safety wear image

The Federal Government has introduced additional regulations into the taxing of resources, effective 1 July 2012. These include a Minerals Resource Rent Tax (MRRT) and broadening the guidelines for the Petroleum Resource Rent Tax (PRRT).

The MRRT taxes the extraction of iron ore and coal for both current and new Australian mining projects.  The aim of the MRRT is to tax the value of the resources mined.

The PRRT regime has been updated to apply to both locally based and abroad Australian oil and gas developments, with the aim of reinforcing equitable conduct across all industry projects.

These measures will directly impact businesses operating in or with the mining sector.  Further, businesses will be indirectly affected through any impacts to the economy generally and the intended utilisation of the taxation revenue from these measures.

Minerals Resource Rent Tax

The MRRT will be levied at 30 per cent on annual assessable profits greater than $50 million.  Therefore, industry taxpayers below this $50 million threshold are exempt from the tax.

Guidelines for the deductibility of expenditure similar to those presently contained in the PRRT have been included in the MRRT.  This allows new projects to claim deductions through immediate write-offs as opposed to depreciating a project over a set number of years.  Consequently, this temporarily defers the MRRT liability, applying the tax once project profits can cover any initial investment costs.

Further, the MRRT also allows taxpayers to offset the MRRT liability by transferring deductions that arise in the construction stage of a project to another of its projects that is already in the production stage.

In addition, a 25 per cent extraction allowance has been established, this focuses the tax on the value of the resources rather than the value add generated by mining companies through mineral extraction.

When implementing the MRRT companies have the opportunity to utilise a credit in order to write down projects over a twenty-five (25) year time frame at their market value.  Alternatively, companies may choose to implement using a project’s current written down book value; in this case, companies will be able to utilise accelerated depreciation rates for a five (5) year duration and uplift this base by the long term government bond rate plus 7 per cent.

Any state royalties for mining developments paid will be treated as a credit under the MRRT.  Further, if the taxpayer has such credits unutilised, the royalty will be raised by the long term government bond rate plus 7 per cent, preserving the value of the credits.  However, credits that are not utilised cannot be refunded or transferred between projects.

The long term government bond rate plus 7 per cent can also be applied to unutilised losses which can be carried forward under the MRRT, preserving the value of these losses.

Petroleum Resource Rent Tax (PRRT)

The PRRT has now been modified to levy a 40 per cent tax rate on Australian oil and gas projects classified as either onshore or offshore, rather than only on offshore projects, as is presently the case.

Consistent with the MRRT, the PRRT allows expenses to be written off immediately and provides allowances for unutilised losses and capital write-offs.  However, there are restrictions on the transfer of losses.  The Federal Government has announced that a key factor of the PRRT is that ‘all State and Federal resource taxes will be creditable against current and future PRRT liabilities from a project’.

To assist existing company projects adapt to the new measures, transition provisions allow either market values or written down book values to be utilised as starting bases.

Future Tax Government Example

The Future Tax Government website provides a useful example demonstrating how the MRRT will be applicable to projects from 1 July 2012.

The example presents outcomes for a single project company with an equity financed mine that operates for five (5) years.  The company is assumed to invest $1 billion in the first year of the project.  Over the life of the project, the pre-tax rate of return (revenue less operating costs) is 50 per cent.

In this example, the average tax rate over the life of the project (total tax as a percentage of total profit before tax) is 42.3 per cent.

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Resource Charge

$million

$million

$million

$million

$million

$million

Revenue

0

520

830

910

1090

1100

Operating expenses

0

130

210

230

270

280

Depreciation

1000

0

0

0

0

0

MRRT allowance @ 13%

0

130

96

28

0

0

MRRT unutilised losses

0

1000

740

216

0

0

MRRT profit/loss

-1000

-740

-216

436

820

820

MRRT @ 30%

0

0

0

131

246

246

Extraction allowance @ 25%

0

0

0

33

62

62

MRRT after extraction allowance

0

0

0

98

185

185

Royalty @ 7.5%

0

39

62

68

82

83

Uplifted Royalty offset

0

0

44

120

102

0

Net MRRT

0

0

0

0

1

102

Total resource charge

0

39

62

68

82

185

Company tax

 

 

 

 

 

 

Revenue

0

520

830

910

1090

1100

Operating expenses

0

130

210

230

270

280

Depreciation

0

200

200

200

200

200

Total resource charge

0

39

62

68

82

185

Company taxable income

0

151

358

412

538

436

Company tax @ 29%

0

44

104

119

156

126

Profit before tax

0

190

420

480

620

620

Total tax

0

83

166

188

238

311

* Figures presented in the table above may not add due to rounding.

The following points are made by way of description of the calculations in the above table:
    - The MRRT is levied at a rate of 30 per cent of the operating margin (revenue less operating and investment costs) less the MRRT allowance and the extraction allowance.
        - The MRRT allowance is calculated as the value of unused losses uplifted by an allowance rate equal to the long term government bond rate plus 7 per cent.
        - The extraction allowance provides a 25 per cent discount to the MRRT liability.
    - State royalties are assumed in this example to be equal to 7.5 per cent of sales revenue and are credited against future MRRT liabilities.
    - The total resource charge is then the sum of royalties paid in the year and the net MRRT liability.

Other Impacts of These Measures

The Federal Government intends to utilise the taxation revenue from these measures for a number of initiatives, these include reducing the company income tax rate from 30 per cent to 29 per cent and introducing further tax breaks, such as asset write offs, for small businesses.

Adelaide Office

Level 1
136 Greenhill Road Unley
South Australia 5061

P 08 8300 0000
F 08 8300 0001

 


 

Member of
 

Business SA is a proud member of the Australian Chamber of Commerce and Industry (ACCI)