The Government has moved one step closer to legislating its much discussed ‘mining tax’ with the recent release of two exposure draft bills for public consultation.
The exposure draft bills include:
- a second exposure draft of the Mineral Resource Rent Tax Bill 2011 (the “MRRT Bill”). This second exposure draft bill follows widespread consultation on the Government’s first draft released in June 2011; and
- a first exposure draft of the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (the “Consequential Amendments Bill”).
The MRRT Bill includes numerous amendments to the initial draft legislation as well as new and significant supporting provisions which had previously been flagged.
The Consequential Amendments Bill is particularly interesting in its integration of the mining tax within Australia’s existing tax regimes.
The ‘mining tax’ has had a contentious history. The complete package of legislation that is now available raises even more issues for debate and discussion. In particular the new MRRT Bill and the Consequential Amendments Bill impose some highly onerous and complex obligations on miners.
The Australian mining industry will now be preparing further submissions on the two draft bills. It is also important that financiers, suppliers and other industries engaged with miners also carefully consider the impacts of the mining tax on their operations.
Key changes from the first draft of the MRRT Bill
Treasury was provided with 28 submissions on the first draft of the MRRT Bill which outlined a range of concerns. A number of these concerns have been acted on and miners may welcome some of these amendments.
The amendments adopted by Treasury include:
- a ‘hard’ start date - the mining tax will now apply from 1 July 2012 to all miners, irrespective of their particular accounting periods. This amendment addresses a concern that miners with substituted accounting periods may have been advantaged;
- exclusion of certain taxing trigger points - certain activities have been excluded from being ‘mining revenue events’ and will no longer give rise to an application of the mining tax. This includes certain preliminary resource extractions. Despite this, miners will need to closely monitor when a ‘mining revenue event’ occurs which may give rise to an MRRT liability (recognising that these may arise in relation to the extraction and/or uses of a ‘taxable resource’);
- exclusions from ‘mining revenue’ - the calculation of ‘mining revenue’ has been significantly altered with the actual revenue from the sale of a resource being taken into account where the “mining revenue event” is a supply of the resource, rather than the price prevailing at the taxing point. As a consequence of this, mining revenue will take into account price increases (or decreases) after the resource has passed the taxing point. However, to ensure that profits relating to downstream activities are not taxed the mining revenue is reduced by a “downstream amount”. The manner in which this downstream amount is calculated and supported is likely to give rise to significant uncertainty and there are also specific arm’s length rules which apply where the taxing event is not an actual supply of the resource;
- ‘excluded expenditure’ clarification - finance lease expenditure (other than hire purchase agreements) are no longer treated as ‘excluded expenditure’. This amendment removes flexibility for miners and financiers in relation to the funding of mining infrastructure ;
- substantial clarifications to grouping and valuation rules - the rules for grouping mining interests and determining the starting allowance for existing interests have been substantially amended. In particular, whereas under the previous exposure draft miners were not able to combine projects where that would enable the transferability of quarantined allowances, they are now given the choice to combine but in order to do so the miner must cancel the quarantined allowances; and
- substantial revisions to the pre-mining loss rules - the application of the general rules to pre-mining project interests has been clarified including confirmation that pre-mining profits will also be subject to the tax in the same way as mining profits are. Further and related changes have also been incorporated in relation to combining and splitting mining interests.
What has not been addressed
At this stage it appears that a significant number of the amendments requested to the mining tax have been rejected. These include:
- no withdrawal or deferral - the submissions requesting the mining tax be withdrawn or deferred to a later time have not been acted on;
- no excluded minerals - the legislation also continues to apply to every form of iron ore and coal. In particular no exclusion has been included for the capital intensive developing magnetite industry, as had been requested;
- no additional protections - additional protections for small miners have also been largely rejected. The threshold for the low-profit offset to be available to small miners remains at $50 million (phased in for revenues up to $100 million). In addition miners who choose to apply the simplified MRRT method to determine their liability continue to lose their allowances and their starting base assets do not accrue losses. This may result in a substantial disadvantage for those miners which are subsequently required to comply with full MRRT obligations. It may be particularly difficult for small miners to deal with the compliance burden; and
- the ‘mining revenue event’ remains on ‘export’ - a number of submissions called for the timing of a ‘mining revenue event’ to reference the time a taxable resource is ‘loaded for export’, rather than the export outside Australia’s territorial sea itself. Some commentators have considered this will result in a different tax calculation of MRRT liability depending on whether the miner takes on the risks of freight and delivery, as well as increased complexity generally.
It is possible that a number of these issues will be raised again with Treasury in the current consultation period.
The second draft MRRT Bill also contains additional provisions (referred to as the specialist liability rules), which were flagged in the first exposure draft. These rules have not previously been available for consultation. The new provisions deal with a range of matters including, inter alia:
- winding down and ending mining projects (which result in the cancellation of any remaining allowances);
- the treatment of pre-mining interests;
- adjusting MMRT liabilities where a change of circumstances arises;
- detailed valuation principles (which will be particularly important in determining starting base allowances); and
- specific integrity measures which include anti-profit shifting rules. These rules are a form of domestic transfer pricing and are intended to apply where miners do not deal “on a wholly independent basis” with other entities in relation to their commercial or financial dealings. These new rules expressly reference the OECD Transfer Pricing Guidelines to assist in determining independent pricing. Importantly, the anti-profit shifting concepts which are relied upon are: (a) self executing (i.e. must be applied on a self assessment basis as they do not depend on a determination by the Commissioner of Taxation, unlike the income tax transfer pricing rules); and (b) in addition to the “arm’s length consideration” concepts applied to determine ‘mining revenue’ under the MRRT liability regime more generally. This means miners may be required to make two separate assessments of the appropriate pricing amounts payable in their value chain, applying the different rules, to ensure compliance with the MRRT law; and
- anti-avoidance measures. The anti-avoidance measure operates where ‘a’ purpose of a particular scheme (other than an incidental purpose) is to obtain an ‘MRRT benefit’.. Unlike Part IVA (the general anti-avoidance regime in the tax legislation) it is not necessary that the tax purpose be the ‘dominant’ purpose of the scheme. It is only necessary that the tax purpose not be an ‘incidental’ purpose. This is likely to result in significant uncertainty for many miners structuring or restructuring their commercial arrangements where a consequence of arrangements is a reduced MRRT liability. There is no statutory time limitation for the Commissioner to amend an assessment in relation to the anti-profit shifting and anti-avoidance measures.
The amendment and anti-avoidance rules may be considered particularly stringent having regard to the overall complexity of the regime.
In addition to this the Consequential Amendments Bill sets out new provisions for the existing Tax Acts. The new provisions deal with the administration and collection of the mining tax with provisions providing for PAYG instalment tax payments, the provision of returns and the maintenance of records.
Miners who are consolidated for tax purposes are also to have the election to consolidate for the purposes of the mining tax. In that case the members of the tax consolidated ‘mining’ group will be subject to the joint and several tax liability regime.
The consolidation of MRRT liabilities and the transfer of a ‘mining interest’ between entities will introduce a range of issues for M&A and project financing activity.
Where to now?
The public have been given a limited time frame to respond to the second exposure draft of the MRRT Bill and the draft Consequential Amendments Bill. Submissions on the Bills are due by Wednesday, 5 October.
A number of the issues raised in relation the first exposure draft of the MRRT Bill are likely to be repeated and emphasized by industry. The significant compliance burden and uncertainties introduced by the revised exposure draft is also likely to be highlighted.
The Government appears determined to introduce the legislation as soon as possible and ensure the tax is in operation for 1 July 2012. Miners and all entities which transact with miners should continue to monitor the development of the tax and plan for its commencement. Miners which are subject to the legislation will need to establish sophisticated administrative systems to ensure their compliance with the new rules.