Australia Tax Alert: Resources sector faces new tax regime - Resource Super Profits Tax

On 2 May 2010, the Australian government announced the proposed introduction of a 40% resource rent tax that will apply to resource entities earning "super profits" from the exploitation of non-renewable resources.

The proposed regime is based on Australia's Henry Tax Reform review recommendations and will have a far-reaching impact across the resource sector, with the government expecting additional annual revenue of AUD 9 billion (USD 8 billion) by the second year the tax is in effect.

Mining and oil and gas entities undertaking resource extraction projects will be caught by the RSPT regime. Certain existing offshore oil and gas operations that are currently subject to a similar tax known as the Petroleum Resource Rent Tax (PRRT, a profits-based tax on certain offshore petroleum projects) will continue to be subject to PRRT, but opt in arrangements will be available for such projects to transition to the RSPT at the taxpayer's election.

The proposed changes are intended to apply to all existing and future projects with effect from 1 July 2012, with industry consultation in developing legislation during the interim period.



Overview of RSPT regime (Resource Super Profits Tax Regime)

The new RSPT regime is a profits-based approach, broadly calculated as follows:

     RSPT profit = assessable receipts – deductible expenditure (grossed up for the RSPT allowance)
     RSPT tax liability = RSPT profit x 40%

Assessable receipts will include receipts from the sale of the resources, but the proposal excludes receipts from the transfer of ownership of a resource project between owners.

In terms of deductible expenditure, the RSPT will allow deductions for the cost of extracting resources, including exploration expenditure, which will be deductible based on income tax concepts, development expenditure under a proposed capital allowance regime and getting such resources to the point of a saleable commodity similar to the case under the existing PRRT regime, but will be subject to further industry consultation.

The government has indicated that the following types of expenditure will be nondeductible:

- Interest and financing costs, including the cost of issuing shares, the repayment of equity, the payment of dividends and financial hedging costs;
- Payments to acquire an interest in an existing exploration permit, retention lease, development license, production license, pipeline license or access authority;
- Payments to acquire interests in projects subject to the RSPT; and
- Income tax and/or Goods and Services Tax.

An "uplift rate," referred to as a RSPT allowance, will be applied to certain capital expenditure and production costs. This allowance will be based on the 10-year government bond rate (currently 5.78%). Very broadly, the government is trying to tax profits over and above this bond rate, which are termed "super profits." However, in practice these are not truly super profits.

The payment of RSPT will not generate franking credits, but will be deductible in determining a resource entity's taxable income.

The government has also indicated that a refundable credit will be given for state and territory royalties currently charged to resource entities to negate concerns of the RSPT being a double tax.

Transitional rules are proposed to apply to existing projects based on audited book values of project assets. This will require further consultation with industry.

The government will commence consultation in June, release an issues paper in July and aims to publish a Final Design Paper for the RSPT regime in late 2010 for comment. This paper will set out the specific design details of the RSPT. Exposure draft legislation is expected in mid-2011, with legislation to be introduced into Parliament during the later part of 2011.


Comments

Some of the issues that the resources sector will need to consider include the following:

- The viability of existing and proposed new projects will need to be modeled under the new RSPT regime and this may necessitate a review of existing and projected costs.
- As resource entities conduct their own analysis of the RSPT impact, it is expected that there will be some debate about whether the RSPT allowance based on the 10-year government bond "risk free rate" is appropriate.
- It is expected that M&A activity on resource projects may be further reviewed, suspended or even abandoned until the impact of the proposed changes can be more clearly determined.
- The question the industry is likely to raise about transitional issues is how resource entities will fare under transitional arrangements where the government proposes a starting tax base using accounting book values when calculating RSPT liability.
- The details of the regime are still being ironed out, and the industry will no doubt be looking to review the proposed changes and consult closely with the government over the coming 18 months prior to its implementation on 1 July 2012.