While 138 recommendations were made in the Henry Review released on 2 May 2010, the Rudd Government ignored or rejected most of them. However, one major recommendation has been adopted: the Resource Super Profits Tax.
The Resource Super Profits Tax (or Resource Tax) - a tax of 40 percent on profits made from the exploitation of resources - will be introduced from 1 July 2012. It will operate in parallel with State and Territory royalty regimes and will provide a refundable credit for royalties paid. Projects within the scope of the Petroleum Resources Rent Tax regime will have the choice of opting into the Resource Tax or staying with the Petroleum Tax.
Resource Tax liabilities will be tax deductible and refunds will be assessable income.
The Government has said that it is making a contribution of 40 percent to the cost of projects, because a company will be able to deduct the costs outlaid on a project from the project's Resource Tax income, or from income of another project owned by the entity or owned by another entity in the same wholly-owned company group.
Any remaining costs will be carried forward to be deducted as a loss against future income or be refundable at the 40 percent rate on a "reasonable basis", such as when an entity exits the resources sector. The detail of the refund arrangements will be determined through consultation.
How does Resource Super Profits Tax work?
The Resource Tax will be imposed at the rate of 40 percent on assessable resource profits - broadly speaking, receipts from resources less the cost of extracting resources, including exploration expenditure and depreciation, but not counting interest and finance costs, costs of permits and licences, and payments to acquire interests in projects subject to Resource Tax.
The Resource Super Profits Tax - a worked example (from the Government's Guide to Resource Super Profits Tax)
The table below illustrates how the Resource Tax calculation for a project interest will work in practice. The project begins at the start of year one, when $100 is spent on capital. The Government recognises capital expenditure through depreciation arrangements, allowing in this example $60 to be claimed as depreciation in year one and $40 to be claimed as depreciation in year two.
In year one, the project does not have any receipts. As such, the project makes a Resource Tax loss of $60 in year one. The unutilised loss, $60, will be carried forward with undepreciated assets, $40, to make the Resource Tax capital base $100 in total.
In year two, the project has $150 of receipts. The project is able to use the depreciation deduction in year two ($40) and losses carried forward from the previous year ($60) as well as the Resource Tax allowance ($6).
The investor will have assessable profit of $44 in year two and pay the Government $18 in Resource Tax.
unutilised losses carried forward from previous year
|Description||Item||Year one||Year two|
|less expenses (such as depreciation)||(2)||60||40|
|less Resource Tax allowance||(3)||0||6|
|less unutilised losses carried forward from previous year||(4)||0||60|
|Net Resource Tax profit (item 1 less items 2, 3, 4) (5)||(5)||(60)||44|
|Taxable Resource Tax profit (nil if item 5 is negative)||(6)||0||44|
|Tax @ 40 percent||(7)||0||18|
|Initial investment (1 July in year 1)||(8)||100||n/a|
|Carry forward losses (item 5 if negative)||(9)||60||0|
|Resource Tax capital base (items 9 + 10)||(11)||100||0|
Which resources will be subject to Resource Super Profits Tax?
The Resource Tax will apply to all mining and petroleum projects with the exception of Petroleum Tax projects, which can elect to opt in to the Resource Tax regime.
Are existing projects affected?
The Government has announced that the Resource Tax will apply to all existing resource projects, except those already within the scope of Petroleum Tax regime.
How will existing projects be treated?
Existing projects will have a Resource Tax "starting base" to reduce future Resource Tax liability by recognising past investment. The Resource Tax starting base can be deducted against Resource Tax revenue, but is not transferable between projects or otherwise refundable.
It is important to note that capital expenditure (including the "starting base" for existing projects) is written off over time for Resource Tax purposes, and is not immediately deducted in the Resource Tax payable calculation.
The Government has announced what it calls "early access to the starting base", by which it will allow accelerated deductions for starting base capital amounts. This means that the Resource Tax calculation will take into account expenditure incurred on existing projects by allowing a write off of these capital costs over five years, as follows:
- Year one – 36 percent
- Year two – 24 percent
- Year three and year four – 15 percent
- Year five – 10 percent
The Resource Super Profits Tax and small Business
The Government says that industry will be consulted to minimise the compliance burden for small businesses and micro operators.
The Government has announced that it intends to finalise the technical design of the Resource Tax before its commencement date of 1 July 2012. An issues paper will be available in late July 2010, and submissions can be made before the end of August 2010. A final design paper will then be released. The initial consultation program announced by Treasury included workshops in Brisbane on Thursday 27 and Friday 28 May 2010.
Given the potential impact of the proposed resources rent tax, it will be critically important that all industry participants are at least aware of the basics of the proposed regime, and take the opportunity to have input during the consultation period.
HopgoodGanim's Taxation and Revenue and Resources and Energy teams will be analysing the detail of the Resources Super Profits Tax as it becomes available, and will keep you informed of what it will mean for companies within the resources sector.
For more information on the Resources Super Profits Tax, please contact HopgoodGanim's Resources and Energy or Taxation and Revenue team.
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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.