TAX NEWS - 
2010
Australia Tax: Resource super profits tax replaced by new minerals resource rent tax (mrrt) and expanded petroleum resource rent tax (prrt)
In May, the government announced the proposed introduction of a 40% resource rent super profits tax (RSPT) that would apply to resource entities earning "super profits" from the exploitation of non-renewable resources. This proposal has been replaced by a minerals resource rent tax (MRRT), and the scope of the petroleum resource rent tax (PRRT) has been expanded to capture both offshore and onshore oil and gas extraction profits.
The new MRRT will apply to companies in the coal and iron ore sectors earning AUD 50 million or more in resource profits, while the expanded PRRT will cover both the offshore and onshore oil and gas sectors. Other mineral sectors (e.g. gold, alumina, copper, zinc, nickel, uranium and sand mining) are effectively carved out of the new taxing proposals.
The government is expecting that over 85% of mining companies previously caught under the RSPT will be excluded from the new mining tax regime.
Both the MRRT and expanded petroleum resource rent tax (PRRT) are intended to apply to all existing and future projects with effect from 1 July 2012 with revised transitional arrangements when compared to those originally proposed under the RSPT. Details of the new rules are in the process of being developed in consultation between the government and affected resource sectors.
The proposed changes also mean that the government will not proceed with the company tax rate reduction to 28%. The government will go ahead with the rate reduction from 30% to 29% from 2013-2014 with the exception of small companies which will benefit from the 29% rate reduction one year earlier from 2012-2013.
Overview of minerals resource rent tax (MRRT) regime
Broadly, the new minerals resource rent tax (MRRT) will tax extraction profits from resource projects at a rate of 30%. The RSPT previously proposed to tax such profits at 40%.
Under the MRRT, it proposed that assessable receipts will be the value of the commodity at mine gate, with a deduction allowed for extraction costs.
A 25% extraction allowance also will be provided that further reduces the minerals resource rent tax (MRRT) tax payable. This is a measure to ensure that only the value of the resource is taxed and not the contribution of expertise applied to the extraction activity. Based on details released by the government to date, this essentially gives rise to an effective tax rate of 22.5% under the minerals resource rent tax (MRRT) regime.
Some of the other main features of the proposed minerals resource rent tax (MRRT) are as follows:
- For existing projects, resource entities can elect to adopt either book value of the mine improvement and plant or market value of all mine assets, including the mine right as a starting base for project deductions.
. Where market value is adopted, resource entities can include the market value mining rights valued as at 1 May 2010 in the starting base. The mining rights would then be depreciated as part of the starting base over effective life up to a maximum of 25 years. It is not clear what is intended by effective life, but under current income tax rules this means the life of the mine.
. Where book value is adopted, the value of mining rights cannot be included but resource entities can depreciate the starting base at an accelerated rate over five years, as per the original RSPT proposal.
. A book value starting base will be uplifted with the long- term bond rate (LTBR), plus 7%. Where a market value starting base is elected, however, the uplift will not be available.
. All post-1 May 2010 capital expenditure will be added to the starting base.
- As noted above, there is a 25% extraction allowance that reduces tax payable for purposes of the minerals resource rent tax (MRRT).
- minerals resource rent tax (MRRT) losses can be transferred to other iron ore or coal projects or carried forward and uplifted at the LTBR rate, plus 7%.
- The underwriting of losses and royalty refunds originally proposed under the RSPT will be scrapped, although royalty credits will be given against the minerals resource rent tax (MRRT) and uplifted at the LTBR, plus 7% if not used immediately.
- Unutilized royalty credits cannot be transferred or refunded.100% of capital expenditure on projects made after 1 July 2012 will be deductible immediately.
- The resource exploration rebate originally proposed will be scrapped.
Overview of expanded PRRT regime
While the current petroleum resource rent tax (PRRT) regime only applies to certain offshore petroleum projects, the expanded PRRT regime will cover all onshore and offshore oil, gas and coal seam methane (also known as coal seam gas).
Features of the expanded PPRT include:
- The PRRT tax rate under the expanded regime will remain unchanged from the current PPRT regime with a tax rate of 40%.
- Projects brought into the expanded petroleum resource rent tax (PRRT) can elect to use the market value of existing projects, including petroleum rights, as the starting base. No mention is made of any requirement to depreciate this amount.
- Resource taxes currently payable under existing federal and state regimes will be creditable against the expanded petroleum resource rent tax (PRRT). Unlike the minerals resource rent tax (MRRT) announcements, no mention is made about the ability to uplift any unused credits at the LTBR, plus 7%.
- Existing features of the current PRRT regime, such as the various uplift allowances for unutilized losses and capital write offs, will continue to apply as well as the immediate expensing of expenditure and limitations of tax loss transferability.
Comments
The new mining proposals will be advantageous for many resource entities compared with the originally proposed RSPT. Many resource entities will benefit from the exclusion of mineral projects from the new regime. For entities caught under the MRRT and expanded PRRT, the transitional arrangements and uplift allowance for deductions are more generous compared with the RSPT.
The main concerns of retroactivity, the definition of "super profit" and the tax rate have been accommodated under the announcement. It is expected that the uncertainty created by the RSPT announcements in project developments and M&A activity in the resources sector should be alleviated.
For resource entities caught under the proposed MRRT and expanded petroleum resource rent tax (PRRT), however, there will still be considerable complexity in transitioning to the new rules.
While the removal of industries such as nickel, copper and alumina, which involve extensive refining, from the new regime lessens issues with the taxing point at mine gate, as well as the identification of deductible extraction costs, those issues remain an area of debate.
With the option to elect market values for existing project assets as a starting base, resource entities will be required to obtain market valuations of their mining and petroleum rights, as well as assessing the effective life of these assets.
Like the superseded RSPT, the impact of existing and proposed new projects will need to be modeled under the new MRRT and expanded PRRT regimes. This also may necessitate a review of existing and projected costs.
The government is still projecting significant revenues from the revised proposals and has indicated that it expects additional tax revenues to fall by AUD 1.5 billion over forward estimates. That is, additional revenues would fall from AUD 12 billion to AUD 10.5 billion in the first two years of operation under the new rules.
Details of the new rules are in the process of being developed and a Policy Transition Group has been formed to oversee this development. The indicative timetable outlined by the government is:
- Release of Exposure Draft legislation by June 2011 for public comment;
- Introduction of legislation into Parliament in the second half of 2011; and
- Passage of the legislation in early 2012 for implementation from 1 July 2012.
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