Details are out! When first proposed in 2010, Australia’s Mineral Resource Rent Tax (MRRT) was expected to raise A$3 billion in its first year. After ruthless negotiations, the draft legislation of the MRRT was released last Friday and despite several concessions it would still raise A$7.7 billion in revenue in its first two years. This is almost unbelievable considering the much lower than anticipated applicable rate (30 instead of 40 percent) and narrower base (iron ore and coal miners (320 firms) instead of all mining firms as initially planned (2500 firms)).
The preliminary exposure draft legislation is based on the recommendations of the Policy Transition Group, released in July 2010. The main components are summarized below.
- The 30 percent tax rate will be kept and will begin to be applied on July 1st, 2012;
- Small miners with assessable profits of under A$50 million a year will be exempted from the tax;
- Investment-wise, firms will benefit from the immediate expensing of new investments as well as a 25 per cent extraction allowance to “further shield from tax the important value add and capital that mining companies bring to mineral extraction”. Moreover, past investments will be recognized at market value and written down over a 5 year period.
- In addition to the transferability of deductions (which allows to offset the MRRT with deductions accumulated through other projects’ construction phase), unutilised tax losses will be carried forward at the government long-term bond rate plus 7 percent;
- Royalties paid at state level will be fully credited by the national government and unused credits for royalties paid will also be carried forward under the same terms as unutilized tax losses but will not be transferrable between projects or refundable;
Some sticky points remain regarding the following issues:
- Pricing arrangements will be established to ensure only the value of minerals extracted will be taxed;
- The tax point for underground coal mines; and
- The valuation of multiple tenements within an area (and the decision to consider those as part of a single or multiple projects for tax purposes) will influence tax payable
The above list shows the extent to which the MRRT is full of deductions. I’m one sceptical nerd. I cannot quite figure how a lower rate and a narrower tax base allow for more revenue to be collected. The Australian Treasury stated that the difference in revenue collected is attributable to strong iron ore and coal prices and the fact that very little revenues was expected to be raised from other minerals. The coal and iron ore prices used in the revenue estimate must have been ridiculously high and the opportunities for tax planning (increasing with the complexity of the tax design) must have been ignored.
The exposure draft released by the Government is not exhaustive and is intended to provide stakeholders with an early overview of the legislation. The Government will release a second and final draft for public consultation later in 2011. If you are bold, courageous and have a lot of time on your hands; here is the exposure draft and its explanatory companion document.