House of Representatives

Explanatory Memorandum

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

Chapter 2 Overview of the Minerals Resource Rent Tax

Outline of chapter

2.1 This chapter is an overview of the Minerals Resource Rent Tax (MRRT). It outlines the resources that are subject to MRRT and explains the basic operation of the MRRT.

Overview of the MRRT

What resources are covered?

2.2 Australia is endowed with some of the world's largest and most valuable deposits of iron ore and coal. These bulk commodities make up a large proportion of Australia's mine production and mineral exports.

2.3 The MRRT applies to certain profits from iron ore and coal extracted in Australia. It also applies to profits from gas extracted as a necessary incident of coal mining and gas produced by the in situ combustion of coal. These non-renewable resources are called 'taxable resources'.

2.4 Where profits are made from the sale of taxable resources, or would have been made if the resources had been sold instead of being exported or used, MRRT may be payable.

Basic operation of the MRRT

2.5 This section explains the operation of the MRRT and how it applies to three different cases. The first case, the 'vanilla' case, examines how the MRRT operates for a project that was not in existence before the announcement of the MRRT.

2.6 The second case examines how the MRRT operates for projects that are transitioning into the MRRT (that is, for projects that were already invested in when the MRRT was announced). It explains how the MRRT recognises those existing investments.

2.7 The third case shows how the MRRT operates for miners with multiple projects. It introduces the concepts of pre-mining losses and transferring mining losses and pre-mining losses between projects owned by the miner. It also explains the process of 'uplifting' unused amounts.

The 'vanilla' case

2.8 The key purpose of the MRRT is to tax the economic rents from non-renewable resources after they have been extracted from the ground but before they have undergone any significant processing or value-add. Generally, the profit attributed to the resource at this point represents the value of the resource to the Australian community. Where the taxable resource is improved through beneficiation processes, such as crushing, washing, sorting, separating and refining, the value added is attributable to the miner.

Mining project interests

2.9 The mining project interest provides the basic unit for taxing the non-renewable resource. The main kind of mining project interest is an entitlement to share in the output of a mining venture carried on to extract taxable resources and produce a resource commodity (which could be the taxable resource or something produced from the taxable resource). It must relate to at least one production right. A production right is a right, under an Australian law, that authorises its holder to extract the resources from a particular area (called a 'project area').

Mining profit or loss

2.10 Once a mining project interest has been identified, the mining profit for the interest for the year has to be determined. The mining profit is the mining project interest's mining revenue for the year less its mining expenditure. If the mining expenditure exceeds the mining revenue, the excess is a mining loss .

Mining revenue

2.11 The main type of mining revenue a mining project interest can have comes from selling, exporting or using taxable resources (or things produced from taxable resources) extracted from the project area. The proceeds are mining revenue to the extent they are reasonably attributable to the taxable resources at a particular point in the production chain (called the 'valuation point').

2.12 Under the MRRT, the valuation point is typically just before the taxable resource leaves the run-of-mine stockpile (also called the ROM stockpile or ROM pad). The run-of-mine stockpile is where the resource is stored after extraction ready for the next stage of production. The next unit of production could be transportation but is often some form of processing. However, not all mining operations use a run-of-mine stockpile. Where a project has no run-of-mine stockpile, or it is by-passed for any reason, the valuation point is generally just before the first beneficiation process starts.

2.13 Mining operations that occur before the valuation point are upstream mining operations ; those that occur afterwards are downstream mining operations .

In this diagram, the dashed line represents the valuation point at the run-of-mine stockpile. Upstream and downstream mining operations are illustrated.

2.14 The MRRT is a tax on proceeds from selling a taxable resource (or on the proceeds which would have been realised if the resources had been sold instead of exported or sold) but only on that part of those proceeds that is reasonably attributable to the condition and location of the resource when it was at the valuation point. That amount must be attributed using the most appropriate and reliable method having regard to the miner's circumstances, the available information and certain statutory assumptions (to the extent to which they are relevant in applying a particular method). The statutory assumptions are that the downstream operations are carried on by a separate entity who has no interest in the resource and who deals independently with the miner in a competitive market.

2.15 Miners can elect to use a safe harbour method under which the mining revenue amount is worked out by reducing the amount realised from selling the resource (or, the arm's length value of the resource when it is exported or used) by the cost of its downstream mining operations - being its operating costs, any depreciation and its cost of capital (being its weighted average cost of capital).

2.16 An alternative, and simpler, valuation method is provided for smaller miners and miners who transform resources they mine in an integrated operation, such as steel manufacturing or electricity generation, to work out the mining revenue attributable to their resources.

2.17 The alternative valuation method is a version of the 'netback' method, which starts with a verifiable price and deducts costs to 'net back' to the value at an earlier point. Miners who have not elected to use the alternative valuation method may use the netback method to value their taxable resources, but they will have to work out the inputs using the most appropriate method instead of using those prescribed for the alternative valuation method.

Mining expenditure

2.18 The MRRT recognises the majority of upstream costs incurred by the miner in extracting the non-renewable resource and getting it to the valuation point.

2.19 Upstream costs are called mining expenditure if they are necessarily incurred by the miner in carrying on the upstream mining operations. Mining expenditure includes costs related to construction of the mining operation, blasting and digging, infrastructure, and capital assets used to transport the non-renewable resource to the valuation point (such as dump trucks and conveyor belts).

2.20 Under the MRRT, upstream capital expenditure is immediately deductible. Unlike income tax, capital assets do not have to be depreciated over their effective lives.

2.21 Some expenditure is specifically excluded from being taken into account as mining expenditure, including financing payments, the costs of acquiring a mining interest, royalty payments, and some tax payments.

Allowances

2.22 Miners reduce their mining profit by their MRRT allowances , to arrive at a net amount, which, for convenience, is referred to in this chapter as the MRRT profit.

2.23 In the vanilla case, the relevant allowances are royalty allowances and mining loss allowances. Royalty allowances

2.24 Miners will generally pay royalties to State and Territory Governments. Royalty regimes and rates vary across jurisdictions but are most commonly a charge on the volume or value of the resource, generally at the point of export or sale to a third party. These royalties are often a proxy for the rents available from that resource.

2.25 The miner will be liable to pay some MRRT in addition to royalties when resource rents are sufficiently high. That is, the company will pay the royalty and then also pay MRRT. However, the MRRT recognises this by providing the miner with a deduction, called a royalty allowance . The royalty allowance is 'grossed-up', using the MRRT rate, so that it reduces the MRRT liability by the amount of the royalty.

2.26 Where the full royalty credits for the year cannot be applied as a royalty allowance, the unused portion is uplifted and carried forward to be applied in a later year. The uplift rate is the long term bond rate plus 7 per cent (LTBR + 7 per cent). Mining loss allowances

2.27 If a mining project interest has a loss for the year, the loss is uplifted at LTBR + 7 per cent and carried forward to be used in a later year. When it is applied to reduce a mining profit of the mining project interest in a later year, it is called a mining loss allowance .

MRRT liability

2.28 If the MRRT profit is above zero after deducting the allowances, the mining project interest is subject to tax under the MRRT. The MRRT liability for the interest is calculated by multiplying the MRRT profit by the MRRT rate.

2.29 The MRRT rate is 30 per cent. However, the MRRT recognises that miners employ specialist skills to extract the resource and bring it to the valuation point. It recognises the value of those specialist skills through a special feature called the extraction factor. The extraction factor reduces the MRRT rate by 25 per cent, to produce an effective MRRT rate of 22.5 per cent.

The miner calculates its mining revenue for its mining project interest and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance and its mining loss allowance to produce its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that net profit multiplied by the MRRT rate.

Example 2.1 : The basic MRRT calculation

In a particular year, Midcap Mining Co. receives $500 million of mining revenue from its mining project interest. It incurs $120 million in upstream expenses and pays a royalty of $37.5 million to a State. It has $50 million of losses carried forward from the previous year. The long term bond rate (LTBR) is 6 per cent.

Mining revenue	$500m
Mining expenditure	($120m)
Mining profit		$380m
Royalty allowance [royalty payable/0.225]	($166.7m)
Mining loss allowance [earlier loss x (LTBR + 7%)]	($56.5m)
Total allowances		($223.2m)
MRRT profit		$156.8m
MRRT liability [MRRT profit x 0.225]		$35.3m

In this example, Midcap Mining Co. is liable to pay MRRT of $35.3 million.

Offset for low-profit miners

2.30 If a miner's mining profit is $50 million or less, it is entitled to a low-profit offset that will reduce its total MRRT liability to nil. If its mining profit is over $50 million, its offset is gradually phased out. In working out this mining profit, the miner must also count any mining profit of other entities it is connected to or affiliated with.

2.31 Even though a miner's mining profit might be under $50 million, it still deducts its allowances and carries forward any remainder.

The second case - treatment of existing investments

2.32 The second case involves miners with an existing mining project interest at 1 May 2010 (that is, before the announcement of a resource rent tax). To recognise their existing investment, those miners receive an allowance, called a starting base allowance , which further reduces their mining profit.

2.33 The starting base for a mining project interest may be calculated using the miner's choice of two methods.

2.34 The market value method uses the market value of the mining project interest's upstream assets at 1 May 2010. The book value method uses the most recent audited accounting value of those assets at 1 May 2010.

2.35 There are some other key differences between the two methods apart from their different values:

•

the market value method includes the value of the mining right, while the book value method excludes it;

•

the market value method recognises the starting base for each asset over its remaining effective life, while the book value method recognises the starting base, in set proportions, over five years;

•

there is no uplift for the remainder of the starting base under the market value method but the remainder under the book value method is uplifted by LTBR + 7 per cent; and

•

under the market value method, starting base losses unable to be applied in the year are uplifted at the consumer price index (CPI) rate, while they are uplifted at LTBR + 7 per cent under the book value method.

The miner calculates its mining revenue for its mining project interest and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance, its mining loss allowance and its starting base allowance to produce its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that MRRT profit multiplied by the MRRT rate.

Example 2.2 : The MRRT calculation with a starting base

In a particular year, Eisenfluss Mining receives $600 million of mining revenue from its mining project interest. It incurs $120 million in upstream expenses, pays a royalty of $37.5 million to a State, and has a market value starting base of $3 billion, which it writes off over 25 years at $120 million a year. It has $50 million of losses carried forward from the previous year. The LTBR is 6 per cent.

Mining revenue	$600m
Mining expenditure	($120m)
Mining profit		$480m
Royalty allowance [royalty payable/0.225]	($166.7m)
Mining loss allowance [earlier loss x (LTBR + 7%)]	($56.5m)
Starting base allowance	($120m)
Total allowances		($343.2m)
MRRT profit		$136.8m
MRRT liability [MRRT profit x 0.225]		$30.8m

In this example, Eisenfluss Mining is liable to pay MRRT of $30.8 million. Its existing investment in its mining project interest has reduced its MRRT liability by $27 million.

2.36 If a starting base allowance for a particular year cannot be used, the unused portion is uplifted and carried forward to be used in later years. If the starting base was valued at market value, the uplift rate is the CPI. If the starting base was valued at book value, the uplift rate is LTBR + 7 per cent.

Example 2.3: Carrying forward starting base losses

In year 1, Big Mountain Pty Ltd receives $100 million of mining revenue from its mining project interest. It incurs $50 million of mining expenditure, and pays a royalty of $7.5 million to a State. It has no mining losses in year one. Its market value starting base is valued at $500 million, which it is writing off over 25 years. In year 1, $3.3 million of Big Mountain's starting base loss for the year is unused because it has insufficient mining profits left after reducing them by its royalty allowance. This unused portion is uplifted at the CPI rate. The CPI for year 1 is 2.5 per cent.

In year 2, Big Mountain receives $250 million of mining revenue from its interest. It incurs $50 million of mining expenditure and pays a state royalty of $15 million. Big Mountain has no mining losses from year 2, as all project expenses were deducted.

	Year 1 ($)	Year 2 ($)
Mining revenue	100m	250m
Mining expenditure	(50m)	(50m)
Mining profit	50m	200m
Royalty allowance	(33.3m)	(66.7m)
Mining loss allowance	0	0
Starting base allowance	(20m)	(23.4m)+
MRRT profit	0	109.9m
MRRT liability	0	24.7m

In this example, the unused starting base allowance from year 1 is uplifted at the CPI rate and included in the year 2 starting base allowance.

+(($20m for year 2) + (year 1's unused $3.3m x 1.025)) = ($23.38m)

The third case - multiple interests or pre-mining expenditure

2.37 The third case involves miners with pre-mining expenditure and miners with more than one mining project interest.

Pre-mining expenditure

2.38 The MRRT recognises that exploration expenditure, and other pre-mining expenditure, in pursuit of taxable resources is a necessary part of the mining process and should be recognised as a cost of that process.

2.39 Pre-mining expenditure can occur in relation to project areas for existing mining project interests or in relation to areas covered by tenements that do not allow commercial extraction of resources (such as exploration tenements). Interests in those tenements are called pre-mining project interests . Regardless of where the expenditure occurs, it is recognised for MRRT purposes. However, it is recognised in different ways.

2.40 Pre-mining expenditure incurred in relation to a mining project interest is deducted along with the interest's other mining expenditure. That expenditure could form part of a mining loss for that interest and could be transferable to another of the miner's mining project interests producing the same resource.

2.41 Pre-mining expenditure incurred in relation to a pre-mining project interest goes into working out a pre-mining loss. Pre-mining losses can be transferred to any of the miner's mining project interests producing the same taxable resource. If a miner disposes of a pre-mining project interest, the purchaser would generally be able to transfer pre-mining losses that come with it to any of its mining project interests producing the same taxable resource.

2.42 If a pre-mining project interest with pre-mining losses matures into a mining project interest, the pre-mining losses will become attached to the mining project interest.

2.43 A pre-mining loss that cannot be used by its mining project interest, or transferred to another interest, is uplifted at LTBR + 7 per cent for up to 10 years. After that, any remaining pre-mining loss is uplifted at the LTBR.

Transferring losses

2.44 A miner with two or more mining project interests that produce the same taxable resource must transfer unused losses from one project interest to another. It can only do so to the extent that the other project has sufficient mining profits to absorb the remaining losses once it has applied its own royalty, mining loss and starting base allowances. Miners must transfer mining losses in the same order they arose.

2.45 Losses attached to a mining project interest the miner acquired from someone else cannot be transferred to another project interest unless both project interests have been in common ownership at all times since the loss arose.

2.46 Royalty credits usually cannot be transferred from one mining project interest to another and a project interest's starting base can never be transferred to another project interest.

The miner calculates its mining revenue for its mining project interest and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance, its pre-mining loss allowance, its mining loss allowance, its starting base allowance, and its allowances for pre-mining losses and mining losses transferred from other project interests, to obtain its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that profit multiplied by the MRRT rate.

Example 2.4 : Transferring losses

Cobb & Coal Brothers Ltd operates two coal mining project interests and has a pre-mining project interest on which it is exploring for coal.

Mining project interest (MPI) 1 has mining revenue for the year of $35 million and mining expenditure of $120 million. It also pays a State royalty of $2.5 million.

MPI 2 has mining revenue of $90 million and mining expenditure of $30 million. It pays a State royalty of $5.7 million.

The pre-mining project interest has pre-mining expenditure of $7 million and no revenue.

MPI 1 has a mining loss of $85 million. Its royalty payment converts into a royalty credit of $11.1 million. It has no profit, so cannot use it as an allowance. Since it also cannot be transferred, it will be uplifted and carried forward to the next year.

MPI 2 has a mining profit of $60 million. It has a royalty allowance of $25.3 million, which reduces its mining profit to $34.7 million. It then transfers in the $7 million pre-mining loss from the pre-mining project interest as a pre-mining loss allowance. It still has $27.7 million of its mining profit remaining, so it next transfers in $27.7 million of the mining loss from MPI 1 as a transferred mining loss allowance. That reduces MPI 2s MRRT profit to nil and MPI 1s mining loss to $57.3 million. That amount is uplifted and carried forward to the next year.

	MPI 1 ($)	MPI 2 ($)	Pre-MPI ($)
Mining revenue	35m	90m	0
Mining expenditure	(120m)	(30m)	(7m)
Mining profit /( loss )	( 85m )	60m	0
Pre-mining loss	0	0	( 7m )
Royalty allowance	0	(25.3m)	0
Transferred pre mining loss allowance	0	(7m)	0
Transferred mining loss allowance	0	(27.7m)	0
MRRT profit /( loss )	( 57.3m )+	0	0
Net pre-mining loss	0	0	0 *

In this example, the pre-mining loss from the pre-mining project interest, and part of the mining loss from MPI 1, are transferred to MPI 2 to reduce its MRRT profit to nil. Both transfers are possible because the transferring and receiving interests relate to the same type of taxable resource.

+ After transferring $27.7 million to MPI 2.

* After transferring $7 million to MPI 2.

Combining project interests

2.47 A miner with several mining project interests must combine them into a single mining project interest if they meet the integration criteria (and satisfy other conditions designed to prevent interests combining if that would effectively transfer allowances that are not otherwise transferable).

2.48 There are two possible ways that a miner's separate mining project interests can be integrated. First, they will be integrated if:

•

each interest produces the same taxable resource; and

•

each of the interests relates to the same mine or proposed mine.

2.49 Second, a miner's interests will be integrated if:

•

each interest produces the same taxable resource;

•

the miner conducts their downstream operations together as one operation; and

•

the miner has chosen to treat its integrated downstream operations in that way for MRRT purposes.

2.50 In deciding whether a miner conducts the downstream operations of the mining project interests as one operation, an important consideration will be the extent to which the relevant infrastructure is used in an integrated way to produce a saleable, exportable or usable resource commodity.

2.51 Mining project interests that would otherwise be required to combine cannot combine if either of them has a starting base or an unused royalty credit (there is an exception for some interests the miner has owned since before 1 May 2010). They also cannot combine if one of them has a mining loss that arose when the two interests were not in common ownership.

In this diagram, the miner has four MPIs relating to the same resource. If they all relate to a single mine or proposed mine, they would be upstream integrated . If they are not a single mine or proposed mine, but their downstream activities are managed as an integrated operation (for example, if they all use common processing infrastructure), they would be integrated if the miner has made a downstream integration choice.

If the four interests were integrated in either of those ways, they would combine into one MPI. However, if one of the MPIs has a starting base, a royalty credit or a mining loss attributable to a time when it was not in common ownership with each of the other interests, it could not be part of the combined interest.

Transferring and splitting mining project interests

2.52 Mining project interests can be transferred (for example, by sale). A mining project interest is transferred if the whole entitlement comprising the mining project interest passes to another entity.

2.53 If there is only a part disposal of the entitlement comprising the mining project interest, the mining project interest will split. A mining project interest can also split if a combined interest stops being integrated.

2.54 When a mining project interest is transferred, any mining revenue and mining expenditure for the mining project interest to the date of the transfer, and any royalty credits, mining losses, pre-mining losses, and starting base amounts of the mining project interest, will be inherited by the transferee.

2.55 When a mining project interest splits, any mining revenue and mining expenditure for the mining project interest to the date of the split, and any royalty credits, mining losses, pre-mining losses, and starting base amounts of the mining project interest, will be divided among the split mining project interests.

2.56 Each of the split interests inherits a proportion of each of those things equal to its share of the total market values of all the split interests.

Simplified MRRT for smaller operations

2.57 The MRRT recognises that some miners may be below the $50 million profit threshold for some time before they start having an MRRT liability. These miners would face an unnecessary compliance burden if they were required to fully comply with MRRT obligations and determine their starting base, calculate their mining revenue and track their losses and royalties.

2.58 Those miners may choose to avoid any MRRT liability for a particular year if either:

•

their earnings before interest and tax, and that of the entities connected to or affiliated with them, totals less than $50 million for that year; or

•

their earnings before interest and tax (and that of those related entities) totals less than $250 million and every mining project interest of those entities has royalties amounting to at least 25 per cent of the interest's earnings before interest and tax.

2.59 A miner who chooses to use the simplified MRRT method loses any starting base, starting base losses, mining losses, pre-mining losses and royalty credits for all its mining project interests and pre-mining project interests. They would begin to generate new losses and royalty credits after they stop using the simplified MRRT method.