Lavan Legal cautiously welcomes the Minerals Resource Rent Tax

 

The Minerals Resource Rent Tax (MRRT), announced on Friday, 2 July 2010, should be acknowledged as a step forward in removing the uncertainty in the investment market for the resource industry since the widely denounced Resource Super Profits Tax (RSPT) was announced on Sunday, 2 May 2010. 

The key features of the MRRT are:

  1. the MRRT will only apply to the iron ore, coal, oil and gas industries;

  2. profits over a threshold level are taxed at 30%, rather than the 40% under the RSPT;

  3. that threshold level is reached when profits are greater than the long term bond rate plus 7% (which is approximately 12%);

  4. the tax is determined by reference to the profits made at the mine gate (less costs up to that taxing point);

  5. there is a 25% extraction allowance to reduce the MRRT taxable profits, which recognises the 'contribution of the miner’s expertise to profits at the mine gate';

  6. the company tax rate will drop to 29% in 2013-14 (the proposed 28% rate in 2014-15 has now been scrapped);

  7. the tax will only apply to companies with resource profits of $50 million or more;

  8. companies can use either book or market value as a starting base for valuing project assets - all capital expenditure post 1 May 20100 will be added to the starting base;

  9. there are different depreciation rates to be used - if book value is used, depreciation (other than for mining rights) could be accelerated over 5 years and if market value is used (as at 1 May 2010), then the effective life could be up to 25 years (including for mining rights);

  10. if book value is used, the starting base will be uplifted at the long term bond rate plus 7% - there is no uplift to the starting base if market value is used;

  11. immediate deduction is available for investment post 1 July 2012; and

  12. MRRT losses may be transferred to other coal and iron ore projects in Australia.

For oil, gas and coal methane projects, the Federal Government announced that:

  1. the existing Petroleum Resource Rent Tax (PRRT) would be expanded to include all offshore and onshore oil, gas and coal seam methane projects;

  2. the PRRT rate remains at 40%;

  3. all state and federal resources tax will be creditable against current and future PRRT liabilities of a project; and

  4. companies can use market value as the starting base for project assets (including oil and gas rights).

Lavan Legal comment

Lavan Legal cautiously welcomes the MRRT. The announced measures should go some way towards improving Australia’s sovereign risk reputation. There are significant features within the MRRT to lessen the tax burden on existing resource investments through the increased threshold levels and through generous depreciation measures.

The MRRT will benefit diversified miners. It will also benefit those companies that have multiple projects in different phases. MRRT losses in the construction phase of one project could be used to offset MRRT liabilities in another project in the production phase. Companies that are not in the iron ore, coal, oil and gas industries can celebrate, and junior companies may take some heart as the MRRT will not affect them until they have reached the $50 million profit level.    

Nonetheless, the MRRT should be seen for what it is - a new tax. The tax announcements do not simplify the tax system, but impose another layer of compliance. The MRRT does not apply to all resource types.    

There are potentially different tax burdens for companies falling within the MRRT net. Once a junior company is within the MRRT net, that company will need to compete, without additional  special allowances, with existing large producers. As the MRRT is a tax, it will reduce the cash flow of a project, remove some of the benefits in investing in a junior company and may still hurt some companies attempting to raise funds, albeit with less impact than the RSPT would have caused. Despite the threshold level now being higher, that level may not truly reflect the borrowing costs of a company. 

Two disappointing features of the MRRT are the removal of the exploration rebate and, given that exploration is the life-blood for future resource development in this country, the lack of additional incentives for junior miners to explore. Resources Minister the Honourable Martin Ferguson AM indicated this morning that the mining industry is at best 'lukewarm' on the exploration rebate, but the Government will consider other potential incentives in this sector in the final technical design of the tax. Any incentives to assist junior explorers should take into account the fact that many junior companies in the exploration phase do not have any income. Accumulated losses by virtue of exploration related deductions may not provide the necessary incentive for investments in junior companies. The concept of 'flow through shares' ought to remain on the government’s agenda to assist junior miners.

Details of the MRRT still need to be clarified. For example:

  • When working out the assessable profit at the mine gate, can financing costs incurred for costs acquired up to that point be deducted?

  • What about infrastructure costs?

  • How does the MRRT work for a company that mines multiple types of ore from the same deposit, for example magnetite (which would be caught under the MRRT) and copper (which would not be caught under the MRRT)? 

  • If the reason for removing the 28% company tax rate proposal was because of the drop in the expected tax proceeds as a result of the MRRT,  will there now be any changes to the infrastructure fund that was proposed for Western Australia and Queensland?  

It will also be interesting to see in time whether the MRRT could withstand a constitutional challenge given that it is clear from the Federal Government’s announcement that the MRRT is designed to tax the value of resources.

For the oil and gas sectors, at least the PRRT now applies across the board for all onshore and offshore projects, which should assist in achieving competitive neutrality, particularly towards the coal seam gas projects.

There will no doubt be losers as there are projects that are currently exempted which would be taxed under the new announcements, such as the North West Shelf project. However, depending on the final tax design, the use of market value as a starting base could potentially have the effect of deferring the starting time for when tax would be ultimately payable for a project. As a result of this it is conceivable that some projects could achieve tax neutrality.

The PRRT should not be seen as the ultimate solution. Although the PRRT has been around for many years, it is far from perfect. Serious consideration should be given as to whether the overall PRRT system should be modified to reduce the disincentives to develop the oil and gas sectors further, and to provide greater international competitiveness against key market players such as Qatar.

The Federal Government’s announcement last Friday is a step in the right direction. A lot of work, however, remains to be done. Lavan Legal hopes that the Federal Government and its Policy Transition Group (led by Resources Minister Martin Ferguson AM and Mr Don Argus AC) will widely consult and allow sufficient time to work on the transitional elements and technical design of the tax. The exposure draft legislation is expected by June 2011, with legislation to be introduced into Parliament in the latter half of 2011 and anticipated passage of the legislation in early 2012. 

Lavan Legal will continue to provide updates on future developments.

For further details on the MRRT and how this may affect you and your business, please contact Tony Chong, Partner, on (08) 9288 6843 or tony.chong@lavanlegal.com.au.