Minerals resource rent tax – A primer
10 June 2011
The Australian Government released exposure draft legislation on 10 June, 2011 for the introduction of the "Minerals Resource Rent Tax" (MRRT). The, public consultation period will close on 14 July 2011 and legislation isexpected to be introduced into Parliament towards the end of 2011.
The MRRT is broadly a tax imposed on mining profits made from extracting certain non-renewable resources in Australia (mainly coal and iron ore) under relevant mining projects.
The Minerals Resource Rent Tax Bill 2011 (Bill) is proposed to come into force from 1 July 2012.
The Australian Government has also proposed to introduce exposure draft legislation relating to amendments in respect of the Petroleum Resource Rent Tax (PRRT) in 2011 for public consultation and comment. The PRRT is to be extended to all offshore and onshore gas and oil projects, including coal-seam methane. The PRRT changes are also to have effect from 1 July 2012.
Below we provide further details regarding the application and calculation of the MRRT based on the Bill.
Who is liable?
Liability for the MRRT is imposed on a 'miner' for each of the miner's 'mining project interests'. Therefore, any entity that has a 'mining project interest' within the meaning of that term in Part 2-2 will have a potential liability to MRRT. That is, a miner's liability for MRRT is broadly the sum of its MRRT liabilities for each of its 'mining project interests'.
Small operators with 'mining profits' of A$50 or less million per annum will not be liable to pay the MRRT.
Miners with existing 'mining project interests' at 1 July 2012 will be eligible for a reduction in their MRRT liability in respect of their investment in assets before 2 May 2010 (and certain expenditure on such assets between 2 May 2010 and 1 July 2012), discussed further below.
Mining project interests
As discussed above, the MRRT is to be imposed in respect of certain mining projects, being 'mining project interests'. An entity has a 'mining project interest' where the requirements of section 9-5 are satisfied. Broadly, the entity must:
Be a participant in an 'undertaking', the purpose of which is:
To extract 'taxable resources' from the area or land covered by a 'production right'; and
To produce an output that is:
the resource extracted under the authority of the production right; or
something produced using such a taxable resource
Be entitled to share in the output produced by the undertaking.
If there is no relevant 'undertaking', the entity or entities who have the right to extract the taxable resources from the area (ie generally those entities with a 'production right') would each have a mining project interest to the extent of their relevant entitlements.
Therefore, an entity will be liable for the MRRT only where its 'mining project interests' relate to the extraction of 'taxable resources', defined as:
Anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction
Coal seam gas extracted as a necessary incident of mining coal.
The terms 'iron ore' and 'coal' are not defined in the Bill and therefore take their ordinary meaning. The Explanatory Memorandum to the Bill indicates that iron ore is both hematite and magnetite and coal is both black coal and brown coal.
The MRRT is calculated based on the 'MRRT Rate' multiplied by an entity's 'MRRT Profit'. The MRRT rate is effectively 22.5% (based on an initial rate of 30% reduced by a 25% extraction allowance to recognise the contribution of the miner's know how and capital).
An entity's 'MRRT Profit' is broadly calculated as follows:
Less 'Mining expenditure'
Equals 'Mining profit'
Equals MRRT profit
The terms above are determined as follows:
Mining revenue: This is broadly the revenues from taxable resources (or things produced from taxable resources) extracted from the project area, attributed to the 'taxing point'. The amount included will generally be calculated based on the value of the commodity that would be obtained from an arm's length sale to a third party.
Taxing point: This is generally the particular point in the production chain where the taxable resource leaves the 'run-of-mine' stockpile (ie where the resource is placed after extraction ready for the next unit of production, such as transportation or some form of processing). In cases where this does not apply, the taxing point is generally just before the beneficiation process. As a result, the MRRT is a tax on the value of the natural resource itself and not on the value added by the miner either through the extraction process or downstream value-added processing.
Mining expenditure: This is generally referred to as the costs incurred by the miner in carrying on 'upstream mining operations' post 1 July 2012, that is, in extracting the resource and getting the resource to the 'taxing point'. These expenses are immediately deductible (and therefore capital assets do not have to be depreciated over their effective lives). As a result, MRRT will not effectively be paid until the project has made enough profit to pay off its up front investment.
Allowances: Miners are entitled to certain allowances, which go to reducing their MRRT profit (and therefore their liability to MRRT). The allowances are calculated separately for each mining project interest and then put into the entity's MRRT Profit calculation above. Examples of such allowances are:
Royalty allowances: Miners are generally entitled to a deduction for royalties paid to Australian State and Territory governments. The amount of royalties paid is generally grossed-up using the MRRT rate, so that the miner's MRRT liability is reduced by the amount of the royalty.
Mining loss allowances: If a 'mining project interest' made a loss in a previous year, that loss will be uplifted at the long term government bond rate plus 7% (LTBR + 7%) and carried forward to be used as an 'allowance' in the next year.
Starting base allowances: Miners with an existing project interest at 1 May 2010 will receive an allowance to recognise the value of their existing investment. Miners can elect to use book or market value as the starting base for project assets. The implications of this choice would depend on the miners specific circumstances. If book value (excluding mining rights) is used, depreciation is generally accelerated over 5 years and the book value starting base will be uplifted with the LTBR + 7%. In the alternative, when market value at 1 May 2010 (including mining rights) is used, the effective life is up to 25 years, and the market value starting base will not be uplifted.