New tax on Australian mining projects

May 2012 Authors: Liz Allnutt, Sarah Lilly

Contacts

The controversial Minerals Resource Rent Tax (MRRT) has now become law in Australia and will come into effect on 1 July 2012.

The MRRT is a tax on profits made from extracting iron ore and coal in Australia, as well as gas extracted as a necessary incident of coal mining and gas produced by the in situ combustion of coal.

The MRRT will apply in full to those miners whose profits exceed AUD$125 million per year.  Miners with mining profits of less than AUD$75 million per year will have their MRRT liability reduced to nil.  To reduce distortions, the MRRT liability for miners with profits between AUD$75 million and AUD$125 million will be phased in.

There will be approximately 320 MRRT taxpayers in total.  The Australian Federal Government currently predicts that the MRRT will generate AUD$10.6 billion in revenue over the next three years, with BHP Billiton, Rio Tinto and Xstrata to account for 90 per cent of this revenue.  The Government’s revenue projections have, however, been disputed in estimates provided by the investment banks involved in preparing liability estimates for BHP Billiton, Rio Tinto and Fortescue Metals.

A miner’s MRRT liability is calculated as follows:

MRRT liability = MRRT rate x (Mining profit – Mining allowances)

The base MRRT rate is 30 per cent, but is reduced by an ‘extraction factor’ of 25 per cent, giving an effective rate of 22.5 per cent.

‘Mining profit’ is equal to mining revenue less mining expenditure.  Mining revenue and mining expenditure are calculated by reference to a ‘valuation point’ (a point prior to any significant processing or value-adding being performed, usually the point immediately before removal from a run-of-mine stockpile).  Mining revenue is the revenue the miner makes from the resources (which reasonably relates to the form and place the resources were in when leaving the valuation point).  Mining expenditure is the cost of finding the resources and bringing them to the valuation point.

The final MRRT amount paid will depend on the mining allowances claimed.  These operate as deductions from the mining profit amount and include allowances for:

  1. State and Commonwealth royalty payments (including royalties paid on other mining projects);
  2. expenditure incurred before a mining project commences (like exploration costs);
  3. circumstances where mining expenditure exceeds mining revenue for a given year (where the excess will carry forward and can be claimed against future mining profits); and
  4. the costs of assets acquired after the announcement of the MRRT in May 2010 but before the commencement date of 1 July 2012.

The Government plans to use part of the proceeds of the MRRT to cut the company tax rate from 30 per cent to 29 per cent.  However, the Government may struggle to pass the necessary legislation through the Federal Parliament as the Australian Greens have indicated that they will support tax cuts for small business only.  The Government would not be able to pass the legislation without the support of the Australian Greens.  The use of the MMRT proceeds will be debated in Parliament in May.

There are several parties contemplating initiating or joining a High Court challenge to the MRRT including Fortescue Metals, mining magnate Clive Palmer, and the States of Western Australia, Queensland and New South Wales.  However, it is uncertain whether any such challenge will be successful, and given the rapidly approaching commencement date for the MRRT, companies should start preparing for the MRRT regardless of any possible legal challenges.

The first instalment payment date for the MRRT is 21 October 2012.  Producing companies will need to start preparing their records, including assessing any available deductions, in order to evaluate whether they can pay a lower instalment rate than the default rates.  This should be done as soon as possible as it will take time to gather all the relevant records together and the assessment needs to be done carefully, given that penalties apply where companies have paid a lower instalment rate and that rate was not accurate. 

Companies also need to be aware of the MMRT in relation to financial reporting obligations – the end of the financial year is approaching and companies need be able to advise shareholders whether they will be paying the tax, how much they expect to pay and how project value will be impacted.