House of Representatives

Explanatory Memorandum

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

Chapter 9 Combining mining project interests

Outline of chapter

9.1 This chapter explains when mining project interests can combine and the effects of such combination. What constitutes a mining project interest is fundamental to the operation of the Minerals Resource Rent Tax (MRRT).

9.2 Combined interests supersede the constituent interests as the basis upon which MRRT liability is determined. Mining revenue, mining expenditure and allowance components are tracked in relation to combined interests.

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

Summary of new law

Combining mining project interests

9.4 If a miner has two or more mining project interests that are integrated, the mining project interests may be able to combine to form a combined mining project interest.

9.5 Two mining project interests may be integrated if the mining operations of the mining project interests are integrated.

9.6 Pre-mining project interest cannot be integrated or combine.

9.7 Integrated mining project interests can only combine if the combination will not result in the effective transferability of otherwise quarantined allowance components.

9.8 If mining project interests can combine, they must combine.

9.9 Integrated mining project interests will combine if:

•

all royalty credits (if any) are transferable between the integrated mining project interests;

•

all pre-mining losses (if any) are transferable between the integrated mining project interests;

•

all mining losses (if any) are transferable between the integrated mining project interests; and

•

the integrated mining project interests have starting base losses or starting base assets and certain ownership requirements are met.

9.10 If the integrated mining project interests cannot combine, the miner can choose to cancel the allowance components that are preventing combination to allow the interests to combine.

9.11 A miner that has a combined mining project interest will not have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the constituent interests. Instead, the miner will only need to track these amounts for the combined mining project interest.

9.12 For the avoidance of doubt, mining project interests can combine from 2 May 2010.

Detailed explanation of new law

9.13 A miner that has a combined mining project interest will not have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the constituent interests. Instead, the miner will only need to track these amounts for the combined mining project interest.

9.14 The combined interest will provide the basis upon which MRRT liability is determined. The combined interest will inherit the tax histories of all the constituent interests. The combined mining project interest will aggregate each type of allowance component that it inherits from the constituent interests.

Integration of mining project interests

9.15 Only integrated mining project interests can combine. [Paragraph 115-10(1)(a)]

9.16 Whether mining project interests are integrated is a question of fact. If interests that were combined cease to be integrated there will be a mining project split [paragraph 125-10(3)(d)] . (Chapter 10 deals with mining project splits, which occur when interests cease to be integrated.)

9.17 Two mining project interests will be integrated on a day if:

•

the same miner has the two interests [paragraphs 255-5(a) and 255-10(a)] ;

•

the interests relate to the same type of taxable resource (that is, both relate to iron ore or both relate to coal) [paragraphs 255-5(b) and 255-10(b)] ; and

•

the interests either:

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relate to the same mine or proposed mine (upstream integration) [paragraph 255-5(c)] ; or

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are integrated in their downstream mining operations (or the mining operations as a whole are integrated) and the miner has made the choice to be downstream integrated [paragraphs 255-10(c) and 255-10(d)] .

9.18 Each of these conditions must be satisfied for two mining project interests to be integrated. Integration is automatic when all these conditions are satisfied.

The same miner must have the mining project interests

9.19 The same miner must have each of the mining project interests for them to be integrated [paragraphs 255-5(a) and 255-10(a)] . The miner will have two or more mining project interests if it is the entity that has each of the interests [section 15-5] .

9.20 If a group has made the choice to consolidate for the MRRT, then all the mining project interests that are within the group are taken to be the interests of the head entity of the group. This is discussed in Chapter 16. The effect of this is that it allows mining project interests that are held by different subsidiaries in the one MRRT consolidated group to combine (provided they meet all the other combination requirements). [Division 215]

The mining project interests must relate to the same type of taxable resource

9.21 The mining project interests must all relate to the same type of taxable resource. A mining project interest will either relate to iron ore or it will relate in some way to coal. [Paragraphs 255-5(b) and 255-10(b)]

9.22 A mining project interest will relate to iron ore if what is extracted from the production right area is:

•

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

•

anything produced from consuming or destroying iron ore in situ [paragraph 20-5(1)(c)] .

9.23 A mining project interest will relate to coal, if what is extracted from the production right area is:

•

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

•

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

•

anything produced from consuming or destroying coal in situ [paragraph 20-5(1)(c)] .

Example 9.91 : Mining project interests relating to iron ore

Rocky Resources has two mining project interests. One mining project interest is in respect of production right A, the other mining project interest is in respect of production right B. Production rights A and B both give Rocky Resources the authority to extract iron ore.

The two mining project interests that Rocky Resources has relate to iron ore.

Example 9.92 : Mining project interests relating to coal

Col Co has two mining project interests. One mining project interest is in respect of a production right that entitles Col Co to extract coal. The other mining project interest is in respect of a production right that entitles Col Co to burn the coal in situ and extract the gas produced.

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

Both mining project interests that Col Co has relate to coal, meaning that this integration condition is satisfied.

Example 9.93 : Mining project interests that do not relate to the same taxable resource

Diverse Co has 10 mining project interests. Nine of the mining project interests relate to iron ore. One mining project interest relates to coal.

The nine iron ore mining project interests may be able to be integrated but the one coal mining project interest is not capable of integrating with the other nine mining project interests.

Whether mining project interests relate to the same mine or proposed mine (upstream integration)

9.24 The mining project interests must relate to the same mine or proposed mine to be upstream integrated. [Paragraph 255-5(c)]

What constitutes a mine

9.25 The concept of a mine takes its ordinary meaning.

Usually, a mine is understood to be a combination of resource deposits, workings, and equipment and machinery needed to extract or recover the resource from its naturally occurring state. A mine can include underground excavations and surface workings.

9.26 The question of whether particular operations constitute one or more mines is a question of fact and degree to be determined by reference to all of the circumstances of a particular case.

9.27 The following are factors that may be relevant in determining if one or more mines exists:

•

the extent and location of relevant ore bodies (noting that the existence of a single ore body does not necessarily equate to the existence of a single mine);

•

the geological and other connections between relevant ore bodies;

•

the extent and location of the workings;

•

the extent and location of extraction facilities and the manner in which they are operated;

•

systems for managing the extractive operations; and

•

the existence and content of relevant mine plans, prepared in accordance with the Joint Ore Reserves Committee's Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (commonly known as the 'JORC Code'), governing production in relation to one or more ore bodies.

Example 9.94 : Two separate mines

Coal Co has two production rights, both of which entitle it to extract coal. Coal Co has a mining project interest in relation to each of the production rights.

Coal Co's head office manages the human resources for employees involved in the upstream mining operations of the two mining project interests without any distinction between the two production rights.

Mine Co manages the logistics of the upstream mining operations (that is, extraction and transportation of the taxable resource from the project areas to the valuation point). These activities are managed separately in relation to each production right. There is no shared upstream equipment or infrastructure, nor are the extraction activities undertaken in a coordinated manner.

The two mines are distinct and cannot be considered to be the same mine. While Coal Co has both of the relevant interests, and both interests relate to coal, it does not operate the two sites as a single mine. Integrated human resources management alone is not enough to result in there being one mine.

As each mining project interest has its own distinct mine, the mining project interests are not upstream integrated.

Example 9.95 : One mine

MineCo Mining Pty Ltd has two mining project interests in respect of two production rights (A and B). It extracts coal from five open cut pits. Two of the pits are located on production right A and the other three pits are located on production right B.

The five pits are managed by a single management group and are covered by a single life-of-mine plan. Mining equipment is shared across the five pits and is continually transferred between pits depending on mining needs at any given time. All production employees are employed under a single enterprise bargaining agreement. All administration and equipment maintenance activities are performed from a central location and are shared across all five pits.

All coal extracted from the pits is hauled by trucks to a single run-of-mine stockpile before being beneficiated (screened, dewatered, separated and washed) through a coal processing plant. The coal is then processed through the plant to produce the saleable product and stored on a single product stockpile. The saleable product is then loaded onto a train and transported to port to be loaded for export.

Taking all these factors into account, MineCo Mining is operating one mine because infrastructure and equipment is shared, there is a single life-of-mine plan, the operations are managed by a single management team and all the coal is placed on a single stockpile. Therefore, the mining project interests are upstream integrated.

What is a proposed mine

9.28 A proposed mine will be indicated by the existence of an ore body and work preparatory to extraction. Such work might include:

•

clearing the site;

•

installing water, light and power;

•

erecting housing and welfare facilities; and

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locating equipment or machinery at the site.

Example 9.96 : One mine, multiple mining project interests

Rock Doctor Co has mining project interests in relation to each of its seven production rights.

The production rights are all governed by a single life-of-mine plan under which production is scheduled to commence on all production rights within a specified period.

Two production rights have not commenced production. However, all production rights are planned to be in production concurrently for a significant number of years.

Rock Doctor Co is producing from 11 open-cut pits across five of the production rights. Rock Doctor Co has employees that work across all the pits. Similarly, all the trucks and other infrastructure that are used across the production rights are operated in an integrated manner. There is one manager responsible for all 11 pits. All the coal extracted from these pits is taken to the one run-of-mine stockpile. The same staff will also service two non-producing production rights when they commence production.

All of the ore bodies are structurally connected and geologically similar.

Taking all these factors together, Rock Doctor Co is operating one mine. Despite the fact that there are some timing differences, the ore bodies are all connected and similar; the production rights are all serviced, or will be serviced, by a single staff unit; the ore bodies are being developed concurrently (albeit in a staggered manner); and the operations are economically integrated.

Therefore the seven mining project interests are upstream integrated with each other.

Whether downstream mining operations are integrated (downstream integrated)

9.29 Two mining project interests are downstream integrated if either the downstream mining operations for each of the interests, or the mining operations as a whole for each of the interests, are integrated and the miner has made a choice to be downstream integrated. [Paragraphs 255-10(c) and (d)]

Downstream mining operations

9.30 Downstream mining operations are those mining operations that are not upstream mining operations. Downstream mining operations are those activities or operations that are necessary to get the taxable resources from the valuation point and into the form and location in which:

•

a mining revenue event happens to them [subparagraph 35-20(1)(b)(i)] ; or

•

they are first applied to producing something in relation to which a mining revenue event happens [subparagraph 35-20(1)(b)(ii)] .

[Sections 35-15, 35-20 and 255-15]

9.31 An activity or operation cannot, in the same instance, be both an upstream and a downstream mining operation. However, the costs of an activity may relate to both upstream and downstream operations and may need to be apportioned between them on a reasonable basis.

9.32 Operations or activities are not downstream mining operations if they are undertaken after the taxable resources:

•

reach the form and location in which they are in at the mining revenue event; or

•

are first applied to produce something in relation to which a mining revenue event occurs.

[Subsections 35-20(1) and 255-15(1)]

Example 9.97 : Downstream mining operations

Deanna Coal Co has a mine covering a single production right from which it extracts coal that is exported to a foreign steel maker. Deanna has a single mining project interest. The coal is sold as it is loaded onto the ship at the port. The coal extracted is taken to a run-of-mine stockpile.

The coal is removed from the run-of-mine stockpile by a reclaimer and taken by conveyer belt to a common crusher for easier processing. The coal is then sent to a processing plant where it is screened, de-watered and separated in order to produce the final saleable product. That product is then taken from the processing plant, loaded onto a train and transported to port. At port, the coal is offloaded to stockpiles, from which it is loaded on to ships in the same form that it leaves the processing plant. That is, it is not blended at port with any other coal. The coal is sold as it goes over the rail of the ships.

Deanna's downstream mining operations begin when the coal is removed from the run-of-mine stockpile (that is, the valuation point) and end when it goes over the rail at port. This is because the coal, at that point, is in the form and location it is in when it is sold (the mining revenue event).

Example 9.98 : Downstream mining operations - several mining project interests

Fox Fines Pty Ltd has two production rights which entitle it to extract iron ore. Fox has a mining project interest in relation to each of these production rights. The iron ore extracted from each production right has different iron content. The miner contracts with a foreign steel mill to provide iron ore of specific iron content and the contract specifies that the iron ore is sold as it is loaded on to a ship.

The iron ore extracted from each production right is taken to run-of-mine stockpiles, a different stockpile for each production right. Iron ore is removed from a run-of-mine stockpile and taken to a crusher and loaded onto trains operated by a third party. The trains take the iron ore to a port where it is deposited in separate piles. A quantity is taken from each pile, blended into one product which is loaded onto ships, such that the shipment satisfies the contractual iron content.

The downstream operations for each of Fox's mining project interest begin when the iron ore is removed from the respective run-of-mine stockpiles and end as it goes over the ship's rail.

Integrated

9.33 'Integrated' takes its ordinary meaning. In essence, things are integrated when separate elements come together in a coordinated or interrelated manner.

9.34 Whether the downstream mining operations or the mining operations of two mining project interests are integrated is a question of fact, but must be determined having regard to the manner in which those operations are carried on, including the way in which infrastructure and equipment is used and operated. [Paragraph 255-10(c)]

9.35 If the mining operations are managed as an integrated operation, demonstrated through the same downstream infrastructure being used or operated in an integrated manner in respect of production from the mining project interests, then the downstream integration tests will be met.

9.36 The integration test would not be satisfied just because two or more mining project interests utilise the same downstream infrastructure. They would need to be integrated in the way they use that infrastructure. For example, integration may be demonstrated through the scheduling and use of the infrastructure, to combine resources from different mining project interests into a blended product.

Example 9.99 : Downstream integration - blended product

Riley Co has five mines, each of which is a single mining project interest. Each mine has its own run-of-mine stockpile. In addition, each mine extracts iron ore with different iron content.

Riley Co also owns and operates a rail network system which is connected to each of the run-of-mine stockpiles. The iron ore is taken from the various run-of-mine stockpiles and delivered to Riley Co's trains, which travel on the rail network to the port facility, which it also owns and operates. At port, iron ore from each of the mines is delivered to separate holding piles, according to the iron content. Riley Co then blends ore from the various piles in order to load a shipment with the required iron content.

Riley Co contracts with overseas customers to deliver iron ore, with specified iron content, to ships at its port. Riley Co's contracts specify that the iron ore is sold to its customers on a free-on-board basis.

Riley Co schedules the extraction activities and transportation of the extracted ore from each of the mines in a way that ensures it has a constant supply of iron ore of varying iron content at the port stockpiles.

Taking into account the manner in which the operations are carried out and the extensive integration of infrastructure used and operated in carrying out these operations, each of the mining project interests that Riley Co has are downstream integrated.

Example 9.100 : Downstream integration - undertaken by a third party on behalf of the miner

Lachlan Co has three coal mines, each of which is a separate mining project interest. Coal from each mine is of slightly varying qualities and must be blended to be of a quality that satisfies customer requirements.

Lachlan Co has a service agreement with Train Corp (an entity unrelated to Lachlan Co) whereby Lachlan Co delivers coal from each of its run-of-mine stockpiles to Train Corp trains for transport to port. Lachlan Co pays Train Corp a fee for its transport service. Lachlan Co's coal is delivered to a port which is owned and operated by Port Coal Services Pty Ltd (PCS). PCS is unrelated to Lachlan Co. Lachlan Co's coal is stored in stockpiles at the port facility until it is loaded onto ships to fulfil Lachlan Co's contracts with overseas customers. Lachlan Co's sales contracts specify that the coal is sold on a 'free on board' basis. Before Lachlan Co's coal is loaded onto ships, PCS blends the varying quality of coal to a blend that satisfies the contract description. PCS provides this service to Lachlan Co for a fee.

Although none of the downstream mining operations are owned or operated by Lachlan Co, the transporting and blending at port are necessary to get the coal into the form and location in which it is sold and are the downstream mining operations of Lachlan Co in relation to its mining project interest. Due to the manner in which the downstream operations are carried on and the integrated way infrastructure is used in carrying out those downstream operations, the downstream mining operations of each of the mining project interests that Lachlan Co has are integrated for the purpose of the MRRT.

Example 9.101 : Downstream integration - mining operation as a whole is integrated

Mining Co has 10 coal mines, each of which is a separate mining project interest. Each mine is operated under a separate life-of-mine plan and has a separate run-of-mine stockpile. The coal is removed from the run-of-mine stockpiles and taken to separate coal preparation plants.

Mining Co has service agreements in place with multiple rail and port operators. Mining Co schedules the transportation of coal on the rail corridors and delivery to the port in a way that ensures that the timing and rate of extraction from each of the mining project interests is managed having regard to the quality, characteristics and volume across the overall system. Contracted capacity for the rail corridors and the port is managed in order to ensure reliable supply to customers in accordance with contract descriptions and market demand.

Mining Co has a dedicated production, rail and port infrastructure team that is responsible for managing the outbound supply chain. This team is accountable for the integrated planning of the rail corridors and the port. Sales and operations planning and supply chain performance management is managed for each of Mining Co's mining project interests centrally. The scheduling of activities downstream of the run-of-mine stockpiles is undertaken in an integrated manner.

Each of the mining project interest that Mining Co has is integrated because of the way in which it conducts its downstream operations, taking into account the overall mining operations, are highly coordinated.

Example 9.102 : Downstream integration - single processing plant

Francis Coking Coal has four production rights (A, B, C, and D). There is a mining project interest in respect of each production right. On production right A, there are three underground coal mines (A1, A2 and A3). On production rights B, C and D there are three open cut pits.

Premium coking coal is extracted from the three underground mines located in production right A and medium quality coking coal, pulverised coal injection coal and thermal coal is extracted from the three open cut pits (on B, C and D). Each of the underground and open cut pits has its own run-of-mine stockpile. The coal from each run-of-mine stockpile is then conveyed on a series of overland conveyors to a single coal processing plant.

All the coal from both the underground and open cut operations is processed through a single coal processing plant in which the coal is beneficiated (screened, dewatered, separated and washed) to produce saleable product. As part of the beneficiation process, lower quality coal from the open cut pits is blended in the processing plant with the premium coking coal from the underground operations to produce a hybrid saleable product. The beneficiated coal is then stored on a common product stockpile area, separated according to the type and quality of coal. The saleable product is then loaded onto trains and transported to port to be loaded for export.

Francis Coking Coal's mining project interests are downstream integrated, due to the coordinated manner in which the coal is processed and transported.

Downstream integration choice

9.37 Even if the downstream mining operations of the mining project interests are factually integrated and the other conditions for integration are satisfied, the interests will not be downstream integrated unless the miner has made a choice to treat the interests as integrated. [Paragraph 255-10(d) and section 255-20]

Example 9.103 : Integrated operations, but no choice has been made

On 1 July 2012, Geologue Jacqueline Pty Ltd has two mining project interests, each relating to coal. The two interests do not relate to the same mine but their downstream mining operations are factually integrated.

Geologue Jacqueline Pty Ltd has not made the choice to downstream integrate. Therefore, despite the downstream mining operations being factually integrated, the two interests are not recognised as integrated for the MRRT.

9.38 The downstream integration choice does not lapse. Once made, the choice operates to integrate all mining project interests that the miner has, including subsequent mining project interests that the miner acquires (so long as they satisfy the other conditions for downstream integration). [Section 255-20]

9.39 The choice will have effect from the day the choice is made, or the day all the other conditions for downstream integration are met, whichever is later. Put simply, two mining project interests will be integrated when they meet all the downstream integration conditions, including the making of a valid choice. [Section 255-10]

9.40 The choice to downstream integrate will cease to have effect in relation to a particular mining project interest after the miner that made the choice stops having the interest. [Subsection 255-20(3)]

Example 9.104 : Integrated on day of choice

Following on from the example above, Geologue Jacqueline Pty Ltd chooses downstream integration on 27 February 2013. Geologue Jacqueline's two mining project interests will be integrated with each other from 27 February 2013.

Example 9.105 : Choice made in advance of integrated operations

On 1 July 2012, Bowen Integrated Materials Co (BIM Co) holds several mineral development licences in various locations throughout the Bowen Basin. BIM Co is in the process of obtaining production rights in respect of the mineral development licences. BIM Co plans to manage the downstream mining operations in relation to each of the production rights as an integrated operation. BIM Co has determined it would want the mining project interests to be recognised as integrated for the purpose of the MRRT (if they are factually integrated in their downstream mining operations).

On 23 April 2013, the production rights are granted in relation to each of the mineral development licences. BIM Co, now a miner with mining project interests, also makes the downstream integration choice on that day.

BIM Co satisfies all of the other conditions for downstream integration on 1 September 2013. Each of the mining project interests that BIM Co has are integrated with the other interests from 1 September 2013.

Retrospective downstream integration

9.41 A transitional rule allows the downstream integration choice to have retrospective effect in limited circumstances. These limited circumstances are where the conditions for integration, excluding the making of the choice, are satisfied in respect of mining project interests between 2 May 2010 and 30 June 2012. In such cases, if the miner makes the choice on or before the lodgement date for the MRRT return for the first MRRT year, the interests will be taken to have been integrated from the time all the other conditions were satisfied. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA & TP) Bill), subitem 7(2)]

9.42 This transitional rule takes account of the fact that a miner cannot make a downstream integration choice before 1 July 2012. Regardless, two mining project interests should still be able to be treated as integrated at an earlier time. This enables mining project interests to be integrated from 2 May 2010, despite the miner not having made a choice at that time.

Example 9.106 : Downstream mining operations - transitional choice

On 2 May 2010, Miner Co has two production rights which entitle it to extract iron ore. The downstream mining operations in relation to each of the production rights are integrated.

Upon commencement of the MRRT, Miner Co will be taken to have two mining project interests in relation to the two production rights at 2 May 2010. Each interest relates to iron ore and the downstream mining operations of the interests are integrated.

Miner Co makes the downstream integration choice at the time it lodges its MRRT return in relation to the first MRRT year.

Despite having not made the downstream integration choice on 2 May 2010, once it makes the choice Miner Co's interests will be treated as integrated with each other from 2 May 2010.

Combining mining project interests

9.43 For the most part, mining project interests that can combine, must combine. Combination is automatic and not optional. [Section 115-10)]

9.44 Unlike integration, which tests the relationship between two mining project interests, combination applies to a collection of mining project interests. Mining project interests must combine to the fullest extent possible. For example, a miner cannot choose to only combine two mining project interests if there are actually four interests that can combine.

9.45 Mining project interests ('constituent interests') that combine are taken to be a single mining project interest ('combined interest') for the purposes of the MRRT law. [Subsection 115-10(1)]

9.46 The constituent interests are not recognised as a combined interest for the purpose of testing whether they must combine. This is to allow the integration provisions to look-through the combined interest and test whether the constituent interests are integrated. [Subsection 115-10(1)]

9.47 Mining project interests are taken to be a combined interest from the time the constituent interests can combine. This time is called the 'combining time'. [Subsection 115-10(1)]

9.48 Combination is not an annual test. It is determined at and from the combining time. However the miner is liable to pay MRRT for the combined interest as if the constituent interests had been combined from the beginning of the MRRT year. [Subsection 115-10(1) and section 115-40]

9.49 A number of conditions must be satisfied for mining project interests to combine. Integration is the first condition for combination. Only interests that are integrated with each of the other interests can combine. [Paragraph 115-10(1)(a)]

9.50 Integrated mining project interests can only combine if:

•

any royalty credits that any of the interests has would be able to be applied in working out a transferred royalty allowance for each of the other interests [paragraph 115-10(1)(b) and section 115-20] ;

•

any pre-mining loss that any of the interests has (or would have if the MRRT year were to end at the combining time) would be able to be applied in working out a transferred pre-mining loss allowance for each of the other interests [paragraph 115-10(1)(c) and section 115-25] ;

•

any mining loss that any of the interests has (or would have if the MRRT year were to end at the combining time) would be able to be applied in working out a transferred mining loss allowance for each of the other interests [paragraph 115-10(1)(d) and section 115-30] ; and

•

any of the interests that has a starting base loss or a starting base asset:

-

existed on 2 May 2010 (or originated from a pre-mining project interest that existed on 2 May 2010) [paragraphs 115-10(1)(e) and 115-35(a)] ; and

-

has been held, at all times since 2 May 2010, by the same miner as held all the other constituent interests (or the pre-mining project interests from which they originated) [paragraphs 115-10(1)(e) and 115-35(b)] .

9.51 A constituent interest that has had a suspension day is unable to combine. See Chapter 11 for a discussion on suspension days. [Subsection 115-10(3)]

9.52 These conditions must be satisfied to ensure that combination does not enable the transferability of either quarantined tax history or future starting base losses.

9.53 If integrated mining project interests are unable to combine because they have allowance components that do not meet the above criteria, the miner can nonetheless make a choice to combine. However, this would have the effect of cancelling those allowance components that otherwise prevent it from combining. [Section 115-15]

9.54 If two mining project interests are integrated with each other and neither interest has a royalty credit, pre-mining loss, mining loss, starting base loss or starting base asset, the interests can and must combine.

Royalty credits must be transferable to combine

9.55 If any of the integrated mining project interests has a royalty credit, it can only combine if all the royalty credits are fully transferable to each of the other interests. Chapter 6 explains what a royalty credit is and when one arises. [Section 115-20]

9.56 Royalty credits are transferable if they would be available to be applied in working out a transferred royalty allowance for each of the other interests. That is, they are transferable if the mining project interests have been integrated from the time the royalty credit arose until the time the mining project interests are seeking to combine (and the royalty credit did not arise when the interest was using the alternative valuation method). [Subsection 65-20(1)]

9.57 In determining whether the royalty credits would be transferable it does not matter whether the royalty credit would have been used by another mining project interest if it was actually available to be applied. [Paragraph 115-20(b)]

Example 9.107 : Royalty credits not fully transferable

Miner Co has two mining project interests, one of which existed at 1 July 2012 and another that was acquired in 2013 from another miner. On 1 July 2014, the interests become integrated in their upstream mining operations. At the time of integration, each interest has royalty credits for the previous MRRT year. The two interests are unable to combine as they each have royalty credits that arose prior to the interests being integrated. (However, the mining project interests may be able to transfer future royalty credits that arise while the two mining project interests are integrated with each other.)

9.58 If any of the royalty credits arose while the mining project interests were not integrated, or they arose when using the alternative valuation method, the mining project interests will be unable to combine unless the miner makes a choice to cancel the royalty credits and enable the combination. This is discussed below. [Section 115-15]

Pre-mining losses must be transferable to combine

9.59 If any of the integrated mining project interests has a pre-mining loss (or would have a pre-mining loss if the MRRT year ended at the combining time) they can only combine if all the pre-mining losses are fully transferable to each of the other integrated mining project interests. Chapter 6 explains what a pre-mining loss is and when one arises. [Section 115-25]

9.60 A mining project interest would have a pre-mining loss if the MRRT year were to end at the combining time, if the pre-mining expenditure for the interest for the period from the start of the combination year until the combining time exceeds the pre-mining revenue for the interest for the same period.

9.61 A mining project interest will only have pre-mining revenue and pre-mining expenditure for the combination year if the mining project interest originated from a pre-mining project interest during the combining year but before the combining time.

9.62 Pre-mining losses are transferable if they are available to be applied in working out a transferred pre-mining loss allowance for the other mining project interests. That is, the mining project interests must relate to the same type of taxable resource (that is, iron ore or coal), the mining project interests must be held by the same miner or by close associates and the common ownership test must be satisfied. [Section 95-20]

9.63 If one of the mining project interests is a combined interest, for the pre-mining loss to be transferable to the combined interest it must be transferable to each of the constituent interests. [Paragraph 115-25(b) and section 115-55]

9.64 In determining if the pre-mining loss would be transferable, it does not matter whether the pre-mining loss would have actually been used by another mining project interest. [Subparagraph 115-25(a)(ii)]

9.65 If the pre-mining losses are not available for transfer, the two mining project interests will be unable to combine, unless the miner makes a choice to cancel the pre-mining losses to enable the combination. This is discussed below. [Section 115-15]

Mining losses must be transferable to combine

9.66 If any of the integrated mining project interests has a mining loss (or would have a mining loss if the MRRT year ended at the combining time) it can only combine if all the mining losses are fully transferable to each of the other integrated mining project interests. Chapter 6 explains what a mining loss is and when one arises. [Section 115-30]

9.67 A mining project interest would have a mining loss if, the MRRT year were to end at the combining time, the mining expenditure for the interest for the period from the start of the combination year until the combining time would exceed the mining revenue for the interest for the same period.

9.68 Mining losses are transferable if they are available to be applied in working out a transferred mining loss allowance for the other mining project interests. That is, they are transferable if the mining project interests relate to the same type of taxable resource (that is, iron ore or coal), the mining project interests satisfy the common ownership test and the mining loss did not arise when the interest was using the alternative valuation method. [Subsection 100-20(1)]

9.69 If one of the mining project interests is a combined interest, for the mining loss to be transferable to the combined interest it must be transferable to each of the constituent interests. [Paragraph 115-30(b) and section 115-60]

9.70 In determining if the mining loss would be transferable, it does not matter whether the mining loss would have actually been used by another mining project interest. [Subparagraph 115-30(a)(ii)]

9.71 If the common ownership test is not satisfied or any of the mining losses arose when using the alternative valuation method, the two mining project interests will be unable to combine, unless the miner makes a choice to cancel the mining losses to enable the combination. This is discussed below. [Section 115-15]

Example 9.108 : Mining losses not fully transferrable

Miner Co has two mining project interests. It has always had one of the interests but it only acquired the other interest recently. The second interest it acquired has a mining loss for a previous MRRT year.

The mining loss of the second interest cannot be applied in working out a transferred mining loss allowance of the first interest, as the common ownership test is not satisfied.

The two interests are unable to combine as the second interest has a mining loss that is unable to be transferred to the first interest.

Starting base losses and starting base assets - the same miner must have had the interests from 2 May 2010

9.72 If any of the integrated mining project interests have a starting base loss or a starting base asset, the interests can only combine if they existed, or originated from a pre-mining project interest that existed, on 2 May 2010 and at all times since that time the miner that has each of the interests (or the pre-mining project interest from which it originated) is the same miner. [Section 115-35]

9.73 If mining project interests that were not held by the same miner at that time but which had starting base losses or assets were able to combine, this would effectively allow starting base losses to be transferred from the old interest to the new interest. Chapter 7 explains when a miner has a starting base loss and a starting base asset. Chapter 6 explains what a pre-mining project interest is and when a mining project interest originates from a pre-mining project interest.

9.74 A mining project interest that has a starting base loss or a starting base asset may be able to combine with another interest, if both interests (or the pre-mining project interests from which they originated) existed on 2 May 2010. [Paragraph 115-35(a)]

9.75 If the mining project interests (or the pre-mining project interests from which they originate) existed on 2 May 2010, the interests can combine if they have always been held by the same miner as each other. [Paragraph 115-35(b)]

9.76 This enables all mining project interests of a miner that relate to exploration or production rights that existed on 2 May 2010 to be capable of combining with other interests that existed on this date (subject to the other conditions).

Example 9.109 : Pre-mining project interest existing on 2 May 2010

Expo Co holds an exploration right at 2 May 2010, in respect of which there is a pre-mining project interest. Subsequently, Expo Co is granted a production right that covers an area that the exploration right covered. The production right originates from the exploration right, therefore the mining project interest that Expo Co now has originates from the pre-mining project interest.

The pre-mining project interest from which the mining project interest originated existed on 2 May 2010 and is therefore capable of combining with other interests that existed on 2 May 2010 (subject to the other conditions).

Example 9.110 : Pre-mining project interest not existing on 2 May 2010

At 2 May 2010, Digger Co is in the process of finalising its application to obtain an exploration right. The exploration right was granted on 1 July 2010, triggering the existence of a pre-mining project interest. Subsequently, Digger Co is granted a production right that covers an area that the exploration right covered. The production right originates from the exploration right, therefore the mining project interest originates from the pre-mining project interest.

The pre-mining project interest from which the mining project interest was derived did not exist on 2 May 2010, it only started to exist on 1 July 2010. Therefore, it is unable to combine with other interests that existed on 2 May 2010.

9.77 Requiring the same miner to have each of the mining project interests is similar to the ownership requirement in the common ownership test for transferred mining loss allowances. One important distinction is that, for the purpose of determining whether mining project interests can combine, the same miner must have the mining project interests; it is not sufficient that a closely associated miner has that interest. If a consolidated group has made the choice to consolidate for MRRT purposes, the head company will be the miner that has all mining project interests that exist within the group.

9.78 A change of ownership does not necessarily stop interests from being combined. Rather, the test focuses on the relationship between the two mining project interests and considers whether they have always been held by the same miner, even if the identity of that miner has changed from time to time. As long as there has been no interruption to the relationship, the mining project interests will have always been held by the same miner.

Example 9.111 : Same miner has mining project interests

Miner Co has two mining project interests at 2 May 2010. Each of those mining project interests has starting base assets that will be depreciated in relation to the mining project interests. On 1 October 2012, Miner Co sells the two interests to CHPP Ltd.

From 2 May 2010 to 30 September 2012, Miner Co had the interests. From 1 October 2012 onwards, CHPP Ltd had the two interests.

Despite different miners having the interests, at all times both interests have been held by the same miner.

Example 9.112 : Same miner has not had mining project interests

Head Co is the head entity of a consolidated group for income tax purposes. A Co and B Co are subsidiaries of Head Co.

Head Co has not made the choice to consolidate for the purposes of the MRRT. Therefore, A Co is a miner as it has mining project interest 1 (MPI 1) and mining project interest 2 (MPI 2). B Co is also a miner as it has mining project interest 3 (MPI 3).

A Co and B Co have had their respective MPI's since 2 May 2010.

MPI 3 cannot combine with MPI 1 or MPI 2 as the miner that has MPI 3 (B Co) and the miner that has MPI 1 and MPI 2 (A Co) are not the same miner.

MPI 1 and MPI 2 can combine as A Co has both the mining project interests.

Example 9.113 : Combination in the case of acquisition of a group

Following on from the example above, Mega Co is the head entity of a consolidated group for the purpose of income tax and the MRRT. Mega Co has three subsidiaries, D Co, E Co and F Co, each of which has a mining project interest, respectively, MPI 4, MPI 5 and MPI 6. Because Mega Co has made the choice to consolidate for the purpose of the MRRT, Mega Co is the miner and has MPI 4, MPI 5 and MPI 6. D Co, E Co and F Co are not entities recognised for MRRT purposes.

On 1 July 2015, Mega Co acquires Head Co. Head Co is now part of Mega Co's consolidated group, therefore Mega Co is now the miner in relation to MPI 1, MPI 2 and MPI 3.

Assume all of the mining project interests have starting base assets with base values.

Mega Co can, provided all the other combination conditions are met, combine all the mining project interests that it now has, provided the same miner has always had each of the interests.

Therefore, Mega Co can combine MPI 1 and MPI 2. It can also combine MPI 4, MPI 5 and MPI 6. MPI 3 is unable to combine as there is no other mining project interest that shares its ownership history.

	Which miner has the MPI ?	Same miner as each other ?
	2 May 2010 - 30 June 2015	1 July 2015 onwards
MPI 1	A Co	Mega Co	The same miner has always had MPI 1 and MPI 2
MPI 2	A Co	Mega Co	The same miner has always had MPI 1 and MPI 2
MPI 3	B Co	Mega Co	No other MPI has the same ownership history as MPI 3
MPI 4	Mega Co	Mega Co	The same miner has always had MPI 4, MPI 5 and MPI 6
MPI 5	Mega Co	Mega Co	The same miner has always had MPI 4, MPI 5 and MPI 6
MPI 6	Mega Co	Mega Co	The same miner has always had MPI 4, MPI 5 and MPI 6

Upon combination, Mega Co will be left with three mining project interests. Two combined interests, one comprising MPI 1 and MPI 2 and the other comprising MPI 4, MPI 5 and MPI 6, and the mining project interest that cannot combine with any of the others, MPI 3.

Choice to combine - cancellation of allowance components

9.79 If a miner has interests that are unable to combine because doing so would enable the transferability of either quarantined tax history or future starting base losses, the miner can make a choice to combine. [Subsection 115-15(1)]

9.80 The effect of making the choice is that any allowance components that are otherwise preventing the interests from combining are cancelled. This includes reducing the base value of starting base assets to zero. [Subsection 115-15(2)]

9.81 Not all the allowance components are necessarily cancelled, only those which are preventing combination from being allowed.

9.82 This choice is intended to give a miner the ability to combine without first having to use up the allowance components that are preventing it from combining.

Example 9.114 : A miner can choose to combine and cancel relevant allowance components

Sprinklingheart Resources is a miner with two integrated mining project interests (MPI 1 and MPI 2).

MPI 2 has no allowance components. MPI 1 has unapplied mining losses for the 2013, 2014 and 2015 MRRT years. The 2014 and 2015 losses are transferable to MPI 2, however, the 2013 losses are not.

As some of the mining losses are not transferable, MPI 1 and MPI 2 are unable to combine.

Sprinklingheart Resources makes a choice to combine. Having made this choice, the carried forward mining losses for the 2013 MRRT year are cancelled. MPI 1 retains the mining losses for the 2014 and 2015 MRRT years.

MPI 1 and MPI 2 combine. The combined interest will therefore inherit MPI 1's mining losses for the 2014 and 2015 MRRT years.

Effects of combining mining project interests

Inherited history

9.83 The MRRT liability for the whole MRRT year will rest with the miner who has the combined interest at the end of the MRRT year. [Section 115-40]

MRRT liability

9.84 In the year in which the constituent interests combine, called the 'combining year', the miner that has the combined interest will be liable to pay MRRT that is payable in relation to the combined interest, as if the constituent interests had been combined from the start of the year. The miner is not separately liable to pay MRRT in relation to the constituent interests. [Section 115-40]

9.85 The miner will also be liable to pay MRRT that is payable in relation to the combined interests for future MRRT years (provided the constituent interests remain combined and the miner continues to have the combined interest). [Section 10-1]

9.86 The allowance components of the constituent interests are taken to be the allowance components of the combined mining project interest. [Section 115-45]

9.87 The royalty credits of the constituent interests are inherited by the combined interest. Royalty credits are not aggregated (as they arise for a particular day and not annually for an MRRT year). [Subsection 115-45(1)]

9.88 Pre-mining losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year. [Subsection 115-45(2)]

9.89 Mining losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year. [Subsection 115-45(3)]

9.90 Starting base losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year and have had the same starting base valuation method applied (that is, book value or market value). [Subsections 115-45(4) and (5) and section 115-50]

Starting base losses - where some starting base assets are subject to book value and others to market value

9.91 The starting base valuation method is a choice a miner makes in relation to a mining project interest. The constituent interests that relate to the combined interest may have different starting base valuation methods applied to value their starting base assets. Book value and market value starting base losses are subject to different uplift rates and therefore cannot be aggregated in the same way as pre-mining losses and mining losses. [Subsections 115-45(4) and (5) and section 115-50]

9.92 The aggregated book value starting base losses will be subject to the book value uplift long term bond rate + 7 per cent (LTBR + 7 per cent) and the aggregated market value starting base losses will be subject to the market value uplift consumer price index (CPI). [Section 115-50]

9.93 The starting base losses for the constituent interests that the combined interest is taken to have are not necessarily aggregated. Rather, the starting base losses are only aggregated to the extent they relate to the same valuation approach for an MRRT year. [Section 115-50]

9.94 If some starting base assets were initially valued using book value and others using market value, the miner will have two starting base losses for the combined interest for the MRRT year, a book value starting base loss and a market value starting base loss. [Section 115-50]

9.95 The book value starting base loss for an MRRT year will be the sum of the book value starting base losses that would have arisen for a constituent interest for the MRRT year. The market value starting base loss for an MRRT year will be the sum of the market value starting base losses that would have arisen for a constituent interest for the MRRT year. [Subsections 115-50(2) and (3)]

9.96 The two starting base losses will be applied in working out the starting base allowance for the miner. The starting base losses that relate to book value will be applied first, then the starting base losses that relate to market value. [Subsection 115-50(4)]

Example 9.115 : Aggregating starting base losses with same valuation method

Miner Co has two mining project interests, MPI A and MPI B. Miner Co made the choice to use the book value starting base methodology for starting base assets that relate to MPI A and MPI B.

From 1 July 2015, MPI A and MPI B are taken to be a combined interest, MPI AB. At the combining time, MPI A had a $200 starting base loss for the 2013 year and a $500 starting base loss for 2014 year and MPI B had a $100 starting base loss for the 2013 year and a $200 starting base loss for the 2014 year.

Upon combination, MPI AB will be taken to have the starting base losses that relate to MPI A and MPI B and the starting base losses for each year will be aggregated as they apply to the same starting base valuation method. Therefore, MPI AB will have a book value starting base loss for the 2013 year of $300 ($200 + $100) and a book value starting base loss for the 2014 year of $700 ($500 + $200).

Example 9.116 : Aggregating starting base losses with different valuation methods

Assume all the same facts as the previous example, except this time Miner Co has made the choice to use the book value methodology in relation to MPI A and the market value methodology in relation to MPI B.

Upon combination MPI AB will be taken to have the starting base losses that relate to MPI A and MPI B but none of the losses will be aggregated as different starting base valuations applied in relation to the starting base losses. Therefore, MPI AB will have book value starting base losses for 2013 and 2014 of $200 and $500 respectively and market value starting base losses for 2013 and 2014 of $100 and $200 respectively.

In the 2015 MRRT year, MPI AB has a mining profit. Assume MPI AB has a $100 book value starting base loss and a $100 market value starting base loss for the 2015 year. When it comes time to calculate the starting base allowance for MPI AB there is $1,000 remaining mining profit, therefore the starting base allowance cannot exceed $1,000.

In working out the starting base allowance, the book value starting base losses are applied first, then the market value starting base losses. Therefore, MPI AB will apply the starting base losses in the following order, $200 book value starting base loss for the 2013 year (attributable to MPI A), $500 book value starting base loss for the 2014 year (attributable to MPI A), $100 book value starting base loss for the 2015 (attributable to MPI A), $100 market value starting base loss for the 2013 year (attributable to MPI B) and $100 of the $200 market value starting base loss for the 2014 year (attributable to MPI B). The remaining $100 from 2014 and the $100 from 2014 (both market values starting base losses) will be carried forward to 2016 and uplifted by the CPI.

Choices

9.97 The downstream integration choice and the simplified MRRT choice both apply to all mining project interests a miner has. When the constituent interests combine, if the miner had made a downstream integration choice or a simplified MRRT choice, these choices will continue to apply to the combined interest.

9.98 Similarly, the starting base valuation choice, while made in respect of a mining project interest, continues to apply to the starting base assets as per the choice made by the miner in relation to the constituent interests.

9.99 An alternative valuation method choice made in respect of a constituent interest will have no effect on the combined interest. [Section 115-65]

9.100 The miner can, if it meets the requirements, choose to use the alternative valuation method in respect of the combined interest.

Transfer of pre-mining losses and mining losses to and from a combined interest

9.101 There are special rules for transferring pre-mining losses and mining losses to or from a combined interest. [Sections 115-55 and 115-60]

9.102 When a miner is seeking to transfer a pre-mining loss, or a mining loss, to or from a combined interest, the common ownership tests for the respective losses must be satisfied in relation to each of the constituent interests and the other mining project interest that is transferring or accepting the loss. [Sections 115-55 and 115-60]

9.103 This rule only applies in relation to pre-mining losses and mining losses that arose in an MRRT year before the combining year, as each of the constituent interests will have the same ownership from the time of combination onwards. [Paragraphs 115-55(1)(b) and (2)(b) and 115-60(1)(b) and (2)(b)]

9.104 This rule applies regardless of whether a pre-mining loss or a mining loss is otherwise transferable under the general transfer rules. [Subsections 115-55(3) and 115-60(3)]

Example 9.117 : Unable to transfer mining losses to combined interest

At the beginning of the 2016 MRRT year, Miner Co has five mining project interests (MPIs). Since 1 July 2012, Miner Co has always had MPI 1, 2, 4 and 5. Miner Co acquired MPI 3 at the beginning of the 2014 MRRT year.

MPIs 1 to 4 became factually integrated from the start of the 2016 MRRT year and do not have any allowance components, so they combine from the beginning of the 2016 year. MPI 5 is unable to combine as it is not integrated with any of the other interests. The combined interest makes a mining profit for the 2016 MRRT year. MPI 5 has a mining loss from 2013 and makes another mining loss in 2016.

The combined interest still has a remaining mining profit when it comes time to apply the transferred mining loss allowance. To determine whether the mining loss for MPI 5 for the 2013 MRRT year can be applied in working out the transferred mining loss allowance of the combined interest, the common ownership test needs to be satisfied in relation to MPI 5 and each of the constituent interests, MPIs 1 to 4.

The common ownership test will be satisfied if the same miner had MPI 5 and each constituent interest from the start of the year for which the mining loss arose until the end of the year for which the mining loss is being transferred.

The common ownership test will not be satisfied for MPI 5 and constituent interest MPI 3 as Miner Co only acquired MPI 3 at the beginning of the 2014 MRRT year.

Therefore, the 2013 mining loss of MPI 5 cannot be applied in working out the transferred mining loss allowance of the combined interest for the 2016 MRRT year.

Application and transitional provisions

9.105 Mining project interests can combine from 1 July 2012.

9.106 However, there is a transitional provision that ensures mining project interests can be taken to be combined from a time earlier than 1 July 2012, provided they satisfy all the other conditions for combination. [Schedule 4 to the MRRT (CA & TP) Bill, subitem 7(1)]

9.107 Allowing mining project interest to be able to combine from 2 May 2010 is particularly important for the purpose of working out the starting base for mining project interests.