House of Representatives

Explanatory Memorandum

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

Chapter 8 Small miners

Outline of chapter

8.1 This chapter explains:

•

how the low profit offset applies to fully or partially relieve small miners of their Minerals Resource Rent Tax (MRRT) liability for an MRRT year; and

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the operation of the simplified MRRT.

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

Summary of new law

Low profit offset

8.3 There is no MRRT liability for miners with group mining profits (as measured for MRRT purposes) of $50 million or less. Nil liability is achieved through an offset, called a 'low profit' offset.

8.4 To ensure that the low profit offset does not distort the production behaviour of an entity approaching the $50 million threshold, it phases-out for profits between $50 million and $100 million.

Simplified MRRT

8.5 A miner can use the simplified MRRT method for an MRRT year if its group profit (as measured for accounting purposes) is below certain limits.

8.6 If a miner chooses to use the simplified MRRT method, it will have no MRRT liability for the MRRT year, but its starting base and its allowances are extinguished rather than carried forward.

Detailed explanation of new law

Low profit offset

Mining profits equal to or less than $50 million

8.7 The low profit offset shields miners from an MRRT liability when the miner's group mining profit of each mining project interest is less than or equal to $50 million in an MRRT year. [Subsection 45-5(1)]

8.8 A miner's group mining profits include the mining profits (as measured for MRRT purposes) of entities that are connected to or affiliated with the miner in the way described in Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997). [Subsection 45-5(1)]

8.9 If a miner's group mining profit is less than or equal to $50 million, the offset is the sum of the miner's MRRT liabilities for each of the miner's mining project interests for the year [subsection 45-5(2)] . This reduces a miner's MRRT liability to nil [section 10-15] .

8.10 The reason for basing the test on a miner's group mining profits is to ensure that miner's cannot split their interests between different entities so that each falls below the threshold and is able to access the offset.

Mining profits between $50 million and $100 million

8.11 If an entity were fully liable for MRRT on mining profits once its group mining profits exceeded the $50 million threshold, an incentive would exist for the entity to delay production in order to remain below the threshold. To remove this distortion, this formula phases-out the offset for profits between $50 million and $100 million:

(($50 million - Taper amount) - Miner's group MRRT allowances) x Miner's share of group mining profit

[Subsection 45-10(1)]

8.12 If the miner's group mining profit is over $50 million and the formula produces a positive amount, the miner's low profit offset is:

[amount from the formula] x MRRT rate

[Subsection 45-10(2)]

8.13 A miner's group MRRT allowances is the sum of the MRRT allowances for each mining project interest for the year of the miner and its closely associated entities. [Subsection 45-10(1)]

8.14 A miner's share of group mining profit is the sum of the miner's mining profit for each of its mining project interests for the year, divided by the miner's group mining profit for the year. [Subsection 45-10(1)]

8.15 The taper amount is the difference between the miner's group mining profit for the year and $50 million. [Subsection 45-10(1)]

8.16 Where the result produced by this calculation is less than zero, there is no low profit offset. Where the result is greater than zero, the miner is entitled to a share of the offset amount calculated by reference to its percentage share of the group's mining profits.

8.17 The phase-out reduces the maximum possible tax offset provided by the low profit offset by $0.225 for every $1 of group mining profits above $50 million.

8.18 Once the low profit offset entitlement is determined, it is applied to reduce the miner's MRRT liability for the year. [Section 10-15]

Example 8.90 : Entitlement to a low profit offset where mining profits are greater than $50 million and less than $100 million

In the 2013-14 MRRT year, Strayan Ltd operates Project B. Strayan Ltd is a subsidiary of Bigger Strayan Resource Corporation, which owns Project A.

	Project A $m	Project B $m	Group Total $m
Mining profits	$20.00	$60.00	$80.00
Royalty allowance	$4.40	$8.00	$12.40
Mining loss allowance	$0.10	$0.00	$0.10
Starting base allowance	$0.10	$0.20	$0.30
Total MRRT allowances	$4.60	$8.20	$12.80

Strayan Ltd works out if it is entitled to a low profit offset using the following steps:

Step 1: It works out its group mining profits as $80 million by adding the mining profits of Project A and Project B and the group MRRT allowances as $12.8 million by adding the total allowances of Project A and Project B. As group mining profits are greater than $50 million and less than $100 million, Strayan Ltd may have a low profit offset.

Step 2: It applies the formula as follows:

Taper amount:	$80m - $50m = $30m
Miner's group MRRT allowances:	$4.6m + $8.2m = $12.8m
Miner's share of group mining profits:	$60m/$80m = 75%

[($50m - $30m) - $12.8m] x 75% = $5.4m

Step 3: Then it multiplies its share of the group profit by the MRRT rate:

$5.4m x 22.5% = $1.215m

Therefore, Strayan is entitled to a low profit offset of $1.215 million.

8.19 The low profit offset is not intended to reduce compliance costs. However, a miner with group mining profits below $50 million may also be eligible to use the simplified MRRT method, which is intended to have that effect.

Simplified MRRT method

8.20 Some miners have the prospect of being below the $50 million MRRT threshold for an extended period. Requiring such miners to fully comply with the MRRT would be burdensome. These miners will have the option of electing to use a simplified MRRT method.

Choosing to use the simplified MRRT method

8.21 To be able to make the simplified MRRT choice, a miner must satisfy one of two alternative tests.

8.22 Under the first test, the aggregate of the miner's group profit (as measured for accounting purposes) must be less than $50 million for the year. [Subsection 200-10(1)]

8.23 Therefore, the first test is similar to the low profit offset test. Indeed, a miner that satisfies this requirement is unlikely to have an MRRT liability in the year because its MRRT profits should be sufficiently low as to fall below the $50 million threshold for the low profit offset.

8.24 Under the second test, a miner is eligible for the simplified MRRT method if the sum of the miner's group profits is less than $250 million. However, if the miner's group profits are less than $250 million, but it, or one of its close associates, has a mining project interest with royalty liabilities that are less than 25 per cent of the profit for that interest for the year, the miner is ineligible for the simplified MRRT. [Subsections 200-10(2) and (3)]

8.25 The choice must be made in the approved form and the miner must give it to the Commissioner of Taxation (Commissioner) by the date its MRRT return would have been due, had it been required to lodge one. [Subsection 200-10(4), and Schedule 1 to the MRRT (CA & TP) Bill, item 8, Division 119 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

Group profit measured in accordance with accounting principles

8.26 An entity's profit for simplified MRRT purposes is its profit from activities relating to the mining of taxable resources, determined in accordance with general accounting principles, and adjusted for interest, taxation, royalties and exceptional items. [Section 200-15]

8.27 The adjustments for interest, taxation and exceptional items are made in order to produce an amount that is a reasonable estimate of the entity's earnings before interest and taxation. The further adjustment for royalties is to align the earnings before interest and taxation amount with the treatment of royalties under the MRRT.

8.28 The profit for simplified MRRT method purposes is intended as a reasonable proxy for an entity's mining profits that is simpler to work out.

Consequences of using the simplified MRRT method

8.29 If a miner chooses to use the simplified MRRT method for a year, then:

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the miner's MRRT liability for each mining project interest the miner has for the year is zero [paragraph 200-5(a)] ;

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all allowance components the miner has that relate to the mining project interest, or a pre-mining project interest, are extinguished [paragraph 200-5(b)] ;

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the starting base assets that the miner has that relate to the mining project interest cease to accrue starting base losses [paragraph 200-5(c)] ; and

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the entity does not have to lodge an MRRT return for the year [Schedule 1 to the MRRT (CA & TP) Bill, item 8, paragraph 117-5(4)(a) of Schedule 1 to the TAA 1953] .

8.30 The allowance components are extinguished because a miner who elects into the simplified MRRT method will have limited records from which the historical tax attributes of a mining project interest can be ascertained.

8.31 Miners that no longer satisfy either of the requirements for electing into the simplified MRRT method or that opt not to elect into it in a subsequent year would need to comply with their full MRRT obligations in that subsequent year.