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Tax

Focus: New minerals tax responds to industry concerns

9 July 2010

Chinese language version (PDF)

In brief: The Federal Government has announced that it proposes to replace the previously announced Resource Super Profits Tax with a new Minerals Resource Rent Tax that will apply to iron ore and coal projects, and to extend the scope of the existing Petroleum Resource Rent Tax to cover onshore oil and gas projects. Partner Katrina Parkyn (view CV) and Senior Associate Rory O'Brien report on how the new Minerals Resource Rent Tax responds to industry's key concerns about the previous Resource Super Profits Tax, and what the extension of the Petroleum Resource Rent Tax is likely to mean for onshore oil and gas projects in Australia.

How does it affect you?

  • Under the proposed Minerals Resource Rent Tax (the MRRT), the headline rate of tax will be reduced from 40 per cent to 30 per cent.
  • The MRRT regime will:
    • only apply to iron-ore and coal; and
    • provide greater choice of transitional arrangements for existing projects.
  • Like the previously announced Resource Super Profits Tax (the RSPT), the MRRT will commence on 1 July 2012.
  • Onshore oil and gas projects in Australia will be brought within the existing Petroleum Rent Resource Tax (the PRRT) that already applies to offshore oil and gas projects.

How the proposed MRRT differs from the RSPT

The key differences between the former RSPT proposal and the new MRRT proposal are set out in Table A below.

In summary, however, the favourable differences between the RSPT and the MRRT are:

  • There is a reduction in the headline rate of tax from 40 per cent (under the RSPT) to 30 per cent (under the MRRT).
  • Like the PRRT, the MRRT will be deductible for income tax purposes. Taking into account the 25 per cent extraction allowance, this should reduce the effective additional tax impost under the MRRT regime to 15.75 per cent (at the current company tax rate of 30 per cent), compared with a 28 per cent effective tax rate under the proposed RSPT regime. State royalties are creditable against the MRRT liability.
  • The RSPT was to apply to all mining and petroleum projects in Australia, other than those subject to the existing PRRT regime. The MRRT regime will only apply to iron ore and coal, meaning fewer projects will be affected by it.
  • Under the MRRT:
    • taxpayers will be entitled to an extraction allowance equal to 25 per cent of the otherwise taxable profit. The effect of this is to reduce the amount of taxable profit subject to the 30 per cent tax rate;
    • all post-1 July 2012 expenditure will be immediately deductible; and
    • the uplift factor applied to carry forward losses will be the long-term bond rate (the LTBR) plus 7 per cent. Under the RSPT, the uplift rate was limited to the LTBR.
  • The MRRT regime will provide greater choice of transitional arrangements for existing projects.

In order to fund these favourable changes, the Federal Government has announced that:

  • from 2013-2014, the company tax rate will continue to be cut to 29 per cent but will not be further reduced to 28 per cent, as previously proposed; and
  • the previously proposed resources exploration rebate will no longer be implemented. However, the Government has announced that its new Policy Transition Group, which will have responsibility for overseeing the detailed technical design of the MRRT, will consider the best way to promote future exploration.

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Twenty-five per cent extraction allowance

One very significant feature of the proposed MRRT regime is the 25 per cent extraction allowance. This was not a feature of the former RSPT regime, nor is it a feature of the PRRT regime.

Under the MRRT regime, taxpayers will automatically be entitled to a 25 per cent extraction allowance that will be offset against the otherwise taxable profit. This extraction allowance is in addition to deductions for the actual cost of extraction.

The Government has said that the rationale for the extraction allowance is to recognise the contribution the miner's expertise makes to the profits from extraction. This, combined with the clarification that the taxing point will be at the mine gate, recognises that the MRRT is intended to be a tax on the resource itself and not the value added by the miner – either through the extraction process or downstream value-added processing.

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Extension of PRRT regime to onshore oil and gas projects

Under the original RSPT announcement, onshore oil and gas projects in Australia would have been subject to the proposed RSPT. Offshore oil and gas projects, however, would have continued to be subject to the existing PRRT regime (unless they elected to opt in to the RSPT regime).

The Government has now announced that onshore oil and gas projects will be brought within the existing PRRT regime. This should mean that onshore oil and gas projects are subject to the same treatment as offshore oil and gas projects.

For existing onshore oil and gas projects transitioning into the PRRT regime, taxpayers may elect to use market value as the starting base for project assets, including oil and gas rights. The Government announcement of 2 July 2010 does not detail any other transitional arrangements that are to apply to existing oil and gas projects. It appears, therefore, that existing projects will otherwise be subject to the existing features of the PRRT regime (which will include the range of uplift allowances applicable to different categories of expenditure).

With the existing PRRT regime having been in existence for more than two decades, this should provide greater certainty for industry participants in planning new investment in oil and gas projects in Australia.

Industry has, however, already raised some concerns about the differences between the MRRT and PRRT regimes; in particular, the:

  • higher rate of tax that applies under the PRRT;
  • absence of an extraction allowance under the PRRT; and
  • lack of a minimum profit threshold for the PRRT to apply. Under the MRRT, miners with resource profits below $50 million per annum will not have an MRRT liability.

It remains to be seen how the Government responds to these concerns.

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Lessons from the PRRT experience

The PRRT regime has given rise to a number of issues that, to date, have only been relevant to offshore projects subject to the PRRT. These issues will now become relevant to onshore projects. Some of the issues that have arisen under the existing PRRT regime include the:

  • deductibility/assessability of operational hedge losses and gains;
  • liability of take or pay payments to tax;
  • deductibility of pre-development expenditure;
  • point at which petroleum becomes subject to tax (ie the taxing point); and
  • deductibility of certain head office costs.

These issues may also be relevant to the proposed MRRT.

The Australian Taxation Office has recently issued three draft rulings (TR 2010/D4, TR 2010/D5 and TR 2010/D6) on the PRRT, each of which addresses issues that may also be relevant in finalising and interpreting the proposed MRRT legislation.

Inevitably, there will be many other issues that will require consideration as the terms of the MRRT legislation are developed. Some of these may include the:

  • methodology used to establish the value of the commodity at the taxing point;
  • deductibility of marginal costs involved in operating a project;
  • effect of a taxpayer carrying out value-adding activities at the mine – related to this is defining what is actually meant by 'mine gate'; and
  • treatment of farm-ins (particularly in light of stamp duty considerations, which have not historically been an issue in the offshore PRRT context).

Taxpayers acquiring an interest in an affected project before the commencement of the new regimes will need to have special regard to their position, particularly insofar as they may inherit the vendor's tax attributes in the project.

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Table A: Key differences between the RSPT and the proposed MRRT

Previously proposed RSPT New proposed MRRT

Projects covered

All mining and petroleum projects in Australia, other than those subject to the existing PRRT regime.

Iron ore and coal projects in Australia.

All other minerals are excluded.

Rate of tax

40% of the taxable profit.

30% of the taxable profit, after allowing for 25% extraction allowance.

Taxable profits / taxing point

Never specified, although the Government had said it intended to consult with industry to 'explore the feasibility of a flexible approach to setting the taxing point'.

Industry had expressed significant concerns about how the taxing point would be determined.

Taxable profit to be calculated based on the value of the commodity determined at its first saleable form (at the mine gate), less all costs to that point.

Uplift rate for undeducted expenditure

LTBR.

LTBR plus 7%.

Treatment of existing projects

All existing projects were to be brought into the RSPT regime. Projects already subject to PRRT could also elect in.

Existing projects were to be brought into the RSPT regime with a starting base for invested capital based on accounting book value as at 2 May 2010.

Accelerated write-off period for the existing capital base over first five years.

Existing projects will still be brought within the proposed MRRT regime.

However, taxpayers will be able to elect their starting base to be either book value (excluding the value of the resource itself) or market value as at 1 May 2010 (which will include the value of the resource).

Where a book value starting base is used, it will be subject to accelerated write-off over the first five years and subject to uplift each year at the LTBR plus 7%.

Where a market value starting base is used, there will be no uplift and the starting base will be written off, based on an appropriate effective life of the assets, not exceeding 25 years.

All expenditure between 1 May 2010 and 1 July 2012 will be added to the starting base.

Treatment of post-1 July 2012 expenditure

Exploration expenditure – immediately deductible, with any undeducted expenditure being carried forward and subject to uplift at the LTBR.

Capital expenditure – deductible over time, with undeducted capital being carried forward and subject to uplift at the LTBR.

Both exploration expenditure and capital expenditure post-1 July 2012 will be immediately deductible on an incurred basis, with any undeducted expenditure being carried forward and subject to uplift at the LTBR plus 7%.

Treatment of state royalties

Refundable credit for state royalties, with the refundable credit being capped based on royalties chargeable as at 2 May 2010, plus scheduled increases as at that date and appropriate indexation factors.

State royalties will be creditable against MRRT liability but will not be transferable or refundable.

Any royalties that are not claimed as a credit will be carried forward at the uplift rate of LTBR plus 7% (in line with other undeducted expenditure).

Treatment of losses

Transferable to another profitable project within the entity or company group.

At the end of a project, any unused RSPT losses that are not able to be transferred to another project were to be refundable (at 40% rate).

MRRT losses will be transferable to offset MRRT profits that the taxpayer or another company in the taxpayer group has on other iron ore and coal projects.

Transfer of interest in project

New owner inherits the transferor's RSPT tax base in the project.

This means that the amount of tax collected from the project is not affected by the transfer of an interest in the project from one person to another.

Essentially the same as the RPST.

Any undepreciated starting base and carry-forward MRRT losses will transfer to the new owner.

De minimis threshold

None.

Small miners with resource profits below $50 million per annum will not have an MRRT liability.

For further information, please contact:

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