The Australian Parliament has passed the Mineral Resource Rent Tax Bill 2012 (Act) introducing the Australian Mineral Resource Rent Tax (MRRT). The Act is the result of consultations with industry and tax experts and sets out the scheme of the MRRT. It becomes law upon Royal Assent being given and is expected to commence on 1 July 2012.
Overview of MRRT
The MRRT is a resource rent tax. It is broadly comparable to rent taxes applying in other countries such as the Norwegian resource rent tax for Norway's North Sea oil. It taxes profits from mining operations for selected commodities, namely iron ore, coal and certain derivatives of these commodities.
The MRRT applies to any entity that has a "mining project interest". The tax is calculated for each financial year starting on or after 1 July 2012. Liability is calculated by multiplying the "mining profit" less "MRRT allowances" by the applicable MRRT rate (30%), although an extraction allowance reduces the effective tax rate to 22.5%.
The key elements of the tax therefore are the following:
● the holding of a "mining project interest" determines whether an entity is in the MRRT tax net or not;
● once the holder of a mining project interest has been identified, the MRRT applies in respect of "mining profit";
● as mining profit is assessed on the basis of mining revenue less mining expenditure, what is allowed as deductible mining expenditure is the third key concept underlying the MRRT. Allowances provide further reductions in the amount of the tax base;
● the fourth key concept is the "valuation point", this is the trigger event for taxation, generally, the point the resource is removed from the run-of-mine stockpile; and
● finally, the starting base needs to be calculated as a transitional matter. This is the amount of the allowance for start-up costs during the period leading up to the commencement of the MRRT that reduces the tax base by means of annual recognition of reductions in the value of the starting base.
Mining project interests
An entity has a mining project interest to the extent the entity is entitled to share in the output of an undertaking in which the entity is a participant. This applies whether the entity is active or passive and whether it owns the relevant tenement or not. It follows that an entity passively involved in a joint venture and simply entitled to part of the offtake will be potentially within the tax net.
A purpose of the undertaking must be to extract some or all of the "taxable resources" (iron ore, coal and certain derivatives) from the area covered by one or more "production rights" and to produce an output that is a taxable resource extracted under the authority of a production right (or rights) or something produced using such a taxable resource.
A mining project interest requires a production right. This is an "authority or right" under an Australian law to extract a taxable resource from a particular area. The concept of "Australian law" includes Federal law, a State law or a Territory law. On-shore mining licences are generally granted under State and Territory laws. Certain rights of extraction granted privately are also caught but a right to exploration or prospecting for taxable resources generally is not a production right. This means that merely holding a right to exploration or prospecting should not of itself bring an entity into the tax net, even if exploration expenses incurred may later be deductible once mining commences.
A mining royalty or a private mining royalty is not an "output", unless it is a private mining royalty that is payable in kind. Consequently holding a right to royalties in money does not of itself give rise to a mining project interest. The holder of such a right and nothing more should stay outside the MRRT net.
The Act explicitly contemplates that each joint venturer in a mining joint venture (whether passive or active) of the usual kind may hold a "mining project interest" and therefore come within the MRRT tax net.
If a mining project interest relates to both iron ore and taxable resources other than iron ore, the interest must be treated as a mining project interest relating to iron ore and another mining project interest relating to taxable resources other than iron ore. This will require keeping separate accounting records for each deemed mining project interest.
The base for calculation of MRRT includes "mining profit".
The tax liability will include the "mining profit" less "MRRT allowances" multiplied by the applicable MRRT rate. This liability is calculated generally for each financial year commencing 1 July 2012.
Mining profit in turn will be calculated on the following basis.
"Mining profit = Mining revenue - Mining expenditure".
It follows that the steps for calculating the annual liability for MRRT are as follows.
1. Ascertain mining revenue for the mining project interest;
2. Work out the miner's mining expenditure for the mining project interest;
3. If the mining revenue exceeds the mining expenditure, the difference is the mining profit (if there is no excess, mining profit for the relevant financial year is zero);
4. The miner's MRRT allowances must then be worked out for the mining project interest for the relevant financial year;
5. The MRRT allowances are then subtracted from the mining profit;
6. The result of the subtraction must be multiplied by the MRRT rate.
The MRRT rate is 30% adjusted to reflect the "extraction factor" of 25%. That adjustment is by .75% so that the effective rate becomes 22.5%.
Mining expenditure that exceeds mining revenue is a mining loss that may be applied in working out a mining loss allowance or a transferred mining loss allowance. In other words, losses of this kind can be used to reduce the liability to MRRT in future years.
Mining revenue generally is calculated on the basis of extracted taxable resources which have been the subject of a "initial supply", that is generally a sale within Australia, an export or use by the miner.
In the case of a domestic sale to a third party, the amount to be included in relation to a mining revenue event is so much of the consideration amount as is reasonably attributable to the taxable resource in the form in which it existed when it was at its "valuation point"; and at the place where it was located when it was at its "valuation point" (see 5 below). The consideration amount to be used is the consideration received or receivable for the supply. Where sales are not at arm's length, anti-avoidance rules may apply to require an arm's length consideration to be used.
For an exportation from Australia of the taxable resource, or a thing produced from the taxable resource, what would be the arm's length consideration for the supply of the taxable resource or thing at the time and place it is loaded for export will be used.
For the use of a thing produced from the taxable resource, what would be the arm's length consideration for a supply of the thing at the time and place of the use must be used.
Mining revenue includes certain other amounts such as recoupment and offsetting of mining expenditure (eg subsidies for employing apprentices), royalty credits and compensation for loss of taxable resources.
A miner's mining expenditure for a mining project interest for the purpose of deductions, includes expenditure necessarily incurred in carrying on upstream mining operations. An amount of expenditure is included to the extent that the miner necessarily incurred the amount in that year in carrying on "upstream mining operations". It is immaterial whether the expenditure is of a capital or revenue nature. These rules contemplate apportionment of expenditure partly incurred in carrying on upstream mining operations and partly in doing other things.
Relevant expenses may include expenses incurred in:
● exploring for taxable resources in the project area;
● crushing and weighing the taxable resources before they reach their valuation point;
● training, engaging, employing, paying, accommodating and ensuring the safety of personnel, and other supportive head office activities, to the extent they are involved in operations or activities relating to getting the taxable resource to the valuation point;
● developing plans and engineering specifications for, and constructing, facilities, acquiring and maintaining plant or equipment for use in recovering, transporting or storing the taxable resources before they reach their taxing point; and
● upgrading computer software used to control inventory (like consumables and spare parts) used for recovering, transporting or storing the taxable resources before they reach their valuation point.
The final step before application of the MRRT rate is the subtraction of the MRRT allowances from the mining profit.
Firstly, mining royalties paid to States and Territories reduce a miner's MRRT liabilities for a mining project interest. Royalty amounts that are not applied in an MRRT year are uplifted and may be able to be applied in later years.
A miner's MRRT liability for a mining project interest may also be reduced by mining royalties, paid to States and Territories, that relate to one or more other mining project interests. The interests must satisfy an "integration test" from the time the royalty is incurred to the time it reduces the MRRT liability. This among other things requires the same miner to have the interests, that the interests relate to the same resource and to the same mine or proposed mine.
Allowances are also available for certain pre-mining losses (e.g. exploration expenditure), losses of a mining project incurred in previous years, transferred pre-mining losses from certain other pre-mining projects, starting base allowances and mining losses from other projects.
The concept of the valuation point is central to determining the revenue and expenditure that make up mining profit. This is because a miner's mining revenue for a mining project interest generally consists of revenue attributable to resources in the form and place they were in when they were at their valuation point. The valuation point in other words is a defined point in the extractive process.
The valuation point for a taxable resource is the point just before the resource is removed from the "run-of-mine stockpile" on which it is stored.
The valuation point for a taxable resource that is not stored on a run-of-mine stockpile is if the resource is moved away from the immediate point of extraction to a place, at or adjacent to the point of extraction, where the resource enters the first beneficiation process after extraction. In this case, the valuation point is the point at which the resource enters that beneficiation process. Otherwise, it is the point at which the resource is first moved away from the immediate point of extraction.
For a gaseous commodity, the valuation point is the first point at which the gaseous resource exits a well head.
Despite these rules, the taxing point for a taxable resource is instead the point just before the initial supply of the resource (see above), if the time the resource is at that point is before the time it would be at the valuation point for the resource under the rules set out above.
Starting base allowances enable certain expenses incurred before the commencement of the MRRT liability to be taken into account as allowances. They allow the following to be taken into account:
● investments in assets in relation to upstream mining operations before 2 May 2010;
● certain expenditure on such assets (excluding expenditure to acquire rights to resources) made by a miner between 2 May 2010 and 1 July 2012.
A starting base allowance consists of a miner's available starting base losses. Starting base losses also reflect the declines in value of starting base assets with the application of uplift factors.
Starting base losses that are not applied are increased by one of two uplift factors. Which uplift factor to use is governed by whether a book value approach or a market value approach is applied to valuing starting base assets.
Any kind of property, or any kind of legal or equitable right that is not property, is a starting base asset relating to a mining project interest if at the relevant time, the property or right was used or installed ready for use, or was being constructed for use in carrying on upstream mining operations relating to a mining project interest that a miner had at that time.
The relevant time is the later of 1 July 2012 and the start date of production.
The valuation approaches for a miner's starting base assets are the book value approach and the market value approach. The miner can elect which valuation approach to apply to all of its starting base assets relating to a mining project interest. The election cannot specify the book value approach unless during the 18 months preceding 2 May 2010, an entity that had the mining project interest or pre-mining project interest in that period prepared a financial report relating to the interest in accordance with accounting standards. The report must also relate to a financial period that ended in the 18 months preceding 2 May 2010 and the report must have been audited in accordance with auditing standards.
The decline in value of a starting base asset during an MRRT year counts towards the miner's starting base loss for a mining project interest for the year. Under the book value approach, an uplift factor, based on the long term bond rate ("LTBR") plus 7%, is applied to components of the asset's base value. Under the market value approach, an uplift factor is not applied. However, unused starting base losses may qualify for an uplift whether under the book value approach. There is no uplift for the remainder of the starting base under the market value approach using the LTBR but a CPI uplift applies.
A miner is entitled to an offset for an MRRT year if the miner's group mining profit for the year is less than $125 million. If that profit is less than or equal to $75 million, the miner's offset reduces the amount of MRRT the miner must pay for the year to nil. The miner's offset phases out between profits of $75 million and $125 million, so that the miner is not immediately subjected to a full MRRT liability when the miner's profit exceeds $75 million.
Combining mining projects
Mining project interests are combined in a single mining project interest in certain circumstances (in particular, they must be "integrated" with each other). The combined mining project interest in effect takes the place of those mining project interests.
Transfer and splitting of mining projects
If a mining project interest is transferred, in most respects the new miner takes over from the original miner in relation to MRRT matters. In particular, the new miner bears the MRRT liability for the transfer year.
If a mining project interest is split, in most respects the new miner takes over from the original miner in relation to MRRT matters, each to an extent appropriate to their share of the split. In particular, each new miner bears an appropriate share of the MRRT liability for the year of the split.
The MRRT is to commence on 1 July 2012.
The tax changes affecting minerals also include an extension of the current Petroleum Resources Rent Tax ("PRRT") from offshore mining to on-shore mining.
The MRRT will, if it becomes law, represent a major extension of the resource taxation net in Australia. This extension represents a trend towards such taxes in response to buoyant commodity prices. Other jurisdictions that already have such taxes include Norway, Papua New Guinea, East Timor, British Columbia, and Russia.