House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 1 - Repeal of the Minerals Resource Rent Tax

Outline of chapter

1.1 Schedule 1 to this Bill repeals the Minerals Resource Rent Tax (MRRT), by repealing the:

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Minerals Resource Rent Tax Act 2012 (MRRTA 2012); and

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Minerals Resource Rent Tax (Imposition-Customs) Act 2012, Minerals Resource Rent Tax (Imposition-Excise) Act 2012 and the Minerals Resource Rent Tax (Imposition-General) Act 2012 (collectively the MRRT Imposition Acts).

1.2 The Schedule also makes consequential amendments to other legislation, including the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953), required as a result of the repeal of the MRRT.

Context of amendments

Background to the MRRT

1.3 The MRRT applied from 1 July 2012 to taxable resources (broadly iron ore and coal) after they were extracted from the ground but before they underwent any significant processing or value adding. Coal seam gas produced as a necessary incident of coal mining was also included as a taxable resource to avoid unnecessary compliance and administration costs, and changes were made to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to ensure that the Petroleum Resource Rent Tax (PRRT) did not also apply to those resources.

1.4 The MRRT imposed a significant regulatory and compliance burden on the iron ore and coal mining industries, which was exacerbated by its complex design. Prior to the introduction of the MRRT, iron ore and coal miners were already subject to the relevant State royalty arrangements as well as to Commonwealth income tax.

1.5 The MRRT did not replace State royalties, as originally envisaged by the Australia's Future Tax System Review, but instead imposed an additional layer of taxation. The revenue expected to be raised by the MRRT has been progressively revised down since its announcement, in part because the States increased their royalties (which are credited against MRRT).

1.6 Repealing the MRRT restores confidence and promotes activity in the mining industry, allowing it to thrive, create jobs and contribute to the prosperity of all Australians.

Summary of new law

1.7 Schedule 1 to the Bill repeals the MRRTA 2012 and the MRRT Imposition Acts.

1.8 Schedule 1 also contains a large number of consequential amendments to other Commonwealth legislation. These amendments principally remove provisions that are no longer required because of the repeal of the MRRT.

1.9 In some cases, repealing the MRRT requires more significant amendments. In the PRRTAA 1987, the definition of 'petroleum' is amended to remove references to MRRT. Amendments are also made to other provisions in the PRRTAA 1987 to exclude coal seam gas recovered under licences that do not permit the commercial use or development of coal seam gas resources, and to clarify that only exploration expenditure for the purpose of finding and commercially developing petroleum resources is deductible exploration expenditure.

1.10 These amendments apply from the date of commencement, which is to be fixed by proclamation. As a result, taxpayers do not accrue any further MRRT liabilities from this date. It also means that rehabilitation tax offsets are only available in relation to MRRT years ending on or before the date of commencement.

1.11 However, the general and special transitional provisions in Schedule 1 ensure that the repeal of the MRRT does not affect taxpayers' existing rights and obligations or the ability of the Commissioner of Taxation (Commissioner) to administer and exercise powers under the law in relation to the period for which the MRRT applied.

Comparison of key features of new law and current law

Detailed explanation of new law

Repeal of the MRRT

1.12 The MRRTA 2012 and the MRRT Imposition Acts are repealed with effect from the date of commencement, which is to be fixed by proclamation. Taxpayers do not accrue any further MRRT liabilities on or after this date and rehabilitation tax offsets are only available in relation to the period before this date. [Schedule 1, items 1 to 4]

PRRT changes

Definition of petroleum and production licence

1.13 As a result of the repeal of the MRRT, the definition of 'petroleum' in the PRRTAA 1987 is amended to remove the exclusion for 'taxable resources' within the meaning of the MRRTA 2012. [Schedule 1, item 48, definition of 'petroleum' in section 2 of the PRRTAA 1987]

1.14 As a result of this amendment, all petroleum (including all coal seam gas) would be subject to PRRT. However, some entities only recover coal seam gas as an unavoidable incident of coal mining activities. Imposing PRRT on these entities would result in excessive compliance costs for no real benefit.

1.15 To exclude these incidental activities, a further amendment has been made to the definition of 'production licence'.

1.16 Generally, any authority or right under Australian law that permits the recovery of petroleum will be a production licence and hence any recovery of petroleum under the right or licence will be subject to tax.

1.17 The amendments to the definition of production licence mean that a right or authority will not be a production licence if coal seam gas is only recovered under the licence:

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as a necessary result of coal mining carried out by the licence holder;

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as required in order to maintain a safe working environment on the mine site; or

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as required to prevent fugitive emissions of methane or similar gases.

[Schedule 1, item 51, section 2AB of the PRRTAA 1987]

1.18 The recovery of coal seam gas is a necessary result of mining for coal where the gas must be removed on an ongoing basis in order for it to be practical (and safe) for mining to proceed. The extraction of coal seam gas as part of a commercial operation before coal mining commences is generally not a necessary result of coal mining.

1.19 To come within the exclusion, the recovery of the gas must also be a necessary result of coal mining carried out by or on behalf of the licence holder under the authority or right. The provision has no application to licence holders that are not themselves carrying out coal mining. For example, an entity that is not engaged in mining coal in an area would be subject to PRRT on all coal seam gas recovered from the area, even though the recovery of the gas might make it easier for another entity that mines for coal in the area in the future.

1.20 The test examines the activity that is carried out under the licence rather than the terms of the licence itself - that is, provided petroleum is only recovered under the licence as detailed in paragraph 1.17 above, the licence will not be a production licence. However, if at any point this test is not satisfied, the right or authority will become a production licence and remain a production licence until it ceases to exist.

1.21 Additional explanatory material has also been included to assist taxpayers in identifying the consequences of the change. [Schedule 1, item 49, note at the end of paragraph (c) of the definition of 'production licence' in section 2 of the PRRTAA 1987]

Treatment of exploration

1.22 To ensure that only profits from the recovery of petroleum are taxed, the PRRT allows entities to offset the expenditure they incur in exploration and development against the assessable receipts they receive from the recovery of the petroleum.

1.23 Coal and coal seam gas are almost inevitably found together in varying quantities. Coal seam gas is often discovered when exploring for coal and vice versa. Previously, identifying whether exploration expenditure related to coal or coal seam gas was necessary to determine whether exploration expenditure was deductible for MRRT or PRRT purposes. However, with the repeal of the MRRT, this distinction is more significant as the different types of exploration activity are now subject to different tax treatments.

1.24 These different tax treatments could result in inappropriate outcomes if an entity that is licensed to explore for both coal and coal seam gas could treat the entire amount of exploration expenditure as PRRT exploration expenditure. In particular, it would be inappropriate if exploration expenditure for coal and incidental coal seam gas was deductible for PRRT purposes and also able to be transferred and used to offset other PRRT liabilities when these resources are not subject to PRRT.

1.25 This situation is unlikely to arise. Expenditure in relation to coal and incidental coal seam gas does not satisfy the existing test to qualify as exploration expenditure in the PRRTAA 1987. However, given the complex arrangements that can exist, the amending provisions make changes to the law to ensure that there are no unanticipated situations in which doubt may arise.

1.26 The amendments achieve this outcome in two ways. Firstly, rights and licences that only permit the incidental discovery and recovery of petroleum, including coal seam gas, are not 'exploration permits' or 'retention leases' for the purposes of the PRRTAA 1987. Expenditure in relation to these permits would be outside the scope of the PRRT and not deductible. [Schedule 1, item 51, section 2AC of the PRRTAA 1987]

1.27 Secondly, the amendments deal with situations where an entity holds a right or licence that permits it to explore for both petroleum and other resources, or a combination of rights and/or licences that have the same effect. In such situations, even if payments the entity makes satisfy the existing test to be exploration expenditure, the payments are only exploration expenditure to the extent that the objective purpose of the payment is finding and commercially exploiting coal seam gas or another form of petroleum. [Schedule 1, item 52, subsections 37(2A) and (2B) of the PRRTAA 1987]

1.28 This additional requirement differs from the existing requirements set out in the PRRTAA 1987 to determine if payments are exploration expenditure. Broadly, to satisfy the existing exploration expenditure requirements (see subsection 37(1) of the PRRTAA 1987); payments must be made in carrying on or providing facilities or operations involved or in connection with exploration for petroleum in the relevant area (as well as certain related activities). To satisfy the additional requirement, payments must also be for the purpose of exploring for petroleum. However, in practice these tests will almost always give rise to the same outcome. Given the complexity of arrangements it is not possible to rule out the existences of cases where ambiguity might exist. As a result, the amendments include the purpose test as a supplement to the existing test for the avoidance of doubt.

1.29 Where a payment only partially satisfies the requirements set out in subsection 37(1) of the PRRTAA 1987, it is only the purpose of that portion of the payment that is exploration expenditure that is relevant in determining if the additional requirement is satisfied. For example, if only half of a payment satisfies the requirement in subsection 37(1) to be exploration expenditure, it is only the purpose of this part of the payment that is relevant to determining if the additional requirement to be exploration expenditure is met.

1.30 The overlap between subsection 37(1) of the PRRTAA 1987 and the additional requirement is intended. To ensure that this intention is clear, the amendments specifically provide that the additional requirement is included to avoid doubt and should not be taken to imply a wider view of the existing law. [Schedule 1, item 52, subsection 37(2C) of the PRRTAA 1987]

1.31 Additional explanatory material has also been included to assist taxpayers identify the consequences of these changes. [Schedule 1, items 47 and 50, notes at the end of paragraph (b) of the definition of 'exploration permit' and 'retention lease' in section 2 of the PRRTAA 1987]

1.32 The purpose of a payment is determined objectively based on what a reasonable person would conclude given the available evidence - the subjective intent of the entity is not relevant. Determining purpose generally requires an examination of the nature of the exploration and the activities of the entity. A wide range of factors can be relevant, including:

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the terms of the right or licence allowing exploration;

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the characteristics and location of the area being explored;

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the nature of the exploration activities;

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any agreement or understanding entered into with other entities about the exploration or development of the area being explored;

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prospectuses or other contemporaneous documents identifying the entity's proposed future activities; and

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the entity's other activities and available expertise.

1.33 An entity's objective purpose for payments made in carrying on exploration activities may change over time. The purpose of a payment, and the proportion that can be included as exploration expenditure, are determined as at the time the payment is incurred. The identified purpose of a payment incurred at one stage of exploration is generally not relevant to the purpose of earlier or later payments.

Example 1.1: Change in purpose over the course of exploration

Coal Co holds an authority under an Australian law that permits it to explore Area A for both coal and coal seam gas. Coal Co makes a payment in carrying on exploration activities in March 2015 (assuming the provisions have commenced by that time). All of the available evidence, including Coal Co's exploration plan that it lodged when obtaining the permit, as well as the nature of the exploration conducted and the expertise of the personnel employed demonstrates that the sole purpose of Coal Co in undertaking this exploration is finding coal. None of the payment relates to exploration for petroleum.

It is found that no part of the March payment qualifies as exploration expenditure under subsection 37(1) of the PRRTAA 1987. The additional requirement added by the amendments does not have any application as it only applies to amounts that would otherwise be exploration expenditure under subsection 37(1).

Coal Co's March exploration does not identify any commercially viable coal deposits but does indicate the area may contain significant coal seam gas reserves.

Coal Co subsequently undertakes further exploration of the area in July 2015. Unlike the March exploration, all of the objective evidence in relation to this exploration indicates it is undertaken solely for the purpose of identifying coal seam gas. This evidence includes Coal Co having varied its exploration plan, changed the nature of its exploration activities and arranged for the exploration to be conducted by experts in coal seam gas exploration.

Assuming the expenditure meets the test in subsection 37(1), payments made in relation to Coal Co's July exploration will not be prevented from qualifying as exploration expenditure under the additional requirement. However, the purpose of the July payment does not affect the character of the March payment.

Example 1.2: Relationship between subsections 37(1) and 37(2A) of the PRRTAA 1987

In April 2015 (assuming the provisions have commenced by that time), Coal Co undertakes exploration activity in Area B. Coal Co's exploration permit allows it to look for both coal and coal seam gas and its exploration plan, as well as other evidence, makes it clear that Coal Co is equally interested in finding both coal and coal seam gas.

In applying subsection 37(1) of the PRRTAA 1987, it is determined that only half of the payment Coal Co made in connection with this exploration qualifies as exploration expenditure as the other portion of the payment is in connection with exploration for coal, not coal seam gas.

The additional requirement added by the amendments then applies to the amount that would otherwise be exploration expenditure under subsection 37(1) but does not result in any reduction in the amount that is included as exploration expenditure. The purpose of the payment by Coal Co is equally for exploring for coal seam gas and coal. The purpose of the remaining portion of the payment is solely to find and obtain a commercial return from coal seam gas.

As a result, 50 per cent of the payment made by Coal Co is exploration expenditure.

Consequential amendments

1.34 Consequential amendments are made to other Commonwealth laws (including taxation laws) to give effect to the repeal of the MRRT. These provisions remove references to MRRT or to MRRT-related provisions that are redundant with the repeal of the MRRTA 2012. [Schedule 1, items 5 to 46, 53 to 88, and 91 to 121, paragraph (e) of Schedule 1 to the Administrative Decisions (Judicial Review) Act 1977; paragraphs 177-12(4)(h) and (i) of the A New Tax System (Goods and Services Tax) Act 1999; subsection 3(1) and Parts II and XI of the Crimes (Taxation Offences) Act 1980; sections 10-5, 12-5, 15-85, 40-725 and 40-751, subsections 703-50(1), 719-50(1), 721-10(2), (4) and (6), and 721-25(1AA), (1B), (2) and (3), section 960-265 and subsection 995-1(1) of the ITAA 1997; Schedule 4 of the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Act 2012; item 169 of Schedule 7 to the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013; section 3D, subsection 8AAB(4), subparagraph 8AAZLG(1)(b)(ii), paragraph 8AAZLH(1)(b), section 14ZQ and subsections 14ZW(1AB) and (1AC) of the TAA 1953; paragraphs 11-1(g), 12-330(1)(b), and 12-335(2)(a), subsection 18-10(3), section 18-49, Part 3-15, paragraph 155-5(2)(e), subsections 155-15(1) and 155-30(3), sections 155-55, 155-57 and 155-90, subsection 250-10(2), sections 280-1, 280-50 and 280-101, paragraph 280-105(1)(a), subsection 280-110(1), sections 280-170, 284-30 and 284-35, paragraphs 284-75(2)(a) and (2)(b), subsections 284-80(1) and 286-75(2AA), paragraph 286-80(2)(a), section 352-1, Subdivision 352-B, section 353-17, subsection 355-50(1), paragraph 357-55(faa), subsection 360-5(1), subsections 444-5(1), (1A), (1B) and (2), subsections 444-10(1), (2), (3) and (5), section 444-15, subsections 444-30(1), (2) and (3), subsections 444-70(1) and (2) and Subdivision 444-F in Schedule 1 to the TAA 1953; subsections 3(1), 3C(1) and 3C(2), sections 12AA, 12AB, 12AC and 12AF of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

1.35 As part of repealing references to the MRRT in the administrative penalty provisions (section 284-90 of Schedule 1 to the TAA 1953), these amendments consolidate the existing threshold requirements relating to income tax and the PRRT. They consolidate thresholds currently located in subsection 284-90(1) and subsection 284-90(3) into the central threshold provisions in subsection 284-90(3). These changes do not change the operation of the provisions. [Schedule 1, items 89 and 90, subsection 284-90(1) and paragraph 284-90(3)(a) in Schedule 1 to the TAA 1953]

Application and transitional provisions

1.36 The amendments in Schedule 1 apply on and from the date it commences, which is a date fixed by proclamation. This means that taxpayers do not accrue any further MRRT liabilities from this date. It also means that rehabilitation tax offsets are only available in relation to the period before this day. [Item 2 of the table in clause 2]

1.37 Due to the delays in the passage of the legislation, the repeal is no longer proposed to commence from a fixed date. This ensures that further delays will not result in the legislation applying retrospectively and imposing unnecessary compliance burdens on taxpayers.

1.38 However, this flexibility also means that it is difficult for both taxpayers and the Commissioner of Taxation to predict the date from which the repeal will have effect.

1.39 Providing for the date of commencement to be fixed by proclamation allows the Government to minimise compliance burdens for taxpayers. The Bill specifies that if a date is not fixed within 12 months of Royal Assent, the Schedule will commence on that day. While it more usual to provide that legislation will commence within six rather than twelve months, in this case it was important that it be possible to specify a date in the next financial year rather than the current financial year, in order to avoid significant compliance implications for taxpayers and administrative problems for the Commissioner.

Transitional provisions

1.40 The transitional provisions ensure that the administration, collection and recovery of MRRT relating to MRRT years ending on or before commencement can still occur despite the repeal of the MRRTA 2012. They also preserve the rights and obligations of taxpayers relating to MRRT years ending on or before the day of commencement. [Schedule 1, Part 3]

Example 1.3: Taxpayer complying with MRRT obligations

Weiss & Yim Limited (WYL) is a large iron ore and coal miner. It is required to lodge its MRRT return and pay the MRRT for the year ended 30 June 2014 (2013-14 MRRT year) on 1 December 2014. Even though this obligation may arise after the repeal has commenced, the obligation is preserved by the general transitional provision as it relates to MRRT years ending prior to the repeal. WYL complies with this obligation by lodging its 2013-14 MRRT return.

On 1 August 2015 WYL discovers that it omitted to include an amount of mining expenditure in its 2013-14 MRRT return. The transitional provisions enable:

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WYL to request that the Commissioner amend its MRRT assessment for the 2013-14 MRRT year; and

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the Commissioner to consider the request and make an amended assessment and refund any overpaid MRRT to WYL.

Example 1.4: Ongoing administration of the MRRT

Huge Iron and Coal Limited (HIC), a large iron ore and coal miner, paid its MRRT and lodged its MRRT return for the year ended 30 June 2013 (2012-13 MRRT year) on 1 March 2014. The general transitional provision preserves anything that was done before the repeal of the MRRT, which includes HIC's payment of its MRRT and lodgment of its 2012-13 MRRT return.

The transitional provisions mean that:

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The Commissioner is able to undertake compliance activities on or after the day of the repeal in the same manner the Commissioner would have if the MRRT had not been repealed. The Commissioner does so by undertaking a risk review and then an audit of HIC's affairs in connection with its 2012-13 MRRT return in November 2014.

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HIC is obliged to comply with requests made by the Commissioner that were provided for in the MRRT law. This includes providing information in accordance with a notification given under section 353-10 of Schedule 1 to the TAA 1953.

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If the Commissioner finds that HIC has entered into a scheme for the dominant purpose of getting an MRRT benefit, the Commissioner is able to:

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make and issue a determination that HIC has entered into a scheme for the dominant purpose of getting an MRRT benefit;

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amend HIC's 2012-13 MRRT assessment;

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notify HIC that a shortfall interest charge applies; and

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impose an administrative penalty relating to the tax shortfall amount.

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HIC must pay any additional MRRT, any shortfall interest charge, and any administrative penalty that is imposed on it by the Commissioner.

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If HIC disagrees with the amended assessment, (for example if it believes that the amendment is excessive), HIC has the right to object to the amended assessment and have this objection considered by the Commissioner. If the objection is not allowed in full, HIC also has the right to appeal to the Administrative Appeals Tribunal or to the Federal Court.

1.41 Through the operation of the transitional provisions, the Commissioner can continue to use the existing MRRT anti-avoidance provisions on or after the date the repeal commences in relation to MRRT years ending on or before the date of the repeal. This includes using the anti-avoidance provisions to address the inappropriate bringing forward of expenditure, including expenditure that would not normally have been incurred by taxpayers before the date of the repeal. Therefore, a specific integrity rule to address the inappropriate bringing forward of expenditure, which would impose additional compliance costs on taxpayers, is not required.

1.42 The transitional provisions set out special rules for the treatment of taxpayers with an MRRT year that would not have ended on the date of the repeal.

1.43 The MRRT year for all taxpayers will end on the date the repeal commences. Whilst this means that most taxpayers are likely to have a 'short' final MRRT year, this approach is necessary to ensure that the MRRT is repealed as soon as possible without creating uncertainty by requiring taxpayers to revisit past MRRT years. [Schedule 1, item 123]

1.44 Where a taxpayer has a 'short' final MRRT year, the full-year threshold amounts applying under the MRRTA 2012 are proportionately adjusted to take into account that the taxpayer's final MRRT year is less than a full year. This ensures that taxpayers are neither advantaged nor disadvantaged if they have a 'short' final MRRT year. [Schedule 1, item 123, note 1]

1.45 Taxpayers with a 'short' final MRRT year may also have a reduced number of instalment quarters and a final instalment quarter of less than the usual three months for their final MRRT year. [Schedule 1, item 123, note 2]

Example 1.5: Taxpayers with a short final MRRT year

Boutique Iron and Coal Limited (BIC) is a large iron ore and coal miner that is an early balancing entity with an MRRT year that ends on 1 July 2014.

Assuming the repeal commences from 1 January 2015, due to the application of the short final MRRT year provision, BIC would have a shortened 2014-15 MRRT year that would commence on 1 July 2014 and end on 1 January 2015.

As its 2014-15 MRRT year is for less than 12 months, BIC will need to adjust its threshold amounts in working out relevant MRRT amounts. During its 2014-15 MRRT year, it had a group production of 5 million tonnes of taxable resources. As the adjusted amount of 10.1 million tonnes (5×365/181) is in excess of 10 million tonnes, it is not eligible to use the alternative valuation method to work out its mining revenue for the 2014-15 MRRT year.

Due to the shortened MRRT year, BIC will only have two instalment quarters in its 2014-15 MRRT year, being those ending 31 September 2014 and 31 December 2014.

Continuation of Commissioner's power to make certain legislative instruments

1.46 The Commissioner may continue to make legislative instruments to provide a class of entities with an extension of time to provide their MRRT return for an MRRT year or to exempt a class of entities from having to provide an MRRT return for an MRRT year. This ensures that the Commissioner retains the flexibility to exempt taxpayers from, or give taxpayers an extension of time for, lodging their MRRT returns for MRRT years ending on or before the date of the repeal. This specific transitional provision does not limit the extent of the Commissioner's powers under the general transitional provisions. [Schedule 1, item 124]