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Australian Government repeals controversial super profits mining tax

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Geoff Simpson

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Perth

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09 September 2014

​Legislation repealing the Mineral Resources Rent Tax (MRRT) was passed on 2 September 2014 after a Government deal with the minor parties PUP and the AMEP for their votes in exchange for compromises in respect of a number of other tax and social security measures (which the MRRT was intended to fund).

The MRRT: a refresher

The MRRT was a tax levied on super profits of Australian coal and iron ore miners which came into force on 1 July 2012.

The concept of a super profits tax first came out of a Government commissioned tax review in 2008 which recommended that the current inconsistent and convoluted royalty system be replaced with a single resources rent tax.  What followed in 2010 was the introduction of a 40% ‘Resources Super Profit Tax’ (RSPT) which applied to all commodities.  It was highly criticised due to what was perceived to be minimal industry consultation. Business leaders called it a ‘sovereign risk’ which was damaging to Australia’s investment reputation.   When the Government leadership changed later that year, then Prime Minister Gillard opened up direct negotiations with Australia’s three largest bulk commodities exporters (Rio Tinto, BHP Billiton and Xstrata) to amend the RSPT.  The result was the MRRT, which was a 22.5% effective tax rate at the extraction point (ie before processing and transport).  It applied only to coal and iron ore, and then only once profits reached $75 million.  In addition, companies with multiple projects could offset their losses against other projects and there were a number of other deductions including in respect of the starting base for existing projects and crediting of future state royalties.

 
This meant that the perceived winners were the large and diversified majors who were able transfer any losses between projects. However, the tax was again highly criticised for failing to consult industry more widely and smaller miners were seen to have lost out.
 
Despite the controversy over the tax’s impact on mining projects when first introduced (the earliest indications were that the RSPT would generate $12 billion in revenues for the Government), it was widely reported that because of the generous deductions, the net present value impact of the MRRT was marginal at best.  According to the repeal bills that were recently introduced to the Senate, the MRRT would have contributed just two thirds of a billion dollars to the federal budget over the next four financial years.

What does this mean for foreign investment?

 "The Senate's vote to repeal the Minerals Resource Rent Tax (MRRT) has removed an unnecessary weight on Australia’s economic growth and competitiveness…Repealing the MRRT will help improve Australia’s reputation as an attractive investment destination and ensure a strong, growing resources industry into the future" said Jennifer Westacott, Chief Executive of the Business Council of Australia.  Already, the repeal of the MRRT has caught international attention with major international mining players like India’s Adani Mining welcoming Australia's move to repeal the tax, saying it reflected the Government's strong commitment towards supporting export opportunities in the resources sector.

 
The repeal of the MRRT, the recent abolition of the carbon tax, and a number of regional developments in the coal sector may improve Australia’s prospects as an investment destination.  Indonesia, for example, has introduced a raft of measures including, most recently (and controversially), an extensive prohibition on unprocessed minerals and the introduction of new foreign ownership limitations.  Similarly, some are calling current coal shortages in India a ‘crisis’, with recent strikes at Coal India (the world’s largest coal miner by output), and more than 200 coal mining licences being declared illegal by the Supreme Court last month.

 

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