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Status update on the Australian minerals resource rent tax

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22 July 2011

On 10 June 2011, the Australian Government released exposure draft legislation (the Minerals Resource Rent Tax Bill 2011 (Bill)) for the introduction of the 'minerals resource rent tax' (MRRT).

The legislation is expected to be introduced into Parliament later this year after a consultation period.

The Bill is proposed to come into force from 1 July 2012. The Bill is largely based on the recommendations of the Policy Transition Group, which consulted extensively with industry.

The MRRT is a tax imposed on mining profits made from extracting coal and iron ore. Key elements include:

  • An effective rate of 22.5%

  • The tax will commence on 1 July 2012 and apply to future and existing projects

  • Small operators with 'mining profits' of A$50 million or less per annum are not liable (the MRRT applies pro rata above A$50 million)

  • The MRRT taxing point (i.e. the point in time at which the liability for MRRT is crystallised) is at the extraction point (run-of-mine)

  • Certain allowances are permitted (e.g. starting base (for existing projects), mining losses and royalties)

  • Allowances that are carried forward can generally be increased by an uplift factor based on the long term government bond rate plus 7% (LTBR + 7%) (the unused starting base allowances calculated under the market value method are only uplifted at the consumer price index)

The Australian Government has also proposed to introduce exposure draft legislation relating to amendments to the Petroleum Resource Rent Tax (PRRT) by mid-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, and the changes are to have effect from 1 July 2012.

The introduction of the MRRT may have a significant impact on industry. For example:

  • The perceived winners are diversified majors (e.g. BHPB and Rio Tinto) who can transfer losses between projects, versus smaller pure-plays who cannot (e.g. Fortescue Metals, Atlas Iron, Gindalbie Metals)

  • New entrants (juniors, having higher cashflow discount rates) are likely to be disadvantaged due to the methodology by which their market value starting base allowance is calculated. The inability to deduct financing costs may also be a disadvantage for small miners because they are usually entirely dependent on debt financing while larger miners can fund their projects with cash flow

  • Industry concern regarding calculation of the starting base (the Bill suggests that deductions may be restricted for projects covering multiple mining leases, while industry insists that they be considered as one project, which means higher deductions) – this is open to consultation

  • In the M&A context, there are certain restrictions on the ability to transfer losses between projects

  • Downstream expenses are not deductible, which may disadvantage companies with resources requiring significant processing as some of the profit arising from that processing could fall within the tax net (e.g. magnetite miners such as Fortescue Metals)

  • To determine the impact of the MRRT, it is important for affected entities to undertake market valuations of existing project assets as at 1 May 2010

  • Existing documentation will need to be reviewed in relation to an entity's joint venture and partnership arrangements, as well as documentation relating to the entity's production rights

We have attached for your reference a legal summary with further details regarding the application and calculation of the MRRT based on the Bill.