to use the simplified MRRT regime for a particular year, they are not subject to MRRT for that year. They also lose any starting base losses, mining losses, pre-mining losses and royalty credits for all of their mining project interests and pre-mining project interests and would begin to generate new losses and royalty credits once they stop using the simplified MRRT regime.

Additional rules still to be provided

  • These include: anti-avoidance and anti-profit shifting rules, valuation principles and rules in relation to balancing adjustment events; closing down expenditure; ending of projects; consolidated groups; partnerships and trusts; functional currency and non-cash amounts.

Key features of the PRRT

  • As noted above, the PRRT will be extended to cover all Australian oil and gas projects from 1 July 2012.
  • The tax rate is 40%.
  • There are a range of uplift allowances for unutilised losses and capital write-offs.
  • Immediate expensing is available for all non-excluded expenditure.
  • The tax value of losses can only be transferred in very limited circumstances.
  • All State, Territory and Federal resource taxes will be creditable against current and future PRRT liabilities.
  • Transition provisions will be provided for existing oil and gas projects that become subject to the PRRT, including a starting base allowance using either market value or book value.
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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