The mining sector is celebrating its compromise agreement with the federal government over the no-longer-super profits tax scheme. Minerals Council of Australia chief executive Mitchell Hooke issued this memorandum to members this morning:

TO: CEOS OF MCA MEMBER COMPANIES AND ASSOCIATE MEMBERS
FROM: Mitchell H Hooke, Chief Executive
DATE: 2 July, 2010
SUBJECT: MINERALS RESOURCE RENT TAX: KEY ELEMENTS

The key elements of the MRRT package announced today are set out below. A copy of the MCA statement responding to the announcement is also attached.

Coverage

The new resource tax will apply from 1 July 2012 only to mined iron ore and coal. All other minerals are excluded.

Headline Rate

The rate of tax will be 30 per cent applied to the taxable profit at the resource.

Taxable profit is to be calculated by reference to:

  • The value of the commodity, determined at its first saleable form (at mine gate) less all costs to that point
  • An extraction allowance equal to 25% of the otherwise taxable profit will be deductible to recognise the profit attributable to the extraction process. (i.e. this to only tax the resource profit)
  • Arms length principles on all transactions pre and post first saleable form.

The combination of the headline rate and the extraction allowance means the effective MRRT tax rate will be 22.5 per cent. This is after the payment of royalties. If the MRRT is greater than the royalties paid then the company will be required to pay the difference. If the MRRT is less than the royalties paid then the company will be given a credit to carry forward losses with an up-lift equivalent to the LTBR plus 7%.

The key point is that this is a resource rent tax applying to the resource – it is not a super profits tax – super profits was always a poor proxy for resource rent.

MRRT is to be calculated on an individual taxpayer’s direct ownership interest in the project.

Threshold

There will be no MRRT liability for taxpayers with low levels of resource profits (i.e. $50m per annum).

All post 1 July 2012 expenditure is to be immediately deductible for MRRT on an incurred basis. Non-deductible expenditure will be broadly consistent with PRRT.

MRRT losses will be transferable to offset MRRT profits the taxpayer has on other iron ore and coal operations.

Uplift factor

Carried-forward MRRT losses are to be indexed at the allowance rate equal to the LTBR plus 7 percent.

The MRRT will be an allowable deduction for income tax.

All State and Territory royalties will be creditable against the resources tax liability but not transferable or refundable. Any royalties paid and not claimed as a credit will be carried forward at the uplift rate of LTBR plus 7 percent.

Starting Base

The starting base for project assets is, at the election of the taxpayer, either:

  • Book value (excluding the value of the resource) or
  • Market value (as at 1 May 2010).

All capital expenditure incurred post 1 May 2010 will be added to the starting base and depreciated against mining operations from 1 July 2012.

“Project assets” for the purpose of the MRRT will be defined to include tangible assets, improvements to land and mining rights (using the Income Tax definition).

Where book value is used to calculate starting base, depreciation will be accelerated over the first 5 years. The undepreciated value will be uplifted at LTBR plus 7 percent.

Where market value is used to calculate starting base, there will be no uplift and depreciation will be based on an appropriate effective life of assets, not exceeding 25 years.

Any undepreciated starting base and carry forward MRRT losses are to be transferred to a new owner if the project interest is sold.

Policy Transition Group

A Policy Transition group led by Resources Minister Martin Ferguson and Don Argus and other industry leaders will oversee the development of detailed technical design to ensure the agreed design principles become effective legislation.  The secretariat will be drawn from both the Treasury and Resources Department.