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A New Resource Taxation Regime
Improved resource tax arrangements
Following extensive consultation with the resources industry, the Australian Government has announced and introduced into the Parliament improved resource taxation arrangements to apply from 1 July 2012. Under the new framework:
- a Minerals Resource Rent Tax (MRRT) regime will apply to the mining of iron ore and coal as well as gas extracted as a necessary part of coal mining; and
- the Petroleum Resource Rent Tax (PRRT) regime will be extended to all Australian onshore oil and gas projects as well as the North West Shelf.
The new resource tax arrangements focus on our biggest and most profitable commodities: iron ore, coal, oil and gas. These commodities represent nearly two thirds of the value of our resource exports. They are also our most profitable commodities and account for an even greater share of resource rents in the resources sector.
These arrangements will also provide certainty for some of the emerging projects being considered, such as converting Coal Seam Gas to Liquefied Natural Gas, by including all Australian onshore and offshore oil and gas projects in the PRRT. Including these major prospective projects within the existing PRRT framework will increase investor certainty in the short term. Including all oil and gas projects in the one regime will also ensure equitable tax treatment between competing projects.
To ensure the smooth implementation of the new arrangements, the Government established a Policy Transition Group (PTG), led by the Minister for Resources, Energy and Tourism, the Hon. Martin Ferguson and Mr Don Argus AC, to develop the detailed technical design of the new resource tax arrangements.
The PTG provided a report on the implementation of the new MRRT and PRRT arrangements to Government in December 2010. The report made 94 recommendations on the technical design of the new resource tax arrangements.
On 24 March 2011 the Government announced its acceptance of all the recommendations of the PTG regarding the new resource taxation reforms. The PTG recommendations form the basis of the design of the MRRT legislation.
Consultation with the industry continued after the acceptance of the PTG report through the Resource Tax Implementation Group (RTIG). The primary role of the RTIG has been to provide assistance to the Treasury in resolving the outstanding design issues identified by the PTG and further issues that may arise in the legislative drafting process. The RTIG also provided feedback on the draft legislation prior to its release for public comment.
The Bill was passed by the House of Representatives on 22 November 2011 and the Senate on 19 March 2012.
The new Minerals Resource Rent Tax (MRRT) for iron ore and coal
The new MRRT will commence on 1 July 2012 and apply to all new and existing iron ore and coal projects.
The key features of the MRRT are:
- Taxpayers with amounts of MRRT assessable profits under $75 million per annum will be excluded from the MRRT.
- The MRRT will apply an internationally competitive rate of 22.5 per cent (that is, a nominal rate of 30 per cent, less a 25 per cent extraction allowance to recognise the use of specialist skills).
- New investments will be given an immediate write-off, rather than depreciation over a number of years. This allows mining projects to access deductions immediately, and means a project will not pay any MRRT until it has made enough profit to pay off its upfront investment.
- The MRRT will carry forward unutilised losses at the government long term bond rate plus 7 per cent.
- The MRRT will provide transferability of deductions. This supports mine development because it means a taxpayer can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.
- The MRRT will provide a full credit for state royalties paid by a taxpayer in respect of a mining project. Unused credits for royalties paid will be uplifted at the long term government bond rate plus 7 per cent, as per other expenses. Unused royalty credits will not be transferrable between projects or refundable. The PTG recommended that the MRRT should not be used as a mechanism to enable States and Territories to increase inefficient royalties, and urged that arrangements be put in place to ensure they have no incentive to do so. Consistent with this, the Government has asked the independent panel conducting the GST Distribution Review to examine whether such incentives currently exist, as well as to recommend ways in which improvements in royalty regimes might be encouraged.
- The MRRT will provide recognition of past investments through a credit that recognises the market value of that investment, written down over a period of up to 25 years.
- However, those companies that wish to use their current written down book values of the project’s assets, excluding the value of the resource, will be provided with accelerated depreciation over five years. This starting base calculated under this methodology will be able to be uplifted at the government long term bond rate plus 7 per cent.
- The MRRT will recognise the particular characteristics of different commodities by applying a taxing point close to the point of extraction, and using appropriate pricing arrangements to ensure only the value of the resources extracted is taxed.
Extension of the Petroleum Resource Rent Tax (PRRT) for all oil and gas
The Government has announced the extension of the PRRT regime as of 1 July 2012 to cover all Australian oil and gas projects whether they are onshore or offshore.
The key features of the PRRT are:
- the tax rate is 40 per cent;
- there are a range of uplift allowances for unutilised losses and capital write-offs;
- immediate expensing is available for all expenditure;
- the tax value of losses can only be transferred in very limited circumstances;
- all state and federal resource taxes will be creditable against current and future PRRT liabilities from a project; and
- transitional provisions will also be provided for oil and gas projects moving into the PRRT, including a generous starting base using either market value or written down book values.
The PRRT is not being extended to projects within the Joint Petroleum Development Area (JPDA) in the Timor Sea, recognising that these projects are governed by the Timor Sea Treaty.
A better return to the nation
The Gillard Government is committed to ensuring that the Australian people receive a better return on the profits made from extracting the resources which belong to the Australian community and that our strong resource sector remains sustainable into the future. These are non-renewable resources which can only be extracted once. That is why it is important that the Australian community gets a fair return for them, to put towards building a stronger economy and securing Australian living standards for the future.
The Government has been working with the resources industry to deliver a profits‑based resource tax that works better for the industry and delivers improved returns for the community.
Improving the taxation of resources
State governments currently tax resource projects through state royalties which are an inefficient form of taxation. These are generally based on a fixed amount per tonne of production or on a fixed percentage of the value of production. This means royalties are payable regardless of how profitable a particular project is.
Resource commodity prices have increased considerably. Since 2004, prices for iron ore have increased by over 700 per cent and prices for black coal have increased over 100 per cent. However under royalties, a declining proportion of the increased profits from this price spike have been accruing to the community.
A profits based regime charges more appropriately for commodities during periods of high profits, this is in contrast to royalties which tend to impact hardest on smaller and more marginal projects.
A detailed explanation of how the MRRT and PRRT will operate is provided in the Bills associated Explanatory Memorandum.
The associated MRRT and PRRT Bills and Explanatory Memorandum can be located on the internet on the Office of Legislative Drafting and Publishing's site .
Access the MRRT Explanatory Memorandum directly on the ComLaw website.
Access the PRRT Explanatory Memorandum directly on the ComLaw website.