Current Page: Home > NEWS & RESOURCES > Minerals Resource Rent Tax Overview > Minerals Resource Rent Tax Overview

 

Minerals Resource Rent Tax Overview

Since the Federal Government 2010-11 Budget announcements, the Resource Super Profits Tax (‘RSPT’) stood out from the “no frills” conservative budget.  It has now been replaced by the Minerals Resource Rent Tax (‘MRRT’) after the newly installed Prime Minister Julia Gillard negotiated a “deal” with significant stakeholders. 

The following is a current overview of the new MRRT and its potential impact on iron ore and coal projects.  Note that other commodities will not be included, which reduces the number of affected companies from 2,500 to around 320.  

The intention of these proposed changes was to target high-value commodities.  However, the government’s definition of iron ore also includes magnetite.  This is generally a lower-grade deposit and is globally accepted as a high-quality feedstock for the production of premium quality, low impurity steel.

To reduce the financial impact of the MRRT, the refundability of unsuccessful project losses under the RSPT has been removed (while transferring these unsuccessful project losses still applies) and the company tax rate is capped at 29%.  In addition, the 30% Resource Exploration Rebate has also been removed, which would have assisted smaller exploration companies from 1 July 2011 with a refundable tax offset rather than carried forward losses.

The Reasoning

Historically, we have experienced relative rising resource prices while Australia’s share in these resources from the existing resource taxes and royalties have been declining (refer to graph).

Resource tax and royalties as a share of resource profits (pre-tax)[1]

Existing resource taxes and royalties only derived a small share of the increased value of resource deposits.  Resource profits were over $80 billion higher in 2008-09 than in 1999-00, but governments only collected an additional $9 billion through resource charges.

Iron Ore & Coal Resources

The MRRT will be introduced on 1 July 2012 at a rate of 30% on assessable iron ore and coal resource profits (assessable revenue less deductible expenses including allowances). 

The MRRT will apply to all legal entities exploiting Australia’s non-renewable iron ore and coal resources from its resource extraction activities.  It is still designed to apply in conjunction with State & Territory royalty regimes at a “creditable” royalty level.  Note that oil and gas projects will still be subject to the extended Petroleum Resources Rent Tax.

Small miners with annual resource profits below $50 million will not have a MRRT liability.  These stakeholders suggest the threshold should be raised to at least $100 million, as a result of the Resource Exploration Rebate not being enacted. 

MRRT Calculation

The MRRT allows deductions for the cost of extracting resources from a certain taxing point.  Note that it is proposed to set the taxing point close to the point of extraction (or saleable form) e.g. at the mine gate or well head to determine the market value of the non-renewable resource. 

Projects will now be entitled to a 25% extraction allowance that reduces taxable profits subject to the MRRT.

MRRT Capital Allowance Calculation

Existing Projects

To determine the starting base for the Deductible Expenditure, this will involve an election to use the book or market value for the project assets.  All post 1 May 2010 capital expenditure will be added to the starting base. 

The book value election will provide an accelerated depreciation rate over five years (excluding mining rights).  Alternatively, if the market value election as at 1 May 2010 is chosen then depreciation is available over the effective life (up to 25 years), which includes mining rights.

The book value election will only enable the starting base to be uplifted with the long-term government bond rate plus 7% (e.g. approximate threshold total of 12%, including the 5% government bond rate).

This valuation process will be critical in determining which election to adopt.  Perhaps consider deferring expenditure if the market value starting base is chosen, due to the effective life being up to 25 years.

Post 1 July 2012 Projects

Exploration expenditure post 1 July 2012 will be immediately deductible under the MRRT rather than depreciating over the five years.  However, similar to the previous RSPT regime, various costs including financing costs such as interest will not be deductible.

Carried forward MRRT losses can be transferred to other Australian iron ore and coal projects at the long-term government bond rate plus the 7% uplift.  This would benefit multi-stage projects where the deductions from the construction phase of a project can offset the MRRT liability against a project in production phase.

State & Territory royalties will continue to be levied but will be creditable against the MRRT payable.  These royalties will not be cash refundable nor will the royalty credits carried forward able to be transferred between projects.  Note however unused credits for royalties paid will be uplifted at the long-term government bond rate plus 7%. 

Large Business

The MRRT will result in the company tax rate being reduced to 29% from 2013-14.  While a further rate drop to 28% from 2014-15 will now not occur.  Interestingly, the Henry Review recommended a drop to 25% company tax rate in the short to medium term.

Small Business

Eligible small business company tax rate will still be reduced early to 29% from 2012-13, thus gaining a head start on larger companies.  In addition, the Henry Review recommended the small business entity turnover threshold should be increased from $2 million to $5 million.

The changes to the existing capital allowances provisions will still be retained to allow:

• an immediate write-off of assets valued at under $5,000 (compared with current $1,000 limit); and
• to write-off other assets (assets valued over $5,000) in one depreciating pool at the rate of 30%.

Currently, depreciating assets may be allocated to two different depreciating pools.  Note this will not apply to buildings.

While continued tax reforms and negotiations are still under way, we await further details to be released.

We will keep you informed however, if you have further queries on how this will affect your business, please contact Anthony Blood from Bentleys in Perth on (08) 9226 4500 or your local Bentleys office.