Australian Mining Tax Agreement Reached

by Mary Swire, Tax-News.com, Hong Kong

06 July 2010

The Australian Deputy Prime Minister and Treasurer, Wayne Swan, has announced changes to the previously-proposed resources super profits tax (RSPT), that appear to be acceptable to the country’s largest mining companies.

Swan said the agreement provides certainty to the resources industry, but also keeps faith with the government’s central goal to deliver a better return for the Australian people for their resources. It is the result of intense consultation and negotiation with the resources industry.

The improved resource taxation reforms focus on the most profitable resources, raise the uplift factor for tax losses and offer generous depreciation arrangements to promote new investment. He added that the reforms “are more generous to industry in some respects, while industry has given ground in other areas.” The profits-based taxation reforms will continue to apply from July 1, 2012.

The resource tax reforms involve the replacement of the RSPT with a new minerals resource rent tax (MRRT), applying only to iron ore and coal in Australia; and the extension of the current petroleum resource rent tax (PRRT) to all Australian onshore and offshore oil and gas projects, including the North West Shelf. The latter is designed to provide certainty for oil and gas projects, and ensure all such projects are treated equitably.

The government is, therefore, to focus its resource tax reforms on Australia’s biggest and most profitable commodities: iron ore, coal, oil and gas. Those commodities represent three-quarters of the value of Australia’s exports and resource operating profits, and will also represent the vast bulk of growth in the sector in the future. The number of companies affected by the new tax will reduce from 2,500 to around 320.

The MRRT on iron ore and coal will apply an “internationally competitive” rate of 30%. MRRT assessable profits will be calculated on the value of the commodity, determined at its first saleable form, less all costs to that point. Projects will be entitled to a 25% extraction allowance that reduces taxable profits subject to the MRRT, and small miners with resource profits below AUD50m per year will not have an MRRT liability.

Mining companies may elect to use the book or market value as the starting base for project assets, with depreciation accelerated over five years when book value, excluding mining rights, is used; or effective life (up to 25 years) when market value at May 1 2010, including mining rights, is used. All post May 1, 2010 capital expenditure will be added to the starting base.

A book value starting base will be uplifted with the long term bond rate plus 7%. However, a market value starting base will not be uplifted.

Investment post July 1, 2012 will be able to be written off immediately, rather than depreciated over a number of years. This will allow mining projects to access the deductions immediately, and means a project will not pay any MRRT until it has made enough profit to pay off its up-front investment.

MRRT losses will be transferable to other iron ore and coal projects in Australia. This should support mine development as it will mean that a company can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.

The extension of the PRRT to cover all oil, gas and coal seam methane projects, onshore and offshore, will continue to apply at a rate of 40%. The standard features of the current PRRT will also continue, except that companies will now be able to elect to use market value as the starting base for project assets, including oil and gas rights, and that all state and federal resource taxes will be creditable against current and future PRRT liabilities from a project.

To ensure the smooth implementation of the new arrangements, the government is establishing a Policy Transition Group (PTG) to consult with industry and advise the government on the implementation of the new MRRT and PRRT arrangements.

The new resource tax reforms are estimated to reduce revenue by AUD1.5bn (USD1.25bn) over the forward estimates. As the government has always said, all elements of the tax reform package announced at the time as the proposed RSPT are dependent on the package being balanced by the revenues from resource taxation.

In that respect, the company tax rate will continue to be cut to 29% from 2013-14, but will not be further reduced to 28% in the following year, as previously planned. Small companies will still benefit from an early cut to the company tax rate to 29% from 2012-13.

In addition, the resource exploration rebate will not be introduced. Resource exploration costs will continue to be deductible in the normal way and the PTG will consider the best way to promote future exploration and ensure a pipeline of resource projects for future generations.

However, other tax benefits, including the state infrastructure fund and the increase to the superannuation guarantee, will remain.

The three largest companies in the Australian mining sector, BHP Billiton, Rio Tinto and Xstrata, also issued a statement saying that they are encouraged by the government’s announcement that it proposes to replace the RSPT with the MRRT.

In the statement, the companies agree that the proposal presented by the government represents very significant progress towards a minerals taxation regime that satisfies the industry’s core principles. The companies add that they “will continue to work constructively with government to ensure that the detailed design of minerals taxation maintains the international competitiveness of the Australian resources industry into the future.”

Recommended