The proposed Minerals Resource Rent Tax

Introduction

On 2 July 2010 the Prime Minister, Deputy Prime Minister and Treasurer, and the Minister for Resources and Energy issued a Joint Media Release (JMR). The JMR announced a 'breakthrough agreement' and provided for two new mining tax regimes to cover:

• coal and iron ore projects to be known as the Minerals Resource Rent Tax (MRRT); and
• the extension of the current Petroleum Rent Resources Tax (PRRT) to cover all onshore and offshore oil, gas and coal seam methane gas projects (including the North West Shelf project).

In summary, the JMR provides for:

• a re-labelling of the name of the proposed tax - from Resource Super Profits Tax (RSPT) to MRRT;
• only coal and iron ore projects in Australia to be subject to the MRRT;
• a headline rate of 30% for the MRRT, with an 'extraction allowance', making an effective tax rate of 22.5%;
• a de minimus exclusion for 'small miners' with resource profits (a term in the JMR which is yet to be clarified) of less than $50 million;
• an improved transitional regime for miners rather than that proposed under the former proposed RSPT;
• unutilised MRRT losses to be carried forward at the Commonwealth government long term bond rate (LTBR) plus 7% per annum, with no refund of a portion of the unutilised MRRT losses in the event of a project's closure;
• unused credits for royalties paid to State or Territory Governments to be uplifted at the LTBR plus 7% per annum, with unutilised credits for State and Territory royalties not being transferable or refundable;
• the extension of the PRRT, with a 40% tax rate, to on-shore and off-shore oil and gas projects, including the North West Shelf and coal seam gas projects;
• a start date of 1 July 2012 for the MRRT and the revised PRRT; and
• the formation of a Policy Transition Group to 'oversee the development of more detailed technical design to ensure the agreed design principles become effective legislation'.

The proposed MRRT

The proposed MRRT is to apply only to coal and iron ore projects. The rationale for this is that together with the oil and gas sector, these commodities represent 75% of the value of Australia's exports and resource operating profits and account for an even greater proportion of the 'resource rents'. Accordingly, a significant portion of the mining sector - such as base metals and gold - will not be subject to the MRRT, unlike the former proposed RSPT.

The tax rate for the MRRT is 30%. The MRRT is proposed to be levied on the 'MRRT assessable profit'. This is computed on the value of the commodity, determined at its first saleable form (at mine gate), less all costs to that point. In broad terms, the costs will include:

• for projects existing at 1 May 2010, depreciation on the 'starting base' as at 1 July 2012 (as to which see below);
• capital project expenditure after 1 July 2012, deductible as and when incurred, and, when carried forward, with an uplift of LTBR plus 7% per annum; and · other deductible expenses (in general terms, it is proposed that expenses for MRRT will follow the PRRT categories).

As part of the proposed transitional arrangements for existing projects as at 1 May 2010, the starting base consists of:

• the value of project assets (i.e. tangible assets, improvements to land and mining rights) calculated, at the taxpayer's election, as either:
  • the market value of project assets as at 1 May 2010, deductible over an effective life of up to 25 years; or
  • the book value as at 1 May 2010, deductible over 5 years with an uplift at LTBR plus 7% per annum, and
• all expenditure from 1 May 2010 to 1 July 2012.

The MRRT, once determined, is subject to what is being advertised as a tax rate of 30%. But this is not the true rate because MRRT taxpayers are entitled to a 25% 'extraction allowance' against the 'taxable profits subject to the MRRT'. The stated rationale for this is to recognise 'the contribution of the miner's expertise to profits at the mine gate'.

The JMR notes that 'small miners' will not be subject to MRRT if their 'resource profits' are less than $50 million. Presumably, small miners will have to maintain extensive records and accounts to prove that their MRRT assessable profits are less than $50 million. At least on the face of the JMR, a miner with MRRT assessable profits of $51 million (pre-MRRT) will be at a great disadvantage when compared with a miner with MRRT assessable profits of $49 million.

The MRRT, like the jettisoned RSPT and the existing PRRT is a tax that applies on a project by project basis. Any undeducted starting base can be transferred to a new owner when the project (or interest in the project) is sold.

MRRT losses can be transferred to other iron ore or coal projects. The JMR observes that this proposed feature of the MRRT 'supports mine development because it means a company can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.' What is not clear from the JMR is if losses from coal projects can only be transferred to other coal projects and if losses from iron ore projects can only be transferred to other iron projects or whether losses from coal and iron ore projects can be transferred to any other project - irrespective of whether the other project is a coal or iron ore project.

MRRT taxpayers are able to carry forward unutilised MRRT losses, with an annual uplift of LTBR plus 7%. However, there will be no refund of a portion of the unutilised MRRT losses in the event of a project's closure. Similarly, unused credits for royalties paid to State and Territory Governments can be carried forward, but the credits will not be transferrable or refundable.

It is proposed that the MRRT will be deductible against company tax - like the existing PRRT and the jettisoned RSPT. Whilst the JMR is silent on the issue of franking credits, MRRT taxpayers should not expect payments of MRRT to generate franking credits (as is the case with the existing PRRT regime).

As a final point, it should be noted that the JMR is silent on the international tax issues surrounding the MRRT. In particular, it will be debatable whether or not foreign investors will be able to obtain a foreign tax credit or underlying foreign tax credit in their 'home' jurisdiction.

It may well be the case the Commonwealth Government will argue that the proposed MRRT is an 'income tax' for the purpose of Australia's tax treaties - as it has done in the context of the PRRT.

Only time will tell if Australia's tax treaty partners will share this view. To judge from the experience with the PRRT, it is unlikely that Australia's tax treaty partners will agree with the view that the MRRT is an 'income tax' for the purpose of Australia's tax treaties or the tax treaty partner's foreign tax credit system: see for example, the Technical Explanation of the Protocol between the Government of the United States of America and Government of Australia signed at Canberra on September 27, 2001 in relation to PRRT.

The changes to the PRRT

There are 5 keys points to note in relation to the PRRT:

• the PRRT regime will be extended to cover all oil, gas and coal seam methane projects not just currently covered projects in Commonwealth waters;
• the PRRT tax rate will remain at 40%;
• for projects not previously subject to PRRT, taxpayers may elect to use market value as the starting base for project assets, including oil and gas rights;
• all State, Territory and Commonwealth resource taxes will be creditable against current and future PRRT liabilities from a project; and
• the remaining features of the pre-existing PRRT regime will otherwise continue to apply, including the range of uplift allowances for unutilised losses and capital write-offs, immediate deductions for expenditure and limited transfer of the tax value of losses.

Policy Transition Group

The JMR announced the formation of a Policy Transition Group to be lead by the Commonwealth Minister for Resources and Energy, the Honourable Martin Ferguson AM MP and Mr. Don Argus AC. The Policy Transition Group has been set with the task of overseeing the development of more detailed technical design to ensure the agreed design principles become effective legislation.

Other changes

The Commonwealth Government has stated that:

• the company tax rate will be reduced to 29% for the 2013-2014 year of income (and not 29% for the 2013-2014 year of income and 28% for the 2014-2015 year of income as previously announced);
• 'small companies' will obtain a reduced company tax rate of 29% for the 2012- 2013 year of income; and
• the proposed resource exploration offset will not be implemented.

Practical things to consider or do now

Companies should:

• keep adequate records to assist in determining future MRRT liabilities;
• review existing contracts, paying close attention to:
  • any clauses dealing with price variations based on tax changes; and
  • profit sharing arrangements to see if the profits are measured on a pre-MRRT or post-MRRT basis;
• review the impact of the MRRT on existing financing arrangements; and
• review acquisitions and expenditure from a MRRT perspective.