The Government has issued its second exposure draft of the proposed legislation for the introduction of a Minerals Resource Rent Tax (MRRT). The closing date for submissions is 5 October 2011.
The key purpose of the MRRT as stated in the exposure draft explanatory memorandum 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.
The MRRT will apply to certain profits from iron ore and coal extracted in Australia and from gas extracted as a necessary incident of coal mining and gas produced by the in situ combustion of coal.
In simple terms, the tax will be 30% of what is called the MRRT profit. The MRRT profit is worked out as follows:
First you work out the mining profit as follows:
Mining revenue - Mining expenditure = Mining profit
Second you then work out the MRRT profit by taking the mining profit and deducting therefrom the following allowances in the following order:
- royalty allowances
- transferred royalty allowances
- pre-mining loss allowances
- mining loss allowances
- starting base allowances
- transferred pre-mining loss allowances
- transferred mining loss allowances.
The allowance highest in the order must be fully applied before the next. If royalty credits, pre-mining losses, mining losses or starting base losses are available, the amount of each is applied in calculating the relevant allowance up to the amount of the mining profit remaining after applying any higher ranked allowances highest can be applied, and so on. Any remaining royalty credits, mining losses or pre-mining losses still available after the mining profit is reduced to nil can then be transferred to other mining project interests to the extent possible to reduce their mining profits. Different conditions need to be satisfied for royalty credits, pre-mining losses and mining losses to be transferrable.
If a miner’s mining profit is $50 million or less, it is entitled to a low-profit offset that will reduce its MRRT liability to nil. If its mining profit is over $50 million, its offset is gradually phased out. In working out this mining profit, the miner must also count any mining profit of other entities it is connected to or affiliated with. Even though a miner’s mining profit might be under $50 million, it still deducts its allowances.
Where the miner has an existing mining project interest at 1 May 2010, in order to recognise their existing investment, the miner will receive an allowance, called a starting base allowance, which further reduces their mining profit. The miner can either use the market value method or the book value method for working out the starting base allowance. For such miners the MRRT profit is worked out by taking the mining profit and deducting not only the royalty allowance and mining loss allowance but also the starting base allowance calculated under one of those valuation methods.
The conversion of royalty credits, pre-mining losses and mining losses to allowances only occurs to the extent that the particular allowance will be fully applied to reduce mining profit for the year. The royalty credits, pre-mining losses and mining losses still unapplied at the end of the year are uplifted. The amounts of royalty credits and mining losses are uplifted at the long term bond rate (LTBR) + 7% per cent each year. The amount of a pre-mining loss is uplifted at LTBR + 7 %for the first 10 years after the loss arises, but only at the LTBR thereafter.
Importantly it should be noted that transfers between two mining interests of any royalty allowance, pre-mining loss allowance or a mining loss allowance, the mining interests have to be with respect to the same mineral groupings i.e. they both have to be either iron ore or coal.