Australia: Minerals Resource Rent Tax Update

On 10 June 2011, the Federal Government released for consultation draft legislation for the Minerals Resource Rent Tax (MRRT).  The MRRT will apply from 01 July 2012 to the mining of iron ore and coal in Australia.

Although quite lengthy, the draft legislation is not exhaustive and is intended to provide stakeholders with an early overview of the legislation.  The closing date for submissions on the MRRT draft legislation is 14 July 2011.  The Government intends to release a second and final exposure draft of the legislation for public consultation later in the year.  Legislation implementing the new resource taxation arrangements is expected to be introduced into Parliament in the second half of 2011.

It is difficult to assess the likelihood of the draft legislation becoming law given Australia's current political climate.  The legislation will need the support of key independent members of Parliament.  It is also unclear whether the legislation will be challenged on constitutional grounds.  There have been recent media reports that some miners may challenge the MRRT on the grounds that only the State Governments can raise a tax on state mineral resources.

The key aspects of the draft MRRT legislation are set out below.

1. Taxpayers with MRRT assessable profits of less than Aus $50 million per annum will be excluded from the MRRT.

2. The MRRT will apply at a headline rate of 30%.

3. The MRRT will provide a 25% extraction allowance which effectively reduces the headline rate to 22.5%.

4. New investment will be eligible for an immediate write off, rather than depreciation over a number of years.  This allows mining projects to access the deductions immediately, and means a project will not pay any MRRT until it has made enough profit to pay off its upfront investment.

5. The MRRT will carry forward unutilised losses at the government long term bond rate plus 7%.

6. The MRRT will provide transferability deductions.  It means a taxpayer can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.

7. The MRRT will also provide a full credit for state royalties paid by a taxpayer in respect of a mining project.  Unused credits for royalties paid will be uplifted at the long term government bond rate plus 7%, as per other expenses.  Unused royalty credits will not be transferrable between projects or refundable.

8. The MRRT will provide recognition of past investments through a credit that recognises the market value of that investment, written down over a period of up to 25 years.  Unlike other costs, this starting base will not be uplifted.

9. Those companies that wish to use their current written down book values of the project's assets, excluding the value of the resource, will be provided with accelerated depreciation over 5 years. This starting base can be uplifted at the government long term bond rate plus 7%.

10. The MRRT will recognise the particular characteristics of different commodities, by applying a taxing point close to the point of extraction and using appropriate pricing arrangements to ensure only the value of the resources extracted is taxed.

The following example provided by the Federal Government is intended to illustrate how the MRRT will apply to iron ore and coal projects, commencing after 01 July 2012.  The example illustrates the complicated nature of the MRRT.

The example presents outcomes for a single project company with an equity financed mine that operates for 5 years.  The company is assumed to invest Aus $1 billion in the first year of the project.  Over the life of the project the pre-tax rate of return (revenue less operating and investment costs) is 50%.

The MRRT is levied at a rate of 30% of the operating margin (revenue less operating and investment costs) less the MRRT allowance and the extraction allowance.  The MRRT allowance is calculated as the value of unused losses uplifted by an allowance rate equal to the long term government bond rate plus 7%.  The extraction allowance provides a 25% discount to the MRRT liability to focus the tax on the value of the resource rather than the value added through mining expertise.

State royalties are assumed in this example to be equal to 7.5% of sales revenue and are credited against the MRRT liability to produce the net MRRT liability.  Where royalty payments exceed the MRRT liability in any one year, the balance is uplifted at the relevant rate to be offset against future MRRT liabilities.  The total resource charge is the sum of royalties paid in the year and the net MRRT liability.

*13% = long term bond rate of 6% plus 7%

# company tax rate is currently 30% but scheduled to decrease to 29% from 01 July 2013 (01 July 2012 for small business entities) if the MRRT is introduced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.