House of Representatives

Explanatory Memorandum

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

Chapter 17 Integrity measures

Outline of chapter

17.1 The Minerals Resource Rent Tax (MRRT) contains two general integrity measures:

•

a general anti-profit shifting rule; and

•

a general anti-avoidance rule.

17.2 Division 205 ensures that a miner's liability to pay MRRT is not reduced because things are done in relation to the miner's mining project interest or pre-mining project interest that would not have been done or would have been done differently had the miner been dealing wholly independently with other entities.

17.3 Division 210 operates to deter avoidance schemes that are designed to obtain MRRT benefits by taking advantage of the MRRT law in circumstances other than that intended by the MRRT law. This ensures that schemes that are artificial or contrived and undertaken with an objective of reducing an entity's MRRT liability, or increasing its MRRT offsets, can be appropriately dealt with.

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

Summary of new law

Anti-profit shifting

17.5 The mining profit, allowance components and offset amounts for a mining project interest are worked out as if the things which are done in relation to the interest are the things which would have been done (or not done) if the miner had been dealing wholly independently with the entities with which it has commercial or financial relations.

17.6 If adjustments are made to amounts because of the profit-shifting rules, the Commissioner of Taxation (Commissioner) can make any compensating adjustments that are fair and reasonable.

General anti-avoidance

17.7 The general anti-avoidance rule applies to schemes that seek to reduce the MRRT liability of an entity for a mining project interest for an MRRT year or to increase a low profit offset or rehabilitation tax offset.

17.8 The Commissioner can make any such scheme ineffective if the scheme was entered into, or carried out, with a sole or dominant purpose of getting an MRRT benefit, or of getting an MRRT benefit and a reduction in a liability to pay any other Australian or foreign tax or mining royalty.

17.9 The Commissioner can also make compensating adjustments to reduce MRRT liabilities that are higher, or to increase offsets that are lower, than they would be apart from the scheme.

Detailed explanation of new law

General profit-shifting rule

When the profit-shifting rule applies

17.10 A miner's liability to pay MRRT must not be smaller than what that liability would be if its commercial and financial relations with other entities were on the same footing as they would have been had the miner been dealing with those entities on a wholly independent basis.

17.11 When entities deal with each other on a wholly independent basis, the conditions of their commercial and financial relations are determined by market forces. When they do not deal with each other in that manner, the MRRT liability of one or more of the parties may be distorted.

17.12 Whether two or more entities have dealt with each other on a wholly independent basis is essentially a factual question which is to be determined by assessing whether the conditions operating between them are the conditions which would operate between independent entities in comparable circumstances that were dealing wholly independently with one another. [Section 205-10]

17.13 This comparison of the conditions that apply in the entities' commercial and financial relations with those which operate in comparable circumstances between independent entities who deal with one another wholly independently is commonly referred to as a 'comparability analysis'. [Subsection 205-10(1)]

17.14 The comparability analysis employed in Division 205 borrows from the arm's length principle used by member countries of the Organisation for Economic Co-operation and Development (OECD) in relation to cross border transactions between resident and non-resident taxpayers.

Commercial or financial relations

17.15 The comparability analysis focuses on the conditions which operate in the commercial or financial relations between the miner and one or more other entities. [Subsection 205-10(1)]

17.16 For these purposes, the 'commercial or financial relations' that must be examined encompasses all aspects of the commercial and financial relationships existing between the miner and the other entities, express or implied.

17.17 The concept is extremely broad and would take in any connections or dealings between the entities that relate to or could otherwise affect the commercial or financial activities of one or all of the entities. It could include a single transaction, a series of transactions, an understanding, an arrangement, things to be done or things not to be done, and practices, whether express or implied and whether or not legally enforceable. It may involve unilateral actions or mutual dealings. It may comprise a strategy.

Example 17.183 : Commercial or financial relations

A miner acquires services from Service Co in carrying on the upstream mining operations for its mining project interest. It also sells coal from its mining project interest to Consumer Co. Service Co and ConsumerCo are associates of each other.

In ascertaining whether the miner has dealt with each of Service Co and Consumer Co on a wholly independent basis it would be relevant to consider the connection that exists between Service Co and Consumer Co and the impact that connection may have had on the dealings between each of those entities and the miner.

Conditions

17.18 The 'conditions' that operate in the commercial or financial relations between the miner and other entities include, but would not be limited to, the price of any dealings between them, the margins or profits earned by one or all of them, and the division of profits between them. [Paragraph 205-10(1)(a)]

17.19 For example, in simple cases it would include the price at which resources are sold or acquired by the miner, the cost of plant and equipment sold or acquired by the miner, and the fees charged by the miner or another entity to provide services to the other entity or the miner.

17.20 In more complex cases, it may extend to include factors that affect an entity's relative financial strength, such as decisions as to whether dividends should be paid and in what amounts, whether shares should be issued and at what prices, whether loans should be advanced and at what interest rates, and whether royalties should be paid and in what amounts. It would also include decisions that could affect an entity's liquidity, such as the time at which an amount should be paid.

17.21 For the avoidance of doubt, the absence of a condition, in either the miner's financial or commercial relations or in the situation being compared, is a difference in conditions with which the Division is concerned. [Paragraph 205-10(2)(b)]

Dealing wholly independently

17.22 The question of whether parties are dealing with each other on a wholly independent basis is essentially a question of fact. [Paragraph 205-10(1)(b)]

17.23 The question is whether the parties have dealt with each other as independent parties would normally do, so that the outcome of their dealing is a matter of real bargaining: Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 21 ATR 1123 at 1132.

17.24 The relationship between the parties is relevant but not determinative. Thus, parties that are related to each other may deal independently with one another and parties that are not related to each other might not deal independently with one another: Barnsdall v FCT (1988) 81 ALR 173; Furse 21 ATR 1123 at 1132; RAL and FCT (2002) 50 ATR 1076 at [45]-[51].

17.25 Circumstances in which parties that are unrelated to each other are not dealing independently with one another includes where:

•

one of the parties submits the exercise of its will to the discretion of the other, perhaps to promote the interests of the other: Granby 129 ALR 503 at 507;

•

one party is indifferent to an outcome sought by the other party on a particular aspect of their dealings: Collis v FCT (1996) 33 ATR 438 at 443; or

•

the parties collude, or act in concert, to achieve an ulterior purpose or result.

Example 17.184 : Parties not dealing independently with one another

Continuing the previous example, if the overall result of the miner's dealings with Service Co and Consumer Co is the product of real bargaining but the price for the upstream services is higher than would ordinarily be charged and the price for the resource is lower than would ordinarily be charged, then the miner could not be said to be dealing wholly independently with either Service Co or Consumer Co.

In this case, Service Co and Consumer Co, as related parties, are only concerned with the overall outcome from their combined dealings with the miner. They are indifferent to the allocation of that amount between the services and the resources.

Comparable circumstances

17.26 For the relations existing between independent entities dealing wholly independently with one another to be considered comparable with the commercial and financial relations between the miner and one or more other entities, the economically relevant characteristics of the situations being compared must be sufficiently comparable.

17.27 To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition or conditions being examined (for example, the price or the margin). [Paragraph 205-10(2)(a)]

17.28 This requires, amongst other things, a comparison of the functions undertaken, the assets employed and the risks assumed by the entities in the situations that are being compared. It also requires a comparison of the characteristics and terms of the dealings (if any) that are being compared, of the relevant markets being compared and of the business strategies being pursued by the entities the subject of the comparison. [Subsection 205-10(1)]

17.29 Where differences exist, a situation may be considered comparable if reasonably accurate adjustments can be made to eliminate the effects of such differences on the comparison.

17.30 In determining the degree of comparability, including what adjustments are necessary to establish it, consideration must be given to the range of options that would realistically be available to an independent enterprise in comparable circumstances. That is because an independent enterprise would consider the options available to it and, in comparing one option to another, would consider any differences between the options that would significantly affect the value of one option over the other.

Example 17.185 : Price comparability

Before purchasing a truck for $100,000 from Associate Co, an independent enterprise carrying on comparable mining activities to Miner Co in a nearby location would be expected to take into account the fact that it could buy the same truck, on the same delivery and payment terms, for $90,000 from Trucking Co.

If, however, Trucking Co offers substantively different terms for delivery and payment to those offered by Associate Co, for example if delivery would be delayed by three months but payment would be on order rather than delivery, then there would exist material differences between the circumstances being compared and an adjustment would be required before the price offered by Trucking Co could be compared to the price charged by Associate Co.

17.31 Although ordinarily, the comparison will be between the commercial or financial relations as they actually exist between the miner and other entities and those which would reasonably be expected between entities dealing wholly independently with one another, they may be some cases in which it will be appropriate to disregard the miner's characterisation of those relations and re-characterise them in accordance with their substance.

Example 17.186 : Reconstructing the actual transaction

Uraba Co grants Miner Co a call option that confers a right on Miner Co (or its assignees) to require Uraba Co to sell it a loading unit. Miner Co also grants Uraba Co a put option that confers on Uraba Co a right to require Miner Co (or its assignees) to purchase the asset from it. Subsequently, Miner Co exercises its call option and Uraba Co sells it the loading unit.

For the purpose of finding a comparable dealing involving independent entities it might be appropriate to characterise the sale of the loading unit as being a sale under an agreement for sale that was entered into when the options were issued (that is, rather than when the options were exercised).

Methodologies

17.32 Once a comparability analysis has been undertaken, it will inform the choice of methods for working out what the miner's mining profit, allowance components and offsets for the mining project interest would have been (or could reasonably be expected to have been) if the independent conditions had operated instead. [Subsection 205-15(1)]

17.33 For these purposes, the miner must use the method that produces the most appropriate and reliable measure of that amount having regard to:

•

the functions performed, assets used and risks performed by the miner and each other entity in their commercial or financial relations [paragraph 205-15(1)(a)] ;

•

whether the method can reliably adjust for differences between the actual circumstances and those that would apply between entities dealing wholly independently with each other [paragraph 205-15(1)(b)] ;

•

the availability of reliable information required to apply the particular method [paragraph 205-15(1)(c)] ; and

•

the OECD's 18 August 2010 transfer pricing guidelines, or such other document published by the OECD as the Commissioner determines to be a replacement for those guidelines or otherwise to be a transfer pricing guideline [paragraph 205-15(1)(d) and subsection 205-15(2)] .

17.34 The OECD transfer pricing guidelines provide a framework for the application of the arm's length principle. The OECD guidelines are entitled OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Guidelines).

17.35 Miners may have regard to the Guidelines, adapted as appropriate in the context of the MRRT, in working out their mining profits, allowance components and offset amounts.

17.36 The various methods outlined in the Guidelines are set out below. However, these are not necessarily the only methods that could be used. Other methods may be applied provided they accord with the arm's length principle (as explained in the Guidelines), are capable of practicable application, and produce an arm's length outcome that is a reasonable estimate of what would have been the result if the dealings had been undertaken between independent entities dealing wholly independently with one another.

Comparable uncontrolled price method

17.37 The comparable uncontrolled price method compares the price actually charged for property or services that have been transferred with the price that would be charged for materially the same property or services by the same supplier in a comparable dealing with an independent party or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.187 : Resource comparable uncontrolled price method

An independent enterprise sells iron ore of a similar type, quality and quantity at the same time and the same stage in the production chain as those produced by the miner. Assuming no other material difference, the price received by the independent iron ore producer would be considered a comparable uncontrolled price

Cost plus method

17.38 The cost plus method provides an estimate of an independent price for property or services by adding an appropriate profit mark-up to the supplier's direct and indirect costs. The profit mark-up is ideally determined by reference to the profit mark-up earned by the same supplier in comparable dealings with independent parties or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.188 : Cost plus for services

Crusher Co has contracted to provide crushing, processing and blending services for the miner. An independent price for the services provided by Crusher Co could be worked out by applying the same mark up on Crusher Co's costs as would reasonably be expected to be applied by an independent service provider providing materially similar services in a materially comparable market.

Resale price method

17.39 The resale price method estimates an independent price for property or services by taking the price at which the product is sold to or by independent entities and reducing it by an independent margin. The margin would be determined by reference to the resale price margins earned by the same supplier in comparable dealings with independent parties or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.189 : Resale price margin

The miner sells its coal to an associated entity which then on-sells the coal to unrelated purchasers. The associated entity does not undertake any further processing of the resource. Rather, it takes on the risks involved in transporting and distributing the resource into offshore markets.

An independent price for the coal sold to the marketing entity could be worked out by subtracting an independent resale price margin from the price at which the marketing entity on-sells the coal. The independent resale price margin would be the margin which an independent reseller would seek in order to cover its operating expenses and allow it an appropriate profit (taking into account the functions it performed, the assets it used and the risks it assumed).

Transactional net margin method

17.40 The transactional net margin method is a transfer pricing methodology based on comparisons at the net profit level between what the taxpayer has achieved with that which independent parties dealing wholly independently in relation to a comparable transaction or dealings would have achieved.

17.41 Comparisons at the net profit level can be made on a single transaction or in relation to an aggregation of dealings between the taxpayer and one or more other entities.

17.42 The transactional net margin method examines the net profit relative to an appropriate base (for example, costs, sales, assets) that a taxpayer realises from an activity or transaction. The transactional net margin method can be applied on a cost plus or a resale margin basis. 'Profit plus appropriate costs' can represent an arm's length sales price for the original transaction or value of the activity, while 'revenue less a net resale margin', adjusted for other costs associated with the purchase of the product, can be regarded as an arm's length purchase price for the original transaction.

Profit split method

17.43 Profit split methods are transfer pricing methods that identify the combined profit of two or more enterprises and then split those profits between the enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement between two enterprises dealing wholly independently with one another.

17.44 The profit split method may be appropriate where different activities make unique and valuable contributions. The profit split method would not be used where one activity is relatively simple and does not make a significant and unique contribution to outcomes as a whole.

Amounts that must be returned

17.45 Having worked out what an amount would have been if the independent conditions had operated between the miner and the other entity or entities, the miner is required to use that amount for the purpose of working out its mining profits, its allowance components, its offsets, and the elements that make up those things. [Subsection 205-10(3)]

17.46 The miner may have to adjust any amount that directly or indirectly affects the calculation of its mining profit, its allowance components or its offsets. For example, it may have to adjust the following amounts:

•

an amount of expenditure that is included in a miner's mining expenditure for a mining project interest;

•

the consideration received or receivable by the miner for a supply of taxable resources, or a thing produced using taxable resources;

•

a downstream cost taken into account in attributing part of the consideration for a supply of resources to the resources' condition and place when they were at their valuation point; and/or

•

an amount that is taken into account in calculating the miner's group profit for simplified MRRT purposes.

Compensating adjustments

17.47 If an amount is adjusted because of the application of the transfer pricing rules, the Commissioner can determine that it would be fair and reasonable to make other adjustments. These adjustments may be to the same miner but for a different MRRT year or to a different miner for that year or another year. [Section 205-20]

Example 17.190 : Adjustment to the same miner for a different year

Assume the miner enters into an operating lease for upstream rolling stock, for two years, from a related party. Under the lease agreement, the rental payments are $15 million for the first year and $5 million for the second year. A comparability analysis shows the arm's length amounts are $10 million for each year. Division 205 would apply in the first year to increase the miner's mining profit by $5 million by limiting its deduction for rent to $10 million.

In the circumstances, it would be fair and reasonable for the Commissioner to reduce the miner's mining profit for the second year by $5 million by increasing its deduction for rent to $10 million.

Example 17.191 : Adjustment to a different miner

Miner A pays $10 million to acquire upstream mine equipment from Miner B. Assume Miner B purchased the equipment for $6 million and, at the date of the sale to Miner A, the arm's length price for the equipment is $8 million. Division 205 would increase Miner A's mining profit by $2 million by limiting its deduction for the equipment to $8 million.

In the circumstances, it would be fair and reasonable for the Commissioner to reduce Miner B's mining profit by $2 million by reducing the amount recouped by Miner B on the sale of the equipment to Miner A from $4 million to $2 million.

17.48 The adjustments can reduce mining profits or increase an allowance component or an offset. [Paragraphs 205-20(1)(b) and (2)(b)]

17.49 The adjustments would restore those profits, components and offsets to what they would have been if the conditions had been those that would have operated between entities dealing wholly independently with each other. [Paragraphs 205-20(1)(c) and (2)(c)]

The Commissioner's determination

17.50 The adjustments only arise if the Commissioner has determined that they should. The determination must state what the relevant profit, allowance component or offset should be, and what should be the elements of the calculations of those amounts. [Subsection 205-25(1)]

17.51 A determination is not limited to a single MRRT year or to a single profit, allowance component or offset (although it could be in a given case). It is possible for one determination to cover multiple profits, allowance components and offsets, to cover more than one of those things, to cover those things for more than one year, and to cover those things for more than one mining project interest. [Subsections 205-25(1) and (6)]

17.52 The Commissioner gives effect to a determination by taking such action as he or she considers necessary. In most cases, such action would be to amend one or more MRRT assessments. [Subsection 205-25(3)]

17.53 The Commissioner must provide an entity affected by a compensating adjustment with a copy of the determination but a failure to provide it does not mean that the determination is invalid. [Subsections 205-25(4) and (5)]

17.54 An entity can ask the Commissioner to make a compensating adjustment determination if it relates to that entity or to an interest it has. The Commissioner must provide the entity with notice of his or her decision on each such request. If the Commissioner decides not to grant the request, the entity can object against it in the normal way for objecting to matters arising under taxation laws. [Subsections 205-25(2) and (7)]

Pre-mining project interest

17.55 The profit shifting rules apply to pre-mining project interests in the same way that they apply to mining project interests. [Divisions 140 and 205]

General anti-avoidance rule

17.56 The general anti-avoidance rule is designed to protect the revenue against what is commonly considered to be tax avoidance and arrangements that are not bona fide. When it applies, it negates the MRRT benefit an entity obtains from a scheme.

When the general anti-avoidance rule applies

17.57 The general anti-avoidance rule applies where an entity has obtained an MRRT benefit from a scheme (an avoidance scheme) and it is concluded that the scheme was entered into, or carried out, with a purpose of getting an MRRT benefit from the scheme. [Division 210]

17.58 Three requirements must be satisfied for the general anti-avoidance rule to apply:

•

there must be a scheme;

•

an entity must obtain an MRRT benefit from the scheme. That is, there must be:

-

a reduction in MRRT liability for a mining project interest for an MRRT year; or

-

an increase in a low profit offset or rehabilitation tax offset;

and that benefit must not be attributable to making a choice expressly provided for by a taxation law; and

•

it must be reasonable to conclude that, taking into account a list of relevant factors, the scheme was entered into or carried out with the sole or dominant purpose either of obtaining the MRRT benefit, or of obtaining that benefit along with a reduction in any other liability to pay an Australian or foreign tax or a mining royalty.

Requirement 1: There must be a scheme

17.59 Scheme has the same meaning as it does in the income tax law:

•

any arrangement; or

•

any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

[Section 300-1, definition of 'scheme']

Requirement 2: An entity must get an MRRT benefit from a scheme

17.60 An entity must get an MRRT benefit from a scheme. An entity gets an MRRT benefit when:

•

an MRRT liability of the entity for a mining project interest for an MRRT year is (or could be expected to be) smaller than it would be apart from the application of the scheme [paragraph 210-15(1)(a)] ; or

•

the entity has either a low profit offset or a rehabilitation tax offset where the entity would not have had, or could not reasonably be expected to have had, that offset apart from the application of the scheme [paragraph 210-15(1)(b)] .

17.61 A smaller MRRT liability includes a case where the MRRT liability is zero or there is no MRRT liability for the year. [Subsection 210-15(2)]

17.62 However the general anti-avoidance rule does not apply to MRRT benefits to which the exception applies. The exception is where the MRRT benefit that is obtained is attributable to making a choice that is expressly provided for by a taxation law, other than a choice relating to functional currency under Subdivision 960-D of the Income Tax Assessment Act 1997 . [Paragraph 210-10(1)(b)]

17.63 The exception for choices does not extend to choices relating to functional currency because an entity can choose to use functional currency for income tax and MRRT purposes notwithstanding that it uses a different currency for accounting purposes.

17.64 The exception for choices also does not extend to schemes entered into or carried out for the purpose of creating the circumstances necessary for the choice to be made. That is, for the exception to apply, the choice must be one genuinely available to the entity, not one that is only available because the scheme entered into or carried out was designed to make the choice available. [Subsection 210-10(3)]

The connection between the MRRT benefit and the scheme

17.65 An entity gets an MRRT benefit from a scheme if an MRRT benefit would not have arisen, or could not reasonably be expected to have arisen, apart from the scheme or part of the scheme. [Subsection 210-15(1)]

17.66 This involves an enquiry into what would have occurred if the scheme or part of the scheme had not been entered into or carried out.

Requirement 3: The purpose test is met

17.67 The scheme, or part of the scheme, must have been entered into or carried out with a particular sole or dominant purpose. That purpose must be either:

•

to get the MRRT benefit the scheme provides; or

•

to get the MRRT benefit and to reduce a liability to pay any other Australian or foreign tax or a mining royalty.

[Paragraph 210-10(1)(c) and subsection 210-10(5)]

17.68 It is not enough that the purpose is an incidental purpose; it must be the only purpose or the dominant purpose (that is, a purpose that is more significant than any other purpose).

17.69 However, it is not necessary that getting the MRRT benefit was the dominant purpose. It is enough that there was a purpose of getting the MRRT benefit and that, taken together with all other purposes of reducing liability to taxes (or to a mining royalty), there was a dominant purpose of getting all those benefits.

17.70 This broad purpose test is unusual in taxation law but is necessary because of the nature of the MRRT as a tax on profits. A scheme might be entered into to reduce profits for the dominant purpose of saving, say, income tax but have the collateral result of also reducing MRRT because it is also dependent on the size of the profits. If a miner could argue that its dominant purpose was to avoid income tax, there would be no way to cancel the collateral MRRT benefit. In an extreme case, it might be possible to argue that there was no dominant purpose because reducing profits had the purpose of avoiding a wide range of profit-based taxes. That risk is not limited to Australian profit-based taxes; it could also include such foreign taxes. For that reason, the purpose test looks to whether there was a dominant purpose of reducing taxes (or mining royalties, which are charges rather than taxes) and at least a purpose of obtaining an MRRT benefit.

17.71 The purpose test is one of objective purpose. The actual purpose of the entity that got the MRRT benefit, and the purpose of any different entity that entered into or carried out the scheme, or part of the scheme, is not relevant. What is relevant is what a reasonable observer would conclude was the purpose of any entity that entered into or carried out the scheme, or part of the scheme. [Paragraph 210-10(1)(c)]

17.72 In reaching that conclusion, eight factors must be taken into account. [Section 210-20]

The eight factors

17.73 The following matters are taken into account in coming to a reasonable conclusion about the purpose or effect of the scheme or part of a scheme:

•

the manner in which the scheme or part of the scheme was entered into or carried out. The terms manner, entered into , and carried out are terms that allow various matters to be taken into account. The terms are not given any restricted meaning. Manner would include consideration of the way in which, and method or procedure by which, the particular scheme or part of the scheme in question was established. The scheme or part of the scheme for these purposes would be the particular means adopted by an entity to obtain the MRRT benefit [paragraph 210-20(a)] ;

•

the form and substance of the scheme or part of the scheme [paragraph 210-20(b)] ;

•

the time at which the scheme was entered into and the length of the period during which the scheme was carried out [paragraph 210-20(c)] ;

•

the effect that the MRRT would otherwise have in relation to the scheme or part of the scheme [paragraph 210-20(d)] ;

•

any change in the entity's financial position that results, or may reasonably be expected to result, from the scheme or part of the scheme [paragraph 210-20(e)] ;

•

any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity that has or had a connection or dealing with the entity, whether the connection or dealing is or was of a family, business or other nature [paragraph 210-20(f)] ;

•

any other consequence for the entity, or an entity of a kind mentioned in the previous paragraph, of the scheme having been entered into or carried out [paragraph 210-20(g)] ; and

•

the nature of the connection (whether business, family or other nature) between the entity and such an entity [paragraph 210-20(h)] .

Limits that are discounted

17.74 The fact that a scheme, or any part of the scheme, is entered into or carried out outside of Australia does not limit the application of the general anti-avoidance rule. [Subsection 210-10(2)]

17.75 Nor is the operation of the general anti-avoidance rule limited by anything in other parts of the MRRT law or in the International Tax Agreements Act 1953 . [Subsection 210-10(4)]

17.76 In particular, it is not limited by the operation of subsection 4(2) of the International Tax Agreements Act 1953 , which would otherwise ensure that the MRRT law was to be read subject to that Act. [Paragraph 210-10(4)(b)]

Negating the effect of a scheme

17.77 If the general anti-avoidance rule applies, the Commissioner can make the scheme ineffective for MRRT purposes. The Commissioner does that by making a determination that negates the MRRT benefit obtained by the entity under the scheme. [Section 210-25]

17.78 There are two ways a Commissioner's determination can negate an MRRT benefit:

•

It can state that the entity's MRRT liability for a mining project interest for an MRRT year is, and at all times has been, a particular amount [paragraph 210-25(1)(a)] .

•

It can state that the entity's low profit offset and/or its rehabilitation tax offset is, and at all times has been, a particular amount [paragraph 210-25(1)(b)] .

17.79 The Commissioner gives effect to a determination by taking such action as he or she considers necessary. In most cases, such action would be to amend one or more MRRT assessments. [Subsection 210-25(2)]

Determinations compensating an entity or another entity

17.80 If a determination has been made against the entity that got the MRRT benefit in relation to a scheme or part of a scheme, the Commissioner can also make a determination that has the effect of compensating an entity that is disadvantaged by the scheme or part of a scheme if he or she considers it fair and reasonable that the disadvantage be negated or reduced. [Section 210-30]

17.81 Three conditions must be satisfied before the Commissioner can make such a determination that a particular entity should get a compensating adjustment:

•

the Commissioner must have made a determination in relation to an entity's MRRT benefit [paragraph 210-30(1)(a)] ;

•

the Commissioner must consider that entity or another entity gets an MRRT disadvantage from the scheme [paragraph 210-30(1)(b)] ; and

•

the Commissioner must consider it fair and reasonable to negate or reduce that MRRT disadvantage [paragraph 210-30(1)(c)] .

17.82 An MRRT disadvantage is an MRRT liability being higher, or a low-tax or rehabilitation offset being lower, than it would be (or would reasonably be expected to be) apart from the scheme. [Subsection 210-30(2)]

17.83 There are two ways a Commissioner's determination can compensate for an MRRT disadvantage:

•

it can state that an entity's MRRT liability for a mining project interest for an MRRT year is, and at all times has been, a particular amount [paragraph 210-30(3)(a)] ; or

•

it can state that an entity's low profit offset and/or rehabilitation tax offset is, and at all times has been, a particular amount [paragraph 210-30(3)(b)] .

17.84 Statements relating to different compensating adjustments, including for different MRRT years can be included in a single determination. That can also be the same determination that cancels MRRT benefits. [Section 210-35]

17.85 The Commissioner must provide a copy of a determination to each entity that is provided with a compensating adjustment under the determination. Not satisfying this requirement does not affect the validity of the determination. [Section 210-40]

17.86 As with determinations to negate an MRRT benefit, the Commissioner gives effect to a determination to compensate for an MRRT disadvantage by taking such action as he or she considers necessary. Once more, in most cases such action would be to amend one or more MRRT assessments. [Subsection 210-30(6)]

17.87 An entity can ask the Commissioner in writing to make a compensating adjustment determination if it relates to that entity or to an interest it has. The Commissioner must provide the entity with notice of his or her decision on each such request. If the Commissioner decides not to grant the request, the entity can object against it in the normal way for objecting to matters arising under taxation laws. [Subsections 210-30(4) and (5)]

Pre-mining project interests

17.88 The general anti-avoidance rule applies to pre-mining project interests in the same way that it applies to mining project interests. [Division 140]

Application and transitional provisions

Application

17.89 The general anti-avoidance rule (see Division 210) applies to schemes entered into on or after 2 May 2010, the MRRT announcement date. This ensures that it covers all aspects of the MRRT, including those arising before 1 July 2012. Examples include matters concerning the determination of the base value of starting base assets and whether a vertically integrated transformative operation existed at 2 May 2010. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA & TP) Bill), item 1]

17.90 The general anti-avoidance rule (see Division 210) also applies to a scheme entered into before 2 May 2010 if, had the MRRT law been in force at the time it was entered into, it would be reasonable to conclude that the entity did so with a sole or dominant purpose of obtaining an MRRT benefit, or of obtaining an MRRT benefit together with a reduction in a liability to pay any other tax or mining royalty. [Schedule 4 to the MRRT (CA & TP) Bill, item 11]

17.91 This ensures that Division 210 can apply to avoidance schemes entered into prior to 2 May 2010 that also result in an entity obtaining on MRRT benefit.

Starting base schemes

17.92 The general anti-avoidance rule also applies to schemes that increase the value of a starting base asset beyond what it would be (or would reasonably be expected to be) apart from the scheme. In such cases, it applies as if that result were an MRRT benefit. This is discussed in more detail in Chapter 7. [Schedule 4 to the MRRT (CA & TP) Bill, item 12]