By Michael Hansel, Partner; Damian O'Connor, Special Counsel and Julian Wright, Solicitor
The Gillard government last week announced that it had reached an agreement about resource tax arrangements with the mining and resources industry.
The new Mineral Resources Rent Tax (Minerals Tax or MRRT), which will replace the Resources Super Profits Tax (Super Tax or RSPT), will have a smaller impact on the resources industry, as it will be levied at a rate of 30 percent rather than 40 percent, and will only be levied on iron ore and coal projects.
As a trade-off for these concessions to the original Super Tax, the resources exploration rebate (or RER), which was the subject of an earlier HG Alert , will not be enacted into law.
Importantly, the Petroleum Rent Resources Tax (Petroleum Tax or PRRT) will be extended to cover all offshore and onshore gas projects. This is a significant change, as this tax previously only applied to offshore petroleum projects. This will mean that coal seam gas projects in Australia may now be taxed under the Petroleum Tax umbrella.
The Minerals Tax compared to the Super Tax
The Minerals Tax and the Super Tax were essentially designed with the same intent - to levy an additional tax on profits from resources projects. However, there are some important differences in the way the two taxes operate.
The Super Tax operated by taxing the assessable revenue of a project at a rate of 40 percent, less the "Super Tax allowance". This allowance was determined by multiplying a long term government bond rate against the "Super Tax capital account", which is largely made up of undepreciated capital expenditure.
There was some symmetry between the Super Tax and the exploration rebate, because at the end of a project, any remaining Super Tax capital account may have been eligible for a rebate at a rate of 40 percent. Because the exploration rebate will no longer proceed, the Minerals Tax does not have this symmetry. While the Super Tax potentially applied to all resources projects, the Minerals Tax only applies to iron ore and coal projects. In addition, taxpayers with assessable profits of less than $50 million per year are exempted from the Minerals Tax.
Key elements of the Minerals Tax
The headline Minerals Tax rate is 30 percent on the "operating margin", less the "Minerals Tax allowance" and "extraction allowance". This is similar to how the Super Tax worked at a high-level, but there are some key differences in how the tax is applied:
- The operating margin allows an immediate deduction for operating costs and certain investment costs. The deductions from Minerals Tax assessable revenue would normally be more generous than those allowed from Super Tax assessable revenue.
- The Minerals Tax allowance is the value of Minerals Tax losses uplifted at the long term government bond rate, plus seven percent (currently the uplift would be about 13 percent). Minerals Tax losses would normally be expected to arise in the early stages of a project, where project development costs may be immediately deducted for Minerals Tax purposes.
- The extraction allowance is essentially a straight 25 percent discount to any Minerals Tax liabilities.
- The uplifted royalty offset applies to any royalties that have been paid, but not yet credited against a net Minerals Tax liability. Such royalties also benefit from the same uplift applied to Minerals Tax losses at the bond rate, plus seven percent.
A worked example
Below is an example extracted from the Federal Government's fact sheet on how the Minerals Tax may apply to iron ore and coal projects, commencing after 1 July 2012.
Although it is a simplified example, it demonstrates how the Minerals Tax losses will be uplifted and carried forward to future years, and how the extraction allowance applies to discount Minerals Tax liability by 25 percent.
This example presents outcomes for a single project company with an equity financed mine that operates for five years. The company is assumed to invest $1 billion in the first year of the project. Over the life of the project, the pre-tax rate of return (revenue less operating and investment costs) is 50 percent. State royalties are assumed to be equal to 7.5 percent of sales revenue and are credited against the Minerals Tax liability to produce the net Minerals Tax liability.
| Resource Charge | Year 1 ($m) | Year 2 ($m) | Year 3 ($m) | Year 4 ($m) | Year 5 ($m) | Year 6 ($m) |
| Revenue | 0 | 520 | 830 | 910 | 1090 | 1100 |
| Operating expenses | 0 | 130 | 210 | 230 | 270 | 280 |
| Depreciation | 1000 | 0 | 0 | 0 | 0 | 0 |
| Minerals Tax allowance @ 13 percent | 0 | 130 | 96 | 28 | 0 | 0 |
| Minerals Tax unutilised losses | 0 | 1000 | 740 | 216 | 0 | 0 |
| Minerals Tax profit/loss | (1000) | (740) | (216) | 436 | 820 | 820 |
| Minerals Tax @ 30 percent | 0 | 0 | 0 | 131 | 246 | 246 |
| Extraction allowance @ 25 percent | 0 | 0 | 0 | 33 | 62 | 62 |
| Minerals Tax after extraction allowance | 0 | 0 | 0 | 98 | 185 | 185 |
| Royalty @ 7.5 percent | 0 | 39 | 62 | 68 | 82 | 83 |
| Uplifted royalty offset | 0 | 0 | 44 | 120 | 102 | 0 |
| Net Minerals Tax | 0 | 0 | 0 | 0 | 1 | 102 |
| Total resource charge | 0 | 39 | 62 | 68 | 82 | 185 |
The value of existing projects
A key point of difference between the Minerals Tax and the Super Tax is the value at which existing projects may be brought into the regime. Taxpayers can now choose between the book value and the market value for existing projects.
The general rule is that if a project is brought in at the (higher) market value, the cost base won't be uplifted at the bond rate, and is depreciated over the effective life of the project (which may be up to 25 years). If the project is brought in at the (lower) book value, then it may be depreciated over an accelerated period of five years, and uplifted at the bond rate plus seven percent.
In summary
- The Minerals Tax should generally result in a lower tax liability than the Super Tax regime for most profitable mining projects.
- The Minerals Tax regime does not include an exploration rebate, which may have been of benefit to junior miners who did not have profits from other projects to offset against unused project losses.
- The Petroleum Tax, which will now cover a wider range of activities, has a headline tax rate of 40 percent.
- Importantly, although it may appear that there is political consensus over the Minerals Tax (as opposed to the Super Tax), the Minerals Tax is not yet law and a lot of the detail, such a taxing points, still needs to be agreed.
We suggest that resources companies consider making submissions to the Policy Transition Group, led by Resources Minister Martin Ferguson and Don Argus, on the details and technical design of the Minerals Tax.
For more information on the Mineral Resources Rent Tax, please contact HopgoodGanim's Corporate Advisory and Governance or Taxation and Revenue practice.
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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.