Legislation repealing the Mineral Resources Rent Tax (“MRRT”) was passed by the Australian Parliament on 2 September 2014 after a Government deal with two minor parties (the Palmer United Party and theAustralian Motoring Enthusiast Party).

Overview of the MRRT

The MRRT was effectively a 30% tax on the profits of coal and iron ore miners at the extraction point (i.e. before processing and transport). It was first introduced by the former Labor Government in 2012.

The tax applied only once profits reached seventy-five million Australian Dollars. Companies with multiple projects could offset their losses against other projects and there were a number of other deductions, including the accounting book value of existing project assets and crediting of future state royalties. This meant that large and diversified mining firms such as BHP Biliton were able transfer any losses between projects and small miners lost out. Even so, the tax was highly controversial with large mining firms such as Fortescue Metals Group and Xstrata complaining that it hurt their competitiveness and affected future investment.

Despite this controversy, it was widely reported that because of the generous deductions, the net present value impact of the MRRT was marginal at best. According to the repeal bills, the MRRT would have contributed less than a billion Australian Dollars to the federal budget over the next four financial years.

This is not the first time Australia has repealed an unpopular tax. In July 2014, it became the first developed nation to repeal its carbon tax legislation.

Impact

The repeal of the MRRT has attracted international attention with major international mining players like India’s Adani Mining welcoming Australia’s move to repeal the tax, saying it reflected the Government’s strong commitment towards supporting export opportunities in the resources sector.

Following the recent abolition of the carbon tax, and a number of regional developments in the coal sector, the repeal of the MMRT may improve Australia’s prospects as an investment destination, especially given the challenges in this sector in neighbouring countries. Indonesia, for example, has introduced a raft of measures including, most recently (and controversially), an extensive prohibition on unprocessed minerals and the introduction of new foreign ownership limitations. Similarly, some are calling current coal shortages in India a “crisis”, with recent strikes at Coal India (the world’s largest coal miner by output), and more than two hundred coal mining licences being declared illegal by the Supreme Court last month.

Conclusion

Australia’s economy is heavily dependent on mining. The cooling off in metals and coal price driven, primarily by reduced demand from China, will mean that now, more than ever, Australia needs to remain competitive. The repeal of the MMRT reflects a growing awareness that proactive steps by both Federal and State Government will be required to ensure the prospects of the Australian resources industry in the future.