Australia: Minerals Resources Rent Tax: A Compromise

Legal Update

On 2 July 2010, the Australian Government announced an agreement with the mining industry on its controversial mining tax. The compromise was the result of intense consultation and negotiation with parts of the mining sector. It will provide miners and financiers with a framework for making investment and financing decisions on projects.

The new mining tax will be renamed the Minerals Resource Rent Tax (MRRT) in place of the Resource Super Profits Tax (RSPT). The primary differences between the MRRT and the RSPT regimes may be summarised as follows:

Scope Iron ore and coal projects

Oil, gas and coal seam methane projects both onshore and offshore Australia will be subject to the Petroleum Resource Rent Tax
All non-renewable resource projects (except projects already subject to the Petroleum Resource Rent Tax)
Headline tax rate 30% (effectively reduced to 22.5% after taking into account an extraction allowance) 40%
Extraction allowance 25% of taxable profits subject to MRRT None
Exemption for small miners Miners with resource profits less than $50m per annum will be exempt None
Uplift Rate Long term government bond rate plus 7% Long term government bond rate
Starting base of existing projects for depreciation purposes

Miners may elect to use:

  • market value (at 1 May 2010); or
  • book value
Generally at book value
Depreciation of existing projects If book value is used, project can be depreciated at an accelerated rate over 5 years
If market value is used, project is to be depreciated over effective life of assets, not exceeding 25 years
Accelerated depreciation over 5 years
State and Territory royalties paid Credit available for State and Territory royalties paid. Unused credit can be carried forward but cannot be refunded or transferred Rebate available for State and Territory royalties paid. Unused rebate is refunded
Uplift (at Uplift Rate)

Available for:

  • undepreciated value of existing projects if book value is used;
  • carried forward losses; and
  • unused credits for royalties paid

Available for:

  • undepreciated capital; and
  • carried forward losses
Depreciation of investments made after 1 July 2012 Immediate deduction To be agreed in consultation with the mining industry
Refund of losses None 40% of unutilised losses are refunded in reasonable circumstances
Resource Exploration Rebate No longer available Refundable tax offset at company tax rate
Company tax rate Reduced to 29% Ultimately reduced to 28%

The MRRT regime will apply from 1 July 2012 to iron ore and coal projects in Australia. The exclusion of other commodities from the MRRT will reduce the number of affected companies from 2,500 to around 320. The tax rate of 30% will be applied to taxable profits relating to the resource. The taxable profits are calculated based on:

  1. the value of the commodity, determined at its first saleable form (at mine gate) less all costs to that point and
  2. an extraction allowance of 25% to reduce taxable profits at the mine gate, in recognition of the contribution of the miner's expertise.

The headline tax rate will effectively be reduced to 22.5% (being 75% x 30%). There will be a carve-out for small miners. Miners with resource profits less than $50 million per annum will be exempt from MRRT liability.

The mining industry expressed concern over the uncertainty surrounding the treatment of existing projects under the RSPT regime. There is now an agreement as to how these projects will be treated under the MRRT regime. Miners may elect to use market value (at 1 May 2010) or book value (excluding mining rights) as the starting base to depreciate these projects going forward. All capital expenditure made after 1 May 2010 will be added to the starting base. The depreciable amount is used to reduce taxable income subject to the MRRT.

If book value is used, depreciation will be accelerated over the first five years. The undepreciated value will be uplifted at the long term government bond rate plus a premium of 7% (Uplift Rate). The addition of a 7% premium to the long term government bond rate in the Uplift Rate, to some extent, recognises the risk inherent in a mining project. However, if market value is used for the starting base, there will be no uplift. Depreciation of the market value will be based on an appropriate effective life of assets, not exceeding 25 years. This is to compensate for the fact that market value may in many instances be significantly higher than book value.

It is also significant that the Australian Government has agreed to allow miners to immediately write off investments made after 1 July 2012. The immediate availability of deductions means that a project will not pay any MRRT until its upfront investment has been recouped. Additionally, miners will be able to transfer MRRT losses to other iron ore and coal projects. Any unutilised MRRT losses will be carried forward at the Uplift Rate. However, unlike the previous RSPT model where a refund for 40% of losses may have been available in "reasonable circumstances", there will be no refund from the Australian Government for any MRRT losses.

Royalties paid to State and Territory Governments will be available to offset any MRRT liability. Any unused credits will be uplifted at the Uplift Rate. However, any unutilised royalty credits will not be transferrable or refundable.

The MRRT regime will be supported by an expansion of the operation of the Petroleum Resource Rent Tax (PRRT) regime. The PRRT regime currently only applies to offshore petroleum projects. It will be extended to cover all oil, gas and coal seam methane projects both onshore and offshore Australia. The PRRT will continue to apply at the current rate of 40%.

Despite an expansion of the operation of the PRRT, the Australian Government estimates that there will still be a $1.5 billion revenue shortfall from the narrowing of the operation of the MRRT from the previous RSPT model. To plug the revenue gap, the Australian Government will reduce the company tax rate to 29% rather than 28% as previously announced. The Australian Government will also abandon the Resource Exploration Rebate Scheme where companies were to receive a refundable tax offset at the prevailing company tax rate for their exploration expenditure deductible under tax law and incurred on or after 1 July 2011.

The ability of the Australian Government to secure a consensus from the mining industry on a form of resources tax will provide some platform for its federal election campaign. It is also possible that the Australian Government may make more concessions. However, the federal opposition has not altered its previous indication that it will not introduce the mining tax if elected. Therefore, there may still be further developments in this space in coming months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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