House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 15 Accounting for the MRRT

Outline of chapter

15.1 This chapter explains the Minerals Resource Rent Tax (MRRT) rules for uncommon accounting situations. It covers the rules in Division 195 about the treatment of non-cash benefits, the Division 185 rules about the treatment of entities that account in a currency other than Australian dollars, and the rules in Division 190 about how the MRRT law applies to an entity using an accounting period other than a financial year.

15.2 All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 unless otherwise indicated.

Summary of new law

Non-cash benefits

Barter transactions

15.3 A barter transaction, where an entity provides one non-cash benefit in return for another, is treated as:

•

selling the benefit the entity provides for money equal to the market value of the benefit it receives in return; and

•

using that money to buy the benefit it receives.

Gift transactions

15.4 An entity that gifts a non-cash benefit is treated as:

•

selling the benefit for money equal to its market value; and

•

gifting that money.

15.5 An entity that receives a non-cash benefit as a gift is treated as:

•

receiving money equal to the market value of the benefit it receives; and

•

using that money to buy the benefit.

Currency translation

15.6 A miner's MRRT liability is calculated by measuring amounts in Australian dollars, even where those amounts are denominated in a foreign currency. This is similar to how amounts are measured to determine an income tax liability for the purposes of the income tax law.

15.7 The translation rules for the MRRT are adapted from the translation rules in Subdivision 960-C of the Income Tax Assessment Act 1997 (ITAA 1997), apart from several special MRRT translation rules.

15.8 If an entity has a valid choice in place to use an applicable functional currency for income tax purposes it will be required to work out its instalment income, mining profit, pre-mining profit, allowances and rehabilitation tax offset by reference to that currency rather than Australian currency. It will also use that functional currency to work out its accounting profit for the purposes of choosing whether to use the simplified MRRT.

15.9 If a valid choice to use an applicable functional currency is in place, an entity will use a two-step translation process to calculate these amounts. This is the same process a taxpayer with an applicable functional currency uses to calculate its taxable income for income tax purposes.

Accounting periods

15.10 An entity that uses an accounting period for income tax other than the standard 1 July to 30 June financial year, treats that substituted accounting period as its MRRT year.

15.11 If an entity changes from one accounting period to another, any overlap between the old and new periods is counted as part of the old accounting period, which will therefore be a long MRRT year (greater than 12 months). Any gap between the old and new accounting periods is treated as a separate, short MRRT year (under 12 months). This ensures that every financial year is matched by one, and only one, MRRT year.

15.12 Such 'transitional' MRRT years can be longer or shorter than 12 months. MRRT amounts that are based on a 12 month period (such as the low-profit offset) are proportionately adjusted to reflect the length of a transitional year.

15.13 All entities start their first MRRT year on 1 July 2012, the date from which the MRRT first applies. Entities using a substituted accounting period in their first year will therefore have a short first MRRT year.

Detailed explanation of new law

Non-cash benefits

15.14 The MRRT includes provisions about how to treat transactions that do not involve money. These provisions are necessary because the MRRT law is generally written on the assumption that a quantifiable monetary consideration is involved in a transaction.

15.15 In broad terms, the MRRT non-cash benefit rules convert non-cash transactions into equivalent transactions denominated in money to ensure that an exchange of non-cash benefits gets the same treatment as purchasing those benefits for money (and that a gift of non-cash benefits is treated in the same way as a gift of money that is then put to acquiring those benefits). That ensures that there is neither an advantage nor a disadvantage to using a non-cash transaction. [Section 195-5]

15.16 The non-cash benefit rules deal with two broad types of non-cash transaction:

•

barter transactions, where non-cash benefits are exchanged; and

•

gift transactions, where an entity provides or receives a non-cash benefit for no consideration.

Barter transactions

15.17 A barter transaction involves an entity providing a non-cash benefit under an arrangement in which it also receives a non-cash benefit. In most cases, this would simply be an exchange of non-cash benefits between two entities but it also covers exchanges of non-cash benefits involving more entities. [Subsection 195-10(1)]

Non-cash benefits

15.18 A non-cash benefit is property or services in any form except money [section 300-1, definition of 'non-cash benefit'] . It covers tangible and intangible property, including the property embodied by an enforceable promise (although in practice a promise to provide something that is proximately satisfied would be treated in the same way as the thing actually provided). It also covers any service, including the service of forgiving some or all of a debt or other enforceable obligation.

Promises to pay money

15.19 The barter transaction rules extend to cover promises to pay money more than 12 months in the future. That extension is not necessary in the non-cash benefit rules for income tax, which has separate mechanisms to deal with the tax treatment of delayed monetary payments. It is necessary in the MRRT context, which has no similar mechanism but nonetheless needs to take into account the time value of money (at least when the timing difference is sufficient to make the difference in values significant). ^[6] [Subparagraph 195-10(1)(a)(ii)]

15.20 The provision does not provide a formula to convert the promise to pay money into a present value, although something of that sort would usually be involved in determining the market value of the promise. To avoid the sort of complexity that can be involved in such calculations, the non-cash benefit rules provide an arbitrary 12 months exception similar to that provided in the income tax law for 'qualifying securities' (see subsection 159GP(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). The result is that promises to pay money within the next 12 months are treated in the same way as immediate payments of the promised amount of money. [Subparagraph 195-10(1)(a)(ii) and subsection 195-10(4)]

Treatment of barter transactions

15.21 The barter rules act to treat an entity as exchanging the non-cash benefits it provides for an amount of money equal to the market value of the benefits it receives. It is then treated as spending that money to buy the benefits it receives. [Subsections 195-10(2) and (3)]

Example 15.166 : Barter transaction

Great Southern Mining agrees with Chamarette Excavations to provide Chamarette with five million tonnes of iron ore to allow it to meet its supply contracts, in return for Chamarette's agreement to provide Great Southern with an equivalent amount of ore on demand in the following year. This is a barter transaction: Great Southern is exchanging five million tonnes of iron ore for a right to obtain five million tonnes in the following MRRT year.

Great Southern is taken to receive an amount for providing its iron ore equal to the market value of Chamarette's promise to provide ore in the following year. Great Southern is also taken to have used that money to purchase the promise from Chamarette. The purchase of the promise will have no MRRT consequences for Great Southern but some part of the sale price it is taken to have received for its ore will be included in its mining revenue.

Similarly, Chamarette will be taken to have sold its promise to provide ore to Great Southern, for an amount equal to the market value of the ore it receives from Great Southern, and to have used the money to buy that ore. The purchase of the ore will have no MRRT implications for Chamarette but the consideration for the promise to supply future ore will give rise to an amount of mining revenue when it makes those future supplies to Great Southern.

15.22 The money value for both sides of the transaction is determined by reference to the value of what is received, not what is provided. This deals with the unusual case where entities exchange things that are not of equal value. If the money value could differ between the two sides, one of the entities would be exposed to double taxation and the other might be able to claim a double deduction.

15.23 If more than one benefit is provided or received as part of the transaction, a money value would be put on the combined benefits. That money value would be apportioned between the individual benefits in proportion to their market values.

Example 15.167 : Multiple non-cash benefits

Great Southern Mining enters into a barter transaction with Dickinson Mining Equipment under which it gives Dickinson five of its old mining trucks in return for two new trucks. Great Southern is taken to have sold its five trucks for an amount equal to the market value of the two new trucks. It would apportion that amount between the five old trucks to see how much (if anything) to bring to account as mining revenue by way of a recoupment. That would matter if the trucks had different values for MRRT purposes (for example, if some of them had not yet been fully deducted because they were starting base assets), or if they had different percentages of upstream use, or if they were used in different projects.

Great Southern would also be taken to have spent that money on acquiring the new trucks and would apportion that amount between the two according to their market values for the purposes of working out its mining expenditure.

15.24 The provisions also handle the possibility of money forming part of the transaction. For example, one entity might provide one non-cash benefit in return for another non-cash benefit plus cash. In such cases, the money value the rules provide for would be apportioned dollar for dollar to the cash and the remainder would be divided between the non-cash benefits.

Example 15.168 : Barter transaction involving cash

Suppose that, in the previous example, Great Southern gave five old trucks plus an amount of money for the two new trucks. The market value of the two new trucks would be apportioned first to the cash on a dollar for dollar basis. The remainder would be divided amongst the five old trucks in proportion to their market values to work out their sale prices.

15.25 If a non-cash benefit is a promise to provide something later, the promise is what is being valued, not the thing that is promised. The value of the promise will be affected by things other than the value of the thing promised. For instance, it would take into account how far into the future the promise will be satisfied and the risk of the promisor defaulting.

15.26 The actual delivery of the thing promised does not have a further MRRT effect (such as an amount of mining revenue or expenditure in the year the thing promised is provided and received). All MRRT effects will have been fully accounted for when the non-cash rules converted the benefits into money, in the same way as if money had actually been paid.

Gift transactions

15.27 The MRRT law includes provisions for non-cash gift transactions largely for the sake of completeness. Although it is possible that there could be some non-cash gifts that are relevant to MRRT activities, they would be fairly rare things.

15.28 The gift provisions work in a similar way to the barter provisions after, of course, taking into account the one-sided nature of a gift.

Receiving a non-cash gift

15.29 If an entity receives a non-cash benefit as a gift, it is taken to have received money equal to the benefit's market value at the time it receives the benefit. It is also taken to have spent that money to acquire that benefit. [Subsection 195-15(1)]

15.30 The money would be treated under the MRRT as if it had been paid and received in the same circumstances in which the benefit was actually given and received. The receipt would seldom result in an MRRT effect for the recipient, although it is conceivable that the particular circumstances of some gifts could produce an effect. For example, if a State government were to gift land to a miner instead of refunding mining royalties, the receipt could produce a reduction of royalty credits or an increase in mining revenue in the same way as a cash refund would.

Example 15.169 : Miner receives free carbon emission units

Lonergan Coal receives 20,000 free emission units for its upstream operations from the Commonwealth as part of an industry assistance package under a Clean Energy Package. The units can be used to offset the company's emission liabilities. Lonergan has to acquire 5,000 further emission units on the market to meet its liability for emissions related to its upstream operations.

The cost of the 5,000 emission units Lonergan purchases is mining expenditure. It is taken to have received cash equal to the value of the 20,000 emission units it received from the Commonwealth and to have used that cash to acquire the 20,000 units. That 'cost' is also Lonergan's mining expenditure. The gift of the notional cash is an advance recoupment of the notional expenditure, so is mining revenue for Lonergan. The net result in this case is that Lonergan reduces its mining profit by the amount of its actual expenditure on the 5,000 emission units.

15.31 The treatment of the consequent notional payment of money to acquire the non-cash benefit could produce an MRRT effect if an actual purchase of the benefit would have done so. For example, if a farmer gifts a miner some surplus blasting caps for use in its mining activities, the miner's deemed purchase could be mining expenditure in the same way as could an actual purchase.

Giving a non-cash gift

15.32 If an entity provides a non-cash benefit as a gift, it is taken to have sold the non-cash benefit at the time it provides it for money equal to the benefit's market value. It is also taken to have gifted that money in the same circumstances as it gifted the non-cash benefit. [Subsection 195-15(2)]

15.33 There could be an MRRT effect arising from the notional sale of the benefit that is taken to have occurred.

Example 15.170 : Miner gifts a mining vehicle

Friendly Mining gifts an old 4-wheel drive vehicle to the local wildlife refuge. It would be taken to have sold the vehicle for money equal to its market value and to have gifted the money to the refuge. If the vehicle had been used 50 per cent in Friendly's upstream mining operation, it would include half the notional amount in its mining revenue as a recoupment, in the same way as if it had actually sold the vehicle. If a real gift of money to the refuge in the same circumstances would have produced an MRRT effect (for instance, as mining expenditure), the notional gift of money produces the same effect.

15.34 The notional gift of the money would seldom produce an MRRT effect. However, in some cases the circumstances of a gift by a miner would be sufficiently related to upstream mining activities to qualify as mining expenditure. That would be determined by reference to the circumstances in which the miner made the non-cash gift.

Currency translation

Translation of foreign currency amounts to Australian dollars

15.35 A miner's MRRT liability is calculated in Australian dollars. Translation rules are required so amounts in foreign currency are appropriately taken into account in calculating this liability.

15.36 The core translation rule provides that, for MRRT purposes, an amount of foreign currency is translated into, or expressed in, Australian dollars. This is similar to the core translation rules for income tax purposes. [Subsection 185-10(1)]

15.37 Foreign currency is defined as a currency other than Australian currency. This is the same definition used for income tax purposes. [Section 300-1, definition of 'foreign currency']

15.38 The translation rule applies to amounts generally and is intended to be interpreted broadly. An amount can include, but is not limited to:

•

an amount of an expense;

•

an amount of an obligation;

•

an amount of a liability;

•

an amount of a receipt;

•

an amount of a payment;

•

an amount of consideration; or

•

a value.

[Subsection 185-10(2)]

15.39 Foreign currency amounts need to be translated into Australian dollars at the applicable exchange rate. The exchange rate that is to be used is the exchange rate that would be applicable if the translation were being done for the purposes of Subdivision 960-C of the ITAA 1997. [Subsection 185-10(3)]

15.40 In some cases, an amount taken into account for MRRT purposes is the sum or the result of two or more other amounts. Any amounts in foreign currency that are elements in the calculation of another amount are translated before calculating the other amount. This is similar to the approach taken for income tax purposes. [Subsections 185-10(4) and 185-15(6)]

15.41 The only exception is calculating an entity's profit for the purposes of the simplified MRRT method. The reason for this exception is to not require the translation of the components of a miner's accounting profit. The accounting rules should determine that profit (which may involve translating amounts according to accounting principles), with the MRRT translation rules only applying to convert the final outcome into Australian dollars (if necessary) on the last day of the MRRT year. [Subsections 185-10(5), 185-15(6) and 185-25(1 ) ( table item 7)]

Functional currency rules

15.42 The functional currency rules in MRRT automatically apply to an entity that has a valid choice in effect to use an applicable functional currency for income tax purposes. The functional currency rules apply to all of the entity's mining project interests and pre-mining project interests while it is required to use an applicable functional currency for income tax purposes. [Subsection 185-15(1)]

15.43 The MRRT functional currency rules allow miners that have made a valid choice under item 1 or item 2 in the table in subsection 960-60(1) of the ITAA 1997 to account for individual MRRT related transactions using a unit of account (being the applicable functional currency) other than Australian dollars. However, the net amount from those transactions is translated into Australian dollars for the purposes of accounting for MRRT.

How are amounts translated using an applicable functional currency?

15.44 Broadly, when an entity is required to use an applicable functional currency for MRRT:

•

all amounts that are not in the applicable functional currency are translated to that currency rather than to Australian dollars; and

•

the instalment income, mining profit, pre-mining profit, mining allowances, accounting profit for the simplified MRRT and rehabilitation tax offsets of the entity are translated from the applicable functional currency to Australian dollars at the end of the MRRT year.

15.45 This follows the approach used for income tax purposes and potentially involves two translations. This is explained below.

First translation rule

15.46 There are situations where an entity undertakes transactions in a currency other than its applicable functional currency. For the purposes of working out:

•

the instalment income of the entity for an instalment quarter in the MRRT year;

•

the mining profit for each mining project interest the entity has in the MRRT year;

•

the pre-mining profit for each pre-mining project interest the entity has in the MRRT year;

•

the amount of an allowance component relating to each mining project interest and pre-mining project interest the entity has in the MRRT year;

•

whether the entity may elect to use the simplified MRRT method for the MRRT year; and

•

the amount of a rehabilitation tax offset for the entity,

an amount that is not in the miner's applicable functional currency must first be translated into that currency, so that a consistent unit of measurement is used to calculate the items. [Subsections 185-15(2) and (3)]

15.47 The amounts that are subject to the first translation rule (translation into the miner's functional currency) include, but are not limited to:

•

an amount of an expense;

•

an amount of an obligation;

•

an amount of a liability;

•

an amount of a receipt;

•

an amount of a payment;

•

an amount of consideration;

•

a value; or

•

a monetary limit or other amount set out in any Commonwealth law.

[Subsection 185-15(4)]

15.48 The exchange rate for translating these amounts is the same exchange rate that would be used if the translation was done for income tax purposes [subsection 185-15(5)] . For income tax purposes, the functional currency translation rules, including the applicable exchange rates, follow the principles set out in the rules for translating foreign currency amounts to Australian dollars (section 960-80 of the ITAA 1997).

Second translation rule

15.49 For income tax purposes, a taxpayer's taxable income is calculated in the applicable functional currency and then translated into Australian dollars. The same methodology has been adopted for the MRRT to calculate:

•

mining profit;

•

pre-mining profit;

•

the amount of an allowance component that is applied to work out an MRRT allowance for the MRRT year; and

•

the amount of a rehabilitation tax offset for the entity.

[Subsection 185-15(7)]

15.50 These amounts are calculated in the applicable functional currency and then translated into Australian dollars at the end of the MRRT year. The exchange rate for this translation is the exchange rate that would be used if the translation was done for income tax purposes. [Subsections 185-15(7) and (8)]

15.51 Only so much of the allowance component that is necessary to reduce the mining profit to nil can be an MRRT allowance in a particular MRRT year. It is only that amount of the allowance component that is applied to form the MRRT allowance for that MRRT year that is translated to Australian dollars. Since the unused portions of any royalty credits, pre-mining losses, mining losses and starting base losses are simply an 'amount' in the calculation of the MRRT allowance, they will stay in the applicable functional currency and are uplifted in that currency.

Example 15.171 : Translating units from functional currency into Australia dollars

Langstraat Mining Co (Langstraat) has chosen to use the Euro as its functional currency for the purposes of Subdivision 960-D of the ITAA 1997.

All amounts are translated into the Euro in order to calculate Langstraat's mining profit. After translating these amounts, they are:

•

mining revenue of € 600 million; and

•

mining expenditure of € 120 million.

Langstraat also applies these allowance components to work out its MRRT allowance for the year.

•

royalty credits of € 150 million;

•

unused mining losses of € 60 million (after uplift);

•

starting base losses of € 120 million.

For the purposes of the example, assume the applicable exchange rate is 1A$ = € 0.75.

In accordance with the second translation rule, the mining profit of € 480 million (mining revenue minus mining expenditure) is translated into A$640 million.

The allowance components that are applied to calculate the MRRT allowances are translated into Australian dollars in accordance with the second translation rule:

•

Royalty allowance A$200 million (150m/0.75)

•

Mining loss allowance A$80 million (60m/0.75)

•

Starting base allowance A$160 million (120m/0.75)

•

Total allowances = A$440 million

MRRT Profit:	A$200 million (mining profit minus allowances)
MRRT Liability:	A$45 million (MRRT profit x 0.225)

Foreign resident operating through a permanent establishment

15.52 In some circumstances, a miner may be a foreign resident that is carrying on the operations of its mining project interest or pre-mining interest through a permanent establishment for which the miner has chosen to use a functional currency. The MRRT functional currency rules apply to that permanent establishment. [Section 185-20]

Special translation rules

Translating the amount of instalment income

15.53 The amount of instalment income for a quarter is subject to the second translation rule and is translated from the entity's applicable functional currency into Australian dollars at the exchange rate applicable on the last day of the instalment quarter. [Subsection 185-25(1), item 1 in the table]

Translating the mining profit or pre-mining profit

15.54 The amount of mining profit or pre-mining profit is translated from the entity's applicable functional currency into Australian dollars at the exchange rate applicable on the last day of the MRRT year. [Subsection 185-25(1), item 2 in the table]

Translating the allowance component used for an MRRT allowance

15.55 Any allowance component applied in working out an MRRT allowance in an MRRT year is translated from the entity's applicable functional currency into Australian dollars. Where this happens, these amount(s) are translated into Australian dollars at the exchange rate applicable on the last day of the MRRT year to which the allowance component relates. [Subsection 185-25(1), item 3 in the table]

Translating amounts already recognised for MRRT purposes in a different currency

15.56 There may be instances where an entity is required to take into account an amount that has already been recognised in a previous MRRT year (such as the decline in value of starting base assets). In these cases, an entity will have to translate the amount if it is now accounting for its MRRT obligations in a different currency. The amount is translated at the applicable exchange rate on the first day of the current MRRT year. [Subsection 185-25(1), item 4 in the table, and subsection 185-25(2)]

15.57 For example, where an entity switches from using Australian dollars to an applicable functional currency, amounts that have been taken into account in an earlier MRRT year will need to be translated into the functional currency if they need to be taken into account in the current MRRT year. This may also arise if an entity changes its applicable functional currency to another applicable functional currency, or stops using a functional currency.

Example 15.172 : Starting to use a functional currency

At the end of the 2014-15 MRRT year, Black Coal Mining Co has unused mining losses of $100 million. This amount had been recorded and accounted for in Australian dollars as Black Coal has not made a functional currency choice under section 960-60 of the ITAA 1997 that applies in that MRRT year.

As a result of a major corporate reorganisation in the 2015-16 MRRT year, Black Coal has a new parent company, Salem Mining. Salem is a foreign resident company based in the United States. Black Coal makes a valid choice to use US dollars as its applicable functional currency under section 960-60 of the ITAA 1997 for the 2015-16 income tax year.

As Black Coal has made a functional currency choice for income tax purposes, it is required to use that applicable functional currency for its corresponding MRRT year.

Black Coal will need to translate the amount of unused mining losses carried forward from the 2014-15 year, that were previously denominated in Australian dollars, into its applicable functional currency (US dollars). It will need to make that translation using the exchange rate that applied on the first day of the 2015-16 MRRT year.

Transfer or split of a mining project interest or pre-mining project interest

15.58 Special translation rules apply if:

•

there is a transfer or split of a mining project interest;

•

the new miner recognises amounts for MRRT purposes in a currency that is different to that being used by the original miner; and

•

as a result of the transfer or split, the new miner is required to translate an amount.

15.59 Where this happens, the amounts are translated by the new miner at the exchange rate applicable on the day the transfer or split happens. [Subsection 185-25(1), item 5 in the table]

15.60 An equivalent rule applies to the transfer or split of a pre-mining project interest. [Subsection 185-25(1), item 6 in the table]

Events that happened before the current choice took effect

15.61 The need for a constant unit of account, combined with the ability to choose an applicable functional currency, raises the question of how to address an event that precedes the choice but is taken into account after that choice takes effect. For income tax purposes, a special translation rule deals with these cases (subsection 960-85 of the ITAA 1997). A similar rule applies for the MRRT where an entity is required to translate an amount to the applicable functional currency and:

•

the amount is attributable to an event that happened, or a state of affairs that arose, before the current choice took effect; and

•

the amount has not previously been taken into account under the MRRT in relation to a project interest or a pre-mining project interest.

[Subsection 185-25(3)]

15.62 The following two-stage translation process applies if there is no previous choice in effect at the time of the event:

•

First, the amount is translated into Australian dollars at the rate prevailing at the event time.

•

Second, the Australian dollar amount is translated into the functional currency (if necessary) at the exchange rate prevailing at the start of the current MRRT year.

[Subsection 185-25(3), item 1 in the table]

15.63 Where a previous functional currency choice has been made, the same process applies, except the previous applicable functional currency is substituted for Australian currency. [Subsection 185-25(3), item 2 in the table]

Example 15.173 : Events before a functional currency is used

Trojan Co has a starting base asset with a base value of A$1 million at the beginning of its 2013-14 MRRT year. It makes a valid choice to use the US dollar as its applicable functional currency from the start of the 2014-15 income tax year. Since the base value of the asset is an amount that is attributable to an event that happened before the functional currency rules for MRRT applied, it is translated into US dollars at the applicable exchange rate at the start of the 2014-15 MRRT year.

Accounting periods

15.64 The standard MRRT year follows a financial year, running from 1 July in a calendar year to 30 June in the following calendar year. This is the same as the standard income year used for income tax purposes.

15.65 However, the income tax law allows taxpayers to use accounting periods that vary from the standard year under section 18 of the ITAA 1936. Historically, these 'substituted accounting periods' were provided for taxpayers in agricultural businesses because the seasonal nature of their activities could conflict with the timing of income tax obligations arising under a standard year. Nowadays, substituted accounting periods are more commonly used to allow a company operating in Australia to align its accounting period with those of its foreign parents and associates, to simplify the tasks involved in group accounting.

15.66 The MRRT law also provides for entities to use substituted accounting periods. However, unlike the income tax model, substituted accounting periods are not optional under the MRRT. Entities that have a substituted accounting period for income tax purposes must use the same substituted accounting period for MRRT purposes. Ensuring that entities use the same accounting period for MRRT and for income tax simplifies the interaction between MRRT and income tax. It is not necessary for entities to track separately their expenses and revenue that are relevant to both taxes if the accounting for both uses the same period. [Sections 190-5 and 190-10]

15.67 Entities use a substituted accounting period once they have applied for, and been granted leave by, the Commissioner of Taxation (Commissioner) to use that period. The Commissioner publishes information outlining the circumstances in which leave is likely to be given.

15.68 A number of exotic entities, such as venture capital limited partnerships, have different accounting periods for income tax purposes under section 18A of the ITAA 1936. These periods stop and start when one of those entities changes its status, ensuring that an entity is of only one type within each accounting period. The MRRT does not use those special accounting periods because the MRRT taxes all entities in the same way. Accordingly, the MRRT annual accounting period is not divided into sub-periods for MRRT purposes, which avoids the additional compliance costs associated with such an approach.

15.69 An entity that uses a substituted accounting period for MRRT purposes still accounts for its MRRT liability on an annual basis but does so over the substituted accounting period rather than the standard MRRT year. It still lodges its MRRT return and pays its MRRT liability by the first day of the sixth month after the end of its MRRT year. It still pays quarterly MRRT instalments by the 21st day after the end of each quarter but its payment dates vary from those of an entity using a standard financial year.

Changing accounting periods

15.70 Substituted accounting periods work just like standard MRRT years as long as the period does not change. The accounting is still done for a 12 month period; but a different 12 month period. Complications occur only when an entity changes from one accounting period to another. This could be when an entity changes from a standard accounting period to a substituted accounting period, or vice versa, or when it changes from one substituted accounting period to a different substituted accounting period.

15.71 The complications arise because an accounting period has to be 12 months long (see section 18 of the ITAA 1936). That means that, when there is a change from one 12 month period to another, there will be a period that either falls into both the old and the new accounting periods or into neither of them.

15.72 There are no income tax provisions that provide an explicit treatment for these situations. The Commissioner administers them by using special assessments under section 168 to ensure that, for income tax purposes, all amounts are properly accounted for and are not accounted for more than once. That treatment is supported by the decision of the Administrative Appeals Tribunal in Norwich Superannuation Services Pty Ltd v FC of T (99 ATC 2015; (1998) 40 ATR 1091).

15.73 In contrast to the income tax law, the MRRT law provides explicit rules to deal with entities changing their accounting periods. It does so either by adjusting the length of the old or new accounting periods, or by creating an interim accounting period [subsection 190-15(1)] . It also proportionately adjusts amounts that require a 12 month accounting period to reflect the adjusted period being longer or shorter than 12 months [sections 190-20 and 190-25] .

Both periods end in the same 1 December to 30 November period

15.74 If the old accounting period and the new accounting period both end within the same 12 months from 1 December of one calendar year to 30 November of the following calendar year, there will be an overlap between the accounting periods. In that case, the old accounting period is extended to the end of the first of the new accounting periods. That means the old accounting period comprises what would have been the old and the new accounting periods and so will be longer than 12 months. Accounting periods after that transitional year are 12 months long (unless the entity changes its accounting period again). This approach ensures that every financial year is matched by one, and only one, MRRT year. [Subsection 190-15(2)]

Example 15.174 : Overlap between old and new accounting periods

A miner changes from a standard accounting period ending on 30 June 2014 to an accounting period ending on 30 September 2014. The new accounting period, which replaces the 2013-14 financial year, is called a 'late balance period' because it ends after the end of the financial year.

The period from 1 October 2013 to 30 June 2014 falls into both the old and the new accounting periods. Therefore, the old accounting period is extended to the end of the new accounting period. That means the accounting period that matches the 2013-14 financial year will be 15 months long (running from 1 July 2013 to 30 September 2014). Accounting periods after that will run for 12 months, from 1 October to 30 September.

Each period ends in a different 1 December to 30 November period

15.75 If the new accounting period ends in a different 1 December to 30 November period than the old accounting period, there can be either an overlap between the periods or a gap between them. The approach taken to determine the length of the transitional year depends on whether there is an overlap or a gap between the old and new accounting periods. Again, the approach ensures there is one MRRT year to match each financial year.

An overlap between the old and new periods

15.76 If there is an overlap, it is allocated to the old accounting period and taken away from the new accounting period. That means the old accounting period will be 12 months long and the first of the new accounting periods will be shorter than 12 months. [Subsection 190-15(3)]

Example 15.175 : Overlap between old and new accounting periods

A miner changes from an accounting period ending on 31 August 2014 to one ending on 31 March 2015. The new accounting period, which replaces the 2014-15 financial year, is called an 'early balance period' because it ends before the end of the financial year.

These accounting periods end in different 12 month periods (because 1 December occurs between their end dates) but the periods do overlap (the period from 1 April 2014 to 31 August 2014 falls into both of them).

Therefore, the old accounting period ends on 31 August 2014, as usual, but the new accounting period is shortened to the seven months from 1 September 2014 to 31 March 2015. Later accounting periods will be 12 month periods, from 1 April to 31 March.

A gap between the old and new periods

15.77 If there is a gap, the old and new accounting periods each run for 12 months as normal and the gap is treated as a separate MRRT year. [Subsection 190-15(4)]

Example 15.176 : Gap between old and new accounting periods

Solldt Mines Pty Ltd changes from an accounting period ending on 30 November 2014 to one ending on 31 January 2016.

These accounting periods end in different 12 month periods (because 1 December occurs (twice) between their end dates) but this time the periods do not overlap. Instead, there is a gap between them: December 2014 and January 2015 occur in neither period.

Therefore, Solldt's old and new accounting periods run for 12 months as normal and the two months between them are a separate MRRT year. The old accounting period is a late balance period for the 2013-14 financial year. The new accounting period is an early balance period for the 2015-16 financial year. The two months between is the accounting period for Solldt that matches the 2014-15 financial year.

Adjusting amounts for long and short accounting periods

15.78 Many amounts under the MRRT law are designed to work on an annual (12 months) basis. For example, a miner with a mining profit of $50 million or less in a year has a low-profit offset that reduces its MRRT liability to nil for that year. Such amounts would not be calculated correctly if they were based on an accounting period longer or shorter than 12 months. With the low-profit offset, for example, a miner with a transitional accounting period of 18 months would be more likely to be over the $50 million profit than if the period had been 12 months long and so could lose the benefit of the offset. For a short transitional period, it would be easier to come under the $50 million profit threshold.

15.79 To deal with such cases, amounts that count towards thresholds like the $50 million profit are adjusted proportionately to reflect the length of the accounting period. This is done by multiplying them by:

365 / Days in the transitional accounting period

[Subsection 190-20(1)]

15.80 The result is that the amounts are increased for the purposes of working out whether a threshold is crossed in a short transitional accounting period and decreased for such purposes in a long transitional accounting period. This ensures the miner is neither advantaged nor disadvantaged when it changes its accounting period.

15.81 The amounts that are adjusted are those that count towards working out:

•

a miner's 'group mining profit', 'share of group mining profit' and 'group MRRT allowances' for the purposes of working out what low-profit offset the miner is eligible for;

•

whether a miner's 'group production of taxable resources' is under 10 million tonnes for working out its eligibility to use the alternative valuation method; and

•

a miner's profit for the purposes of determining its eligibility to use the simplified MRRT method.

[Subsection 190-20(1)]

Example 15.177 : Low-profit offset in a transitional accounting period

New Valley Mining has a transitional accounting period of 15 months for the 2013-14 financial year, ending on 30 September 2014. In that period, it makes a mining profit of $75 million and has MRRT allowances of $10 million. The MRRT year of its affiliate, Old Ridge Mining, is the standard 2013-14 financial year. Old Ridge makes a mining profit of $23 million and has MRRT allowances of $3 million for that year.

New Valley would multiply its mining profit and its MRRT allowances by 365/457 for the purposes of working out its eligibility for the low-profit offset. Old Ridge's figures would not be adjusted because it is using a 12 month accounting period. New Valley's adjusted mining profit would be $60 million ($75m x 365/457) and its adjusted MRRT allowances would be $8 million ($10m x 365/457). The group's mining profit would be $83 million ($60m + $23m) and the group's MRRT allowances would be $11 million ($8m + $3m).

Applying the low-profit offset formula, would produce an offset for New Valley of $976,500 ($4.34m x .225) and an offset for Old Ridge of $373,500 ($1.66m x .225).

Further adjustment for the low-profit offset

15.82 In the case of the low-profit offset, it is necessary to adjust the amount of the offset before applying it. This addresses the fact that, in calculating the offset, the mining profit is increased for a short accounting period, or decreased for a long accounting period, and therefore results in an annualised offset amount that is not proportionate to the mining profit of the miner for the actual transitional period.

15.83 The further adjustment multiplies the unadjusted offset by:

Days in the transitional accounting period / 365

to proportionately adjust the offset to the right amount for the length of the actual accounting period being used. [Subsection 190-20(2)]

Example 15.178 : Further adjustment for the low-profit offset

Continuing the previous example, New Valley would multiply its $976,500 offset figure by 457/365 to get a final offset of $1.22 million.

Old Ridge would not adjust its $373,500 offset figure because Old Ridge is using a 12 month accounting period, so its offset and its mining profit are already worked out for a 12 month period.

Special adjustment for the simplified MRRT method

15.84 One of the eligibility tests for using the simplified MRRT method is that:

•

the miner's group profit (that is, the profits of the miner and its related entities) is under $250 million for the year; and

•

neither the miner nor any of those related entities has a mining project interest whose profits for the year are not at least four times its liability for mining royalties for the year (after adjusting for any recoupment of royalties).

15.85 If the miner is in a transitional accounting period, its group profit would be adjusted by the normal rule for annualising transitional accounting period figures. A special adjustment ensures that the same thing is done for the mining royalties (after adjusting for any recoupment) by multiplying them by:

365 / Days in the transitional accounting period

[Subsection 190-20(3)]

Uplifts for transitional accounting periods

15.86 The MRRT law uplifts the values of a number of things from one year to the next. For example, an unused mining loss from one year is uplifted by the long term bond rate plus 7 per cent (LTBR + 7 per cent) for use in the next year.

15.87 In all such cases, the uplift factor for the year following a transitional accounting period is indexed by:

Days in the transitional accounting period / 365

That produces the same result as uplifting the amount on a daily basis, thus properly reflecting the number of days in the transitional period. [Section 190-25]

Example 15.179 : Uplifting a loss from a transitional accounting period

Exoform Tunnelling makes a mining loss of $4 million for its 2016-17 MRRT year, which was a nine month transitional accounting period ending on 30 March 2017. Exoform would normally uplift that loss for use in 2017-18 by multiplying it by the 2016-17 LTBR + 7 per cent. Instead, it has to index that uplift figure by 274/365. Assuming the long term bond rate in 2016-17 was 5.5 per cent, it would get an adjusted uplift factor of:

(0.055+1.07) 274/365

which comes to 1.09. Multiplying 2016-17's $4 million loss by 1.09, would produce an uplifted loss of $4.37 million for Exoform to use in 2017-18.

Application and transitional provisions

Accounting periods

15.88 The MRRT only applies from 1 July 2012. That means that all entities using a substituted accounting period when the MRRT commences on 1 July 2012 have a short first MRRT year covering the period from 1 July 2012 until the end of their accounting period. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, item 10]

15.89 The adjustments applicable for transitional accounting periods apply to entities where their first MRRT year is not a 12 month accounting period.