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2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
EXPOSURE DRAFT
Minerals Resource Rent Tax
EXPLANATORY MATERIAL
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
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Table of contents
Glossary......
Chapter 1Charging for Australia’s nonrenewable resources
Chapter 2Overview of the Minerals Resource Rent Tax......
Chapter 3Core rules......
Chapter 4Mining revenue......
Chapter 5Mining expenditure......
Chapter 6Allowances......
Chapter 7Starting base allowances......
Chapter 8Small miners......
Chapter 9Combining mining project interests......
Chapter 10Transfers and splits of mining project interests......
Chapter 11Winding down and ending of mining project interests...
Chapter 12Premining project interests......
Chapter 13Adjustments......
Chapter 14Valuations......
Chapter 15Accounting for the MRRT......
Chapter 16Entities......
Chapter 17Integrity measures......
Chapter 18Administration of the MRRT......
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Glossary
All legislative references throughout this explanatory material are to the Minerals Resource Rent Tax Bill 2011 unless otherwise indicated.
The following abbreviations and acronyms are used throughout this explanatory material.
Abbreviation / DefinitionAFTS Review / Australia’s Future Tax System Review
AMPLA / Australian Mining Petroleum Law Association
APA / Advance Pricing Agreement
ATO / Australian Taxation Office
CGT / capital gains tax
CPI / Consumer Price Index
CUP / comparable uncontrolled price
DCF / discounted cash flow
EBIT / earnings before interest and tax
GAAR / The general antiavoidance rule (see Division210)
GST / goods and services tax
GSTAA 1999 / A New Tax System (Goods and Services Tax ) Act 1999
ITAA 1997 / Income Tax Assessment Act 1997
ITAA 1936 / Income Tax Assessment Act 1936
LTBR / long term bond rate
LTBR + 7 / long term bond rate plus 7 percent
MRRT / Minerals Resources Rent Tax
MRRT Bill / Minerals Resource Rent Tax Bill 2011
MRRT (CA&TP) Bill / Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011
OECD / Organisation for Economic Cooperation and Development
PRRT / Petroleum Resource Rent Tax
PTG / Policy Transition Group
RET / Department of Resources, Energy and Tourism
ROM / run-of-mine
RTIG / Resource Tax Implementation Group
SAP / substituted accounting period
T(IOEP) Act 1983 / Taxation (Interest on Overpayments and Early Payments) Act 1983
TAA 1953 / Taxation Administration Act 1953
TNMM / transactional net margin method
Treasury / Department of the Treasury
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Charging for Australia’s non-renewable resources
Chapter 1
Charging for Australia’s nonrenewable resources
Outline of chapter
1.1This chapter explains the rationale for charging for Australia’s nonrenewable resources.
Australia’s nonrenewable resources
1.2Australia is naturally endowed with a large, high qualitynonrenewable resource base.
1.3Nonrenewable resources are stocks of minerals and petroleum that are exhaustible and depletable.
1.4The majority of Australia’s nonrenewable resources are publicly owned. The rights to these nonrenewable resources are vested in the Crown.
Nonrenewable resources and taxation
1.5It is the characteristic of nonrenewability that allows exploitation of these resources to generate economic rent or above normal profit. Economic rent can generally be taxed without distorting the decisions of investors if the tax is well designed.
1.6There are two main types of resource taxes: royalties and resource rent taxes.
Royalties
1.7In Australia, State and Territory governments typically tax nonrenewable resources by applying a royalty to production. Royalties are generally applied on the basis of volume or value and do not take into account how profitable a mining operation is.
1.8Royalties therefore will only recover a small portion of mining rents when mining profits are high, but will also tax mining operations where no economic rent is present.
Resource rent taxes
1.9Resource rent taxes are profitbased, cash flow taxes. They differ from most royalties in that they take into account the profitability of a mining operation. A resource rent tax collects a percentage of the resource project’s economic rent.
1.10One form of resource rent tax is the Brown tax, invented by Cary Brown in 1948. A Brown tax is a pure cash flow tax levied (at a constant percentage) on the difference between revenue and expenditure.
(i)When there is a positive cash flow, the government taxes that positive cash flow. When there is a negative cash flow, typically at the investment phase, the government provides an immediate refund at the tax value.
(ii)The tax rate determines the portion of economic rent that the government collects, and the value of the refund that they provide.
1.11Under a Brown tax, the government is effectively sharing in the profits and costs of the mining project in proportion to the tax rate.
1.12However, the Brown tax model is difficult to implement because of the immediate nature of the refund. So governments typically rely on other models of resource rent taxes that mimic the effect of the Brown tax.
1.13The GarnautClunies Ross resource rent tax is a resource rent tax model that attempts to replicate the effects of a Brown tax. It is named after the Australian economists Ross Garnaut and Anthony Clunies Ross. The GarnautClunies Ross resource rent tax is levied on the positive cash flows, or profits, of a project, but there is no refund when the cash flow is negative or the taxpayer is making a loss. Instead, losses are carried forwardand ‘uplifted’ by an interest rate, so that they can be used as a deduction against positive cash flows in later years.
1.14The uplift rate preserves the value of the taxpayer’s losses because they do not get an immediate refund for the tax value of the government’s contribution to the mining project. The uplift rate also includes a premium to compensate for the risk that the taxpayer may never get to use its losses.
1.15The Petroleum Resource Rent Tax (PRRT) is an example of a GarnautClunies Ross resource rent tax.
Background to the Minerals Resource Rent Tax
1.16The Minerals Resource Rent Tax has its origins in the recommendations of the Australia’s Future Tax System (AFTS) Review.
1.17The AFTS Review found that the royalty regimes applied by the States and Territories were among the most distorting taxes in the Federation. In addition, royalty regimes are not particularly flexible.
1.18As a consequence of being distorting and relatively inflexible, royalties tend to be set at rates low enough for the mining industry to continue to operate in periods of low to average commodity prices. However, this means that royalties will fail to provide an adequate return to the community when commodity prices are high.
1.19The company tax is a profitsbased tax, which generally applies to incorporated businesses and will tend to raise more revenue from mining operations when profits are high. However, the AFTS Review found that there would be benefits to economy more broadly through lowering the company tax rate to assist in attracting internationally mobile capital investment.
1.20The AFTS Review concluded that a lower company tax rate was desirable for Australia but only if a specific profitsbased tax was extended to mining operations to ensure a sufficient return to the community in periods of high commodity prices.
1.21In response to the AFTS review, the Government has decided that, from 1 July 2012, the Minerals Resource Rent Tax (MRRT) will apply to profits from coal and iron ore operations, while the Petroleum Resource Rent Tax will be extended to all offshore and onshore gas and oil projects, including coalseam methane. These commodities account for the bulk of Australia’s mineral wealth.
1.22The detailed design of the MRRT is based on the recommendations of the Policy Transition Group (PTG). The PTG was chaired by Don Argus AC and the Hon Martin Ferguson AM MP, Minster for Resources, Energy and Tourism. The PTG consulted extensively across Australia on the new resource tax arrangements and reported to the Government in December 2011.
The Minerals Resource Rent Tax
1.23The MRRT is a type of resource rent tax based on the GarnautClunies Ross model.
1.24Under the MRRT, the government taxes positive cash flows, or mining profits, and allows taxpayers to carry forward and uplift losses with interest for use in later years.
1.25As the MRRT taxes profits from minerals that are commonly subject to state and territory royalties, it provides a credit for royalties.
1.26The tax base for the MRRT is confined to net profits at the taxing point. The taxing point is the point in the mining production chain that separates upstream and downstream operations.
1.27As the MRRT is intended to apply only to upstream profits, it is a tax on a narrow portion of mining profits unlike, for example, the company income tax, which seeks to tax all sources of company income comprehensively.
1.28The MRRT is a tax on realised profits. As the proceeds from the sale of a resource are typically realised downstream of the taxing point, the MRRT requires taxpayers to determine the amount of those proceeds that relate to upstream operations for tax purposes using the most appropriate and reliable method. The tax is not intended to tax the value added in downstream activities.
1.29To calculate the MRRT profit at the taxing point, the sales proceeds are reduced by an amount that recognises value added downstream of the taxing point using the most appropriate and reliable method. Allowable upstream capital and operating expenditure is then directly and immediately deducted, along with royalty credits, carry forward losses, starting base depreciation, starting base losses and losses transferred from other projects.
1.30If losses and royalty credits cannot be used within an MRRT year, they are transferred where possible, or carried forward to later years with the relevant uplift rate applied.
1.31Through providing effective deductions for all allowable capital and operating expenditure, with an uplift of carry forward losses, the tax base for the MRRT approximates a Brown tax on the profit attributable to the resource in the state is was in at the taxing point.
1.32As the sources of mining rents are difficult to identify separately in practice, the MRRT aims to strike an appropriate balance between recovering a sufficient return to the community for the profits attributable to the underlying resource rent at the taxing point, while recognising that some mining expertise and capital may also be taxed in a process which hasregard to realised profits and their equivalents. This balance is achieved through the combined effect of the features of the tax, including the tax rate, the extraction allowance, the taxing point, the interest allowance (uplift) and the scope of assessable revenues and allowable deductions.
1.33An overview of the operation of the MRRT is at Chapter 2 of this explanatory material.
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Overview of the Minerals Resource Rent Tax
Chapter 2
Overview of the Minerals Resource Rent Tax
Outline of chapter
2.1This chapter is an overview of the Minerals Resource Rent Tax (MRRT). It outlines the resources that are subject to MRRT and explains the basic operation of the MRRT.
Overview of the MRRT
What resources are covered?
2.2Australia is endowed with some of the world’s largest and most valuable deposits of iron ore and coal. These bulk commodities make up a large proportion of Australia’s mine production and mineral exports.
2.3The MRRT applies to certain profits from iron ore and coal extracted in Australia. It also applies to profits from gas extracted as a necessary incident of coal mining and gas produced by the in situ combustion of coal. These nonrenewable resources are called taxable resources.
2.4Where profits are made from the sale or use of taxable resources, MRRT may be payable.
Basic operation of the MRRT
2.5This section explains the operation of the MRRT and how it applies to three different cases. The first case, the ‘vanilla’ case, examines how the MRRT operates for a project that was not in existence before the announcement of the MRRT.
2.6The second case examines how the MRRT operates for projects that are transitioning into the MRRT (that is, for projects that were already invested in when the MRRT was announced). It explains how the MRRT recognises those existing investments.
2.7The third case shows how the MRRT operates for miners with multiple projects. It introduces the concepts of premining losses and transferring mining losses and premining losses between projects owned by the miner. It also explains the process of ‘uplifting’ unused amounts.
The ‘vanilla’ case
2.8The key purpose of the MRRT is to tax the economic rents from nonrenewable resources after they have been extracted from the ground but before they have undergone any significant processing or valueadd. Generally, the profit attributed to the resource at this point represents the value of the resource to the Australian community. Where the taxable resource is improved through beneficiation processes, such as crushing, washing, sorting separating and refining, the value added is attributable to the miner.
Mining project interests
2.9The mining project interest provides the basic unit for taxing the nonrenewable resource. A mining project interest is an entitlement to share in the output of an undertaking carried on to extract taxable resources and produce a resource commodity (which could be the taxable resource or something produced from the taxable resource). It must relate to at least one production right. A production right is a right, issued under a law of a State or Territory, that authorises its holder to extract the resources from a particular area (called a project area).
Mining profit or loss
2.10Once a mining project interest has been identified, the mining profit for the year has to be determined. The mining profit is themining project interest’s mining revenue for the year less its mining expenditure. If that produces a negative amount, that is a mining loss.
Mining revenue
2.11The main type of mining revenue a mining project interest can have comes from selling taxable resources (or things produced from taxable resources) extracted from the project area. The proceeds are mining revenue to the extent they relate to the taxable resources at a particular point in the production chain (called the ‘taxing point’).
2.12Under the MRRT, the taxing point is typically when the taxable resource leaves the ‘runofmine’ stockpile (also called the ‘ROM stockpile’ or ‘ROM pad’). The ROM stockpile is where the resource is placed after extraction ready for the next unit of production. The next unit of production could be transportation but is often some form of processing. However, not all mining operations use a ROM stockpile. Where a project has no ROM stockpile, or it is bypassed for any reason, the taxing point is generally just before the first beneficiation process starts.
2.13Mining operations that occur before the taxing point are upstream mining operations; those that occur afterwards are downstream mining operations.
Diagram 2.1: The taxing point
In this diagram, the dashed line represents the taxing point at the ROM stockpile. Upstream and downstream mining operations are illustrated.
2.14The MRRT is a tax on realised proceeds from selling a taxable resource but only on that part of those proceedsthat relate to the condition and location of the resource when it was at the taxing point. In most cases, the mining revenue will be determined as an amount of the consideration received for the sale of the resource reduced by an amount for the value added by the downstream operations.
Mining expenditure
2.15The MRRT recognises the majority of upstream costs incurred by the miner in extracting the nonrenewable resource and getting it to the taxing point.
2.16Upstream costs are called mining expenditure if they are necessarily incurred by the miner in carrying on the upstream mining operations. Mining expenditure includes costs related to construction of the mining operation, blasting and digging, infrastructure, and capital assets used to transport the nonrenewable resource to the taxing point (such as dump trucks and conveyor belts).
2.17Under the MRRT, upstream capital expenditure is immediately deductible. Unlike income tax, capital assets do not have to be depreciated over their effective lives.
2.18Some expenditure is specifically excluded from being taken into account as mining expenditure, including financing payments, the costs of acquiring a mining interest, royalty payments, and some tax payments.
Allowances
2.19Miners reduce their mining profit by their allowances, to arrive at a net amount, which, for convenience, is referred to in this explanatory material as the MRRT profit.
2.20In the vanilla case, the relevant allowances are royalty allowances and mining loss allowances.
Royalty allowances
2.21Miners will generally pay royalties to State and Territory Governments. Royalty regimes and rates vary across jurisdictions but are most commonly a charge on the volume or value of the resource, generally at the point of export or sale to a third party. These royalties are often a proxy for the rents available from that resource.
2.22The miner will be liable to pay some MRRT in addition to royalties when resource rents are sufficiently high. That is, the company will pay the royalty and then also pay MRRT. However, the MRRT recognises that the royalty is already a type of resource rent charge on the nonrenewable resource, by providing the miner with a deduction, called a royalty allowance. The royalty allowance is ‘grossedup’, using the MRRT rate, so that it reduces the MRRT liability by the amount of the royalty.
2.23Where the full royalty allowance for the year cannot be used, the unused portion is uplifted and carried forward to be used in the next year. The uplift rate is the long term bond rate (LTBR)+7 per cent.
Mining loss allowances
2.24If a mining project interest made a loss in an earlier year, the loss is uplifted at LTBR+7 per cent and carried forward to be used in a later year. When it is applied to reduce a mining profit of the mining project interest in a later year, it is called a mining loss allowance.