House of Representatives

Explanatory Memorandum

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

Chapter 6 Allowances

Outline of chapter

6.1 This chapter explains how to calculate the individual allowances (apart from starting base allowances, which are explained in Chapter 7) that reduce a mining profit for a Minerals Resource Rent Tax (MRRT) year. It explains the allowances' common features and why there are some differences between them.

6.2 All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) unless otherwise indicated.

Summary of new law

6.3 An MRRT liability for a mining project interest is calculated by reducing the interest's mining profit by any MRRT allowances and multiplying the result by the MRRT rate.

6.4 MRRT allowances are taken into account in a specified order. The seven types of allowances available to miners, and the order in which they are applied in working out the MRRT liability for a mining project interest are:

•

royalty allowances;

•

transferred royalty allowances;

•

pre-mining loss allowances;

•

mining loss allowances;

•

starting base allowances;

•

transferred pre-mining loss allowances; and

•

transferred mining loss allowances.

6.5 Starting base allowances are explained in Chapter 7.

6.6 Only so much of the available royalty credits, pre-mining losses and mining losses (including by way of transfer) as are necessary to reduce the mining profit to nil can be an MRRT allowance in a particular MRRT year.

6.7 Allowances reduce the mining profit of a mining project interest in the specified order until either the mining profit is reduced to nil or the available royalty credits, pre-mining losses, mining losses and starting base losses are exhausted.

6.8 The balance of any royalty credits, mining losses and pre-mining losses available after the mining profit is reduced to nil are then available to be transferred to offset mining profits of certain other mining project interests. Any balance remaining after these transfers is carried forward to future MRRT years and is uplifted.

Detailed explanation of new law

Allowances generally

6.9 Under the MRRT, the mining profit of a mining project interest for an MRRT year must be reduced by any available MRRT allowance. [Sections 60-10, 65-10, 70-10, 75-10, 80-10, 95-10 and 100-10]

6.10 Allowances are applied in this order:

•

royalty allowances;

•

transferred royalty allowances;

•

pre-mining loss allowances;

•

mining loss allowances;

•

starting base allowances;

•

transferred pre-mining loss allowances; and

•

transferred mining loss allowances.

The allowance highest in the order must be fully applied before the next highest can be applied, and so on. [Section 10-10]

Allowances only up to the amount of the mining profit

6.11 If royalty credits, pre-mining losses, mining losses or starting base losses are available, the amount of each is applied in calculating the relevant allowance up to the amount of the mining profit remaining after applying any higher ranked allowances. [Sections 60-10, 60-15, 65-10, 65-15, 70-10, 70-15, 75-10, 75-15, 80-10, 80-15, 95-10, 95-15, 100-10 and 100-15]

Example 6.61 : Ordering of allowances

Alpha Coal Co has a mining profit for a mining project interest for an MRRT year of $52 million and available royalty credits of $5 million, a pre-mining loss of $3 million and a mining loss of $45 million.

The $5 million royalty credit is fully applied to calculate a royalty allowance of $5 million, which reduces the remaining mining profit to $47 million. The pre-mining loss is fully applied to calculate a pre-mining loss allowance of $3 million, which reduces the remaining mining profit to $44 million. The available mining loss of $45 million is applied to the extent necessary to reduce the remaining mining profit to nil. That is, a mining loss allowance of $44 million, leaving an available mining loss of $1 million.

6.12 Any remaining royalty credits, mining losses and pre-mining losses still available after the mining profit is reduced to nil can then be transferred to other mining project interests to the extent possible to reduce their mining profits. Different conditions need to be satisfied for royalty credits, pre-mining losses and mining losses to be transferrable. These are explained below.

Order of applying royalty credits, losses and pre-mining losses

6.13 If there is more than one royalty credit, more than one mining loss, or more than one pre-mining loss available, they are applied in the order in which they arose. [Subsections 60-15(2), 65-15(2), 70-15(2), 75-15(2) 95-15(2) and 100-15(2)]

6.14 The miner may choose the order in which to transfer two or more royalty credits, pre-mining losses or mining losses that arose at the same time. [Subsections 65-15(2), 95-15(2) and 100-15(2)]

Uplifting

6.15 The conversion of royalty credits, pre-mining losses and mining losses to allowances only occurs to the extent that the particular allowance will be fully applied to reduce mining profit for the year. The royalty credits, pre-mining losses and mining losses still unapplied at the end of the year are uplifted. The amounts of royalty credits and mining losses are uplifted at the long term bond rate + 7 per cent (LTBR + 7 per cent) each year [subsections 60-25(2) and 75-20(3)] . The amount of a pre-mining loss is uplifted at the LTBR + 7 per cent for the first 10 years after the loss arises, but only at the long term bond rate (LBTR) thereafter [section 70-50] .

When two interests relate to iron ore or do not relate to iron ore

6.16 Before amounts can be transferred between two interests to give rise to a transferred royalty allowance, a transferred pre-mining loss allowance or a transferred mining loss allowance, one of the preconditions is that the two interests must either both relate to iron ore or both not relate to iron ore. This limits transfers to project interests with the same broad groupings: those that are related to iron ore and those that are related to coal.

6.17 An interest will relate to iron ore if it relates to extracting:

•

iron ore [paragraph 20-5(1)(a)] ; or

•

something produced from a process that results in iron ore being consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

6.18 An interest will not relate to iron ore (that is, it will effectively relate to coal) if it relates to extracting:

•

coal [paragraph 20-5(1)(b)] ;

•

coal seam gas as a necessary incident of mining coal [paragraph 20-5(1)(d)] ; or

•

something produced from a process that results in coal being consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

Example 6.62 : Pre-mining project interests do not relate to iron ore

Greater Coal Gas Co has two pre-mining project interests. One pre-mining project interest involves an extensive coal deposit that Greater Coal is considering developing into a coal mine. The other pre-mining project interest is awaiting State approval to begin a coal seam gasification operation.

The first pre-mining project interest relates to coal. The second pre-mining project interest relates to gas produced by consuming the coal in situ .

Since neither of Greater Coal's pre-mining project interest relates to iron ore, allowances may be transferable between them.

Example 6.63 : Mining project interests relate to different resources

Green Bond Mines has a mining project interest that extracts coal with an available mining loss and another mining project interest that extracts iron ore that has a mining profit for the year.

The first mining project interest relates to coal. The second mining project interest relates to iron ore. As the project interests relate neither both to iron ore nor both to something other than iron ore, the mining loss of one mining project interest cannot be transferred to the mining project interest with the mining profit.

Royalty allowances

6.19 A miner has a royalty allowance for a mining project interest if the interest has a mining profit and there are royalty credits that relate to that interest [section 60-10] . The amount of the royalty allowance is the sum of the available royalty credits up to the amount of the mining profit [subsection 60-15(1)] . Excess royalty credits are applied in calculating any transferred royalty allowance for another mining project interest of the miner for the MRRT year if that other interest is integrated with the first mining project interest at all times from when the royalty credit arose to the end of the transfer year. Any remaining royalty credits are uplifted and are available for use in future years.

Royalty credits

6.20 For a liability to be relevant in determining if a royalty credit arises for a mining project interest, it has to be incurred on or after 1 July 2012. It does not matter whether the resources were extracted on, before, or after that day. [Subsection 60-20(2 ); and Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, item 6]

Royalties

6.21 A mining royalty gives rise to a royalty credit for a mining project interest when the miner incurs a liability to pay the royalty in relation to taxable resources extracted under a production right that relates to the interest. [Paragraph 60-20(1)(a)]

6.22 A mining royalty is a liability payable under a Commonwealth, State or Territory law to make a payment in relation to a taxable resource, extracted under the authority of a production right, that:

•

is a royalty; or

•

would have been a royalty if the taxable resource had been owned by the Commonwealth, a State or Territory just before it was recovered.

[Subsection 35-45(1)]

6.23 The first dot point alludes to the need for a mining royalty to be a 'royalty' within the ordinary meaning of that word. Within its ordinary meaning, a royalty is a payment usually made in respect of a particular exercise of a right to take a substance that is calculated in respect of either the quantity or value taken or the occasions on which it is exercised (see FCT v Sherritt Gordon Mines Ltd 77 ATC 4365 at p. 4372; Stanton v FCT (1955) 92 CLR 630 at p. 642). So, for instance, a royalty does not include amounts imposed by some State mining legislation by way of interest for late payment of mining royalties, even if those interest payments are described as 'royalties' for the purposes of that legislation.

6.24 The second dot point deals with possible arguments that a relevant liability cannot be a royalty if it is not payable to the Crown and that a payment cannot be a royalty if it is not paid to the owner of the resources in situ . It ensures that liabilities incurred under Australian laws can still be a mining royalty even when payable to private owners of taxable resources in the ground.

6.25 Mining royalties include royalties payable to the Commonwealth, as well as the more common State and Territory royalties. This is necessary because the MRRT law extends to Australia's offshore areas, which can be the subject of authorities to extract resources under the Offshore Minerals Act 1994 . Commonwealth royalties could apply in respect of such resources (see section 4 of the Offshore Minerals (Royalty) Act 1981 ).

Payments by way of recoupment of royalties

6.26 A royalty credit also arises for a mining project interest when the miner incurs a liability to pay an amount (in relation to a taxable resource extracted under a production right that relates to the interest) to another entity by way of recoupment of a liability of the other entity that:

•

gives rise at any time to a royalty credit for that other entity in relation to the production right; or

•

would give rise at any time to a royalty credit for that other entity if the other entity had a mining project interest relating to that production right.

[Paragraph 60-20(1)(b)]

6.27 This covers the situation where a miner with a mining project interest but no direct interest in the production right has to compensate the production right holder for the mining royalty it must pay. It does not matter whether the production right holder itself has a mining project interest in relation to that production right.

Example 6.64 : Minerals rights agreement

Alister Co owns a mining lease on which it mines mineral sands. Under a Minerals Rights Agreement, Alister grants Blaster Co an exclusive right to enter the land covered by the mining lease to mine and remove iron ore. Title in the iron ore is transferred at the point of extraction. Under the agreement, Blaster Co is contractually obliged to comply with the obligations associated with the Mining Lease to the extent those obligations relate to the exercise of its iron ore right. One of the obligations is that Blaster Co pays the State all the royalties applicable to the iron ore it mines that are legally payable by Alister Co as the mining lease holder.

Blaster Co is the miner under the MRRT law and Alister Co is not because it does not share in the production from the operation. Blaster Co is entitled to a royalty credit, even though Alister Co is legally required to pay the royalties. The royalty credit is available to Blaster Co because its payment to the State on behalf of Alister Co recoups Alister Co's liability that would have given rise to a royalty credit if Alister Co had had a mining project interest.

6.28 It also covers cases where a miner has to compensate someone else who in turn has to compensate the production right holder. This could arise when a miner conducts a mining operation by agreement with the production right holder but sub-leases the actual mining activities to another miner in return for a share of the taxable resources produced. The possibility of a chain of such obligations is covered. [Paragraph 60-20(1)(b)]

6.29 Whether the holder of the mining project interest obtains a royalty credit for royalties paid by another party (for instance, the production right holder) depends on whether the interest holder pays an amount to the other party to recoup the actual royalty the other party pays. 'Recoupment' is defined by section 20-25 of the Income Tax Assessment Act 1997 (ITAA 1997) and includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described. [Section 300-1, definition of 'recoupment']

Example 6.65 : Royalty reimbursement arrangement

Porthole Properties Pty Ltd grants Fox Fine Ores an exclusive license to access and mine coal on its production right. Fox acquires title in the coal after it is loaded onto the run-of-mine stockpile and must pay Porthole $5 a tonne for the coal it sells. Porthole is required by State law to pay royalties for the coal Fox mines but is, under its agreement with Fox, entitled to reimbursement of those royalties.

Fox is the miner under the MRRT, and Porthole is not because it does not share in the production from the operation. Therefore, Porthole is not entitled to any royalty credit for the royalties it pays. Fox is reimbursing Porthole rather than paying a royalty directly but is still entitled to a royalty credit for the payments because they 'recoup' Porthole's royalty payments and Porthole would have got a royalty credit for its payments if it had been a miner.

6.30 A miner reduces its royalty credits in an MRRT year it receives, or becomes entitled to receive, a recoupment of a liability that gave rise to a royalty credit for one of its mining project interests. Royalty credits are reduced in the order in which they arose. Only any remaining royalty credits after this reduction can produce royalty allowances and transferred royalty allowances for that year. [Subsection 60-30(1)]

6.31 In the same way that royalty credits are the grossed-up amount of the royalty liability (this is explained later), recoupments of royalty liabilities are grossed-up before they reduce a miner's royalty credits. [Paragraph 60-30(1)(a)]

6.32 If the reduction for the recoupment exceeds the miner's royalty credits available to be reduced, the excess becomes mining revenue of that year. [Subsection 60-30(2) and section 30-45]

6.33 The effect of generating royalty credits for royalty payments relating to a production right and for payments to recoup the payer of such royalties, and reducing credits for receiving recoupments of such payments, is that the royalty credit from the actual payment of the royalty is apportioned between the various entities that have a mining project interest related to the production right. That apportionment might not occur within a single MRRT year. For example, if a royalty paid in one year was recouped in the following year, there would be royalty credits in the first year and a reduction in royalty credits in the second year.

Example 6.66 : Royalty recoupment

Smelaya Resources and Malyshka Minerals are jointly developing a mine owned by Smelaya. They have agreed to share equally the resources they mine and the costs they incur.

In 2014-15, Smelaya is liable for royalties of $5 million to the State but, under the terms of the agreement, is entitled to a $2.5 million reimbursement from Malyshka. Smelaya generates a royalty credit of $22.22 million ($5 million/0.225) and Malyshka generates a credit of $11.11 million ($2.5 million/0.225) for its liability to reimburse Smelaya. Smelaya will reduce its credit by $11.11 million for that recoupment.

In 2015-16, the State refunds Smelaya $2 million of its royalty payment as an incentive to further develop the mine. This recoupment reduces Smelaya's royalty credits for 2015-16 by $8.89 million ($2 million/0.225). Because it is liable to pass half of that on to Malyshka, it would also generate a royalty credit of $4.44 million ($1 million/0.225). Receipt of the refund reduces Malyshka's 2015-16 royalty credits by $4.44 million.

Initial amount of a royalty credit

6.34 The amount of a royalty credit in the year it arises is the grossed-up amount of the royalty liability incurred. The grossing-up is achieved by dividing the royalty amount by the MRRT rate. That produces a deductible amount that will have the same effect as an offset equal to the royalty payment. The royalty amount has to be converted into a deductible amount, rather than applied as an offset, because the ordering of allowances requires royalty allowances to be recognised before some deductible amounts (such as losses). [Subsection 60-25(1)]

Example 6.67 : Royalty payments and royalty credits

South and Co Mines extracts 500,000 tonnes of iron ore from its mining project. The State charges a 7.5 per cent royalty on the value of the iron ore at the point of sale. South and Co sells the iron ore to a third party for $150 per tonne. It pays a State royalty of $5.625 million.

South and Co Mines' royalty payment is converted to a royalty credit for MRRT purposes by dividing it by the MRRT rate of 22.5 per cent giving a royalty credit of $25 million. Its annual mining profit for the mining project is $55 million. The royalty credit is applied to produce a royalty allowance of $25 million. South and Co Mines' mining profit is reduced to $30 million by the royalty allowance, which exhausts the royalty credit.

Example 6.68 : Royalty payment to private landowner

Zenat Ltd extracts 20,000 tonnes of coal during an MRRT year from land owned by Yady Co, which also owns the coal in the ground. Under State legislation, a royalty of $6 per tonne extracted is payable directly to Yady on a monthly basis. Zenat has an available royalty credit of $533,333 [(20,000 x $6)/0.225] that will be applied to calculate its royalty allowance. The payments to Yady would normally be a private mining royalty but are instead mining royalties because they are paid under State legislation.

Uplifting unused royalty credits

6.35 The amount of a royalty credit available in a later year is the royalty credit available for the previous MRRT year less what was applied during that previous year to work out a royalty allowance or a transferred royalty allowance. That result is uplifted by the LTBR + 7 per cent. [Subsection 60-25(2)]

Using up a royalty credit

6.36 A royalty credit ceases to be a royalty credit once it has been fully applied in working out royalty allowances for the mining project interest or transferred royalty allowances for other mining project interests. [Subsection 60-20(3)]

Transferred royalty allowances

6.37 A miner has a transferred royalty allowance for a mining project interest for an MRRT year if the interest has a remaining mining profit (after application of royalty allowances) and there are unused royalty credits available that can be transferred to it from other interests. [Section 65-10]

6.38 A royalty credit of one mining project interest can be transferred and used to offset a mining profit in another mining project interest, if:

•

the two mining project interests are integrated at all times from when the royalty credit arose to the end of the year in which the royalty credit is transferred; and

•

the royalty credit does not relate to a year for which an election was made to use the alternative valuation method.

[Subsection 65-20(1)]

6.39 Transferability of royalty credits aims to put mining project interests that are unable to combine (because they have quarantined allowances) into a similar position (prospectively) as if they had combined.

6.40 Whether two mining project interests are integrated is explained in Chapter 9.

6.41 The amount of a royalty credit that can be transferred to a mining project interest cannot exceed the amount of the receiving interest's remaining mining profit. [Subsection 65-15(1)]

6.42 Royalty credits must be transferred in the order in which they arose. If several royalty credits arose at the same time (for example, if there are several mining project interests with credits available to transfer), the miner can choose which of them to transfer. [Subsection 65-15(2)]

Pre-mining loss allowances

6.43 An entity has a pre-mining loss allowance for a mining project interest for an MRRT year if it has an available pre-mining loss that relates to that interest and it has a remaining mining profit after deducting all higher ranked allowances. [Section 70-10]

6.44 The amount of the pre-mining loss allowance is the lesser of the sum of the available pre-mining losses and the remaining mining profit. [Subsection 70-15(1)]

6.45 Any pre-mining losses remaining after a pre-mining loss allowance is calculated are then applied in calculating any transferred pre-mining loss allowance for the MRRT year. Any pre-mining losses remaining after that are then available for use in future years to reduce future mining profits for that mining project interest. They are uplifted at the LTBR + 7 per cent for the first 10 years, and at the LTBR thereafter. [Section 70-50]

6.46 A pre-mining loss is an available pre-mining loss for a mining project interest if it relates to a pre-mining project interest from which the mining project interest originated. A mining project interest 'originates' from a pre-mining project interest when the mining project interest starts to apply to an area and at the same time the pre-mining project interest stops applying to that area. [Section 70-20]

6.47 A pre-mining loss ceases to be a pre-mining loss once it has been fully applied in working out pre-mining loss allowances for the mining project interest or transferred pre-mining loss allowances for other mining project interests. [Subsection 70-30(2)]

Pre-mining project interest

6.48 A pre-mining project interest is an interest in an authority or right for a purpose (other than an incidental purpose) of exploration or prospecting for taxable resources. If the interest relates to both iron ore and another taxable resource it is treated as two separate pre-mining project interests: one relating to the iron ore and the other relating to the other taxable resource(s). [Section 70-25]

6.49 Since 'exploration or prospecting' is defined to include studies to evaluate the economic feasibility of mining discovered resources, pre-mining interests will include interests in mineral development leases, which are usually held for those purposes. An interest in a retention lease is also considered a pre-mining project interest, since one of the significant rights conferred under a retention lease is to explore. [Sections 70-25 and 300-1, definition of 'exploration or prospecting']

Pre-mining losses

6.50 An entity has a pre-mining loss for an MRRT year if it holds a pre-mining project interest and its pre-mining expenditure for the interest exceeds its pre-mining revenue for the interest for the MRRT year. [Subsection 70-30(1)]

6.51 This allows pre-mining project expenditure (for example, exploration expenditure) that is a necessary precursor to the development of a mining project interest to be recognised under the MRRT.

Pre-mining expenditure

6.52 An entity's pre-mining expenditure for a pre-mining project is expenditure, whether of a capital or revenue nature, to the extent it is necessarily incurred in carrying on the pre-mining project operations, and is not excluded expenditure. [Subsections 70-35(1) to (4)]

6.53 Operations or activities are pre-mining project operations to the extent that they would have been upstream mining operations if the interest were a mining project interest rather than a pre-mining project interest [subsection 70-35(5)] . Upstream mining operations of a mining project interest are discussed in Chapter 5.

6.54 In some circumstances, an entity that holds a pre-mining project can also include amounts in its pre-mining expenditure for the exploration activities carried on by another entity under a 'farm-out' arrangement. A farm-out typically involves an agreement between:

•

an entity that holds a pre-mining project interest (the farmor) wanting to explore that project area; and

•

another entity (the farmee) who incurs expenses exploring the project area, in exchange for an interest in the pre-mining project interest.

6.55 Where the farm-out arrangement results in the farmee being granted an interest in the pre-mining project, then the farmor will include an amount in its pre-mining expenditure at that time to reflect the value of the interest they have given up in exchange for the exploration. ^[5] [Divisions 35 and 195]

Example 6.69 : Successful farm-out arrangement

Farmor Co holds an exploration permit. It is interested in exploring the pre-mining project area. Farmee Co agrees to undertake the exploration work in exchange for a 10 per cent interest in the exploration permit. Farmee Co agrees to complete the exploration within three years and does so.

Farmor Co may include in its pre-mining expenditure an amount for the exploration services completed by Farmee. The non-cash benefit rules (in Division 195) operate such that the amount of the deduction will be the market value of the exploration services. The amount ascertained using the non-cash benefit rules is included in Farmor Co's pre-mining expenditure when it is necessarily incurred.

However, Farmee Co's exploration expenses are excluded expenditure because they are its cost of acquiring a right (being its interest in the permit).

6.56 However, in some circumstances the farm-out arrangement will not be completed and the farmor will not be required to give the farmee an interest in the pre-mining project interest. In those circumstances, the farmor will have obtained the benefit of the exploration without any expenditure. Specific provision is therefore made to ensure that the costs of the exploration are included in the pre-mining expenditure for the farmor's interest. They are included in pre-mining expenditure when it becomes clear that the farmee is not going to be granted the interest. [Subsection 70-35(7)]

Example 6.70 : Unsuccessful farm-out arrangement

Farmor Co holds an exploration permit. It is interested in exploring the pre-mining project area. Farmee Co agrees to undertake the exploration work in exchange for a 10 per cent interest in the exploration permit. Farmee Co agrees to complete the exploration within three years but fails to do so.

At the end of the three years, the amounts incurred by Farmee Co in exploring in the project area are included by Farmor Co in the pre-mining expenditure for the pre-mining project interest.

No double counting of pre-mining expenditure

6.57 The same amount cannot be included in the pre-mining expenditure of an entity under two or more provisions. This prevents the double counting that could arise if an amount was otherwise allowable under more than one provision. [Subsection 70-35(8)]

6.58 Similarly, where the same amount is included in both mining expenditure and pre-mining expenditure it is only to be allowable under the provision that is most appropriate. To determine which the most appropriate provision is, it will be necessary to have regard to the facts and circumstances of the particular case, including the character of the amount and its relationship to the mining project interest and pre-mining project interest. [Subsection 70-35(9)]

Pre-mining revenue

6.59 An amount is pre-mining revenue if it would have been mining revenue if the pre-mining interest to which the amount relates had instead been a mining project interest. For instance, the sale of taxable resources that have been extracted under a mineral development lease will give rise to an amount of pre-mining revenue. In some instances, the amounts of pre-mining revenue will exceed the amounts of pre-mining expenditure for a pre-mining interest for an MRRT year to produce a pre-mining profit. Pre-mining profits are discussed in Chapter 12. [Section 70-40]

Mining loss allowances

6.60 A mining project interest has a mining loss allowance for an MRRT year if the interest has a mining profit remaining after all higher ranked allowances (royalty allowance, transferred royalty allowance and pre-mining loss allowance) have been applied and there is an available mining loss for the interest. [Section 75-10]

6.61 The amount of a mining loss allowance is the lesser of the remaining mining profit and the available mining losses for the mining project interest. When working out the amount of a mining loss allowance, mining losses are applied in the order in which they arise. So, a mining loss that arises in the 2012-13 MRRT year will be applied before a mining loss that arises in the 2013-14 MRRT year. [Section 75-15]

6.62 A mining project interest has a mining loss for an MRRT year if its mining expenditure exceeds its mining revenue for the year. The amount of the mining loss for that year is the amount of the excess. [Subsections 75-20(1) and (2)]

6.63 The amount of a mining loss available in a later year is the mining loss available for the previous year less the amount of it that was applied during that preceding year in working out a mining loss allowance or transferred mining loss allowances. The result is uplifted by the LTBR + 7 per cent. [Subsection 75-20(3)]

Example 6.71 : Mining losses

Slow Start Pty Ltd's mining project interest makes a mining loss for each of the 2013, 2014, 2015, 2016 and 2017 MRRT years. It then makes a mining profit in the 2018 and 2019 MRRT years.

Assume:

•

LTBR for all years is 6 per cent, so the uplift factor is 1.13 (0.06 + 1.07).

•

There are no other relevant allowances or transferred allowances.

Tax year	2013 $m	2014 $m	2015 $m	2016 $m	2017 $m	2018 $m	2019 $m
Mining profit / loss	(100)	(50)	(200)	(100)	(20)	400	800
Previous amount of loss
2013		(100)	(113)	(127.69)	(144.29)	(163.05)
2014			(50)	(56.50)	(63.85)	(72.14)
2015				(200)	(226)	(255.38)	(154.35)
2016					(100)	(113)	(127.69)
2017						(20)	(22.60)
2018
Uplifted prior year loss
2013		(113)	(127.69)	(144.29)	(163.05)	(184.24)
2014			(56.50)	(63.85)	(72.14)	(81.52)
2015				(226)	(255.38)	(288.58)	(174.41)
2016					(113)	(127.69)	(144.29)
2017						(22.60)	(25.54)
2018
Remaining mining profit	0	0	0	0	0	0	455.76

The 2018 MRRT year's mining profit of $400 million is reduced by a mining loss allowance worked out taking into account so much of each available mining loss as does not exceed the mining profit, starting with the oldest. The mining loss for the 2013 MRRT year, as uplifted to the 2018 MRRT year ($184.24 million), is applied first.

This is followed by the mining loss for the 2014 year, as uplifted to the 2018 year ($81.52 million). Then the mining loss for the 2015 year, as uplifted to the 2018 year ($288.58 million), is applied but only to the extent that it reduces the mining profit in the 2018 year to nil. Therefore, only $134.24m of that loss is used up

($400m - $184.24m - $81.52m)

This remaining $154.34 million of the mining loss for the 2015 year will be uplifted for the 2019 year (to $174.40 million) to be an available mining loss to be applied in calculating the mining loss allowance to be deducted from the $800 million mining profit for the 2019 year.

6.64 The mining loss from a particular MRRT year ceases to be a mining loss if it has been fully applied in working out either one or more mining loss allowances or one or more transferred mining loss allowances. [Subsection 75-20(4)]

Transferred pre-mining loss allowances

6.65 Because most mineral exploration in Australia is conducted by entities that do not themselves mine their successful discoveries, the transfer of pre-mining losses is dealt with differently from the transfer of mining losses. Pre-mining losses do not have to satisfy a common ownership test before they can be transferred. However, they do have to satisfy the requirements that transfers occur between interests related to the same type of taxable resource and held by the same entity or by a closely associated entity. The transfer of pre-mining losses is also capped where they are acquired for an amount that is less than their tax value.

When does a miner have a transferred pre-mining loss allowance?

6.66 A miner has a transferred pre-mining loss allowance for a mining project interest if it has any remaining mining profit after deducting all higher ranked allowances and there are available pre-mining losses. [Section 95-10]

6.67 There are two situations in which a mining project interest can have a transferred pre-mining loss allowance.

6.68 The first is where the miner (or a close associate) has a mining project interest and holds a pre-mining project interest in relation to the same type of taxable resource. The pre-mining losses associated with the pre-mining project interest can be applied to work out a transferred pre-mining loss allowance for the mining project interest. [Subsections 95-20(1) and (2)]

6.69 The second is where a miner has a mining project interest that originated from a pre-mining project interest that had a pre-mining project loss. 'Origination' was discussed in more detail above. In these circumstances, the originating mining project interest inherits the pre-mining loss, which can be applied to work out a transferred pre-mining loss allowance another mining project interest of the miner, or a close associate. [Subsections 95-20(1) and (3)]

Meaning of closely associated

6.70 An entity is closely associated with another entity at a particular time if they are both members of the same consolidatable group for income tax purposes, or would be if the entities were Australian residents. Broadly speaking, the concept of a 'consolidatable group' in the income tax law is relevant to deciding whether a group of wholly-owned entities could be treated as a single entity for income tax purposes. However, the income tax concept does not permit foreign residents to be the head or members of a consolidatable group. However, reflecting the MRRT policy of requiring the transfer of pre-mining losses between all members of a group, the Australian residence requirement of the definition of 'consolidatable group' is ignored for these purposes. [Subsection 95-20(5) and section 300-1, definition of 'consolidatable group']

Amount of a transferred pre-mining loss allowance

6.71 The amount of a transferred pre-mining loss allowance is the amount of the available pre-mining losses (or the amount of the mining project interest's remaining mining profit if that is less). [Subsection 95-15(1)]

6.72 In calculating the amount of the allowance, pre-mining losses are applied in the order in which they arose. If there are several pre-mining losses that arose in the same year (because they arose from different pre-mining project interests), the miner can choose which of them to transfer first. [Subsection 95-15(2)]

Capping the amount of a transferred pre-mining loss allowance

6.73 On the sale of a pre-mining project interest or a mining project interest, any pre-mining losses that exist in relation to that interest will be transferred with it. These transfers are explained in Chapter 10.

6.74 The purchaser can then apply the pre-mining losses to reduce mining profits of its (or its close associates) mining project interests.

6.75 However, to prevent trading in pre-mining losses that have a greater economic value than the underlying project interest (the loss interest), the extent to which those pre-mining losses can be transferred to another mining project interest (the receiving interest) may be capped when an interest is acquired. [Sections 95-25 and 95-30]

6.76 The cap applies if either the receiving interest or the loss interest was not held by the miner or a close associate at all times from the start of the loss year until the end of the year in which the loss is being transferred. This common ownership test is not focused on whether there has been a change in the direct ownership of the interests, nor is it asking if the interests have remained in the one entity or group. Rather, the test focuses on the relationship between the holders of the two project interests and asks whether, at each moment within the test period, both were held by the same entity or by entities within the same common group (even if the entities holding them, or the group they were part of, changed from time to time within the period). [Paragraph 95-25(2)(b) and subsection 95-25(3)]

6.77 The cap only applies to pre-mining losses that arose before the cap arises and which are to be transferred in that year or a later year. In other words, the cap does not limit the transfer of pre-mining losses that arise for a year after the cap arises. [Paragraphs 95-25(2)(c) and (d)]

6.78 The cap arises in relation to a loss interest or a receiving interest when an entity starts to have the interest. However, as an exception to this, the cap does not arise when the interest starts to exist (such as on the initial grant of a production or an exploration right). The cap also does not apply if the entity starts to have the interest simply because it is the head company of a group that consolidates, or is the entity leaving a consolidated group. [Paragraph 95-30(1)(a)]

6.79 The cap also arises when the entity that has the receiving interest or the loss interest joins a consolidatable group (or would if the Australian residence requirements of that definition were ignored). This means that the cap will arise when an entity that holds the loss interest becomes closely associated with a miner that has the receiving interest. [Paragraph 95-30(1)(b)]

6.80 The amount of the cap is worked out by grossing-up the amount paid for the receiving interest or the loss interest. Where the entity that has the interest joins a consolidatable group, the cap is worked out by grossing up so much of the amount paid for that entity as is attributable to the interest. [Subsection 95-30(2)]

Example 6.72 : Cap on transferable pre-mining losses

Log Jam Co. buys:

•

a mining project interest for $1 million; and

•

a pre-mining project interest for $2 million, which has $10 million of pre-mining losses from an earlier year.

Assume that the mining project interest has sufficient mining profit to utilise any of the pre-mining losses available. At the end of the MRRT year, Log Jam is required to transfer its pre-mining losses to the mining project interest, subject to the following caps:

•

for the mining project interest - the cap is $4.44 million ($1m/0.225); and

•

for the pre-mining project interest - the cap is $8.88 million ($1m/0.225).

Log Jam must transfer only $4.44 million of its pre-mining losses to the mining project interest.

Transferred mining loss allowances

6.81 A miner has a transferred mining loss allowance for a mining project interest for an MRRT year if the interest has a mining profit (after the application of all other allowances) and there is a mining loss that is available to be transferred. [Section 100-10]

6.82 The amount of a transferred mining loss allowance cannot exceed the remaining mining profit the mining project interest has. [Subsection 100-15(1)]

6.83 Mining losses that can be transferred must be applied in the order in which they arose. However, if several losses arose at the same time (for example, if there are several mining project interests with losses available for transfer), the miner can decide the order in which they are applied. [Subsection 100-15(2)]

6.84 A mining loss of a mining project interest must be transferred to another mining project interest if:

•

the two mining project interests satisfy the common ownership test [paragraph 100-20(1)(a)] ;

•

the mining loss is not attributable to an MRRT year in respect of which an election was made to use the alternative valuation method for its mining project interest [paragraph 100-20(1)(b)] ; and

•

the two mining project interests both relate to iron ore or both relate to taxable resources that are not iron ore (that is, a coal mining project interest cannot transfer its mining loss to reduce a mining profit from an iron ore mining project interest and vice versa) [paragraph 100-20(1)(c)] .

Example 6.73 : Order of application of mining losses

Hidden Treasure Mines Ltd has mining project interest A, which it has owned since before the MRRT and which has mining losses for each of the 2013 to 2016 MRRT years. In the 2014 MRRT year, it acquires mining project interest B. Mining project interest B has a remaining mining profit (after higher ranking allowances are applied) in the 2016 MRRT year. Due to the common ownership test, mining project interest A's mining losses of 2013 and 2014 cannot be applied to mining project interest B. They will be carried forward (and uplifted) to be used against mining project interest A's own future mining profits.

In the 2016 MRRT year, the mining losses of project interest A for the 2015 and 2016 MRRT years must be applied against mining project interest B's 2016 mining profit (after all other allowances have been applied). The loss for 2015 must be applied first and that for 2016 applied if there is any profit remaining.

Common ownership test

6.85 The common ownership test is satisfied if, at all times from the start of the year for which the mining loss arose to the end of the year in which the mining loss is to be applied, the two mining project interests were held by the same miner or by miners who are closely associated with each other. [Section 100-25]

6.86 The common ownership test is not focused on whether there has been a change in the direct ownership of the mining project interests, nor is it asking if the interests have remained in the one entity or group. Rather, the test focuses on the relationship between the holders of the two mining project interests and asks whether, at each moment within the test period, both were held by the same entity or by entities within the same common group (even if the entities holding them, or the group they were part of, changed from time to time within the period).

6.87 This test is similar to the common ownership test that can limit the transfer of some pre-mining losses (discussed above). However, while a pre-mining loss that fails the common ownership test may only be limited in the extent to which it is transferred, a mining loss that fails to meet the common ownership test cannot be transferred at all.

Example 6.74 : Same miner has both interests

Echo Coal Co is the head of a consolidated group (which consolidated for MRRT purposes in 2012). Mining project interest P1 has a mining loss for the 2013 year and mining project interest P2 has a mining profit for that year. Because it is a consolidated MRRT group, both interests are treated as being held by the group's head entity, Echo Coal Co, from the start of the loss year until the end of the transfer year. P1's mining loss is available to reduce P2's mining profit for the year. Similarly, P1's mining loss is available to be applied in calculating a transferred mining loss that will reduce mining profits of P3, P4 or P5.

Example 6.75 : Transfer of the group containing loss and profit project interests

Following on from the previous example, Foxtrot Coal Co purchases Bravo Coal Co (which owns P1 and P2). Bravo Coal Co is now part of Foxtrot's consolidatable group. P1 and P2 have moved from Echo's consolidated group to Foxtrot's consolidatable group. While P1 and P2 have existed in two different groups during the test period, the two interests have always been in the same group as each other. There has been no interruption to their relationship; they have continually been closely associated with each other. P1 is required to transfer any available mining loss to P2 as it has a mining profit, up to the amount of that profit. However, P1's mining loss cannot be transferred from P1 to P6 or P7 since P1 was not in common ownership with P6 and P7 at all times from the start of the year in which the mining loss arose to the end of the year in which the mining loss is to be applied.

Example 6.76 : Loss project interest transferred within same consolidatable group

Following on from the previous example, Foxtrot Co undertakes a restructure and moves ownership of P2 from Bravo Coal Co to Hotel Coal Co. As Foxtrot's group is not consolidated, each subsidiary within the group is a miner and responsible for its own MRRT liability.

While P1 and P2 are now held by different miners, each miner is within the same consolidatable group. Therefore both mining project interests have at all times been held by miners closely associated with each other. P1's available mining loss would still be required to be transferred to P2 up to the amount of P2's remaining mining profit but those mining losses could still not be transferred to P6 or P7 for the same reason as in the previous example.

Example 6.77 : Loss and profit project interests sold simultaneously

Following on from the previous example, India Coal Co, a single entity miner, simultaneously purchases P1 and P2 from Bravo Coal Co and Hotel Coal Co. P1 and P2 are now held by the same miner (a single entity). As P1 and P2 were purchased by India Coal Co at the same time, both mining project interests continue to have always been closely associated with each other. Therefore, any available mining loss in P1 still needs to be transferred to P2 up to the amount of P2's remaining mining profit.