On Sunday, 2 May 2010, the Australian Government announced the proposed introduction of the RSPT, a tax on the 'super profits' associated with the extraction of non-renewable resources.
It is currently proposed that the new tax will apply to all entities - companies, partnerships and trusts, conducting non-renewable resource extraction operations in Australia from 1 July 2012. It will apply to both new and existing projects, subject to certain prescribed transitional arrangements.
The application and calculation of the tax is complex and to some extent unclear with both the Prime Minister Kevin Rudd and the Treasurer Wayne Swan experiencing difficulties explaining the scope of the tax, and how it will apply in practice. Their difficulties have been compounded by the fact that key aspects as to the calculation of the tax have not yet been settled, and are subject to detailed consultation. The Government has highlighted the fact that similar taxes have been levied in other parts of the world. However, these are limited to Norway, a few Canadian States and Nevada. In general these taxes are levied at significantly lower rates, and are calculated quite differently from the proposed RSPT.
Proposed application of the tax
A new tax
The RSPT is proposed to be a completely new tax levied at a rate of 40% on the difference between the value of items extracted and the cost of extraction (including depreciation/amortisation and a RSPT 'allowance' for the deemed cost of capital). The RSPT will be determined as part of a separate calculation from income tax. The amount of RSPT levied will then be available as a deduction in calculating the entity's ordinary income tax.
Entities currently subject to the Petroleum Resource Rent Tax (PRRT) will be able to elect to be covered by RSPT. The election will be irrevocable. The RSPT and PRRT are similar in nature, but there are significant differences in the calculation of each tax. The Government expects that most petroleum operators will elect to be covered by RSPT.
Because RSPT and income tax are levied on a different basis, it is not possible to simply add the two taxes together to determine the total amount of tax. However, simplistic calculations indicate that the total tax on a project can amount to 57% of the total project profit. This is significantly higher than in the other jurisdictions which levy the tax (apart from Norway).
RSPT assessable value
The point at which the value of the ore/other commodity extracted is to be determined has not yet been specified. The Government has suggested that the value could be determined as soon as a saleable product exists. However, it could be as early as the point of extraction (prior to processing and transport). The difference in taxing point can make a considerable difference to the impact of the tax on various projects, and the assessable amount may differ significantly from the actual sale price achieved. The Government has also acknowledged that the RSPT could potentially apply to some part of the specific value added by the developer of the resource project. Significant challenges and detailed consultation can be expected to determine a fair and practically acceptable approach to determining the value of the commodity/resource for RSPT purposes.
RSPT deductible costs
The deductible costs will include all costs of getting the resources to the taxing point, including depreciation and amortisation of capital expenditure as well as the costs of exploration. However, it will not include interest and financing costs or the costs of acquiring an interest in an existing project. A deduction will also be allowed for the 'RSPT allowance' - broadly calculated as the Long Term Bond Rate multiplied by the opening written down value of capital costs of the project (the RSPT capital account). The Government claims that this allowance will ensure that the tax is only levied on 'super profits'. However, given that the long term bond rate is currently only approximately 5.5%, and the companies actual cost of capital will be significantly higher, it is likely that in many cases the tax will be levied on amount in excess of the actual profit on the project (after taking financing costs into account).
Royalties refundable credits
Certain royalties paid to the States or Territories will be available as a refundable credit. Effectively resource projects would then only be subject to the RSPT. The Government claims that the RSPT will minimise the adverse effects that royalties have on investment and structuring decisions.
RSPT losses and refund on termination of project
RSPT losses may be offset against RSPT profits on other projects, or may be carried forward and included in the RSPT capital account. It is not clear whether the ability to transfer losses will be done on a 'consolidated group' or some other basis.
The Government has indicated that any balance in the RSPT capital account remaining will be paid by the Government at a rate of 40% when the entity leaves the resource sector. This effectively results in the Government becoming a 'silent' JV partner sharing 40% of both the risk and reward of resource activities. Many have questioned whether this is an appropriate role for Government. It is also not clear when the Government will be satisfied the entity has left the resource sector, and this is a matter for further consultation. It is expected that strict anti-avoidance rules would be required.
The RSPT will apply to all projects, including existing projects. The Government proposes that those projects' RSPT starting base will initially be based on the most recent audited financial statements at the date of announcement (2 May 2010). For many companies this will be the values in the 30 June 2009 accounts. Assets acquired after the accounts are audited but before 2 May 2010 will be included at historical cost. The RSPT capital account will be increased by acquisitions of capital and exploration expenditure until commencement date. The capital account will NOT be subject to notional depreciation until commencement. Once the regime commences, the RSPT starting base will be able to be depreciated/ amortised on an accelerated basis from 1 July 2012 as follows:
Next steps - consultation and timetable
There are many critical aspects of the proposed RSPT which have not yet been determined, making investment and production decisions very difficult and uncertain for entities operating in the sector. It is proposed that the consultation process will continue over three phases, with the legislation only scheduled to be introduced into Parliament in late 2011.
In order to assist with and expedite the consultation process, the Government has established a Resource Tax Consultation Panel (RTCP) of leading public and private sector advisors/members. The ATO has also established an internal specialist team to liaise with Treasury and the private sector through the consultation process.
As expected, there are significant/controversial tax policy issues - equity, efficiency, neutrality and related aspects - and important concerns of the resources and related sectors that are being raised and will continue to be promoted in the coming months as a substantial Australian tax reform initiative is analysed and critiqued in more detail. We would be pleased to assist you in analysing the potential impact of the proposed RSPT on you and your business.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.