Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
MINERALS RESOURCE RENT TAX BILL 2011
MINERALS RESOURCE RENT TAX (CONSEQUENTIAL AMENDMENTS AND
TRANSITIONAL PROVISIONS) BILL 2011
MINERALS RESOURCE RENT TAX (IMPOSITION-CUSTOMS) BILL 2011
MINERALS RESOURCE RENT TAX (IMPOSITION-EXCISE) BILL 2011
MINERALS RESOURCE RENT TAX (IMPOSITION-GENERAL) BILL 2011
REVISED EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE
HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Charging for Australia's non-renewable
resources ...................................................................... 5
Chapter 2 Overview of the Minerals Resource Rent Tax ............. 11
Chapter 3 Core rules .................................................................... 27
Chapter 4 Mining revenue ............................................................ 45
Chapter 5 Mining expenditure ...................................................... 73
Chapter 6 Allowances................................................................... 95
Chapter 7 Starting base allowances ........................................... 119
Chapter 8 Small miners .............................................................. 145
Chapter 9 Combining mining project interests ............................ 151
Chapter 10 Transfers and splits of mining and pre-mining
project interests......................................................... 183
Chapter 11 Winding down and ending of mining and pre-
mining project interests ............................................. 213
Chapter 12 Pre-mining project interests ....................................... 235
Chapter 13 Adjustments ............................................................... 241
Chapter 14 Valuations .................................................................. 257
Chapter 15 Accounting for the MRRT .......................................... 279
Chapter 16 Entities ....................................................................... 301
Chapter 17 Integrity measures ..................................................... 317
Chapter 18 Administration of the MRRT ....................................... 337
Chapter 19 Miscellaneous consequential amendments ............... 387
Index ................................................................................................... 391
Glossary
The following abbreviations and acronyms are used throughout this
combined explanatory memorandum.
Abbreviation Definition
AFTS Review Australia's Future Tax System Review
APA Advance Pricing Agreement
ASX Australian Securities Exchange
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
CPI consumer price index
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax )
Act 1999
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
LTBR long term bond rate
LTBR + 7 per cent long term bond rate plus 7 per cent
MRRT Minerals Resource Rent Tax
MRRT (CA&TP) Bill Minerals Resource Rent Tax (Consequential
Amendments and Transitional Provisions)
Bill 2011
MRRT Bill Minerals Resource Rent Tax Bill 2011
MRRT customs imposition Minerals Resource Rent Tax
Bill (Imposition-Customs) Bill 2011
MRRT excise imposition Bill Minerals Resource Rent Tax
(Imposition-Excise) Bill 2011
MRRT general imposition Bill Minerals Resource Rent Tax
(Imposition-General) Bill 2011
OECD Organisation for Economic Co-operation and
Development
1
Minerals Resource Rent Tax
Abbreviation Definition
OECD Guidelines OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax
Administrations
PAYG pay as you go
PRRT Petroleum Resource Rent Tax
TAA 1953 Taxation Administration Act 1953
2
General outline and financial impact
Minerals Resource Rent Tax
The Minerals Resource Rent Tax (MRRT) is a tax on the economic rents
miners make from the taxable resources (iron ore, coal and some gases)
after they are extracted from the ground but before they undergo any
significant processing or value add. `Economic rent' is the return in
excess of what is needed to attract and retain factors of production in the
production process.
The MRRT is a project-based tax, so a liability is worked out separately
for each project the miner has at the end of each MRRT year. The miner's
liability for that year is the sum of those project liabilities.
The tax is imposed on a miner's mining profit, less its MRRT allowances,
at a rate of 22.5 per cent (that is, at a nominal rate of 30 per cent, less a
one-quarter extraction allowance to recognise the miner's employment of
specialist skills).
A project's mining profit is its mining revenue less its mining expenditure.
If the expenditure exceeds the revenue, the project has a mining loss.
Mining revenue is, in general, the part of what the miner sells its taxable
resources for that is attributable to the resources in the condition and
location they were in just after extraction (the `valuation point'). Mining
revenue also includes recoupments of some amounts that have previously
been allowed as mining expenditure.
Mining expenditure is the cost a miner incurs in bringing the taxable
resources to the valuation point.
Mining allowances reduce each project's mining profit. The most
significant of the allowances is for mining royalties the miner pays to the
States and Territories. It ensures that the royalties and the MRRT do not
double tax the mining profit.
In the early years of the MRRT, the project's starting base provides
another important allowance. The starting base is an amount to recognise
the value of investments the miner has made before the MRRT.
Other allowances include losses the project made in earlier years and
losses transferred from the miner's other projects (or from the projects of
some associated entities).
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Minerals Resource Rent Tax
If a miner's total mining profit from all its projects comes to less than
$75 million in a year, there is a low profit offset that reduces the miner's
liability for MRRT to nil. The offset phases out for mining profits
totalling more than $75 million.
Date of effect: The MRRT applies from 1 July 2012.
Proposal announced: The MRRT was announced in the Treasurer's
Media Release No. 055 of 2 July 2010.
Financial impact: The MRRT will have these revenue implications:
2011-12 2012-13 2013-14 2014-15
Nil $3,700m $4,000m $3,400m
Compliance cost impact: This measure is expected to impose significant
compliance costs on taxpayers in the iron ore and coal sectors
(approximately 320 taxpayers). In the first year of the MRRT's operation,
taxpayers will need to value their starting base and modify their
accounting procedures. Ongoing compliance costs will reduce over the
medium to long term.
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Chapter 1
Charging for Australia's non-renewable
resources
Outline of chapter
1.1 This chapter explains the rationale for charging for Australia's
non-renewable resources.
Australia's non-renewable resources
1.2 Australia is naturally endowed with a large, high
quality non-renewable resource base.
1.3 Non-renewable resources are stocks of minerals and petroleum
that are exhaustible and depletable.
1.4 The majority of Australia's non-renewable resources are
publicly owned. The rights to these non-renewable resources are vested in
the Crown.
Non-renewable resources and taxation
1.5 It is the characteristic of non-renewability that allows
exploitation of these resources to generate economic rent or above normal
profit. Economic rent can generally be taxed without distorting the
decisions of investors if the tax is well designed.
1.6 There are two main types of resource taxes: royalties and
resource rent taxes.
Royalties
1.7 In Australia, State and Territory governments typically tax
non-renewable resources by applying a royalty to production. Royalties
are generally applied on the basis of volume or value and do not take into
account how profitable a mining operation is.
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Minerals Resource Rent Tax
1.8 Royalties therefore may only recover a portion of mining rents
when mining profits are high, but will also tax mining operations where
no economic rent is present, such as when profits are low.
Resource rent taxes
1.9 Resource rent taxes are profit-based, cash flow, taxes. They
differ from most royalties in that they take into account the profitability of
a mining operation. A resource rent tax collects a percentage of the
resource project's economic rent.
1.10 One form of resource rent tax is the Brown tax, invented by
Cary Brown in 1948. A Brown tax is a pure cash flow tax levied (at a
constant percentage) on the difference between revenue and expenditure.
(i) When there is a positive cash flow, the government taxes that
positive cash flow. When there is a negative cash flow,
typically at the investment phase, the government provides an
immediate refund at the tax value.
(ii) The tax rate determines the portion of economic rent that the
government collects, and the value of the refund that they
provide.
1.11 Under a Brown tax, the government is effectively sharing in the
profits and costs of the mining project in proportion to the tax rate.
1.12 However, the Brown tax model is difficult to implement because
of the immediate nature of the refund. So governments typically rely on
other models of resource rent taxes that mimic the effect of the Brown tax.
1.13 The Garnaut -- Clunies-Ross resource rent tax is a resource rent
tax model that attempts to replicate the effects of a Brown tax. It is named
after the Australian economists Ross Garnaut and Anthony Clunies-Ross.
The Garnaut -- Clunies-Ross resource rent tax is levied on the positive
cash flows, or profits, of a project, but there is no refund when the cash
flow is negative or the taxpayer is making a loss. Instead, losses are
carried forward and `uplifted' by an interest rate, so that they can be used
as a deduction against positive cash flows in later years.
1.14 The uplift rate preserves the value of the taxpayer's losses
because they do not get an immediate refund for the tax value of the
government's contribution to the mining project. The uplift rate also
includes a premium to compensate for the risk that the taxpayer may never
get to use its losses.
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Charging for Australia's non-renewable resources
1.15 The Petroleum Resource Rent Tax (PRRT) is an example of a
Garnaut -- Clunies-Ross resource rent tax.
Background to the Minerals Resource Rent Tax
1.16 The Minerals Resource Rent Tax (MRRT) has its origins in the
recommendations of the Australia's Future Tax System (AFTS) Review.
1.17 The AFTS Review found that the royalty regimes applied by the
States and Territories were among the most distorting taxes in the
Federation. In addition, royalty regimes are not particularly flexible.
1.18 As a consequence of being distorting and relatively inflexible,
royalties tend to be set at rates low enough for the mining industry to
continue to operate in periods of low to average commodity prices.
However, this means that royalties will often fail to provide an adequate
return to the community when commodity prices are high.
1.19 The company tax is a profits-based tax, which generally applies
to incorporated businesses and will tend to raise more revenue from
mining operations when profits are high. However, the AFTS Review
found that there would be benefits to the economy more broadly through
lowering the company tax rate to assist in attracting internationally mobile
capital investment.
1.20 The AFTS Review concluded that a lower company tax rate was
desirable for Australia but only if a specific profits-based tax was
extended to mining operations to ensure a sufficient return to the
community in periods of high commodity prices.
1.21 In response to the AFTS review, the Government decided that,
from 1 July 2012, the MRRT would apply to profits from coal and iron
ore operations, while the PRRT would be extended to all offshore and
onshore gas and oil projects, including coal-seam methane. These
commodities account for the bulk of Australia's mineral wealth.
1.22 The detailed design of the MRRT is based on the
recommendations of the Policy Transition Group. The Policy Transition
Group was chaired by Don Argus AC and the Hon Martin Ferguson AM
MP, Minister for Resources, Energy and Tourism. The Policy Transition
Group consulted extensively across Australia on the new resource tax
arrangements and reported to the Government in December 2010.
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Minerals Resource Rent Tax
The Minerals Resource Rent Tax
1.23 The MRRT is a type of resource rent tax based on the
Garnaut -- Clunies-Ross model.
1.24 Under the MRRT, the government taxes positive cash flows, or
mining profits, and allows taxpayers to carry forward and uplift losses
with interest for use in later years.
1.25 As the MRRT taxes profits from minerals that are commonly
subject to State and Territory royalties, it provides a credit for royalties.
1.26 The tax base for the MRRT is confined to net profits at the
valuation point. The valuation point is the point in the mining production
chain that separates upstream and downstream operations.
1.27 As the MRRT is intended to apply only to upstream profits, it is
a tax on a narrow portion of mining profits unlike, for example, the
income tax, which seeks to tax all sources of income comprehensively.
1.28 The MRRT is a tax on realised profits. As the proceeds from the
sale of a resource are typically realised downstream of the valuation point,
the MRRT requires taxpayers to determine the amount of those proceeds
that are reasonably attributable to the resource and upstream operations
for tax purposes. The tax is not intended to tax the value added in
downstream activities.
1.29 To calculate the MRRT profit at the valuation point, the sales
proceeds are reduced by an amount that recognises the arm's length value
of the downstream operations using the most appropriate and reliable
method. Allowable upstream capital and operating expenditure is then
directly and immediately deducted, along with royalty credits, carry
forward losses, starting base depreciation, starting base losses and losses
transferred from other projects.
1.30 If losses and royalty credits cannot be used within an MRRT
year, they are transferred where possible, or carried forward to later years
with the relevant uplift rate applied.
1.31 Through providing effective deductions for all allowable capital
and operating expenditure, with an uplift of carry forward losses, the tax
base for the MRRT approximates a Brown tax on the profit attributable to
the resource in the state it was in at the valuation point.
1.32 As the sources of mining rents are difficult to identify separately
in practice, the MRRT aims to strike an appropriate balance between
recovering a sufficient return to the community for the profits attributable
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Charging for Australia's non-renewable resources
to the underlying resource rent at the valuation point, and recognising that
some mining expertise and capital may also be taxed in a process which
has regard to realised profits and their equivalents. This balance is
achieved through the combined effect of the features of the tax, including
the tax rate, the extraction factor, the valuation point, the interest
allowance (uplift) and the scope of assessable revenues and allowable
deductions.
1.33 An overview of the operation of the MRRT is provided in
Chapter 2.
9
Chapter 2
Overview of the Minerals Resource Rent
Tax
Outline of chapter
2.1 This chapter is an overview of the Minerals Resource Rent Tax
(MRRT). It outlines the resources that are subject to MRRT and explains
the basic operation of the MRRT.
Overview of the MRRT
What resources are covered?
2.2 Australia is endowed with some of the world's largest and most
valuable deposits of iron ore and coal. These bulk commodities make up
a large proportion of Australia's mine production and mineral exports.
2.3 The MRRT applies to certain profits from iron ore and coal
extracted in Australia. It also applies to profits from gas extracted as a
necessary incident of coal mining and gas produced by the in situ
combustion of coal. These non-renewable resources are called `taxable
resources'.
2.4 Where profits are made from the sale of taxable resources, or
would have been made if the resources had been sold instead of being
exported or used, MRRT may be payable.
Basic operation of the MRRT
2.5 This section explains the operation of the MRRT and how it
applies to three different cases. The first case, the `vanilla' case,
examines how the MRRT operates for a project that was not in existence
before the announcement of the MRRT.
2.6 The second case examines how the MRRT operates for projects
that are transitioning into the MRRT (that is, for projects that were already
invested in when the MRRT was announced). It explains how the MRRT
recognises those existing investments.
11
Minerals Resource Rent Tax
2.7 The third case shows how the MRRT operates for miners with
multiple projects. It introduces the concepts of pre-mining losses and
transferring mining losses and pre-mining losses between projects owned
by the miner. It also explains the process of `uplifting' unused amounts.
The `vanilla' case
2.8 The key purpose of the MRRT is to tax the economic rents from
non-renewable resources after they have been extracted from the ground
but before they have undergone any significant processing or value-add.
Generally, the profit attributed to the resource at this point represents the
value of the resource to the Australian community. Where the taxable
resource is improved through beneficiation processes, such as crushing,
washing, sorting, separating and refining, the value added is attributable to
the miner.
Mining project interests
2.9 The mining project interest provides the basic unit for taxing the
non-renewable resource. The main kind of mining project interest is an
entitlement to share in the output of a mining venture carried on to extract
taxable resources and produce a resource commodity (which could be the
taxable resource or something produced from the taxable resource). It
must relate to at least one production right. A production right is a right,
under an Australian law, that authorises its holder to extract the resources
from a particular area (called a `project area').
Mining profit or loss
2.10 Once a mining project interest has been identified, the mining
profit for the interest for the year has to be determined. The mining profit
is the mining project interest's mining revenue for the year less its mining
expenditure. If the mining expenditure exceeds the mining revenue, the
excess is a mining loss.
Mining revenue
2.11 The main type of mining revenue a mining project interest can
have comes from selling, exporting or using taxable resources (or things
produced from taxable resources) extracted from the project area. The
proceeds are mining revenue to the extent they are reasonably attributable
to the taxable resources at a particular point in the production chain
(called the `valuation point').
2.12 Under the MRRT, the valuation point is typically just before the
taxable resource leaves the run-of-mine stockpile (also called the ROM
stockpile or ROM pad). The run-of-mine stockpile is where the resource
is stored after extraction ready for the next stage of production. The next
12
Overview of the Minerals Resource Rent Tax
unit of production could be transportation but is often some form of
processing. However, not all mining operations use a run-of-mine
stockpile. Where a project has no run-of-mine stockpile, or it is by-passed
for any reason, the valuation point is generally just before the first
beneficiation process starts.
2.13 Mining operations that occur before the valuation point are
upstream mining operations; those that occur afterwards are downstream
mining operations.
Diagram 2.1: The valuation point
In this diagram, the dashed line represents the valuation point at the
run-of-mine stockpile. Upstream and downstream mining operations
are illustrated.
2.14 The MRRT is a tax on proceeds from selling a taxable resource
(or on the proceeds which would have been realised if the resources had
been sold instead of exported or sold) but only on that part of those
proceeds that is reasonably attributable to the condition and location of the
resource when it was at the valuation point. That amount must be
attributed using the most appropriate and reliable method having regard to
the miner's circumstances, the available information and certain statutory
assumptions (to the extent to which they are relevant in applying a
particular method). The statutory assumptions are that the downstream
operations are carried on by a separate entity who has no interest in the
resource and who deals independently with the miner in a competitive
market.
2.15 Miners can elect to use a safe harbour method under which the
mining revenue amount is worked out by reducing the amount realised
from selling the resource (or, the arm's length value of the resource when
it is exported or used) by the cost of its downstream mining operations --
being its operating costs, any depreciation and its cost of capital (being its
weighted average cost of capital).
2.16 An alternative, and simpler, valuation method is provided for
smaller miners and miners who transform resources they mine in an
integrated operation, such as steel manufacturing or electricity generation,
to work out the mining revenue attributable to their resources.
13
Minerals Resource Rent Tax
2.17 The alternative valuation method is a version of the `netback'
method, which starts with a verifiable price and deducts costs to `net
back' to the value at an earlier point. Miners who have not elected to use
the alternative valuation method may use the netback method to value
their taxable resources, but they will have to work out the inputs using the
most appropriate method instead of using those prescribed for the
alternative valuation method.
Mining expenditure
2.18 The MRRT recognises the majority of upstream costs incurred
by the miner in extracting the non-renewable resource and getting it to the
valuation point.
2.19 Upstream costs are called mining expenditure if they are
necessarily incurred by the miner in carrying on the upstream mining
operations. Mining expenditure includes costs related to construction of
the mining operation, blasting and digging, infrastructure, and capital
assets used to transport the non-renewable resource to the valuation point
(such as dump trucks and conveyor belts).
2.20 Under the MRRT, upstream capital expenditure is immediately
deductible. Unlike income tax, capital assets do not have to be
depreciated over their effective lives.
2.21 Some expenditure is specifically excluded from being taken into
account as mining expenditure, including financing payments, the costs of
acquiring a mining interest, royalty payments, and some tax payments.
Allowances
2.22 Miners reduce their mining profit by their MRRT allowances, to
arrive at a net amount, which, for convenience, is referred to in this
chapter as the MRRT profit.
2.23 In the vanilla case, the relevant allowances are royalty
allowances and mining loss allowances.
Royalty allowances
2.24 Miners will generally pay royalties to State and Territory
Governments. Royalty regimes and rates vary across jurisdictions but are
most commonly a charge on the volume or value of the resource,
generally at the point of export or sale to a third party. These royalties are
often a proxy for the rents available from that resource.
2.25 The miner will be liable to pay some MRRT in addition to
royalties when resource rents are sufficiently high. That is, the company
14
Overview of the Minerals Resource Rent Tax
will pay the royalty and then also pay MRRT. However, the MRRT
recognises this by providing the miner with a deduction, called a royalty
allowance. The royalty allowance is `grossed-up', using the MRRT rate,
so that it reduces the MRRT liability by the amount of the royalty.
2.26 Where the full royalty credits for the year cannot be applied as a
royalty allowance, the unused portion is uplifted and carried forward to be
applied in a later year. The uplift rate is the long term bond rate plus
7 per cent (LTBR + 7 per cent).
Mining loss allowances
2.27 If a mining project interest has a loss for the year, the loss is
uplifted at LTBR + 7 per cent and carried forward to be used in a later
year. When it is applied to reduce a mining profit of the mining project
15
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