2011
EXPOSURE DRAFT
MINERALS RESOURCE RENT TAX
EXPLANATORY MATERIAL
10 June 2011
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP) Table of contents
Glossary 1
Chapter 1 Charging for Australia’s non-renewable resources 3
Chapter 2 Overview of the Minerals Resource Rent Tax 9
Chapter 3 Core rules25
Chapter 4 Mining revenue 39
Chapter 5 Mining expenditure 55
Chapter 6 Allowances 71
Chapter 7 Starting base allowances 91
Chapter 8 Small miners 113
Chapter 9 Alternative valuation method 121
Chapter 10 Combining mining project interests 131
Chapter 11 Mining project transfers and splits 159 Glossary The following abbreviations and acronyms are used throughout this explanatory material.
Abbreviation Definition AFTS Review Australia’s Future Tax System Review ATO Australian Taxation Office CGT capital gains tax CPI Consumer Price Index CUP comparable uncontrolled price GST goods and services tax ITAA 1997 Income Tax Assessment Act 1997 ITAA 1936 Income Tax Assessment Act 1936 LTBR Long Term Bond Rate (of the previous year or part thereof unless otherwise specified) LTBR + 7 Long Term Bond Rate plus 7 per cent MRRT Minerals Resource Rent Tax OECD Organisation for Economic Cooperation and Development PRRT Petroleum Resource Rent Tax PTG Policy Transition Group ROM run-of-mine
1 Chapter 1 Charging for Australia’s non- renewable resources
Outline of chapter
1.1 This chapter explains the rationale for charging for Australia’s non-renewable resources via the Minerals Resource Rent Tax (MRRT).
Australia’s non-renewable resources
1.2 Australia is naturally endowed with large, high quality deposits of minerals and petroleum that are exhaustible and depletable.
1.3 The majority of these non-renewable resources are publicly owned and the rights to use, sell and otherwise benefit from them are vested in the Crown.
Non-renewable resources and taxation
1.4 It is the characteristic of non-renewability that allows exploitations of these resources to generate economic rent or above normal profit.
1.5 Economic rent is a return to a factor of production (in this context mining investments) greater than is necessary to attract the factor into the production process. Economic rent to the extent it can be identified can generally be taxed without distorting the decisions of investors.
1.6 There are two main types of resource taxes: royalties and resource rent taxes.
Royalties
1.7 In Australia, State and Territory governments typically tax non-renewable resources by applying a royalty to production. Royalties are generally applied on the basis of volume or value and do not take into account how profitable a mining operation is.
2 Charging for Australia’s non-renewable resources
1.8 In times of low profitability, royalties will tax mining operations where no economic rent is present and, conversely, when mining profits are high, they may only recover a small portion of mining rents.
Resource rent taxes
1.9 Profit based, cash flow taxes are rent taxes and when applied to resource projects are referred to as resource rent taxes. Resource rent taxes differ from most royalties in that they take into account the profitability of a mining operation. A resource rent tax collects a percentage of the resource project’s economic rent.
1.10 One form of resource rent tax is the Brown tax, invented by Cary Brown in 1948. A Brown tax is a pure cash flow tax levied (at a constant percentage) on the difference between revenue and expenditure.
1.11 When there is a positive cash flow, the government taxes that positive cash flow. When there is a negative cash flow, typically at the investment phase, the government provides an immediate refund at the tax value.
1.12 The tax rate determines the portion of economic rent that the government collects, and the value of the refund that it provides.
1.13 Under a Brown tax, a government is effectively sharing in the net benefits and risks of the mining project in proportion to the tax rate.
1.14 However, the Brown tax model is difficult to administer because of the immediate nature of the refund. So governments typically rely on modified models that mimic the effect of the Brown tax.
1.15 The Garnaut-Clunies Ross resource rent tax is one such model that attempts to replicate the effect of a Brown tax. It is named after the Australian economists Ross Garnaut and Anthony Clunies Ross.
1.16 The Garnaut-Clunies Ross resource rent tax is levied on the positive cash flows, or profits, of a project, but there is no refund when the cash flow is negative (known as losses for this purpose). Instead, these losses are carried forward, so that they can be used as a deduction against positive cash flows in later years, and ‘uplifted’ by an interest rate.
1.17 The uplift rate preserves the value of the investor’s losses because they do not get an immediate refund for the tax value of the government’s contribution to the mining project. The uplift rate also includes a premium to compensate for the risk that the taxpayer may never get to use its losses.
3 Explanatory material: Minerals Resource Rent Tax
1.18 The Petroleum Resource Rent Tax (PRRT) is an example of a Garnaut-Clunies Ross resource rent tax.
Background to the Minerals Resource Rent Tax
1.19 The MRRT has its origins in the recommendations of the Australia’s Future Tax System (AFTS) Review.
1.20 The AFTS Review found that the royalty regimes applied by the States and Territories are among the most distorting taxes in the Federation. In addition, royalty regimes are not particularly flexible.
1.21 As a consequence of being distorting and relatively inflexible, royalties tend to be set at rates low enough for mining to operate in periods of low to average commodity prices. This approach means that royalties will often fail to provide an adequate return to the community when commodity prices are high.
1.22 The company income tax is also a profits-based tax, which applies to incorporated businesses generally, and will tend to raise more revenue from mining operations when profits are high. However, the AFTS Review found that there would be benefit to the economy through lowering the company tax rate to assist in attracting internationally mobile capital investment provided resource rents are appropriately captured.
1.23 The AFTS Review concluded that a lower company tax rate was desirable for Australia but only if a specific profits-based tax was extended to mining operations to ensure a sufficient return to the community in periods of high commodity prices.
1.24 Following that review, the Government has decided that, from 1 July 2012, the MRRT will apply to profits from coal and iron ore operations, and the PRRT will be extended to all offshore and onshore gas and oil projects, including coal-seam methane. These commodities account for the bulk of Australia’s non-renewable resource wealth.
1.25 The detailed design of the MRRT applies the recommendations of the Policy Transition Group (PTG) chaired by Don Argus, AC and the Hon Martin Ferguson AM MP, Minister for Resources and Energy. The PTG consulted extensively across Australia on the new resource tax arrangements and reported to the Government in December 2010.
The Minerals Resource Rent Tax
1.26 The MRRT is a type of resource rent tax based on the Garnaut-Clunies Ross model.
4 Charging for Australia’s non-renewable resources
1.27 Under the MRRT, the government taxes positive cash flows, or mining profits, and allows miners to carry forward and uplift losses for use in later years.
1.28 As the MRRT taxes profits from minerals that are commonly subject to state and territory royalties, it provides a credit for royalties.
1.29 The tax base for the MRRT is confined to net profits at the taxing point. The taxing point separates upstream and downstream operations in the mining production chain.
1.30 As the tax is intended to apply only to upstream profits, it is a tax on a relatively limited portion of mining profits unlike, for example, the company income tax, which seeks to tax all sources of company income comprehensively.
1.31 The tax applies to realised profits. As minerals are typically sold downstream of the taxing point, the MRRT requires miners to attribute their realised profits to upstream operations using the method which is the most appropriate and reliable for their particular circumstances.
1.32 To calculate the MRRT profit at the taxing point, allowable downstream capital and operating expenditure can be effectively accounted for through the process of attributing a portion of the revenue to the upstream using the most appropriate and reliable method.
1.33 Allowable upstream capital and operating expenditure is then directly and immediately deducted, along with royalty credits, carry forward losses, starting base depreciation, starting base losses and losses transferred from other projects.
1.34 If losses and royalty credits cannot be used within an MRRT year, they are either transferred (where possible) or carried forward with the relevant uplift applied.
1.35 Through providing effective deductions for all allowable capital and operating expenditure, with an uplift of carry forward losses, the tax base for the MRRT approximates a Brown tax applying to the resource in the state it was in at the taxing point.
1.36 As the sources of mining rents are difficult to identify separately in practice, the MRRT aims to strike an appropriate balance between recovering a sufficient return to the community for the profits attributable to the underlying resource rent at the taxing point, while recognising that some mining expertise and capital may also be taxed in a process which has regard to realised profits and their equivalents. This balance is
5 Explanatory material: Minerals Resource Rent Tax
achieved through the combined effect of the features of the tax, including the tax rate, the extraction allowance, the taxing point, the interest allowance (uplift) and the scope of assessable revenues and allowable deductions.
1.37 An overview of the operation of the MRRT is at Chapter 2 of this explanatory material.
6 Chapter 2 Overview of the Minerals Resource Rent Tax
Outline of chapter
2.1 This chapter is an overview of the Minerals Resource Rent Tax (MRRT). It outlines the resources that are subject to MRRT and explains the basic operation of the MRRT.
Overview of the MRRT
What resources are covered?
2.2 Australia is endowed with some of the world’s largest and most valuable deposits of iron ore and coal. These bulk commodities make up a large proportion of Australia’s mine production and mineral exports.
2.3 The MRRT applies to certain profits from iron ore and coal extracted in Australia. It also applies to profits from gas extracted as a necessary incident of coal mining and gas produced by the in situ combustion of coal. These non-renewable resources are called taxable resources.
2.4 Where profits are made from the sale or use of taxable resources, MRRT may be payable.
Basic operation of the MRRT
2.5 This section explains the operation of the MRRT and how it applies to three different cases. The first case, the ‘vanilla’ case, examines how the MRRT operates for a project that was not in existence before the announcement of the MRRT.
2.6 The second case examines how the MRRT operates for projects that are transitioning into the MRRT (that is, for projects that were already invested in when the MRRT was announced). It explains how the MRRT recognises those existing investments through a starting base.
2.7 The third case shows how the MRRT operates for miners with multiple projects. It introduces the concepts of pre-mining losses and
7 Explanatory material: Minerals Resource Rent Tax
transferring mining losses and pre-mining losses between projects owned by the miner. It also explains the process of ‘uplifting’ unused amounts.
The ‘vanilla’ case
2.8 The key purpose of the MRRT is to tax the rents from non-renewable resources after they have been extracted from the ground but before they have undergone any significant processing or value-add. Generally speaking, the profit attributed to the resource at this point represents the value of the resource to the Australian community. Where the taxable resource is improved through beneficiation processes, such as crushing, washing, sorting, separating and refining, the value added is attributable to the miner.
Mining project interests 2.9 The mining project interest provides the basic unit for taxing the profits attributable to the non-renewable resource. A mining project interest is an entitlement to share in the output of an undertaking carried on to extract taxable resources and produce a resource commodity (which could be the taxable resource or something produced from the taxable resource). It must relate to at least one production right. A production right is a right, issued under a law of a State or Territory that authorises its holder to extract the resources from a particular area (called a project area).
Mining profit or loss 2.10 Once a mining project interest has been identified, the mining profit for the year has to be determined. The mining profit is the mining project interest’s mining revenue for the year less its mining expenditure. If that produces a negative amount, that is a mining loss.
Mining revenue 2.11 The main type of mining revenue a mining project interest can have comes from selling taxable resources (or things produced from taxable resources) extracted from the project area. The proceeds are mining revenue to the extent they are attributable to the taxable resources at a particular point in the production chain (called the ‘taxing point’).
2.12 Under the MRRT, the taxing point is typically when the taxable resource leaves the ‘run-of-mine’ stockpile (also called the ‘ROM stockpile’ or ‘ROM pad’). The ROM stockpile is where the resource is placed after extraction ready for the next unit of production. The next unit of production could be transportation but is often some form of processing. However, not all mining operations use a ROM stockpile. Where a project has no ROM stockpile, or it is by-passed for any reason,
8 Overview of the Minerals Resource Rent Tax
the taxing point is generally just before the first beneficiation process starts.
2.13 Mining operations that occur before the taxing point are upstream mining operations; those that occur afterwards are downstream mining operations. Diagram 13.1: The taxing point
In this diagram, the dashed line represents the taxing point at the ROM stockpile. Upstream and downstream are illustrated.
2.14 The MRRT is a tax on realised profits but only on that part of the profits attributable to the condition and location of the resources when they were at the taxing point. The part of the profits that is so attributable will usually not be observable because the sale of the resource usually occurs after the taxing point and not at it. Therefore, in most cases, the attribution process will have to use an arm’s length pricing method. The most appropriate and reliable method, having regard to the particular operations, should be used. Some guidance on the various valuation methodologies that are commonly used is provided in Chapter 4.
Mining expenditure 2.15 The MRRT recognises the majority of upstream costs incurred by the miner in extracting the non-renewable resource and getting it to the taxing point.
2.16 Upstream costs are called mining expenditure if they are necessarily incurred by the miner in carrying on the upstream mining operations. Mining expenditure includes costs related to construction of the mining operation, blasting and digging, infrastructure, and capital assets used to transport the non-renewable resource to the taxing point (such as dump trucks and conveyor belts).
2.17 Under the MRRT, upstream capital expenditure is immediately deductible. Unlike income tax, capital assets do not have to be depreciated over their effective lives.
9 Explanatory material: Minerals Resource Rent Tax
2.18 Some expenditure is specifically excluded from being taken into account as mining expenditure, including financing payments, the costs of acquiring a mining interest, royalty payments, and some tax payments.
Allowances 2.19 Miners reduce their mining profit by their allowances, to arrive at a net amount, which is referred to in this explanatory material as the MRRT profit.
2.20 In the vanilla case, the relevant allowances are royalty allowances and mining loss allowances.
Royalty allowances 2.21 Miners will generally pay royalties to State and Territory Governments. Royalty regimes and rates vary across jurisdictions but are most commonly a charge on the volume or value of the resource, generally at the point of export or sale to a third party. These royalties are often a proxy for the rents available from that resource.
2.22 The miner will be liable to pay some MRRT in addition to royalties when resource rents are sufficiently high. That is, the company will pay the royalty and then also pay MRRT. However, the MRRT recognises that the royalty is already a type of resource rent charge on the non-renewable resource, by providing the miner with a deduction, called a royalty allowance. The royalty allowance is ‘grossed-up’, using the MRRT rate, so that it reduces the MRRT liability by the amount of the royalty.
2.23 Where the full royalty allowance for the year cannot be used, the unused portion is uplifted and carried forward to be used in the next year. The uplift rate is LTBR + 7 per cent.
Mining loss allowances 2.24 If a mining project interest made a loss in an earlier year, the loss is uplifted at LTBR + 7 per cent and carried forward to be used in a later year. When it is applied to reduce a mining profit of the mining project interest in a later year, it is called a mining loss allowance.
MRRT liability 2.25 If the MRRT profit is above zero after deducting the allowances, it is subject to tax under the MRRT. The MRRT liability is calculated by multiplying the MRRT profit by the MRRT rate.
10 Overview of the Minerals Resource Rent Tax
2.26 The basic MRRT tax rate is 30 per cent. However, the MRRT recognises that miners employ specialist skills to extract the resource and bring it to the taxing point. It recognises the value of those specialist skills through a special feature called the extraction factor. The extraction factor reduces the MRRT rate by 25 per cent, to produce an effective MRRT rate of 22.5 per cent. Diagram 26.1: Calculating MRRT Liability
The miner calculates its mining revenue and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance and its mining loss allowance to produce its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that net profit multiplied by the MRRT rate.
11 Explanatory material: Minerals Resource Rent Tax
Example 1.1: The basic MRRT calculation
In a particular year, Midcap Mining Co. receives $500m of mining revenue from its mining project interest. It incurs $120m in upstream expenses and pays a royalty of $37.5m to a state. It has $50m of losses carried forward from the previous year. Assume for the purpose of this example that the LTBR is six per cent.
Mining revenue $500m Mining expenditure ($120m) Mining profit $380m Royalty allowance [royalty payable/0.225] ($166.7m) Mining loss allowance [earlier loss x ($56.5m) (LTBR + 7%)] Total allowances (223.2m) MRRT profit $156.8m MRRT liability [MRRT profit x 0.225] $35.3m
In this example, Midcap Mining Co. is liable to pay $35.3m in MRRT.
Offset for low-profit miners 2.27 If a miner’s mining profit is $50 million or less, it is entitled to a low-profit offset that will reduce its MRRT liability to nil. If its mining profit is over $50 million, its offset is gradually phased out. In working out this mining profit, the miner must also count any mining profit of other entities it is connected to or affiliated with.
2.28 Even though a miner’s mining profit might be under $50 million, it still deducts its allowances.
The second case — treatment of existing investments
2.29 The second case involves miners with an existing mining project interest at 1 May 2010 (that is, before the announcement of a resource rent tax). To recognise their existing investment, those miners receive an allowance, called a starting base allowance, which further reduces their MRRT profit.
2.30 The starting base for a mining project interest may be calculated using the miner’s choice of two methods.
2.31 The market value method uses the market value of the mining project interest’s upstream assets at 1 May 2010. The book value method uses the most recent audited accounting value of those assets at 1 May 2010.
12 Overview of the Minerals Resource Rent Tax
2.32 There are some other key differences between the two methods apart from their different values:
• the market value method includes the value of mining rights, while the book value method excludes it;
• the market value method recognises the starting base for each asset over its remaining effective life, while the book value method recognises the starting base, in set proportions, over five years;
• there is no uplift for the remainder of the starting base under the market value method but the remainder under the book value method is uplifted by LTBR + 7 per cent; and
• under the market value method, starting base losses are uplifted at the CPI rate, while they are uplifted at LTBR + 7 per cent under the book value method. Diagram 32.1 Calculating MRRT Liability
The miner calculates its mining revenue and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance, its mining loss allowance and its starting base allowance to produce its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that net profit multiplied by the MRRT rate.
13 Explanatory material: Minerals Resource Rent Tax
Example 1.2: The MRRT calculation with a starting base
In a particular year, Eisenfluss Mining receives $600m of mining revenue from its mining project interest. It incurs $120m in upstream expenses, pays a royalty of $37.5m to a state, and has a market value starting base of $3b, which it writes off over 25 years at $120m a year. It has $50m of losses carried forward from the previous year. Assume the LTBR is six per cent.
Mining revenue $600m Mining expenditure ($120m) Mining profit $480m Royalty allowance [royalty payable/0.225] ($166.7m) Mining loss allowance [earlier loss x ($56.5m) (LTBR + 7%)] Starting base allowance ($120m) Total allowances (343.2m) MRRT profit $136.8m MRRT liability [MRRT profit x 0.225] $30.8m
In this example, Eisenfluss Mining is liable to pay MRRT of $30.8m. Its existing investment in its mining project interest has reduced its MRRT liability by $27m.
2.33 If a starting base allowance for a particular year cannot be used, the unused portion is uplifted and carried forward to be used in later years. If the starting base was valued at market value, the uplift rate is the increase in CPI. If the starting base was valued at book value, the uplift rate is LTBR + 7 per cent.
Example 1.3: Carrying forward starting base losses
In year 1, Big Mountain Pty Ltd receives $100m of mining revenue from its mining project interest. It incurs $50m of mining expenditure, and pays a royalty of $7.5m to a state. It has no mining losses in year 1. Its market value starting base is valued at $500m, which it is writing off over 25 years. In year 1, $3.3m of Big Mountain’s starting base allowance for the year is unused because it has insufficient mining profits left after reducing them by its royalty allowance. This unused portion is uplifted at the CPI rate. The CPI for year 1 is 2.5 per cent.
In year 2, Big Mountain receives $250m of mining revenue from its interest. It incurs $50m of mining expenditure and pays a state royalty of $15m. Big Mountain has no mining losses from year 1, as all project expenses were deducted.
14 Overview of the Minerals Resource Rent Tax
Year 1 Year 2 Mining revenue 100m 250m Mining expenditure (50m) (50m) Mining profit 50m 200m Royalty allowance (33.3m) (66.7m) Mining loss allowance 0 0 Starting base allowance (20m) (23.4m)† MRRT profit 0 119.9m MRRT liability 0 24.7m In this example, the unused starting base allowance from year 1 is uplifted at the CPI rate and included in the year 2 starting base allowance.
†($20m for year 2) + ( year 1’s unused $3.3m × 1.025)) = ($23.4m)
The third case — multiple interests or pre-mining expenditure
2.34 The third case involves miners with pre-mining expenditure and miners with more than one mining project interest.
Pre-mining expenditure 2.35 The MRRT recognises that exploration expenditure, and other pre-mining expenditure, in pursuit of taxable resources is a necessary part of the mining process and should be recognised as a cost of that process.
2.36 Exploration expenditure can occur in relation to project areas for existing mining project interests or in relation to areas covered by tenements that do not allow commercial extraction of resources (such as exploration tenements). Interests in those tenements are called pre- mining project interests. Regardless of where the expendit ure occurs, it is recognised for MRRT purposes. However, it is recognised in different ways.
2.37 Exploration expenditure incurred in relation to a mining project interest is deducted along with the interest’s other mining expenditure. That expenditure could form part of a mining loss for that interest and could be transferable to another of the miner’s mining project interests.
2.38 Expenditure incurred in relation to a pre-mining project interest (called pre-mining expenditure) goes into working out a pre-mining loss. Pre-mining losses can be transferred to any of the miner’s mining project interests producing the same taxable resource. If a miner disposes of a pre-mining project interest, the purchaser would be able to transfer pre-
15 Explanatory material: Minerals Resource Rent Tax
mining losses that come with it to any of its mining project interests producing the same taxable resource.
2.39 If a pre-mining project interest with pre-mining losses matures into a mining project interest, the pre-mining losses will become attached to the mining project interest.
2.40 A pre-mining loss that cannot be used by its mining project interest, or transferred to another interest, is uplifted at LTBR + 7 per cent for up to ten years. After that, any remaining pre-mining loss is uplifted at LTBR.
Transferring mining losses 2.41 A miner with two or more mining project interests that produce the same taxable resource can transfer losses from one project interest to another. It can only do so to the extent that the other project has sufficient mining profits to absorb the remaining mining losses once it has applied its own royalty, mining loss and starting base allowances. Miners must transfer mining losses in the same order they arose.
2.42 Mining losses attached to a mining project interest the miner acquired from someone else cannot be transferred to another project interest unless both project interests have been in common ownership at all times since the loss arose.
2.43 Royalty credits usually cannot be transferred from one mining project interest to another and a project interest’s starting base can never be transferred to another project interest.
16 Overview of the Minerals Resource Rent Tax
Diagram 43.1: Calculating MRRT Liability
The miner calculates its mining revenue for its mining project interest and subtracts its mining expenditure to work out its mining profit. It then reduces its mining profit by its royalty allowance, its pre-mining loss allowance, its mining loss allowance, its starting base allowance, and its allowances for pre-mining losses and mining losses transferred from other project interests, to obtain its MRRT profit. If the miner has an MRRT profit, its MRRT liability equals that profit multiplied by the MRRT rate.
Example 1.4 Transferring losses
Cobb & Coal Brothers Ltd operates two coal mining project interests and has a pre-mining project interest on which it is exploring for coal.
Mining project interest 1 has mining revenue for the year of $35m and mining expenditure of $120m. It also pays a state royalty of $2.5m.
Mining project interest 2 has mining revenue of $90m and mining expenditure of $30m. It pays a state royalty of $5.7m.
17 Explanatory material: Minerals Resource Rent Tax
The pre-mining project interest has pre-mining expenditure of $7m and no revenue.
Mining project interest 1 has a mining loss of $85m. Its royalty payment converts into a royalty credit of $11.1m. It has no profit, so can’t use it as an allowance. Since it also can’t be transferred, it will be uplifted and carried forward to the next year.
Mining project interest 2 has a mining profit of $60m. It has a royalty allowance of $25.3m, which reduces its mining profit to $34.7m. It next transfers the pre-mining loss from the pre-mining project interest. It still has $27.7m of its MRRT profit remaining, so it then transfers $27.7m of the loss from mining project interest 1. That reduces project interest 2’s mining profit to nil and project interest 1’s mining loss to $57.3m. That amount is uplifted and carried forward to the next year.
MPI 1 MPI 2 Pre-MPI Mining revenue 35m 90m 0 Mining expenditure (120m) (30m) (7m) Mining profit/(loss) (85m) 60m 0 Pre-mining loss 0 0 (7m) Royalty allowance 0 (25.3m) 0 Transferred pre-mining loss 0 (7m) 0 allowance Transferred mining loss 27.7m (27.7m) 0 allowance MRRT profit/(loss) (57.3m)† 0 0 Net pre-mining loss 0 0 0*
In this example, the pre-mining loss from the pre-mining project interest, and the part of the mining loss from mining project interest 1, are transferred to mining project interest 2 to reduce its mining profit to nil.
† After transferring $27.7m to mining project interest 2. * After transferring $7m to mining project interest 2.
Combining project interests
2.44 A miner with several mining project interests must combine them into a single mining project interest if they meet the integration criteria (and satisfy some other conditions designed to prevent interests combining if that would effectively transfer allowances that are not otherwise transferable).
18 Overview of the Minerals Resource Rent Tax
2.45 There are two possible ways that a miner’s separate mining project interests become integrated. First, they will be integrated if:
• they both produce the same taxable resource; and
• the miner conducts their upstream operations together as one operation.
2.46 Second, a miner’s interests will be integrated if:
• both produce the same taxable resource; and
• the miner conducts their downstream operations together as one operation; and
• the miner has chosen to treat its integrated downstream operations in that way for MRRT purposes.
2.47 In deciding whether a miner conducts the upstream or downstream operations of the mining project interests as one operation, an important consideration will be the extent to which the relevant upstream, and downstream infrastructure, assets and personnel are used, managed or operated in an integrated way to produce a saleable, exportable or usable resource commodity.
2.48 Mining project interests that would otherwise be required to combine cannot combine if either of them has a starting base or an unused royalty credit (there is an exception for some interests the miner has owned since before 1 May 2010). They also cannot combine if one of them has a loss that arose when the two interests were not commonly owned.
19 Explanatory material: Minerals Resource Rent Tax
Diagram 2.5: Integrated mining project interest
In this diagram, the miner has four mining project interests relating to the same resource. If they are all run as a single integrated mining operation, they would be upstream integrated. If they aren’t operated in that way, but their downstream activities are managed as an integrated operation (for example, if they all use common processing infrastructure), they would be integrated if the miner has made a downstream integration election.
If they were integrated in either of those ways, they would combine into one mining project interest. However, if any of the mining project interests has a starting base, a royalty credit or a mining loss attributable to a time when it did not have a common ownership with each of the other interests, it could not be part of the combined interest.
Transferring and splitting mining project interests
2.49 Mining project interests can be transferred (for example, by sale or gift). A mining project interest is transferred if the whole entitlement comprising the mining project interest passes to another entity.
2.50 If there is only a part disposal of the entitlement comprising the mining project interest, the mining project interest will split. A mining project interest can also split if a combined interest stops being integrated or if the whole project is sold to more than one purchaser.
2.51 When a mining project interest is transferred, any current year mining revenue and mining expenditure for the mining project interest to the date of the transfer, and any royalty credits, mining losses, pre-mining losses, and starting base amounts of the mining project interest, will be inherited by the transferee.
20 Overview of the Minerals Resource Rent Tax
2.52 When a mining project interest splits, any current year mining revenue and mining expenditure for the mining project interest to the date of the transfer, and any royalty credits, mining losses, pre-mining losses, and starting base amounts of the mining project interest, will be divided among the split mining project interests.
2.53 Each of the split interests inherits a proportion of each of those things equal to its share of the total market values of all the split interests.
Simplified MRRT for smaller operations
2.54 The MRRT recognises that some miners may be below the $50m threshold for some time before they start having an MRRT liability. These miners would face an unnecessary compliance burden if they were required to fully comply with MRRT obligations and determine their starting base, calculate their mining revenue and track their losses and royalties.
2.55 Those miners may choose to avoid any MRRT liability for a particular year if either:
• their profit for simplified MRRT purposes, and that of the entities connected to or affiliated with them, totals less than $50m for that year; or
• their profit for simplified MRRT purposes totals less than $250m and every mining project interest of those entities has royalties paid amounting to at least 25 per cent of the interest’s profit for MRRT purposes.
2.56 A miner who chooses to use the simplified MRRT regime loses any starting base, mining losses, pre-mining losses and royalty credits for all their mining project interests and pre-mining project interests. They would begin to generate new losses and royalty credits after they stop using the simplified MRRT regime.
21 Chapter 3 Core rules
Outline of chapter
3.1 This chapter explains the framework for calculating how much MRRT a miner must pay for an MRRT year together with the core concepts that underlie that calculation.
3.2 The concept of mining project interest is the basic building block of the MRRT. It is the unit in respect of which MRRT liability is determined.
3.3 The MRRT only applies to profits made from extracting taxable resources. This chapter explains what taxable resources are.
3.4 This chapter explains where the taxing point is. Where the taxing point is affects which revenues and expenditures are recognised in working out the MRRT liability for a mining project interest.
Summary
General Liability
3.5 An entity that has a mining project interest is a ‘miner’.
3.6 The key element in working out a miner’s liability for MRRT for a year is to work out its MRRT liability for each of its mining project interests for the year.
3.7 If there is no mining profit for a mining project interest for a year, the miner will not have an MRRT liability for that mining project interest. If there is a mining profit for the mining project interest for the year, then the MRRT liability in respect of that profit may be reduced to nil by MRRT allowances relating to the interest.
3.8 MRRT allowances are applied in a particular order.
3.9 A miner’s overall MRRT liability for a year may be reduced to nil by operation of the low profit offset.
22 Core rules
Mining Project Interest
3.10 A miner is an entity that has a mining project interest.
3.11 A miner’s MRRT liability comprises the sum of its MRRT liabilities for each of its mining project interests.
3.12 Mining revenue, mining expenditure and MRRT allowances are calculated in respect of each mining project interest that a miner has.
Taxable Resources
3.13 Taxable resources are quantities of iron ore, coal, gas extracted as a necessary incident of coal mining, and anything produced from the in situ consumption of iron ore or coal.
Taxing Point
3.14 For coal and iron ore, the taxing point is just before it leaves the mining project interest’s run-of-mine stockpile.
3.15 If there is no run-of-mine stockpile, or if it is bypassed in a particular case, the taxing point is instead immediately before the resources enter their first beneficiation process at the mine site, or immediately after leaving the point of extraction if there is no such process.
3.16 For any gas that is a taxable resource, the taxing point is when it exits the wellhead.
3.17 If there is a supply of the resources before they reach their normal taxing point, the point of supply becomes the taxing point.
Detailed explanation of the new law
A miner’s liability for MRRT
3.18 The amount of MRRT a miner must pay is the sum of the miner’s MRRT liabilities for each of its mining project interests for an MRRT year, reduced by the low profit offset [section 7-1 and section 7-20].
3.19 An MRRT year is a ‘financial year’ as defined in section 995-1 of the ITAA 1997, adjusted to allow for substituted accounting periods [section 7-30].
23 Explanatory material: Minerals Resource Rent Tax
3.20 A miner’s MRRT liability for a mining project interest is worked out by applying the adjusted tax rate to the mining profit from the mining project interest, reduced by any MRRT allowances applicable to the mining project interest [section 7-5].
3.21 The adjusted tax rate is a tax rate of 30 per cent reduced by 25 per cent to recognise the know-how and capital that mining companies bring to mineral extraction [section 7-15].
3.22 Each of the MRRT allowances is made up of allowance components [section 190-1]. For example, a mining loss allowance comprises mining losses, a pre-mining loss allowance comprises pre-mining losses, a royalty allowance comprises royalty credits and a starting base allowance comprises starting base losses.
3.23 The MRRT allowances must be applied in a particular order. Broadly, the principle is that project specific allowances must be applied before allowances can be transferred from another project. This is consistent with the design of the MRRT as a project-based tax. [Section 7-10]
3.24 MRRT allowances cannot reduce a MRRT liability below nil.
Example 1.1: Order of MRRT allowances
Francis Mining Co has $500 million of mining revenue in respect of a mining project interest in the 2012-13 MRRT year.
Francis Mining Co has MRRT allowances totalling $190 million. The allowances are applied in the following order:
• $20 million royalty allowance;
• $10 million pre-mining loss allowance;
• $10 million mining loss allowance; and
• $150 million starting base allowance.
The MRRT allowances are subtracted from the mining profit producing an MRRT profit of $310 million.
Francis Mining Co’s MRRT liability is $69.75 million worked out as 22.5% x $310 million.
3.25 A miner must pay its assessed MRRT for the MRRT year on or before the day on which the assessed MRRT becomes due and payable
24 Core rules
[section 7-25]. Provisions yet to be drafted will be included in the Taxation Administration Act 1953 to require miners to pay MRRT in instalments.
3.26 A miner will not be liable to pay MRRT for a year if the miner has elected to use the simplified MRRT regime and it satisfies one of two tests in Division 125.
Mining project interest
Share of an undertaking to extract taxable resources
3.27 An entity will have a mining project interest, and consequently be liable for MRRT, if it obtains taxable resources extracted from an area covered by a production right in return for sharing the risks of extracting the resources.
3.28 Specifically, an entity will have a mining project interest if:
• it is a participant in an undertaking the purpose or a purpose of which includes:
– extracting taxable resources from an area covered by a production right; and
– producing an output being a commodity that comprises either a taxable resource or something produced using a taxable resource; and
• the entity is entitled to share in the commodity produced by the undertaking.
[Subsection 9-5(1)]
3.29 The ‘undertaking’ mentioned in subsection 9-5(1) is an undertaking or endeavour whereby the entity, alone or together with other entities, extracts or plans to extract taxable resources from a particular area with a view to producing a commodity which the entity and the other participants in the undertaking (if any) can each enjoy.
3.30 The kinds of commodities that might be the output of such an undertaking include iron ore and coal (produced in different forms and to different grades to meet customer specifications), gas, or products made from iron ore, gas, and coal, such as steel and electricity.
3.31 An entity would be a participant in such an undertaking if it risks money, property or skills in the undertaking in exchange for a right to share the commodity produced by the undertaking.
25 Explanatory material: Minerals Resource Rent Tax
Example 1.2: A vanilla joint venture
ExplorerCo enters into a joint venture with DiggerCo (the joint venturers) to produce coal. The joint venturers hold a production right in equal shares and are entitled to an equal share of the resources extracted from the project area.
Each of the joint venturers has a mining project interest and will be liable for MRRT.
Example 1.3: Another joint venture
ExplorerCo holds a production right over a project area, from which it is entitled to extract iron ore.
ExplorerCo does not have the required expertise to extract the iron ore so it enters into a joint venture with DiggerCo to extract the resources. In return for venturing its extraction expertise, DiggerCo receives 50 per cent of the resources extracted from the project area. ExplorerCo takes the other 50 per cent of the iron ore as its return on its production right. Both DiggerCo and ExplorerCo have mining project interests.
DiggerCo and ExplorerCo will be liable for MRRT.
Example 1.1: The other joint venture
HolderCo grants DiggerCo an exclusive license to access and mine coal from its production right. In consideration for the grant of the exclusive license, DiggerCo is required to pay HolderCo $5.00 per tonne for all coal sold during the month.
DiggerCo acquires title to the coal after it is extracted and loaded on the ROM stockpile. HolderCo is required to pay mineral royalties to the State. However, under the license agreement it is entitled to be reimbursed for those royalties by DiggerCo.
In this example, although HolderCo is the legal and beneficial holder of the production right, DiggerCo has a mining project interest and HolderCo does not.
3.32 An entity that merely provides a service or accommodation to such an undertaking would not itself be a participant in the undertaking.
Example 1.2: Finance arrangement
DiggerCo obtains a production right over an area rich in iron ore and commences to extract the ore using funds borrowed from Big Bank.
26 Core rules
The terms of the loan are calculated on the usual terms for a loan of that nature, including a commercial rate of interest. Big Bank does not share the risks of extracting the resources and is not itself a participant in DiggerCo’s undertaking. BigBank does not therefore have a mining project interest.
This would remain the case if, instead of paying cash, DiggerCo discharged its loan obligations to Big Bank by delivering to Big Bank iron ore equal in value to the loan obligations.
Example 1.1: Mining services
MinerCo holds a right to extract coal from a production right area, but it does not have the required expertise to undertake the extraction activities.
MinerCo enters into a contractual arrangement with DiggerCo whereby DiggerCo agrees to extract the resources for MinerCo in return for a commercial fee calculated as a fixed rate per tonne of coal extracted by MinerCo.
DiggerCo does not share the risks of extracting the resource and is not itself a participant in MinerCo’s undertaking. DiggerCo does not therefore have a mining project interest.
This would remain the case if, instead of paying cash, MinerCo discharged its fee to DiggerCo by delivering to DiggerCo coal equal in value to the fee.
3.33 An entity would not be entitled to an output of such an undertaking merely because it is entitled to a royalty for the resources or to a private mining royalty comprising a share of the profits of such an undertaking [subsection 9-5(5)].
Example 1.1: Profit sharing
DiggerCo has a mining project interest comprising an entitlement to extract and produce coal from an area covered by a production right it acquired from ExplorerCo. When DiggerCo acquired the production right from ExplorerCo it undertook to pay ExplorerCo 10 per cent of its net profits from selling coal extracted from the production right area.
DiggerCo has a mining project interest and will be liable for MRRT. ExplorerCo does not share in the output of the undertaking and does not have a mining project interest.
27 Explanatory material: Minerals Resource Rent Tax
More than one undertaking to extract taxable resources
3.34 There may be more than one undertaking to extract resources in relation to a single production right.
Example 1.2: More than one undertaking
DiggerCo and CrusherCo enter into a joint venture to extract coal from a particular area within a larger area covered by a production right which they jointly hold. They are each entitled to take an equal share of the resources which they extract. DiggerCo and CrusherCo each have a mining project interest.
Subsequently, CrusherCo decides it wants to undertake mining in another part of the area covered by the production right. DiggerCo takes the view that mining in that area would be too risky but agrees that CrusherCo may do so on its own behalf and at its own risk.
CrusherCo commences to extract coal from that other area. CrusherCo would be viewed as having a second undertaking and would have a second mining project interest comprising its right to the output of that separate undertaking.
No undertaking to extract taxable resources
3.35 In a case where an undertaking to extract taxable resources from an area covered by a production right does not exist, the entity or entities who have the right to extract the taxable resources from the area would each have a mining project interest to the extent of their respective entitlements [subsection 9-5(2)].
3.36 Where there is no such undertaking, the entity that has the mining project interest will typically, albeit not necessarily, be the entity that has the production right.
Example 1.3: No undertaking to extract resources
ExplorerCo holds a production right over an area but it does not have any plans to commence extraction activities in that area because it has insufficient capital to conduct such an operation. It is currently searching for potential equity participants.
Explorer Co would have a mining project interest.
3.37 If an entity has a mining project interest because there is no undertaking in respect of the area covered by the production right, that entity will not have a new mining project interest merely because it subsequently enters into an undertaking to extract resources from the production right area [subsection 9-5(4)].
28 Core rules
Acquiring a further share in a mining project interest
3.38 If an entity that has a mining project interest because it is entitled to a share in the output of an undertaking acquires an additional right to share in the output of the undertaking it will have a separate mining project interest that corresponds to that further entitlement.
3.39 Similarly, if an entity that has a mining project interest because it has an entitlement to extract taxable resources from a particular area acquires an additional right to extract taxable resources from that area it will have a separate mining project interest that corresponds to that further entitlement. [Subsection 9-5(3)]
Example 1.4: Acquiring a further share
DiggerCo and CrusherCo are participants in a joint venture with each other. They each have a right to receive and dispose of 60 and 40 per cent respectively of the resources extracted under a production right that they jointly hold.
Subsequently, DiggerCo decides not to continue mining in the project area and sells its share of the joint venture to CrusherCo.
By acquiring DiggerCo’s share of the joint venture CrusherCo acquires a new and separate mining project interest.
Mining project interests to be kept separate
3.40 A mining project interest cannot relate to both iron ore and another taxable resource.
3.41 Mining project interests that would otherwise relate to both iron ore and one or more other taxable resources will be taken to constitute separate mining project interests. [section 9-10]
Production right
3.42 The term production right refers to any authority, license, permit or right under an Australian Law granted by a State or Territory (or in some instances a private land owner) that enables an entity to extract resources from a particular area [section 9-20].
3.43 The various State and Territory Acts use different terms to describe a ‘production right’, including ‘mining leases’ and ‘mining licences’.
29 Explanatory material: Minerals Resource Rent Tax
3.44 A production right should be distinguished from an authority, license, permit or other right (granted by a State or Territory or private land owner) to prospect or explore for minerals in a particular area or to examine the feasibility of mining in an area. These rights are often described as ‘prospecting permits’, ‘exploration licences’, ‘mineral development licences’ and ‘retention leases’. A production right does not include rights of this kind [subsection 9-20(2)].
3.45 For the purposes of the MRRT, interests in these other rights are referred to as pre-mining project interests [section 53-40].
Project area
3.46 Production rights authorise the extraction of taxable resources from particular areas. The project area for a mining project interest is the area covered by the production right to which the mining project relates [section 9-25].
Taxable resources
3.47 The MRRT is a tax on profits a miner makes from extracting certain non-renewable resources. Those non-renewable resources are called ‘taxable resources’.
3.48 The taxable resources for the MRRT are quantities of:
• iron ore;
• coal;
• anything produced by the in situ consumption of coal or iron ore; and
• coal seam gas extracted as a necessary incident of coal mining or a proposed coal mine.
[Subsection 13-5(1)]
3.49 The terms ‘iron ore’ and ‘coal’ take their ordinary meanings. Iron ore is rock or soil from which metallic iron can be economically extracted. Coal is a combustible carbonaceous material formed from deposited layers of decomposed or decomposing vegetation.
3.50 Every form of iron ore and coal is a taxable resource. The legislation makes no distinction, for example, between hematite and magnetite or between black coal and brown coal.
30 Core rules
3.51 In deciding whether something is a taxable resource, no regard is to be had to the use to which it will be put or what will be produced from it. [Subsection 13-5(2)]
3.52 This ensures that definitions provided by some dictionaries are not read in an inappropriately narrow way. For example, the Macquarie Dictionary’s definition of iron ore, which suggests that it usually occurs as hematite deposits, should not be used to limit iron ore to hematite. Similarly, when it suggests that coal is something used as a fuel, it should not mean that coal is not coal simply because the miner or its customers intend to use it for something other than a fuel (for example, in making detergent).
3.53 Although ‘taxable resource’ is defined as a quantity of iron ore, coal, etc. it is not necessary for the quantity to be measured (or even measurable). So long as it is some quantity, it will be a taxable resource. [Subsection 13-5(3)]
The MRRT and gases
3.54 Most petroleum gases are not taxable resources under the MRRT. Instead, most of them are, or will be, taxed under the Petroleum Resource Rent Tax Assessment Act 1987. However, there are two cases where such a gas is a taxable resource under the MRRT. In those cases, the gas is excluded from taxation under the PRRT.
3.55 The first case is when it is necessary to extract the gas as an incident of a coal mining operation or in relation to a proposed mine (say prior to construction of an underground mine). In theory, it would be possible to tax the gas under the PRRT regime and the coal under the MRRT regime but that would increase the miner’s compliance costs for no significant difference in outcome. To prevent those unnecessary compliance costs, the gas is taxed under the MRRT, which already applies to the main (coal mining) part of the operation. [Paragraph 13-5(1)(d)]
3.56 The most common reason why it might be necessary to extract gas as an incident of a coal mining operation is mine safety: the presence of coal seam gas makes a mining operation inherently more dangerous. But there could be other reasons, such as State legislation or environmental requirements.
3.57 Sometimes coal seam gas is drained from a potential coal mine as a pre-mining activity. Where that drainage occurs prior to the actual or proposed construction of a coal mine, then it will be a MRRT taxable resource. However, where that gas extraction is a self-sustaining activity in its own right, it is not an incident of coal mining or proposed coal mining, but a separate gas extraction operation. Such gas would not be a
31 Explanatory material: Minerals Resource Rent Tax
taxable resource under the MRRT and would be taxed under the PRRT regime instead.
3.58 The second case involves turning coal into gas by consuming the coal in the ground, typically by a controlled burning of the coal (usually coal that it is not economic to mine conventionally). This is sometimes referred to as ‘underground coal gasification’. [Paragraph 13-5(1)(c)]
3.59 That gas is included under the MRRT, instead of the PRRT, to avoid subjecting coal that is mined and then converted into gas to a different tax regime from coal that is converted into gas before extraction. Such a difference could distort commercial behaviour.
3.60 This second case is drafted widely enough to cover more than gas derived from the in situ conversion of coal; it covers any in situ consumption of coal or iron ore. While consuming coal to produce gas is the only currently known operation of this type, the legislation is intended to cover possible future developments.
Taxing point
3.61 The taxing point is the point in the mining process that sets the quality of the taxable resources, which is used for working out what part of the proceeds of selling the resources is included in mining revenue. The taxing point also separates upstream activities (expenditure on which is deductible in working out the mining profit) from the downstream activities (expenditure on which is not, although it may be relevant to working out how much of the sale price of the resources is mining revenue- for instance if a netback methodology is used).
Normal taxing point for coal and iron ore
3.62 The usual taxing point for coal and iron ore is immediately before it leaves the run-of-mine stockpile. [Subsection 23-5(1)]
3.63 This means that expenditure on moving the resources to the stockpile, and expenditure on managing and maintaining the stockpile, is upstream of the taxing point and so will be mining expenditure recognised in working out the mining profit. Expenditure on moving the resources away from the stockpile will not be mining expenditure (although it may be relevant to working out how much of the sale price of the resources is mining revenue – for instance, if a ‘netback’ methodology is used).
3.64 ‘Run-of-mine stockpile’ is not defined in the legislation but is a well understood term in the mining industry. Most mines have such a stockpile. Synonymous terms include ‘run-of-mine pad’, ‘run-of-the- mine stockpile’, ‘ROM stockpile’ and ‘ROM pad’.
32 Core rules
3.65 The run-of-mine stockpile is the place where the coal or iron ore, largely in the form in which it is extracted, is stored. Although it may have undergone preliminary crushing for the purpose of moving it to the run-of-mine stockpile, it will not have been subject to any beneficiation processes.
Taxing point for coal and iron ore with no stockpile
3.66 In some cases, coal or iron ore mines may have no run-of-mine stockpile. The coal or iron ore might go straight into a beneficiation process or, in the case of coal, be transported directly to a power station. Even if the mine does have a run-of-mine stockpile, an occasional quantity of coal or iron ore might bypass the stockpile.
3.67 In those cases, the taxing point is immediately before the coal or iron ore enters the first mine site beneficiation process [paragraph 23-5(2) (a)]. If there is no beneficiation process at the mine site, the taxing point is instead when the resource leaves the point of extraction [paragraph 23-5(2) (b)].
3.68 The legislation does not define ‘beneficiation’ but it is another term well understood within the mining industry. It relates to the processes by which the raw coal or iron ore is made more suitable for sale, export or use, usually by separating it from waste material, regulating its size, and improving its quality. It includes processes such as crushing, washing, screening, separating and pelletising. However, it would not include the preliminary crushing that is done for the purpose of facilitating transportation of the coal or iron ore.
Taxing point for gases
3.69 The MRRT taxes profits from gas that is produced by consuming coal in situ. It also taxes profits from gas that is extracted as a necessary incident of coal mining.
3.70 The taxing point for those gases is when they exit the wellhead. [Subsection 23-5(3)]
3.71 ‘Wellhead’ is not defined in the legislation but it is a well understood term in the gas and petroleum industries. It is the point at which the gas reaches the surface and enters storage facilities or pipes for transfer elsewhere. The wellhead typically incorporates equipment for controlling pressure in, and regulating the flow from, the well. Because the taxing point is when the gas exits the wellhead, expenditure on the wellhead is upstream of the taxing point and therefore deductible.
33 Explanatory material: Minerals Resource Rent Tax
Taxing point for earlier supplies
3.72 In all these cases, it is possible (although unusual) that the resource will be supplied to someone not involved in the mining undertaking before it reaches its normal taxing point. If that happens, the taxing point is immediately before that supply. [Subsection 23-5(4)]
34 Chapter 4 Mining revenue
Outline of chapter
4.1 This chapter outlines the concept of mining revenue in the Minerals Resource Rent Tax (MRRT).
Summary
4.2 Mining revenue is a fundamental concept in the tax as it feeds directly into the calculation, in Division 17, of a miner’s mining profit for a mining project interest in respect of an MRRT year.
4.3 Most revenue amounts are dealt with in Division 19, but some amounts may be included in mining revenue by provisions in other Divisions.
Detailed explanation of new law
What is a miner’s mining revenue?
4.4 A miner’s mining revenue in respect of an MRRT year is calculated separately for each mining project interest of the miner. [section 19-5]
4.5 Broadly, a miner’s mining revenue in respect of a mining project interest includes revenue from:
• the supply or export of taxable resources extracted from the project area for the mining project interest, to the extent the revenue is attributable to the resources as they were at the taxing point;
• the supply, export or use of something produced using the taxable resources;
• economic recoupment of mining expenditures relating to the mining project interest; and
35 Explanatory material: Minerals Resource Rent Tax
• compensation for loss of taxable resources and loss of amounts that would have been mining revenue in respect of the mining project interest.
4.6 Other amounts from provisions contained outside Division 19 may also be included in a miner’s mining revenue, such as amounts arising out of balancing adjustment events for starting base assets and from adjustments where circumstances change (note, some of these other provisions are yet to be drafted).
4.7 An amount to be included in a miner’s mining revenue does not include any GST payable on a supply for which the amount is consideration (in whole or in part) or any increasing adjustments that relate to the supply. [Section 19-100]
4.8 The law contains a provision to prevent double counting of the same amount. If the same amount is potentially included as mining revenue under more than one provision, it is included only once and under the most appropriate provision. [Section 19-85]
4.9 The sum of the amounts treated by the Act as revenue in respect of a mining project interest in respect of an MRRT year is the total mining revenue for that interest for that year [section 19-5]. This drafting approach is taken to facilitate the calculational process in [section 17-5].
Revenue from the supply, export or use of taxable resources
4.10 An amount is included in a miner’s mining revenue if a taxable resource has been extracted from the project area for the miner’s mining project interest and during the year a mining revenue event happens in relation to the taxable resource. The taxable resource need not have been extracted by the particular miner.
4.11 The need for a mining revenue event reflects the fact that the MRRT applies generally to profits miners have made. Hence extraction of the resource, or the fact of its reaching the taxing point, is not sufficient in itself to attract the tax in a particular MRRT year.
4.12 There are three ways a mining revenue event may happen through which an amount from the taxable resources may be included in a miner’s revenue for an MRRT year [section 19-22].
4.13 The first way is by making a first supply of the taxable resource prior to its exportation. For example, if a miner sold coal to an export customer on free on board terms, where risk and title passes ‘over ships rail’, such a sale would be a supply prior to export.
36 Mining revenue
Example 1.5
Francis Resources supplies 30,000 tonnes of ore to a third party in Australia and 20,000 tonnes to an overseas purchaser by an agreement executed at or before export. Both supplies would be examples of supplies prior to export.
4.14 Secondly, by exporting them where there is no first supply at or before that time.
Example 1.1
Francis Resources exports 20,000 tonnes to China which is later sold to a third party.
4.15 Thirdly, by making a first supply of, using, or exporting, something produced using the taxable resource in circumstances where the cases described above have not occurred.
Example 1.2
Francis Resources extracts 50,000 tonnes of iron ore from an MRRT project, processes the iron ore into pellets, and supplies them to a third party.
Example 1.3
Francis Resources extracts 50,000 tonnes of coal from an MRRT project and feeds the coal directly into the power plant for its iron ore processing facility.
4.16 These mining revenue events are mutually exclusive and only one can happen in relation to the relevant taxable resources relating to a mining project interest of a miner.
4.17 The approach taken is to focus on, in order, whether there is a first supply of the resource, and if not, has export occurred, and if neither of these, has there been a first supply, export, or use of something produced using the taxable resource.
Supply
4.18 ‘Supply’ has the meaning given by section 9-10 of the GST Act and s995-1(1) of the ITAA 1997, but is to be interpreted as in the context of the MRRT.
37 Explanatory material: Minerals Resource Rent Tax
4.19 In the context of the MRRT, a supply will usually happen where the miner relinquishes title to the resource. Generally, this will be a sale of the resource to a third party.
4.20 A practical and commercial approach must be taken to the concept of supply. The relevant supply will generally be the one which, in all the circumstances, captures the profit attributable to the resource as it was at the taxing point.
First Supply
4.21 The usual way that the revenue provisions will be triggered is by the miner making the first supply of the taxable resource [subsection19- 22(a)].
4.22 This is a very important concept in the MRRT.
4.23 The first supply of a taxable resource extracted under the authority of a production right is generally the first supply that a miner makes after it has extracted the taxable resources [subsection 19-23(1)].
4.24 The concept of a first supply is subject to an exception relating to supplies made between participants in the course of undertakings relating to the production right [subsection 19-23(2)]. This mainly affects joint-venture agreements and arrangements.
4.25 The exception ensures that if a supply is made between participants to an undertaking relating to the production right, and is made in the course of that undertaking, and each participant has a mining project interest in respect of the production right being an entitlement to share in the undertaking’s output, this supply is treated as if it is not a first supply.
Example 1.4
X Co and Y Co are participants in a joint venture undertaking where X Co undertakes extraction activities, and Y Co blending activities. Each takes a share of the resulting resource. The supply from X Co of the resource to Y Co (giving Y Co possession) is not treated as a first supply of the resource, its having occurred in the course of the joint-venture undertaking.
Example 1.5
Taking the facts in example 4.1, if, after the extraction and blending activities have occurred, X Co sells its share in the resource to Y Co, this supply is not excepted because it has not occurred in the course of the joint-venture undertaking.
38 Mining revenue
Example 1.6
In a separate situation where Extractor Co extracts the resource and sells it to Blender Co who blends it and sells it to third parties, the sale to Blender Co is the first supply.
4.26 The time when a supply is made is the earliest of when consideration for it is received or becomes receivable, when it is delivered, or when ownership passes in the resource [section 19-35].
Export
4.27 If the miner exports the taxable resource from Australia where there has not been a first supply, the export will trigger a mining revenue event [subsection 19-22(b)].
4.28 The word ‘export’ is not defined. It takes its ordinary meaning of sending the resource to another country for sale or exchange, or merely taking the resource out of Australia with the intention of landing it in another country.
4.29 In general, the miner ‘exports’ the resources if they are exported while the miner has ownership or title to them.
4.30 The miner ‘exports’ the resource even if there are arrangements to facilitate the export of the resource which are carried out for, or on behalf of the miner by a third party.
4.31 Similarly, the miner ‘exports’ the resource even if the miner is not actually responsible for the exporting activities.
4.32 The time of ‘export’ determines both the time of the mining revenue event if it happens under section 19-22(b) and whether it (or a supply that occurs at the same time or earlier) is the relevant mining revenue event to use.
4.33 It will only be where the resource finally clears Australia’s territorial limits (which, for the MRRT, will usually be territorial waters) that the time of export will have occurred. Merely leaving the final Australian port is not sufficient to constitute export.
4.34 The usual case of export will be where there has been no sale or other arrangement in relation to the resource when it leaves Australia. For example, where a mining company merely transfers its resource to an overseas branch.
39 Explanatory material: Minerals Resource Rent Tax
4.35 More complicated cases may arise where a transaction has occurred prior to the resource leaving Australia, and you have to determine whether it is a first supply or export that triggers the revenue.
4.36 In this regard, it should be noted that while a supply has usually not occurred until ownership has passed in the resource, the time of that supply may be earlier if consideration is received or receivable or the resource is delivered. The time of the supply is the earliest of these things. [Section 19-35]
4.37 The overall effect of this is that a sale (ownership passing) at the port or while the ship is in Australian waters will be dealt with under the ‘first supply’ test and not the ‘export’ test. So for instance, sales of coal or iron ore using free-on-board or cost-insurance-freight in commercial terms will be dealt with under the ‘first supply test’.
4.38 But if title does not pass in the resource until after it leaves Australian waters, and no consideration is received or receivable, nor has the resource been delivered at or before the departure from Australia, the export test will apply. For instance, where coal or iron ore is sold to an export customer using terms which result in title to the product passing and consideration being received following export of the product from Australia – for example, delivered at terminal or delivered at place, in commercial terms contracts, where risk and title passes at the destination port.
Supplying, using or exporting something produced using the taxable resource
4.39 Making a first supply of, using or exporting something produced using the taxable resource triggers a mining revenue event if one has not been triggered by a first supply or export of the taxable resource [subsection 19-22(c)].
Use
4.40 ‘Use’ takes its ordinary meaning in the context of the MRRT. It includes, for example, the use by the miner of electricity produced from the burning of coal in carrying on other mining activities.
4.41 There is no mining revenue event for the ‘use’ of the resource itself, as opposed to the ‘use’ of something produced from it. For example, if coal is burned to produce electricity, it is the electricity produced from the coal rather than the coal itself that is ‘used’.
40 Mining revenue
4.42 Compensation for loss, destruction or damage before a taxable resource reaches its taxing point may also be included in revenue [section 19-55].
Working out revenue amounts to be included
4.43 The revenue amount to be included for a particular mining revenue event that has happened is determined through a process of reasonably attributing the consideration for supply (e.g sale) of the resource (or equivalent arm’s length consideration in some cases) to the resource in the form in which it existed at its taxing point and the place where it was located. [Section 19-25]
4.44 The reason for the attribution to the resources as they were at the taxing point, is that the MRRT does not seek to tax profits made downstream of the taxing point. However, having regard to an actual amount of consideration in this process makes it more robust, and the amount serves as a ‘cap’ on revenue ensuring that only realised profits, or their equivalent, are actually brought to tax under the MRRT.
4.45 Although regard is had to the circumstances of the resource at the taxing point, the price of the taxable resource prevailing at the time of the mining revenue event is used rather than that prevailing price at the taxing point.
4.46 The effect of this is that price increases after the taxing point which are reflected in the sale price of the resource will be treated as revenue. However, in respect of price decreases, because revenue cannot exceed the supply consideration or equivalent, the miner will not be taxed on revenue not realised.
4.47 The attribution process involves reasonably attributing an amount of supply consideration (or equivalent) to the resource as it was at the taxing point. This may involve consideration of arm’s length approaches at two places:
• in relation to the circumstances of the actual supply (in the case of a non arm’s length dealing) or in the case of export or use; and
• in the process of attribution (e.g under a net back methodology).
4.48 It would be wrong to conclude, however, that the process of reasonable attribution necessarily involves the initial ascertainment of the supply consideration (or equivalent amount), and then the direct
41 Explanatory material: Minerals Resource Rent Tax
attribution of that amount using a ‘net back’ approach to arrive at the value of the resource (in current prices) as it existed at the taxing point.
4.49 As discussed below, there may be circumstances in which this is not in fact the most reliable method of attribution in the circumstances.
4.50 Because the attribution process has regard to the supply consideration or equivalent amount, this is discussed first, and following that the reasonable attribution process.
Determining the supply consideration (or equivalent amount)
4.51 There are four categories of circumstance which determine whether actual supply consideration for the resource or an equivalent amount is used in the attribution process.
Arm’s length dealing – use the actual supply consideration
4.52 If the amount relates to a supply of the resource in an arm’s length dealing, the actual consideration received or receivable for the supply is used. [Subsection 19-25(1), item 1 in the table]
4.53 An amount that is not actually paid to a miner is taken to be received by the miner if and when it is applied or otherwise dealt with on behalf of the miner or as the miner directs [section 19-95].
Not an arm’s length dealing – use the arm’s length consideration.
4.54 If the supply is not an arm’s length dealing, the arm’s length consideration for the supply is used [subsection 19-25(1), table, item 2)]. This meaning of arm’s length consideration is discussed below at paragraph 4.65.
Is there an arm’s length dealing?
4.55 In respect of actual supplies, the question arises whether parties are dealing at arm’s length in relation to the supply.
4.56 Whether parties are dealing at arm’s length is largely a factual question: Granby v FCT (1995) 129 ALR 503 at 507), but it is informed by principles that have been developed judicially.
4.57 The relationship between the parties is relevant, but not determinative. The focus is on the actual dealing between the parties.
4.58 Thus, parties which are not at arm’s length may deal at arm’s length ‘if they deal with each other as arm’s length parties would normally
42 Mining revenue 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.
4.59 On the other hand, there is no presumption that parties which are arm’s length have dealt at arm’s length: Barnsdall v FCT (1988) 81 ALR 173; Furse 21 ATR 1123 at 1132; RAL and FCT (2002) 50 ATR 1076 at [45]-[51].
4.60 Parties at arm’s length will not be dealing with each other at arm’s length if, for example:
• 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; or
• if one party seeking an overall result is indifferent to an outcome sought by the other party on a particular aspect of concern to it: Collis v FCT (1996) 33 ATR 438 at 443.
Example 1.1
A miner enters into an agreement with a party who is at arm’s length for the sale of the resource and for the sale of other things. The purchaser is indifferent as to the allocation of the proceeds between the resource and the other things, but the miner wants to allocate on a basis that minimises exposure to the MRRT. Such an allocation is not the subject of an arm’s length dealing.
No actual dealing cases
4.61 In addition to a case of non arm’s length dealing, the arm’s length consideration is also used in the remaining two revenue event cases where there is no actual transaction.
4.62 The arm’s length consideration is used for an exportation of the resource, or a thing produced from the resource [subsection 19-25(1), table, item 3], or where the amount relates to the use of a thing produced from the taxable resource [subsection 19-25(1), table, item 4].
4.63 In these cases, it is what would have been the arm’s length consideration for a supply at the time of the exportation or use as the case may be.
Meaning of arm’s length consideration
43 Explanatory material: Minerals Resource Rent Tax
4.64 Arm’s length consideration for a supply is the amount that would be expected to be received or receivable by the miner as consideration for the supply if the miner made the supply under an agreement between the miner and another entity dealing at arm’s length with each other in relation to the supply. [Subsection 19-30(1)]
4.65 The reference to ‘the miner’, as opposed to any entity that might have supplied the resource under an arm’s length agreement, is to ensure that the miner’s particular circumstances are taken into account.
4.66 The process to be undertaken is not one of determining the market value of the resource supplied at that time, or one simply of determining an arm’s length value having regard to the same transaction and same circumstances. Rather the miner’s own circumstances need to be considered.
4.67 The requirement to take into account the miner’s circumstances is made even clearer by the express requirement in the law as to methodology.
Most reliable method
4.68 The taxpayer must use the most reliable method to determine the arm’s length consideration [subsection 19-30(2)]. Regard must be had to all relevant circumstances, including:
• the position and economic circumstances of the miner and the characteristics of the resource at the point of supply or equivalent;
• the terms and conditions of arrangements entered into;
• the risks, functions and assets of the parties to the transaction and their market strategies;
• the availability, coverage, and reliability of data;
• the degree of comparability that exists between the controlled and uncontrolled dealings or between enterprises undertaking the dealings, including all the circumstances in which the dealings took place and whether adjustments can and should be made; and
• the nature and extent of any assumptions that must be made.
44 Mining revenue
4.69 The method must produce an arm's length result that is reasonable and makes sense on a commercial basis in all the circumstances.
4.70 If, because of an insufficiency of available information, or for any other reason, it is neither possible nor practicable to work out the arm’s length consideration, the arm’s length consideration is the amount that is fair and reasonable in the opinion of the Commissioner. [Subsection 19-30(3)]
Reasonable attribution
4.71 Having ascertained the relevant supply consideration (or equivalent amount), the task is then to determine how much of this is reasonably attributable to the taxable resources as at the taxing point.
4.72 In making this reasonable attribution, you must use the method that produces the most reliable measure of the amount that is reasonably attributable having regard to the circumstances of the miner.
4.73 The attribution methodology can be identified by the following key features:
• The attribution process reflects the fact that the MRRT seeks to tax realised profits, and hence the supply consideration (or equivalent amount) serves as a ‘cap’ on the amount of revenue that can be calculated.
• In making a ‘reasonable attribution’ arm’s length principles and approaches are to be used, and existing transfer pricing guidelines (such as the OECD guidelines) are relevant, adapted as appropriate to the MRRT.
• Whatever method is used it needs to be the most reliable method. This is discussed above in respect of arm’s length consideration.
• It will be relevant to have regard to the risks assumed, assets employed, and functions performed by the miner in relation to downstream activities.
• The attribution process will seek to approximate the ‘arm’s length value’ of the resource to the particular miner at the taxing point. A market valuation of the taxable resource at the taxing point will not necessarily represent a reasonable attribution in the particular miner’s circumstances.
45 Explanatory material: Minerals Resource Rent Tax
• Although the attribution methodology requires a reasonable attribution to be made of supply consideration, this does not mandate a ‘net back’ approach from this amount to arrive at a value at the taxing point, though this may prove to be the most reliable method in many cases. The methodology permits the use of another approach (e.g a comparable uncontrolled price of the resource at the taxing point, or a transactional net margin method) if it is the most reliable method.
• The requirement to have regard to the circumstances of the miner in determining the most reliable amount means that it is necessary to undertake the attribution process on an objective basis taking into account all the relevant circumstances of the miner.
1.2 Expenditures incurred in relation to activities downstream of the taxing point will not be mining expenditure. However, they may be relevant to working out how much of the sale price of the resources is mining revenue. For instance, if a netback or similar methodology is used.
1.3 If such costs are taken into account in applying such a methodology as netback, they should be calculated using a similar approach to determining mining expenditure. That is, by determining the expenditure that is necessarily incurred in undertaking those downstream activities and excluding any costs that would otherwise be excluded expenditure if they were upstream costs.
1.4 This approach is appropriate for operating type expenditure for downstream activities. Capital expenditure in relation to downstream activities should not be treated as fully deductible in net back calculations just because that would be the treatment for upstream capital costs. Netback and other methodologies will apply a different treatment for downstream capital expenditure.
Arm’s length pricing methods
4.74 As noted previously, arm’s length methodologies may be employed in either the determination of arm’s length consideration for an actual supply as if a supply were made, and they are employed in the reasonable attribution process.
4.75 The Organisation for Economic Co-Operation and Development (OECD) has provided a framework for the application of the arm’s length principle. The OECD guidelines are titled OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
46 Mining revenue
4.76 Regard may be had to those guidelines, adapted as appropriate in the context of the MRRT, by miners in working out their mining revenue.
4.77 The various methods outlined in the OECD guidelines are set out as follows. Some examples relate to netback calculations.
Comparable uncontrolled price (CUP) method 4.78 The CUP method endeavours to determine an arm's length consideration by attempting to identify comparable transfers of property between unrelated parties in comparable markets. It sets the relevant arm’s length price by reference to such comparable dealings. In this regard, the word comparable means the same as, similar to or analogous. Even though identical dealings do not exist, there may be comparables.
Example 1.7
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 taxpayer. Assuming no other material differences, the price received by the independent iron ore producer would be considered a comparable uncontrolled price.
Cost plus method 4.79 The cost plus method requires the estimation of an arm's length price by adding an appropriate profit mark-up to the supplier's cost. The profit mark-up is ideally determined by reference to the profit mark-up earned by the same supplier in a comparable dealing with an independent party.
Example 1.8
The taxpayer undertakes crushing, processing and blending of iron ore after removing the ore from the ROM pad. The arm’s length value of these downstream activities can be determined by adding an appropriate benchmark of the gross mark-up to the costs of undertaking those activities. The combined cost and the mark-up can then be subtracted from the value of the iron ore sold supplied or exported after crushing, processing and blending, as part of a netback process.
Resale price method 4.80 The resale price method is based on the price at which a property or services acquired by a taxpayer is resold to an arm's length buyer. The selling price is then reduced by an appropriate mark-up to
47 Explanatory material: Minerals Resource Rent Tax
cover the taxpayer's costs and a profit margin. The balance remaining can be regarded as the arm's length price for the original acquisition.
Example 1.9
The taxpayer undertakes a selling activity as part of its production and selling of coal. The resale price method can be used to calculate the gross margin necessary to be earned from those selling activities. This resale price margin – or reseller’s fee - can then be subtracted from the selling price of that coal – as part of the net back process - to recognise that part of its downstream activities related to selling rather than to the value of the resource.
Transactional net margin (TNMM) method 4.81 TNMM is a transfer pricing methodology based on comparisons at the net profit level between the taxpayer and independent parties dealing wholly independently in relation to a comparable transaction or dealings. Comparisons at the net profit level can be made on a single transaction or in relation to some aggregation of dealings between associated enterprises.
4.82 The transactional net margin method examines the net profit relative to an appropriate base (e.g costs, sales, assets) that a taxpayer realises from an activity or transaction. The TNMM can be applied on a cost plus or 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
Example 1.10
The taxpayer undertakes crushing, processing and blending of iron ore, after removing the iron ore from the ROM pad. Rather than apply a gross mark-up as in the cost plus method, the TNMM allows a benchmarked net mark-up to be added to the costs of undertaking the activities as well as administrative and other similar expenses not covered by the gross mark-up. In this instance, TNMM is applied in a manner that is consistent with the cost plus method but using a net profit mark-up.
4.83 The TNMM can also be applied using return on assets (or capital etc) as the appropriate profit indicator where assets are a better indicator of the value added by the downstream activities.
48 Mining revenue
Profit split method 4.84 Profit split methods are transfer pricing methods that identify the combined profit to be split for the associated enterprises from a controlled transaction or controlled transactions, and then split those profits between the associated enterprises according to an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length between independent parties.
4.85 The profit split method identifies the combined profit from relevant activities across the resource producer’s value chain, and then splits those profits between the activities according to an economically valid basis that an independent party would have expected to realise. The profit split method can be applied as a residual profit split, where an initial share of profit is attributed to one party or another using one of the other OECD methods, with any remaining profit or loss split as would have occurred between parties dealing independently.
4.86 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.
Other mining revenue
4.87 Other forms of mining revenue include:
• amounts recouping or offsetting mining expenditure and payments that give rise to royalty credits [sections 19-50 and 19-52]; and
• compensation for loss of taxable resources or loss of mining revenue [sections 19-55 and 19-60)].
Recoupments and offsets
4.88 If a miner obtains an amount, (which does not trigger an adjustment in Division 105 for change of circumstances) of recoupment or offset of mining expenditure (including future expenditure) that was included (or will be included) in a miner’s mining expenditure for the mining project interest, the amount of recoupment or offset is included in the miner’s mining revenue in relation to that interest. [Subsection 19-50(1)]
4.89 An example is a receipt of a subsidy for expenditure incurred by the miner in employing apprentices to work on the mining project interest.
49 Explanatory material: Minerals Resource Rent Tax
4.90 The amount included in revenue cannot exceed the difference between the relevant amount of mining expenditure, and any other amount included in revenue relating to the expenditure, including for changed circumstances under Division 105. [Subsection 19-50(2)]
4.91 This ensures that revenue treatment for the recoupment does not exceed the expenditure and it also ensures that any recoupment etc. addressed elsewhere is not double counted.
Recoupments or offsetting of payments that give rise to royalty credits
4.92 Recoupments or offsets of payments that give rise to a royalty credit are also included in mining revenue, after increasing the amount by dividing it by the MRRT rate. This ‘grosses’ up the royalty compensation payment in the same way that section 43-105 grosses-up the payment for which the miner has a royalty credit. [Section 19-52]
Compensation for the loss of taxable resources or mining revenue
4.93 A miner who obtains an amount of insurance, compensation or indemnity relating to the loss destruction or damage to an extracted taxable resource or something produced from it, must include mining revenue to the extent that, if the payment had been consideration or arm’s length consideration and the reasonable attribution process in 19-25 undertaken, it would have so been included. [Section 19-55]
4.94 Similarly, insurance, compensation or indemnity payments for the loss of amounts that would otherwise have been included in mining revenue are also included in mining revenue when received or receivable by the miner. [Section 19-60]
Expenditure causing revenue to be received
4.95 An amount that would otherwise be included in mining revenue in respect of a mining project interest under Subdivisions 19-B or 19-C is reduced to the extent that the miner incurred expenditure in causing the amount to be received or receivable and the expenditure was not mining expenditure for the mining project interest and was not excluded expenditure. [Section 19-90]
4.96 An example of such reduction of an amount to which this provision deals is litigation costs incurred in recovering compensation for damages to taxable resources.
50 Chapter 5 Mining expenditure
Outline of chapter
5.1 This chapter explains when a miner’s expenditure on mining operations will be taken into account in working out the miner’s mining profit for a mining project interest.
Summary of chapter
5.2 A miner’s mining expenditure for a mining project interest includes expenditure necessarily incurred in carrying on mining operations upstream of the taxing point.
5.3 However, some expenditure that would otherwise qualify as mining expenditure is specifically excluded.
Mining expenditure
5.4 Under the MRRT, a miner's mining profit for a mining project interest is worked out by taking its mining expenditure away from its mining revenue.
Mining Profit = Mining Revenue – Mining Expenditure
5.5 Mining expenditure for a mining project interest includes all expenditure incurred in carrying on upstream mining operations.
5.6 Deductible mining expenditure can be of a capital or revenue nature. Under the MRRT, capital expenditure has the same treatment as revenue expenditure in that it is immediately deductible [subsection 21-20(2)].
5.7 A taxpayer’s total mining expenditure for a mining project interest is the sum of all the amounts that are mining expenditure under the MRRT for that MRRT year [subsection 21-5(1)].
5.8 Under the MRRT, a general test is used to determine if an amount is mining expenditure for a mining project interest [section 21-20]. An amount will also be mining expenditure if it is an adjustment for changes in circumstances.
51 Explanatory material: Minerals Resource Rent Tax
5.9 However, some amounts such as royalty payments and financing costs are specifically excluded from mining expenditure [subsection 21-5(2) and Subdivision 21-B].
5.10 An amount is only included in mining expenditure once, under the most appropriate provision [section 21-30].
General test for mining expenditure
5.11 A miner’s mining expenditure for a mining project interest includes all capital or revenue expenditure the miner is liable to pay, to the extent that it is necessarily incurred by the miner in carrying on upstream mining operations in respect of that mining project interest. This means that the deductibility of expenditure will be determined by the scope of upstream mining operations and the extent to which the expenditure is reasonably capable of being seen as doing or enabling those operations to be done.
5.12 Only expenditure that has the necessary relationship with the upstream mining operations included in mining expenditure.
5.13 In the MRRT, the general deduction test is based on the income tax concept of an expense being necessarily incurred. Expenditure will qualify as a MRRT deduction to the extent it is necessarily incurred by an entity in carrying on mining operations upstream of the taxing point. As these words are judicially well tested and familiar to taxpayers through their use in income tax law, they should deliver a high degree of certainty regarding the deductibility of expenses.
5.14 The words ‘to the extent’, which are also familiar to taxpayers through their use in income tax, support the apportionment of costs. They allow allocation of expenditure using a method that is fair and reasonable in all the circumstances. Consistent with income tax this could include apportionment using a proxy or key such as revenue, production volumes, direct costs, labour costs or head counts.
5.15 This does not mean that all expenditure necessarily incurred in carrying on the business which includes the production of the taxable resource and as a result has a relationship to the taxable resource is deductible. Rather it is expenditure that has the necessary relationship with the upstream mining operations that is included in the mining expenditure. For instance, the ASX listing costs of an entity focussed on coal operations in Australia would not have the appropriate relationship with upstream mining operations.
5.16 Expenditure incurred in relation to activities downstream of the taxing point will not be MRRT expenditure. However, it may be relevant
52 Mining expenditure
to working out how much of the sale price of the resources is mining revenue. For instance, if a netback methodology is used. If such costs are taken into account they should be calculated using a similar approach to determining MRRT expenditure. That is, by determining the expenditure that is necessarily incurred in undertaking those downstream activities.
Mining operations 5.17 There is a broad general definition of mining operations under the MRRT. The general definition includes all activities or operations that are ‘preliminary or integral to’ or ‘consequential upon’ extracting taxable resources and producing them (or something produced using the taxable resource) in the form they are in when a mining revenue event happens to the resources. This is a wide definition and will include doing things that are directly involved in production as well as those things that the miner does before the commencement and after the cessation of those operations. Things done as a matter of practical need to facilitate or enable that production will also be included [section 21-23(1)].
5.18 Some relevant activities and operations are specifically identified as mining operations for a mining project interest. This does not limit what is included under the general definition [Subsection 21-23(2)].
5.19 The specific activities are:
• exploring for taxable resources in the project area;
• extracting taxable resources from the project area;
• doing anything to or with the taxable resources recovered from the project area before they reach the form they are in when a mining revenue event happens in relation to them;
• obtaining access to the project area for mining operations;
• acquiring, constructing or maintaining anything to be used in the above activities;
• rehabilitation of land;
• closing down any of the above activities; and
• activities done in furtherance of these activities.
5.20 An activity will be an activity done in furtherance of the other activities specified in the definition of mining operation if it is, from a practical and business point of view, directed to facilitating or enabling
53 Explanatory material: Minerals Resource Rent Tax
those activities to be carried on. It does not extend to activities that have only a remote or temporal connection with a listed activity- for instance, the costs associated with the ASX listing activities mentioned above would have too remote a connection. However, it could include staff functions as well as the acquisition of systems to control inventories of consumables.
What are upstream mining operations? 5.21 Upstream mining operations include all mining operations to the extent that they are involved in the extraction of the taxable resource from the mining project area for the mining project interest as well as those involved in getting them to the taxing point [section 21-22]. They also include all activities preliminary, integrated and consequential upon such activities. Accordingly, it will include the cost of constructing assets to the extent to which they are for use.
Example 1.1: Activities partly for upstream mining operations
A loader is used to maintain the run-of-mine stockpile and to load ore onto vehicles for transport to the next stage of processing. The use of the loader will be an upstream mining operation to the extent that it is used to maintain the stockpile. Its use will not be an upstream mining operation to the extent that it is used to load the ore for transport away from the stockpile.
5.22 There is no requirement that the operations or activities be carried on within the mining project area. Activities such as staff training or scheduled maintenance of equipment carried out in a capital city away from the mine site will be covered to the extent that they relate to obtaining and getting the resource to the taxing point [paragraph 21-22(a)]. They also include all activities preliminary, integral and consequential upon such activities. Accordingly, it will include the cost of constructing the assets to be used in upstream mining operations.
Example 1.2: Activities in remote location
Wildfire Coal has automated some activities for producing and handling taxable resources before the taxing point. These are electronically controlled by operators working in a dedicated operations facility located away from the project area in a capital city. The provision and operation of the facilities will be upstream mining operations.
Example 1.3: Staff training on and off mine site
Wildfire Coal employs staff at its head office in a capital city whose duties include the initial induction and training of all new mine site employees. These activities may be carried out at the mine or in the
54 Mining expenditure
capital city. The activities are upstream mining operations to the extent that they are for employees to be engaged in activities that are themselves upstream mining activities.
Example 1.4: Mine planning in a capital city
Wildfire Coal employs staff at its head office in a capital city whose duties include the life of mine planning. These activities are carried out in the capital city, but in liaison with personnel at the mine site. The mine planning activities are upstream mining operations as they are activities integral to undertaking the mining activities.
Example 1.5: Consultants researching new extraction processes
Wildfire Coal has engaged consultants to examine and evaluate new extraction processes for use in the planned expansion of production volumes of its taxable resources in relation to its mining project interest. The research takes place in various locations around the world as well as on the site of the mine concerned. The research will be an upstream mining activity as it is preliminary and integral to producing the taxable resources.
5.23 Such activities or operations may also be carried out before or after the taxable resource reaches the taxing point so long as they otherwise have the required relationship to the extraction of the resource and getting it to the taxing point. However they do not include any activity or operation involved in doing anything to or with the taxable resource after it reaches the taxing point [paragraphs 21-22(b) and (c)].
Example 1.6: Mine site rehabilitation
Wildfire Coal carries out rehabilitation activities on an area from which taxable resources have been recovered by open cut mining. These activities are a consequence of producing the taxable resources and will be included to the extent that they relate to land otherwise affected by upstream mining operations.
5.24 Exploration may be undertaken within a project area in order to define and clarify the exact location and extent of a taxable resource within a mining project area. This informs decisions that are made around the working and operation of the mine in order to extract the taxable resource and is an upstream mining operation.
Example 1.7: Exploration within a project area
Wildfire Coal produces taxable resources from an established mine and wants to expand production from the mining project area. It undertakes drilling to clearly establish the boundaries of the existing
55 Explanatory material: Minerals Resource Rent Tax
ore body within the project area. The drilling is an activity that is an upstream mining operation.
5.25 Extracting the taxable resource incorporates all those activities required in order to free the taxable resource from its in situ location and would include activities such as pre-stripping operations, loosening the ore with explosives, excavating the ore and operating long wall mining equipment.
5.26 Activities such as crushing and weighing the resource, conveying the resources to the ROM stockpile or maintaining the ROM stockpile will be upstream mining operations insofar as they relate to the resources reaching their taxing point.
5.27 Negotiating and entering into agreements with regulatory authorities, traditional land owners or other parties with an interest in the land or other things done to obtain access to the area covered by a production right will be upstream mining activities when carried out in relation to a mining project interest. This does not include anything done in relation to an interest in the taxable resource, for instance, the acquisition of a production right.
5.28 Ancillary activities such as acquiring, constructing or maintaining anything to be used, or reasonably expected to be used, for any upstream mining operations will also be upstream mining activities. It will include the maintenance of equipment for use directly in those activities as well as the acquisition or construction of that equipment.
Example 1.8: Ancillary activities
Wildfire Coal holds a production licence and will be conducting activities to produce taxable resources from the project area. In developing the mine, it decides to prepare part of the project area for use as a run-of-mine (ROM) stockpile. This includes earthworks to level and provide access to the ROM stockpile site and drainage work to ensure that any run-off from the ROM stockpile does not contaminate local waterways. These activities are upstream mining operations.
5.29 Rehabilitating that part of the project area that is upstream of the taxing point, or any other area affected by activities comprising upstream mining operations, is also an upstream mining operation.
Example 1.9: Rehabilitation and restoration activities
Wildfire Coal operates a tailings pond to contain water drained from the coal mine it operates and for which it has a mining project interest.
56 Mining expenditure
The water is removed from the mine to allow for the extraction of the coal and to maintain mine safety.
Wildfire Coal undertakes activities to drain and backfill the tailings pond to restore the site. These restoration activities are upstream mining operations.
5.30 Activities are upstream mining operations to the extent that the activities are for the closing down of any activities constituting an upstream activity. It includes activities such as removing buildings, fixtures and equipment used to extract resources and get them to the taxing point. For example, removing conveyor belt systems used to transport coal from the coal face to the taxing point is an upstream mining operation.
5.31 A number of examples are also included in the Act to illustrate the kind of activities or operations that are upstream mining operations. [Section 21-22]
Necessarily incurred in carrying on upstream mining operations 5.32 Expenditure must be necessarily incurred in carrying on upstream mining operations in order for it to be included as mining expenditure.
5.33 The concept of necessarily incurred is used in section 8-1 of the ITAA 1997. Its application in that context is well understood and familiar to business taxpayers. It is used here to establish the necessary relationship between the expenditure and upstream mining operations because the practical approach that has been adopted by the courts in interpreting and applying the concept in the context of carrying on a business is also appropriate in this context.
5.34 Expenditure must be relevant and incidental to the upstream mining operations in order for it to be necessarily incurred. The requirement for expenditure to be necessarily incurred does not impose a narrow test or a test of logical or inescapable necessity. Rather it is a requirement that will be satisfied if the expenditure is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the upstream mining operations.
Example 1.10: Community infrastructure contributions
After negotiation with a local authority Wildfire Coal pays for the construction and ongoing maintenance of a community aquatic centre at a township established to provide housing and community facilities for the workforce for the mine. While the aquatic centre is for the use of the whole community including employees of the miner it is
57 Explanatory material: Minerals Resource Rent Tax
primarily for the use of those employees. The expenditure on the construction and maintenance of the aquatic centre is an important part of ensuring that it has the workforce that it requires to carry on it operations. The expenditure is incurred for the aquatic centre are as a matter of practical operational necessity and will be mining expenditure to the extent that it is for employees engaged in upstream mining operations.
Incurring Mining expenditure
5.35 Mining expenditure deducted under this general test must be incurred by the miner and is deductible in the year that it is incurred. The MRRT operates on an accruals basis, and not a cash basis and mining expenditure is accounted for when it is incurred. In many cases this will be before a payment is made. This aligns with the treatment of deductible expenditure under the ITAA 1997 and under the PRRTAA.
Apportioning mining expenditure
5.36 If expenditure is partly incurred in carrying on upstream mining operations and partly incurred in some other activity of the entity, then only the part of the expenditure that is incurred in the upstream operations is mining expenditure and deductible against mining revenue.
5.37 Apportionment of expenditure may be necessary in a number of circumstances. For instance, a cost may relate to both upstream and downstream activities, may relate to more than one mining project interest, or could relate to taxable resources and non-taxable resources. In such cases, apportionment across the operations, interests or resources is appropriate. This is made possible by the use of the words ‘to the extent that’ in the definitions of mining expenditure, mining operations, upstream mining operations and downstream mining operations.
5.38 Apportionment of mining expenditure must be on a fair and reasonable basis, as is consistent with other areas of the tax law, but taking into account the specific design features of the MRRT noted above. This could include apportionment using a proxy or key such as revenue, production volumes, direct costs, labour costs or head counts.
5.39 If apportionment is required, what will be fair and reasonable will be essentially a question of fact, to be determined in each case. Where the expenditure is used to produce distinct and severable outcomes, the expenditure can be determined on a proportionate basis worked out arithmetically or rateably. In other cases, the expenditure may serve several objectives indifferently. In these cases the apportionment will depend to an even greater degree upon using reasonable and practical
58 Mining expenditure methodologies to quantify how much of the expenditure is directed towards carrying on upstream mining operations.
Example 1.1: Apportioning mining expenditure
Wildfire Coal operates an iron ore mine in Northern Queensland. The mine can only be accessed for six months of the year due to the wet season. The company also operates a copper mine in Southern Queensland. Wildfire Coal purchases a fleet of 10 dump trucks for use in its iron ore mine, to transport iron ore to the taxing point. When the wet season comes, they move the dump trucks south to work in the copper mine.
The trucks spend 50 per cent of their time in the iron ore mine and 50 per cent of their time in the copper mine. The total cost of the dump trucks was $5,000,000. The taxpayer must apportion this expenditure to its iron ore operation and its copper operation. The taxpayer may only claim $2,500,000 as mining expenditure.
Example 1.2: Apportioning head office expenditure
Wildfire Coal operates two coal mines and one nickel mine in Queensland (nickel is not a taxable resource). It does not engage in any other commercial activities.
During the year, Wildfire Coal receives $200 million revenue from each of its coal mines and $70 million from its nickel mine. The operating expenditure for each of the coal mines is $80 million, of which $20 million is upstream of the respective taxing points. The operating expenditure for the nickel mine is $40 million.
Wildfire Coal also incurs $30 million of costs at its head office in Brisbane. These costs relate to the following: ASX Listing $1 million Interest $4 million Private Royalties $5 million Mine Human Resources $10 million Mine management $10 million The ASX listing fee would not qualify as a general expenditure as it does not have the necessary connection with the coal operations. To the extent to which the interest and private royalties relate to the coal operations, they would be excluded expenditure.
The remaining $20 million of payroll and management expenditure has the necessary connection with the mining operations but needs to be apportioned between the three mines on a fair and reasonable basis and between the upstream and downstream operations of the coal mines.
59 Explanatory material: Minerals Resource Rent Tax
One basis for allocating the payroll and management expenditure may be to use a reasonable estimate of the staff hours employed in each of the mines. Another may be to allocate the expenditure based on the proportion that the upstream operating costs of each of the coal mines ($20 million each) bears to the total operating costs of the three mines ($200 million). In this case that would result in the coal mines each being allocated 10 per cent of the payroll and management costs (or $1 million each).
On the facts of this case, an allocation of the payroll and management expenditure based on the proportion that the revenue from each of the coal mines bears to the total mining revenue would not be reasonable. That is because Wildfire Coal’s profit margin from its coal mines is disproportionately large compared to its profit margin from its nickel mine. The revenue is not therefore an accurate proxy for working out the purpose for which the expenditure was incurred.
Excluded expenditure
5.40 There are certain expenditures that are specifically excluded from mining expenditure because of the general design of the MRRT and because of the way that it deals with the various claims to the resource right. These are:
• costs of acquiring rights and interests in projects;
• royalties;
• financing costs;
• hire purchase agreements and finance leases;
• non-adjacent land and buildings used in administrative or accounting activities;
• hedging losses or foreign exchange losses;
• rehabilitation bond and trust payments; and
• payments of income tax or GST.
Cost of acquiring rights and interests in a project
5.41 The cost of acquiring an interest in a production right or a pre-mining project interest and the cost of acquiring a mining project interests or its mining profits, mining revenue or mining expenditure is excluded from mining expenditure [section 21-45]. Broadly speaking, production rights and pre-mining project interests will include all rights or
60 Mining expenditure interests in the tenement that allow for the recovery or exploration of taxable resources.
5.42 Where a mining project or project interest is purchased or sold by a miner, the transfer of ownership does not trigger a taxing event giving rise to mining revenue for the vendor or mining expenditure for the purchaser. Otherwise it would inappropriately be recognising dealings in the resource and its value.
5.43 However expenditure in relation to the initial grant of such an interest or right will be included in mining expenditure. This may include amounts for government fees and legal expenses.
Mining royalty, private mining royalty and payments to other miners that give rise to royalty credits
5.44 A mining royalty is a payment made to the owners of the minerals in situ (the State or Territory or the certain land owners who owns minerals in situ) under a State or Territory law. A royalty credit arises for these payments. Consequently, these payments are excluded expenditure [paragraph 21-50(1)(a)].
5.45 Payments to other miners that give rise to royalty credits are be excluded from mining expenditure [paragraph 21-50(1)(b)].
5.46 A private mining royalty is a payment in the nature of a royalty to another person (not made under a State or Territory law), usually calculated by reference to a percentage or share of the gross or net value of the taxable resource or by reference to a quantity of taxable resource (or of some product form or component of it). Examples of private mining royalties include:
• royalties to a landowner where the mineral rights have not been alienated by the State or Territory and there is no obligation to pay the royalty under a State or Territory law;
• payments to a party other than under a State or Territory law for access to the land (private override royalties);
• resource profit sharing arrangements (private override royalties); and
• any of the above payable in kind.
5.47 Private override royalty arrangements differ from State imposed royalties in that they are, in substance, a profit sharing agreement in
61 Explanatory material: Minerals Resource Rent Tax
respect of the exploitation of a resource, rather than the sale of the resource by the owner.
5.48 To be consistent with the overarching principle that the MRRT represents a charge by the Australian community for the exploitation of that resource, it follows that the MRRT should capture a share of resource revenues regardless of who receives them. However, this would result in private royalty recipients being caught within the MRRT. Yet most of these private royalty recipients are not miners and so would not otherwise fall within the MRRT.
5.49 Under the MRRT, all mining profits are taxed in the hands of the mining project interest holder and the recipient of the private mining royalties is not subject to MRRT. A private royalty payment is excluded expenditure. This approach is consistent with that under the PRRT, which excludes private override royalties as a deduction.
5.50 However, a private mining royalty payment is not excluded expenditure if:
• it is paid or given to a contractor for services provided and it does not represent a share of the miner’s profits [subsection 21-50(2)];
• it is payable in respect of a period after 30 June 2012 to a State or Territory body under an agreement entered into prior to 2 May 2010. These negotiated royalty payments payable to the State are not excluded expenditure [subsection 21-50(3)];
• it is made, by way of compensation for the carrying on of mining operations in the project area, to native title holders, registered native title holder claimants, or a person that holds rights arising under an Australian law dealing with the rights of Aboriginal persons or Torres Strait Islanders in relation to land or waters that relate to the project area are not excluded from mining expenditure [subsection 21-50(4)].
Example 1.3: Private mining royalties
Wildfire Coal negotiates an Indigenous Land Use Agreement (ILUA) with a native title group under the Native Title Act 1993. The ILUA is registered. In accordance with the ILUA, the native title group agrees to the granting of mining tenure over a part of their land, and to allow Wildfire Coal to access and disturb that land. Wildfire Coal agrees to provide a benefits package that includes a lump sum payment, a share of mining revenues, scholarship and apprenticeship programs, payments relating to heritage protection and environmental management, and the provision of community infrastructure. These
62 Mining expenditure
payments by Wildfire Coal in accordance with the ILUA are necessarily incurred in carrying on mining operations. Although the payments of a share of mining revenues are private mining royalties, they are not excluded expenditure under subsection 21-50(4).
Financing costs
5.51 Financing costs and associated payments are not deductible under the MRRT. These costs include principal or interest on a loan, borrowing costs, payments of dividends, repayment of equity capital, trust and partnership distributions and the cost of issuing membership interests in entities [section 21-55]. This approach is consistent with the PRRT.
5.52 Financing costs are excluded because the purpose of the MRRT is to tax profits arising from the non-renewable resource that is extracted and those profits should not depend on the way in which a taxpayer chooses to finance its operations.
5.53 Capital invested in upstream operations is instead recognised through immediate deductibility and an ‘uplift’ allowance to maintain the value of losses for activities upstream of the taxing point. The ‘uplift’ also includes a premium for the risk that losses may never be used. Downstream operations are effectively recognised through the process of attributing the revenue to the resource at the taxing point where the taxpayer’s first arm’s length sale is beyond the taxing point.
5.54 Allowing a specific deduction for financing costs would amount to a double deduction for the cost of capital unless financiers were also subject to MRRT. This would also distort investment and production decisions-creating a bias towards debt financing instead of equity financing.
Hire purchase agreements and finance leases
5.55 Hire purchase agreements and finance leases are to be treated as if they were a debt funded purchase of property. Under the MRRT any payment made in relation to a finance lease or hire purchase agreement is excluded expenditure [subsection 21-60(1)].
5.56 Where this occurs the taxpayer will be taken to have acquired the property for the amount shown in the agreement as the cost or value of the property. If an amount is not shown in the agreement then an amount equal to an arm’s length purchase price will apply. This amount may be mining expenditure subject to otherwise meeting the requirements of the MRRT [subsection 21-60(2)].
63 Explanatory material: Minerals Resource Rent Tax
Non-adjacent land and buildings used in connection with administrative or accounting activities
5.57 Capital expenditure that is made in relation to land and buildings used in connection with administrative or accounting activities which are not located at or adjacent to the mining project area are excluded expenditure [section 21-65]. It does not matter whether the land and buildings are partly used in connection with administrative or accounting activities and partly used for upstream mining operations.
5.58 Land or building that are at or adjacent to upstream mining operations are likely to take their value from the production right itself and their treatment recognises that ownership reflects the risk associated with the project. However the value of non-adjacent land and buildings do not reflect this risk, are likely to appreciate over time and capital payments in relation to these assets are excluded expenditure.
5.59 Adjacent to the project area should be taken to mean the nearest practicable location that is consistent with this principle. Whether a place is the nearest practicable location will vary in different circumstances and may take into account factors such as mine operation and safety and remote geographic location.
Example 1.4: Land and buildings
Wildfire Coal operates an underground coal mine in relation to a production right that it holds. Due to the remoteness of the coal mine, employees engaged in operations on the mine site live in a regional centre located 50 kilometres from the mine site. All administration for the coal mine is carried on at the administration building located in this regional township. The company incurs capital expenditure in respect of that administration building. The expenditure is not excluded expenditure as the building is considered to be adjacent to the project area – the nearest practical location for land or buildings where administrative or accounting activities can be carried out for the operations of the coal mine.
Example 1.5: Land and buildings
South & Co Mines operates an iron ore mine in the Pilbara region of Western Australia. They incur capital expenditure on a building in Perth city where from which they conduct the administration associated with the mine. The capital expenditure for the building is not mining expenditure.
64 Mining expenditure
Hedging losses or foreign exchange losses
5.60 Broadly, hedging and foreign exchange arrangements should not affect the MRRT liability as those arrangements do not affect the value of the resource.
5.61 It is noted, that where a hedge or foreign exchange arrangement is integral to the sale arrangement for the resource, capital item or service, compliance costs in removing the effect of any hedging integrated within the
5.62 sale, may be significant.
5.63 Under the MRRT, a loss or gain on a hedging or foreign exchange arrangement is not taken into account in calculating the MRRT liability, unless the loss (or gain) is a part of the sale contract. Expenditure is excluded to the extent that it relates to derivative financial arrangements or a foreign currency hedge [section 21-70].
5.64 Derivative financial arrangements and foreign currency hedges are defined as having the meaning given in subsections 230-350(1) and (2) respectively of the ITAA 1997.
Example 1.6
KF Iron Exports has entered a contract with a major overseas industrial group to provide a substantial amount of iron ore over an extended period for a set amount per tonne. As the currency of the country in which the industrial group operates is volatile, KF Iron Exports enters into a hedging contract with the third party (unrelated to the sales contract) to cover the possibility that the value of the currency falls during the term of the contract. Any expenditure, to the extent that it relates to the foreign currency hedge is excluded expenditure for MRRT.
Rehabilitation bonds and trust payments
5.65 Rehabilitation bonds and trust payments are amounts set aside to provide security for rehabilitation costs.
5.66 To ensure that money put aside for rehabilitation is secure, rehabilitation bonds and trust payments are generally placed in low-risk investments. That being the case, it is not appropriate that the MRRT uplift rate (which is intended to reflect the higher risk associated with a resource project) apply to such payments.
5.67 Accordingly, expenditures relating to rehabilitation bonds and trust payments are excluded expenditure for the MRRT [section 21-75].
65 Explanatory material: Minerals Resource Rent Tax
Payments of income tax or GST
5.68 Payments under the Income Tax Assessment Act 1997, the Income Tax Assessment Act 1936 or the Goods and Service Tax Act 1999 are not mining expenditure and cannot be deducted against mining revenue [section 21-80].
5.69 As with mining revenue, all mining expenditure should be deducted on a GST-exclusive basis.
PARTS TO COME
PART 5-1 RECORD KEEPING
PART 5-2 MISCELLANEOUS
66 Chapter 6 Allowances
Outline of chapter
6.1 This Chapter explains how to calculate the individual allowances (apart from the starting base allowance, which is dealt with in Chapter 7) used in working out a miner’s Minerals Resource Rent Tax (MRRT) liability for an MRRT year. It explains the allowances’ common features and why there are some differences between allowances.
Summary
6.2 An MRRT liability for a mining project interest is calculated by reducing the interest’s mining profit by any MRRT allowances and multiplying the result by the MRRT rate.
6.3 MRRT allowances are taken into account in a specified order. The seven types of allowances available to miners, and the order in which they are applied in working out a miner’s MRRT liability are:
• royalty allowances;
• transferred royalty allowances;
• pre-mining loss allowances;
• mining loss allowances;
• starting base allowances;
• transferred pre-mining loss allowances; and
• transferred mining loss allowances.
6.4 The starting base allowance is explained in Chapter 7.
6.5 Only so much of the available royalty credits, pre-mining losses and mining losses (including by way of transfer) as are necessary to reduce the mining profit to nil can be an MRRT allowance in a particular MRRT year.
67 Explanatory material: Minerals Resource Rent Tax
6.6 Allowances reduce the mining profit of a miner’s mining project interest in the specified order until either the mining profit is reduced to nil or the available royalty credits, pre-mining losses, mining losses and starting base losses are exhausted.
6.7 The balance of any royalty credits, mining losses and pre-mining losses available after the mining profit is reduced to nil are then available to be transferred to offset mining profits of certain other mining project interests. Any balance remaining after any transfers is carried forward to future MRRT years and uplifted.
Detailed explanation
Allowances generally
6.8 Under the MRRT, the mining profit of a mining project interest for an MRRT year must be reduced by any available MRRT allowance. [Sections 43-15, 48-15, 53-20, 63-20, 73-17, 83-10 and 93-10]
6.9 Allowances are applied in this order:
• royalty allowances;
• transferred royalty allowances;
• pre-mining loss allowances;
• mining loss allowances;
• starting base allowances;
• transferred pre-mining loss allowances; and
• transferred mining loss allowances.
The allowance highest in the order must be fully applied before the next highest can be applied, and so on. [Section 7-10]
Allowances only up to the amount of the mining profit
6.10 If royalty credits, pre-mining losses, mining losses or starting base losses are available, the amount of each is applied in calculating the relevant allowance up to the amount of the mining profit remaining after
68 Allowances
applying any higher ranked allowances. [Sections 43-15, 43-25, 48-15, 48-25, 53-20, 53-25, 63-20, 63-25, 73-15, 73-17, 83-10, 83-15, 93-10 and 93-25].
Example 1.1 Ordering of allowances
Alpha Coal Co has a mining profit for a mining project interest for an MRRT year of $52m and available royalty credits of $5m, a pre-mining loss of $3m and a mining loss of $45m.
The $5m royalty credit is applied to calculate a royalty allowance of $5m, which reduces the mining profit to $47m. The pre-mining loss is applied to calculate a pre-mining loss allowance of $3m, which reduces the remaining mining profit to $44m. The available mining loss of $45m is applied to the extent necessary to reduce the remaining mining profit to nil, that is a mining loss allowance of $44m, leaving an available mining loss of $1m.
6.11 Any remaining royalty credits, mining losses or pre-mining losses still available after the mining profit is reduced to nil can then be transferred to other mining project interests to the extent possible to reduce their mining profits. Different conditions need to be satisfied for royalty credits, pre-mining losses and mining losses to be transferrable. These are explained below.
Order of applying royalty credits, losses and pre-mining losses
6.12 The order in which a royalty credit, mining loss or pre-mining loss arises is the order in which it is applied in calculating the amount of each of the relevant allowances for the MRRT year. [Subsections 43-25(2), 48-25(2), 53-25(2), 63-25(2) 83-15(2) and 93-25(2)]
6.13 However, in relation to working out each transferred royalty allowance, transferred pre-mining loss allowance and transferred mining loss allowance, the miner may choose which order to apply any two or more royalty credits, pre-mining losses or mining losses that arise at the same time. [Subsections 48-25(2), 83-15(2) and 93-25(2)]
Uplifting
6.14 The conversion of royalty credits, pre-mining losses and mining losses to allowances only occurs to the extent that the particular allowance will be fully applied to reduce mining profit for the year. The royalty credits, pre-mining losses and mining losses still unapplied at the end of the year are uplifted. The amounts of royalty credits and mining losses are uplifted at LTBR + 7 per cent each year [subsections 43-105(2) and 63- 100(3)]. The amount of a pre-mining loss is uplifted at LTBR + 7 per cent
69 Explanatory material: Minerals Resource Rent Tax
for the first 10 years after the loss arises, but only at LTBR thereafter [section 53-85].
When two interests relate to iron ore or do not relate to iron ore
6.15 Before amounts can be transferred between two interests to give rise to a transferred royalty allowance, a transferred pre-mining loss allowance or a transferred mining loss allowance, one of the preconditions is that the two interests either both relate to iron ore or both do not relate to iron ore. This limits transfers to between two groupings of taxable resources, those that are related to iron ore and those that are related to coal.
6.16 An interest will relate to iron ore if what the interest relates to is:
• iron ore [paragraph 13-5(1)(a)]; or
• anything produced from a process that results in iron ore being consumed or destroyed without extraction [paragraph 13-5(1)(c)].
6.17 An interest will not relate to iron ore (that is, it will effectively relate to coal) if what it relates to is:
• coal [paragraph 13-5(1)(b)]; or
• coal seam gas extracted as a necessary incident of mining coal [paragraph 13-5(1)(d)]; or
• anything produced from a process that results in coal being consumed or destroyed without extraction [paragraph 13-5(1) (c)].
Example 1.2: Pre-mining project interests do not relate to iron ore
Greater Coal Gas Co has two pre-mining project interests. One pre-mining project interest involves an extensive coal deposit that Greater Coal Gas Co is considering developing into a coal mine. The other pre-mining project interest is awaiting State approval to begin a coal seam gasification operation.
The first pre-mining project interest relates to coal. The second pre-mining project interest relates to gas produced by consuming the coal in situ.
70 Allowances
Since neither of Greater Coal Gas Co’s pre-mining project interest relates to iron ore, they both do not relate to iron ore.
Example 1.1 Mining project interests relate to different resources
Green Bond Mines has a mining project interest that extracts coal with an available mining loss and another mining project interest that extracts iron ore that has a mining profit for the year.
The first mining project interest relates to coal. The second mining project interest relates to iron ore. As both project interests do not relate to iron ore and only one of the project interests does not relate to iron ore, the mining loss cannot be transferred to the mining project interest with the mining profit.
Royalty allowances
6.18 A miner has a royalty allowance for a mining project interest it has if the interest has a mining profit and there are royalty credits that relate to that interest [section 43-15]. The amount of the royalty allowance is the sum of the available royalty credits up to the amount of the mining profit [section 43-25]. Any excess royalty credits are applied in calculating any transferred royalty allowance for another mining project interest of the miner (or of a close associate) for the year. Any royalty credits remaining after transfers are available for use in future years.
Royalty credits
6.19 For a liability a miner incurs to be relevant in determining if a royalty credit arises for a mining project interest, it has to be incurred in relation to taxable resources extracted on or after 1 July 2012. [Subsections 43-100(1) and (2)]
State and Territory royalties 6.20 A royalty credit arises for a mining project interest when the miner incurs a liability to pay a mining royalty in relation to taxable resources extracted under a production right that relates to the interest. [Subsection 43-100(1)]
6.21 A mining royalty is a liability to make a payment that:
• is a royalty under a State or Territory law; or
71 Explanatory material: Minerals Resource Rent Tax
• would have been a royalty if the taxable resource had been owned by a State or Territory just before it was recovered.
[Section 190-1]
6.22 The second dot point deals with possible arguments that a relevant liability cannot be a royalty if it is not payable to the Crown and a payment cannot be a royalty if it is not paid to the owner of the resources in situ. It ensures that liabilities incurred under State or Territory legislation can still be a mining royalty even when payable to private owners of taxable resources in the ground.
Payments by way of recoupment of royalties 6.23 A royalty credit also arises for a mining project interest when the miner incurs a liability to pay an amount, in relation to a taxable resource to which the miner is entitled and extracted under a production right that relates to the interest, to another entity by way of recoupment for a liability that:
• gives rise at any time to a royalty credit for that other entity in relation to the production right; or
• would give rise at any time to a royalty credit for that other entity if the other entity had a mining project interest relating to that production right.
[Subsection 43-100(2)]
6.24 This covers the situation where a miner might have no direct interest in the production right but has to compensate the production right holder for the mining royalty it must pay, even if the production right holder has no mining project interest itself.
6.25 It also covers cases where a miner has to compensate someone else who in turn has to compensate the production right holder. This could arise when a miner conducts a mining operation by agreement with the production right holder but sub-leases the actual mining activities to another miner in return for a share of the taxable resources produced. The possibility of a chain of such obligations is covered by use of the phrase “or a previous application of this subsection”. The royalty credit is, in effect, apportioned between the various entities that have a mining project interest related to the production right. [Subsection 43-100(2)]
1.5 Whether the holder of the mining project interest obtains a royalty credit for royalties paid by another party (for instance, the
72 Allowances
production right holder) will depend on whether the mining project interest holder pays an amount to the other party which recoups the actual royalty the other party pays. Recoupment is defined by reference to section 20-25 of the ITAA 1997 and includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described.
Example 1.1: Royalty reimbursement arrangement
Porthole Properties Pty Ltd grants Fox Fine Ores an exclusive license to access and mine coal on its production right. Fox acquires title in the coal after it is loaded onto the ROM stockpile and must pay Porthole $5 a tonne for the coal it sells. Porthole is required by State law to pay royalties for the coal Fox mines but is, under its agreement with Fox, entitled to reimbursement of those royalties.
Fox is the miner under the MRRT, and Porthole is not because it does not share in the production from the operation. Therefore, Porthole is not entitled to any royalty credit for the royalties it pays. Fox is reimbursing Porthole rather than paying a royalty directly but is still entitled to a royalty credit for the payments because they ‘recoup’ Porthole’s royalty payments and Porthole would get a royalty credit for its payments if it were a miner.
If Porthole was sharing in the resources, it would also be a miner, so would be entitled to a royalty credit for its royalty payments and the recoupments from Fox would be included in its mining revenue.
6.26 The royalty credit arises when the miner incurs the liability to make the payment and relates to the MRRT year in which it arises [subsection 43-100(3)]. The royalty credit ceases to be a royalty credit once it has been fully applied in working out royalty allowances for the mining project interest or transferred royalty allowances for other project mining interests [subsection 43-100(4)].
Amount of a royalty credit 6.27 The amount of a royalty credit in the year it arises is the grossed-up amount of the royalty liability incurred. The grossing-up is achieved by dividing the royalty amount by the MRRT rate. That produces a deductible amount that will have the same effect as an offset equal to the royalty payment [section 43-105]. The royalty amount has to be converted into a deductible amount, rather than applied as an offset, because the ordering of allowances requires royalty allowances to be recognised before some deductible amounts (such as losses).
73 Explanatory material: Minerals Resource Rent Tax
Example 1.1: State and Territory royalty payments and royalty credits
South and Co Mines extracts 500,000 tonnes of iron ore from its MRRT mining project. The State charges a 7.5 per cent royalty on the value of the iron ore at the point of sale. South and Co sells the iron ore to a third party for $150 per tonne. It pays a State royalty of $5.625 million.
South and Co Mines’ royalty payment is converted to a royalty credit for MRRT purposes by dividing it by the MRRT rate of 22.5% giving a royalty credit of $25 million. Its mining profit for the MRRT year in relation to the mining project is $55 million. The royalty credit is applied to produce a royalty allowance of $25 million. South and Co Mines’ mining profit is reduced to $30 million by the royalty allowance and the royalty credit is exhausted.
Example 1.2: Royalty payment to private landowner
Zenat Ltd extracts 20,000 tonnes of coal during an MRRT year from land owned by Yady Co which also owns the coal in the ground. Under State legislation, a royalty of $6 per tonne extracted is payable directly to Yady Co on a monthly basis. Zenat Ltd has an available royalty credit of $533,333 [(20,000 x $6)/0.225] that will be applied to calculate its royalty allowance. The payments to Yady Co would normally be a private mining royalty but are instead mining royalties because they are paid under State legislation.
Example 1.3: Minerals rights agreement
Alister Co owns a mining lease on which it mines mineral sands. Under a Minerals Rights Agreement, Alister Co grants Blaster Co an exclusive right to enter the land covered by the mining lease to mine and take iron ore. Title in the iron ore is transferred at the point of extraction. Under the agreement, Blaster Co is contractually obliged to comply with the obligations associated with the Mining Lease to the extent those obligations relate to the exercise of its iron ore right. One of the obligations is that Blaster Co pays the State all the royalties applicable to the iron ore it mines that are legally payable by Alister Co as the mining lease holder.
Blaster Co is the miner under the MRRT and Alister Co is not because it does not share in the production from the operation. Blaster Co is entitled to a royalty credit, even though Alister Co is legally required to pay the royalties. The royalty credit is available to Blaster Co, because its payment to the State on behalf of Alister Co recoups Alister Co’s liability that would have given rise to a royalty credit if Alister Co had had a mining project interest.
74 Allowances
6.28 The amount of a royalty credit available in a later year is the royalty credit available for the previous MRRT year less what was applied during that previous year to work out a royalty allowance or a transferred royalty allowance. That result is uplifted by LTBR + 7 per cent. [Subsection 43-105(2)]
Transferred royalty allowances
6.29 A miner has a transferred royalty allowance for a mining project interest for an MRRT year if the interest has a remaining mining profit (after application of royalty allowances) and there are unused royalty credits available that can be transferred to it. [Section 48-15]
6.30 A royalty credit of a mining project interest can be transferred and used to offset a mining profit in another mining project interest, if:
• the two mining project interests are integrated at all times from when the royalty credit arose to the end of the year in which the royalty credit is transferred; and
• the royalty credit does not relate to a year for which an election was made to use the alternative valuation method.
[Section 48-100]
6.31 Transferability of royalty credits aims to put mining project interests that are unable to combine (because they have quarantined allowances) into a similar position (prospectively) as if they had combined.
6.32 Whether two mining project interests are integrated is explained in Chapter 10.
6.33 The amount of a royalty credit that can be transferred to a mining project interest cannot exceed the amount of the interest’s mining profit. [Subsection 48-25(1)]
6.34 Royalty credits must be transferred in the order in which they arose. If several royalty credits arose at the same time (for example, if there are several mining project interests with credits available to transfer), the miner can choose which of them to transfer. [Subsection 48-25(2)]
75 Explanatory material: Minerals Resource Rent Tax
Pre-mining loss allowances
6.35 The general mining expenditure rule will not apply to expenses necessarily incurred on exploration if there is no mining project interest. If a miner merely holds an interest in an exploration or prospecting permit, authority, licence or right that is not a production right, such expenditure will be taken into account for MRRT purposes as a pre-mining loss allowance.
6.36 An entity has a pre-mining loss allowance for a mining project interest for an MRRT year if it has an available pre-mining loss that relates to that interest and it has a remaining mining profit after deducting all higher ranked allowances. [Section 53-20]
6.37 The amount of the pre-mining loss allowance is the lesser of the sum of the available pre-mining losses and the remaining mining profit. [Section 53-25]
6.38 Any pre-mining losses remaining after a pre-mining loss allowance is calculated are then applied in calculating any transferred pre-mining loss allowance for the year. Any pre-mining losses remaining after that are then available for use in future years to reduce future mining profits for that mining project interest. They are uplifted at LTBR + 7 per cent for the first ten years, and LTBR thereafter. [Section 53-85]
6.39 A pre-mining loss is an available pre-mining loss for a mining project interest if it relates to a pre-mining project interest that either ceased to be in force because the mining project interest came into existence or ceased to apply to the project area because the mining project interest came into existence. [Section 53-35]
Pre-mining project interest
6.40 A pre-mining project interest is any interest in an authority, licence, permit or right to explore or prospect for taxable resources, that is not a production right. If the interest relates to both iron ore and another taxable resource it is treated as two separate pre-mining project interests: one relating to the iron ore and the other relating to the other taxable resource. [Subsections 53-40(1) and (2)]
Pre-mining loss
6.41 A miner has a pre-mining loss for an MRRT year if it holds a pre-mining project interest and its pre-mining expenditure for the interest exceeds its pre-mining revenue for the interest for the year. [Subsection 53-55(1)]
76 Allowances
6.42 This allows pre-mining project expenditure (for example, exploration expenditure) that is a necessary precursor to the development of a mining project to be recognised under the MRRT.
Pre-mining expenditure 6.43 An entity’s pre-mining expenditure for a pre-mining project is expenditure, whether of a capital or revenue nature, to the extent it is necessarily incurred in carrying on the pre-mining project operations, except to the extent it is excluded expenditure. [Subsections 53-60(1), (2), (3) and (4)]
Pre-mining project operations
6.44 Operations or activities are pre-mining project operations to the extent that they would have been upstream mining operations if the interest were a mining project interest rather than a pre-mining project interest. [Paragraph 53-60(5)(a)]
6.45 Operations or activities are also pre-mining project operations to the extent that they are preliminary or integral to, or consequential upon, either holding the interest or developing the project area for the interest or obtaining a production right in relation to at least part of the project area, regardless of whether the operations or activities were carried on in the project area or not. [Paragraph 53-60(5)(b)]
Pre-mining revenue
6.46 An amount is pre-mining revenue if it would have been mining revenue if the interest to which it relates had been a mining project interest rather than a pre-mining project interest. Similarly, it is pre-mining revenue if it relates to an amount of pre-mining expenditure and would have been mining revenue if that had been mining expenditure instead. [Section 53-65]
Mining loss allowances
6.47 The mining loss allowance enables a mining loss that the miner has for a mining project interest for an earlier MRRT year to be carried forward, uplifted and applied against mining profits that the miner has for the mining project interest in future MRRT years.
6.48 A miner’s mining project interest has a mining loss allowance for an MRRT year if the interest has a mining profit remaining after all higher ranked allowances (royalty allowance, transferred royalty
77 Explanatory material: Minerals Resource Rent Tax
allowance and pre-mining loss allowance) have been applied and there is an available mining loss for the interest. [Section 63-20]
6.49 The amount of a mining loss allowance is the lesser of the mining profit and the available mining losses for the mining project interest. When working out the amount of a mining loss allowance, mining losses are applied in the order in which they arise. So, a mining loss that arises in the 2012-13 MRRT year will be applied before a mining loss that arises in the 2013-2014 MRRT year. [Section 63-25]
6.50 A mining project interest has a mining loss for an MRRT year if its mining expenditure exceeds its mining revenue for the year. The amount of the mining loss for that year is the amount of the excess. [Subsections 63-100(1) and (2)]
6.51 The amount of a mining loss available in a later year is the mining loss available for the previous year less the amount of it that was applied during that preceding year in working out a mining loss allowance or transferred mining loss allowances. The result is uplifted by LTBR + 7 per cent. [Subsection 63-100(3)]
78 Allowances
Example 1.1: Mining losses
Slow Start Pty Ltd’s mining project interest makes a mining loss for each of the 2013, 2014, 2015, 2016 and 2017 MRRT years. It then makes a mining profit in the 2018 and 2019 MRRT years.
Assume:
• LTBR for all years is 6%, so the uplift factor is 1.13 (0.06 + 1.07).
• There are no other relevant allowances or transferred allowances.
Tax year 2013 2014 2015 2016 2017 2018 2019 $m $m $m $m $m $m $m Mining (100) (50) (200) (100) (20) 400 800 profit/ loss Previous amount of loss 2013 - 100 113 127.69 144.29 163.05 - 2014 - - 50 56.50 63.85 72.14 - 2015 - - - 200 226 255.38 154.35 2016 - - - - 100 113 127.69 2017 - - - - - 20 22.60 2018 ------Prior year Mining loss 2013 - 113 127.69 144.29 163.05 184.24 - 2014 - - 56.50 63.85 72.14 81.52 - 2015 - - - 226 255.38 288.58 174.41 2016 - - - - 113 127.69 144.29 2017 - - - - - 22.60 25.54 2018 ------Mining 0 0 0 0 0 0 455.76 profit
A mining loss for a later MRRT year is the mining loss for the preceding MRRT year less what was applied against a mining profit for the preceding MRRT year (in working out a mining loss allowance or a transferred mining loss allowance).
The 2018 mining profit of $400m is reduced by a mining loss allowance worked out taking into account so much of each available mining loss as does not exceed the mining profit, starting with the oldest. The mining loss for the 2013 MRRT year, as calculated up to the 2018 MRRT year ($184.24m), is applied first.
79 Explanatory material: Minerals Resource Rent Tax
This is followed by the mining loss for the 2014 year, as calculated up to the 2018 year ($81.52m). Then the mining loss for the 2015 year, as calculated up to the 2018 year ($288.58m), is applied but only to the extent that it reduces the mining profit in the 2018 year to nil. Therefore, $154.34m ($400m – $184.24m – $81.52m – $288.58m = -$154.34m) of the mining loss for the 2015 year will not be applied in calculating the mining loss allowance for the 2018 MRRT year.
This remaining $154.34m mining loss for the 2015 year will be uplifted for the 2019 year (to $174.40m) to be an available mining loss to be applied in calculating the mining loss allowance to be deducted from the $800m mining profit for the 2019 year.
6.52 The mining loss from a particular MRRT year ceases to be a mining loss if it has been fully applied in working out either one or more mining loss allowances or one or more transferred mining loss allowances. [Subsection 63-100(4)]
Transferred pre-mining loss allowances
6.53 Because most mineral exploration in Australia is conducted by entities that do not themselves mine their successful discoveries, the transfer of pre-mining losses is dealt with differently from the transfer of mining losses. Pre-mining losses do not have to satisfy a common ownership test before they can be transferred. However, they do have to satisfy a requirement that transfers occur between interests related to the same type of taxable resource.
6.54 A miner has a transferred pre-mining loss allowance for a mining project interest if it has any remaining mining profit after deducting all higher ranked allowances and there are available pre-mining losses. [Section 83-10]
6.55 The amount of a transferred pre-mining loss allowance is the amount of the available pre-mining losses (or the amount of the mining project interest’s remaining mining profit if that is less). [Subsection 83-15(1)]
6.56 In calculating the amount of the allowance, pre-mining losses are applied in the order in which they arose. It is necessary to attach pre-mining losses to particular years, rather than use a rolling balance, because the uplift factor for pre-mining losses reduces after 10 years. If there are several pre-mining losses that arose in the same year (because they arose from different project interests), the miner can choose which of them to transfer. [Subsection 83-15(2)]
80 Allowances
6.57 There are three situations in which a mining project interest can have a transferred pre-mining loss allowance.
A pre-mining project interest is in force
6.58 The first is where the miner (or a close associate) holds a pre-mining project interest in relation to the same type of taxable resource. The pre-mining losses associated with the pre-mining project interest can be applied to work out a transferred pre-mining loss allowance for the mining project interest. [Subsection 83-25(2)]
Pre-mining project interest replaced by a mining project interest
6.59 The second is where the miner (or a close associate) holds another mining project interest that relates to the same type of resource and has a pre-mining loss it inherited from a pre-mining project interest it replaced or was carved out of. The pre-mining loss can be applied to work out a transferred pre-mining loss allowance for the first mining project interest. [Subsection 83-25(3)]
Pre-mining project interest ceased to exist without a related mining project interest coming into existence
6.60 The third is where the miner (or a close associate) has a pre-mining loss that arose with a pre-mining project interest that no longer exists but related to the same type of resource as the mining project interest. The pre-mining loss can be applied to work out a transferred pre-mining loss allowance in relation to the mining project interest. [Subsection 83-25(4)]
6.61 A pre-mining loss cannot be applied to the extent it has already been applied in working out another pre-mining loss allowance or a transferred pre-mining loss allowance for the year. [Subsection 83-25(5)]
Sale of a pre-mining project interest
6.62 On the sale of a pre-mining project interest, any pre-mining losses will be transferred with that tenement. The purchaser can use the pre-mining losses to reduce mining profits of mining project interests it holds or that are held by entities closely associated with it. To prevent trading in pre-mining losses that have a greater economic value than the underlying tenement, the pre-mining losses that go with a transferred pre-mining project interest are limited to the grossed-up amount paid for the acquired pre-mining project interest (tenement). These transfers are explained in Chapter 11.
81 Explanatory material: Minerals Resource Rent Tax
Meaning of closely associated
6.63 An entity is closely associated with another entity at a particular time if they are both members of the same consolidated or consolidatable group or the same MEC group. Those expressions are income tax concepts relevant to deciding whether a group of entities is, or could be, treated as a single entity. [Subsection 83-25(6)].
Transferred mining loss allowances
6.64 A miner has a transferred mining loss allowance for a mining project interest for an MRRT year if the interest has a mining profit (after the application of all other allowances) and there is a mining loss that is available to be transferred. [Section 93-10]
6.65 The amount of a transferred mining loss allowance cannot exceed the amount of mining profit the mining project interest has. [Subsection 93-25(1)]
6.66 Mining losses that can be transferred must be transferred in the order in which they arose. However, if several losses arose at the same time (for example, if there are several mining project interests with losses available for transfer), the miner can decide the order in which they are transferred. [Subsection 93-25(2)]
6.67 A mining loss of a mining project interest must be transferred to another mining project interest if:
• the two mining project interests satisfy the common ownership test [paragraph 93-100(1)(a)]; and
• the mining loss is not attributable to a year in respect of which an election was made to use the alternative valuation method for its mining project interest [paragraph 93-100(1)(b)]; and
• the two mining project interests both relate to iron ore or both relate to taxable resources that are not iron ore (that is, a coal mining project interest cannot transfer its mining loss to reduce a mining profit from an iron ore mining project interest) [paragraph 93-100(1)(c)].
82 Allowances
Common ownership test
6.68 The common ownership test is satisfied if, at all times from the start of the year for which the mining loss arose to the end of the year in which the mining loss is to be applied, the two mining project interests were held by the same miner or by miners who are closely associated with each other. [Section 93-115].
6.69 The common ownership test is not focused on whether there has been a change in the direct ownership of the project interests, nor is it asking if the project interests have remained in the one entity or group. Rather, the test focuses on the relationship between the holders of the two mining project interests and asks whether, at each moment within the test period, both were held by the same entity or by entities within the same common group (even if the entities holding them, or the group they were part of, changed from time to time).
6.70 These examples illustrate the circumstances where two mining project interests satisfy the common ownership test.
Example 1.1: Same miner has both interests
Echo Coal Co is the head of a consolidated group (which consolidated for MRRT purposes in 2012). P1 has a mining loss in relation to its mining project interest for the 2013 year and P2 has a mining profit in relation to its mining project interest for that year. Because it is a consolidated MRRT group, both mining project interests are treated as being held by the group’s head entity, Echo Coal Co, from the start of the loss year until the end of the transfer year. P1 is able to transfer its mining loss to reduce P2’s mining profit for the year. Similarly, P1’s mining loss is available to be applied in calculating a transferred mining loss that will reduce mining profits of P3, P4 or P5.
83 Explanatory material: Minerals Resource Rent Tax
Example 1.2: Transfer of the group containing loss and profit project interests
Following on from the previous example, Foxtrot Coal Co purchases Bravo Coal Co (which owns P1 and P2). Bravo Coal Co is now part of Foxtrot Coal Co’s consolidatable group. P1 and P2 have moved from Echo Coal Co’s consolidated group to Foxtrot Coal Co’s consolidatable group. While P1 and P2 have existed in two different groups, the two project interests have always been in the same group as each other. There has been no interruption to their relationship; they have continually been closely associated with each other. P1 is required to transfer any available mining loss to P2 as it has a mining profit, up to the amount of that profit. However, P1’s mining loss cannot be transferred from P1 to P6 or P7 as P1 was not in common ownership with P6 and P7 at all relevant times.
84 Allowances
Example 1.3: Loss project interest transferred within same consolidatable group
Following on from the previous example Foxtrot Co undertakes a restructure and moves ownership of P2 from Bravo Coal Co to Hotel Coal Co. As Foxtrot Coal Co is not consolidated, each subsidiary within the group is a miner and responsible for its own MRRT liability.
While P1 and P2 are now held by different miners, each miner is within the same consolidatable group. Therefore both mining project interests have at all times been held by miners closely associated with each other. P1’s available mining loss would still be required to be transferred to P2 up to the amount of its remaining mining profit but those mining losses could still not be transferred to P6 or P7 for the same reason as in the previous example.
Example 1.4: Loss and profit project interests sold simultaneously
Following on from the previous example, India Coal Co, a single entity miner, simultaneously purchases P1 and P2 from Foxtrot Coal Co. P1 and P2 are now held by the same miner (a single entity). As P1 and P2 were purchased by India Coal Co at the same time, both mining project interests continue to have always been closely associated with each other. Therefore, any available mining loss in P1 still needs to be transferred to P2 up to the amount of its remaining mining profit.
85 Chapter 7 Starting base allowances
Outline of chapter
7.1 This chapter explains Part 3-5 (Divisions 73, 75 and 77), which deal with starting base allowances.
Summary of new law
7.2 Starting base allowances reduce a miner’s MRRT liability for a mining project interest for an MRRT year. The allowances recognise investments in assets that relate to the upstream activities of a mining project interest (starting base assets) that existed before the announcement of the resource tax reforms on 2 May 2010. Further rules are being developed to deal with cases where a pre-mining interest existed on 1 May 2010.
7.3 A miner has a starting base allowance if it has profit remaining after using all other higher ranked allowances, and it has one or more starting base losses. Unlike other losses, starting base losses are never transferable to other mining project interests.
7.4 A miner can generally choose to work out the starting base losses for its mining project interest based on either:
• the market value of starting base assets (including rights to the resources) at 2 May 2010; or
• the most recent accounting book value of starting base assets (not including rights to the resources) available at that time.
7.5 Starting base losses also recognise certain expenditure made by a miner between 2 May 2010 and 1 July 2012 on its starting base assets.
7.6 A starting base loss reflects the annual depreciation (decline in value) of the starting base assets. If there is insufficient profit to use a starting base loss, it is carried forward and uplifted.
7.7 Under the market value approach, a starting base asset is depreciated over the shorter of: the asset’s remaining effective life; the life of the mine; and the period until 30 June 2037. The undepreciated value
86 Starting base allowances
of a starting base asset is not uplifted, though the real value of any unused loss is preserved by uplifting it by the consumer price index.
7.8 Under the book value approach, a starting base asset is depreciated over five years. The undepreciated value of a starting base asset is uplifted each year by the LTBR + 7 per cent. Any unused losses are also uplifted by the LTBR + 7 per cent.
Detailed explanation of new law
A miner has an allowance when it can use a starting base loss
7.9 A miner has a starting base allowance if it has sufficient profit to use some or all of its starting base losses, after using all other higher ranked allowances [section 73-15]. Royalty, transferred royalty, pre-mining loss, and mining loss allowances are all higher ranked allowances [section 7-10].
7.10 The starting base allowance is made up of the starting base losses of the mining project interest, to the extent there is sufficient profit to use those losses after the higher ranking allowances have been used. [Section 73-17]
7.11 A miner has a starting base loss for a year when it holds a starting base asset and there is a decline in value for that asset. The loss is reduced to the extent it is applied as a starting base allowance, and ceases to exist when it has been fully applied. [Section 73-20]
Starting base assets produce starting base losses
What is a starting base asset?
7.12 Starting base assets include most tangible and intangible assets that are relevant to the upstream operations of a mining project interest.
7.13 A starting base asset is one that is used, installed ready for use, or being constructed for use in carrying on the upstream mining operations in relation to the mining project interest on 1 July 2012 (or when production begins, if that is later) [subsections 73-25(1) and (2)]. The concept of ‘upstream mining project operations’ is explained in Chapter 5.
1.6 The definition of a starting base asset is based on the income tax definition of a ‘CGT asset’ (see section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)), which means any kind of property or a legal or equitable right. The ‘asset’ concept is a broad one,
87 Explanatory material: Minerals Resource Rent Tax
encompassing all types of legal property and rights. Where a miner holds an interest in an asset, the interest in the underlying asset is itself capable of being the starting base asset.
7.14 For the market value approach, the definition specifically includes mining information (as defined in subsection 40-730(8) of the ITAA 1997), which may not otherwise be considered a legal asset as it is not capable of assignment (eg, see Hepples v FCT (1990) 90 ATC 4497 and Taxation Determination TD 2000/33). [subsection 73-25(4)]
7.15 If a miner chooses the book value approach, the rights and interests that make up the mining project interest itself are not included in the definition of a starting base asset. This exclusion reflects the policy to exclude the value of the taxable resources if a miner chooses the book value approach. For the same reason, the value of mining information is also excluded. It is unlikely that goodwill would be an asset that can be meaningfully identified in relation to the upstream operations of a mining project interest (as goodwill is normally associated with a business enterprise as a whole). However, to the extent that it would otherwise be considered a starting base asset, goodwill is excluded under the book value approach. [Paragraph 73-25(3)(a)]
7.16 Generally, if a miner chooses the market value approach, the rights, interests, mining information and goodwill (if any) are taken to be a single starting base asset [subsections 73-25(4)(b)]. In other words, any relevant mining information held by a miner should be taken to be part of the same asset as all the rights and interests that comprise the mining project interest. This composite starting base asset is taken to be a depreciating asset, which has an effective life equal to the longest effective life of any of those rights and interests [subsection 77-11(3)].
7.17 However, if the mining project interest includes an interest (a constituent interest) that the miner has chosen to combine because it is a part of the same integrated downstream operation, then the rights and interests of that constituent interest are only combined with any associated mining information and goodwill to form a single starting base asset [subsection 73-27(2), paragraph 73-27(3)(a) and subparagraph 73-27(3)(b)(i)]. Chapter 10 explains integration and combination of mining project interests.
7.18 In addition, if the mining project interest includes a constituent interest (either because it is integrated in the upstream or downstream operations) and production has not commenced in relation to that constituent interest, then the rights and interests of the constituent interest are only combined with any associated mining information and goodwill to form a single starting base asset. [subsection 73-27(2), paragraph 73-27(3)(a) and 73-27(3)(b)(ii)]
88 Starting base allowances
7.19 Under either the book value or market value approach, other intangible assets relevant to the upstream operations of the mining project interest would be starting base assets.
7.20 All tangible assets relevant to the upstream operations of the mining project interest are starting base assets as well. The most common type will be the equipment that is involved in the extraction activities of the mine.
7.21 Land that is used in upstream mining operations can be a starting base asset. Improvements to land or fixtures on land are treated as separate assets, not as part of the land, regardless of whether they can be removed from the land or are permanently attached. This ensures that a miner can hold these things as starting base assets, regardless of whether it holds the land on which the improvement or fixture exists. [Subsection 73-25(5)]
7.22 Some trading stock and consumable assets are included in the definition of starting base assets, but it is expected that few of these assets would produce starting base losses. If they were held on 1 May 2010 and continue to be held on 1 July 2012, they are capable of producing starting base losses. However, trading stock and consumables that are acquired between 2 May 2010 and 1 July 2012 would not have a ‘cost’ that is included in the value of a starting base asset (see interim expenditure below).
7.23 An asset is not considered to be a starting base asset where a miner:
• fails to make a valid election about whether to use the market value or the book value approach; or
• was not entitled to elect to use the book value approach (see below for the restrictions on electing this approach); or
• did not incur interim expenditure in relation to the asset.
[paragraph 73-25(3)(b)]
7.24 This exclusion reflects the fact that some assets, which would otherwise be starting base assets, would never be capable of producing a starting base loss. Where a miner was entitled to use the book value approach but failed to do so, it will still be entitled to write off the assets it held on 1 May 2010, and the interim expenditure it incurs on assets [paragraph 77-15(3)(b)]. Where a miner did not make a valid election, and was not entitled to choose the book value approach, it may nevertheless be
89 Explanatory material: Minerals Resource Rent Tax
able to write off the interim expenditure it incurs on assets [subsection 75-15(2)].
7.25 Finally, an asset stops being a starting base asset once it is incapable of producing any further starting base losses because it has been completely written off. [Paragraph 73-25(3)(c)]
When an asset is used, installed ready for use, or being constructed for use
7.26 The concept of an asset being ‘used, or installed ready for use’ also appears in the depreciation provisions of the income tax law (see section 40-60 of the ITAA 1997).
7.27 The word ‘used’ takes its ordinary meaning, which in any particular case will depend on the context in which the word is employed and the purpose for which the asset is held (Newcastle City Council v Royal Newcastle Hospital (1956) 96 CLR 493).
7.28 The degree of physical or active use that is required to constitute ‘use’ will depend to a certain extent on the nature of the asset and the purpose for which it is held. For a tangible depreciating asset, physical or active employment of the asset would generally be expected in order for an asset to be considered to be ‘used’. For an intangible asset, employment of the asset may not be physical and the asset may be considered to be ‘used’ in the context of passive use. However, use would generally be expected to involve an exploitation of the inherent character of the asset.
7.29 The phrase ‘installed ready for use’ is defined in subsection 995-1(1) of the ITAA 1997 and requires not only that the asset be installed ready for use but also that it be ‘held in reserve’. In that context, the courts have held that things ‘held in reserve’ must be held for future use in an existing operation and that the concept of holding in reserve was not ‘so wide as to embrace income producing operations which may be undertaken at some future time’ (Case X46 90 ATC 378 (at 381)).
7.30 The phrase ‘being constructed for use’ does not appear in the income tax law. In the context of the MRRT starting base, these words are intended to cover assets that are in the process of being created by the miner for later use in the upstream operations of the mining project interest. An asset that is being constructed by an entity other than the miner would be a starting base asset, but the miner would only have a base value for the asset if it held the asset on 2 May 2010, or if it incurred interim expenditure at a time that it held the asset after 2 May 2010 and before 1 July 2012.
90 Starting base allowances
When does a miner hold a starting base asset?
7.31 The meaning of ‘hold’ adopts the income tax definition for depreciation purposes (see section 40-40 of the ITAA 1997), which generally refers to the economic owner of the asset. [Section 73-30]
Amount of a starting base loss
7.32 The starting base loss is based on a portion of the value (the decline in value) of the starting base assets. The principles and mechanisms used in the depreciation provisions of the income tax law (Division 40 of the ITAA 1997) have, to the extent possible, been adopted to work out the decline in value of a starting base asset.
Amount of a starting base loss in the year in which it arises
7.33 For the year in which the starting base loss arises, it is worked out as follows:
• Step 1: Work out the decline in value for each starting base asset the miner held in the year.
• Step 2: Reduce the result of step 1 to the extent that the asset is used, installed ready for use, or being constructed for use, for a purpose other than upstream mining operations of the mining project interest.
• Step 3: Reduce the result of step 2 to the extent it relates to amounts that would not be deductible under the MRRT.
• Step 4: Add up the amounts remaining after step 3 for each of the starting base assets.
Step 1 — Decline in value for each starting base asset 7.34 The starting base loss includes an amount equal to the ‘decline in value’ for a year of a starting base asset that a miner held for any time during the year [subsection 73-55(1)]. This is explained further below.
Step 2 — Ignore the decline in value to the extent it does not relate to upstream mining operations 7.35 The starting base loss does not include any part of the asset’s decline in value that is attributable to the miner’s use of the asset, or having it installed ready for use, or constructing it for use, for a purpose other than upstream mining operations in relation to the mining project interest. [Subsection 73-55(3)]
91 Explanatory material: Minerals Resource Rent Tax
7.36 Any decline in value that is not attributable to upstream mining operations will not contribute to a loss. However, this does not affect the decline in value itself, which will continue irrespective of the use of the asset. This means that any decline that is attributable to a period when the asset was not used for upstream mining operations is not available to form part of a starting base loss in a later year.
Example 1.1: Ignore decline in value for downstream use
Fran Co. has one starting base asset with a base value for the MRRT year of $10 million. The decline in value of the asset for the year is $1 million.
Fran Co. uses the asset 20 per cent in the upstream mining operations of its mining project interest. Therefore, the starting base loss is $200,000 (which is the decline is reduced by $800,000 to reflect the use of the asset other than in upstream mining operations).
The base value of the asset for the next MRRT year is $9 million.
7.37 The narrow base of the MRRT means there is a need to apportion the decline in value. This will be relevant when starting base assets are partly used to mine taxable resources as well as being partly used to mine non-taxable resources, or even when assets used solely to mine taxable resources are partly used for downstream mining operations (ie activities after the taxing point). As under the general expenditure provision (section 21-20), this apportionment should be made on a fair and reasonable basis. The portion relating to downstream operations may still be relevant to working out how much of the sale price of the resources is mining revenue (for instance, if a netback methodology is used).
Step 3 — Ignore the decline in value to the extent it relates to amounts that would be explicitly not deductible 7.38 The starting base loss does not include any part of the asset’s decline in value that would be excluded expenditure if it were an amount that was incurred on or after 1 July 2012 [subsection 73-55(4)]. So, to the extent that the circumstances which lead to an amount being specifically non-deductible apply in relation to a starting base asset in a year, the decline in value of that asset is so reduced. For an explanation of ‘excluded expenditure’, see Chapter 5.
Example 1.2: Ignoring the decline that relates to excluded expenditure
Cham Co. has a starting base asset which is a building located away from the project area. In the 2013-14 year, the building is used partly
92 Starting base allowances
for accounting activities. If Cham Co. had incurred a capital amount during the year in relation to the building it would be excluded expenditure to that extent (see section 21-65). As a consequence, to that extent the decline in value for the year for the starting base asset (the building) is not taken into account in working out the starting base loss.
7.39 However, where the market value approach is used, the starting base loss may include the decline in value, regardless of whether that decline would, if it were an amount incurred on or after 1 July 2012, be excluded expenditure under section 21-45. [Subsection 73-55(5)]
7.40 Under section 21-45, expenditure incurred to acquire an interest in a production right is one type of excluded expenditure. However, if the market value approach is chosen, the decline in value of a starting base asset that is a production right (or an interest in a production right) is not reduced simply because it relates to production right.
Example 1.3: Decline that relates to a starting base asset that is a production right
Fox Co. chose to use the market value approach. It has a starting base asset which is an interest in a production right. If Fox Co. incurred an amount during the year to acquire this interest, it would be excluded expenditure under section 21-45. However, the decline in value for the year for the starting base asset (the interest) is not affected in these circumstances.
Step 4 — Add up the remaining amounts for each starting base asset 7.41 The starting base loss is the total of the amounts worked out under steps 1 to 3 for each starting base asset [subsection 73-55(1)]. In other words, a miner adds together the decline in value for each of its starting base assets in relation to a particular mining project interest to work out the starting base loss for the year (less any reductions under steps 2 and 3). As explained above, this starting base loss will produce an allowance to the extent that the miner has sufficient mining profits against which to offset these losses.
Amount of a starting base loss after the year in which it arises
7.42 In a later year, the starting base loss includes any unused starting base loss for the mining project interest for the previous year, increased by an uplift factor. [Section 73-60]
7.43 An unused starting base loss is any part of a starting base loss that is not used to make a starting base allowance in the previous year. In other words, it is the amount (if any) by which the starting base loss for
93 Explanatory material: Minerals Resource Rent Tax
the previous year exceeded the mining profit for the previous year, after all higher ranked allowances had been applied.
7.44 To the extent that a starting base loss is not used in a year, it will be uplifted and carried forward to the next year. The uplift factor that applies is:
• under the book value option — LTBR + 7 per cent [paragraph (a) of the definition of uplift factor in section 73-60];
• under the market value option — the consumer price index for the previous year ending 31 March. The consumer price index is expressed in the same way as section 960-80 of the ITAA 1997 [paragraph (b) of the definition of uplift factor in section 73-60].
Example 1.4: Starting base loss for a year after the loss arose
Link Co. has a starting base loss of $1 million for the 2015-16 MRRT year. It has no mining profits remaining after it applies its higher ranked allowances, so it carries forward the entire loss to the next year.
Link Co. has chosen the book value approach for the mining project interest, so it uplifts the loss by the LTBR + 7 per cent. The LTBR for the 2015-16 MRRT year is 6 per cent.
Therefore, in the 2016-17 MRRT year, the amount of the 2015-16 starting base loss is $1.13 million.
Electing between the market value and book value approaches to valuing and writing off starting base assets
7.45 A miner may be able to elect to value and write off all the starting base assets in relation to a mining project interest using either the market value or the book value approach. [Subsections 75-5(1), (3) and 75-15(1)]
Election applies to all assets used in a project
7.46 The choice as to which approach to adopt needs to be made by a miner in relation to all the starting base assets in a particular mining project interest.
7.47 However, where a miner has more than one mining project interest, it can adopt different approaches in relation to the different interests. As starting base losses are not transferable between different mining project interests, there is no requirement that the different mining
94 Starting base allowances projects of a miner (or a closely associated miner) to have adopted the same approach.
7.48 There are various other choices available to miners under the MRRT apart from that relating to the starting base. Consideration is being given to a common rule that would apply to all of these choices.
Making the election
7.49 The method of making the starting base election is consistent with the general approach for making elections under income tax law. That is, a miner should make its choice by the date it lodges its MRRT return for the relevant year, or within a further time allowed by the Commissioner of Taxation. In this context, the relevant year is the one in which the start time occurs for the starting base assets, since this is the first year in which the assets are capable of producing starting base losses. The ‘start time’ of a starting base asset is outlined below. [Subsection 75-5(2)]
7.50 The election is irrevocable. It applies to the mining project interest for all times after the start time for the starting base assets. [Subsection 75-5(5)]
7.51 The irrevocable election could be problematic if there is uncertainty as to what constitutes a mining project interest at the time the election needs to be made. In these circumstances, there would be compliance and administrative difficulties if a miner was required to specify the particular mining project interests to which an election applies. For example, at that time there may be doubt as to whether mining project interests were integrated and so able to combine (see Chapter 10 for an explanation of integration and combination). In order to ameliorate these potential difficulties, a miner can elect to use a valuation approach in relation to the mining project interest(s) that relate to a particular area, rather than nominating the mining project interests directly. [Subsection 75-5(4)]
Example 1.5: Election covering an area
Bay Co. has two mining operations, Alpha and Beta, which it initially considers to be two mining project interests. The start time for each is 1 July 2012.
Bay Co. elects to use the book value approach in relation to any mining project interest(s) it has at 1 July 2012 that relate to the area covered by Alpha.
95 Explanatory material: Minerals Resource Rent Tax
Bay Co. elects to use the market value approach in relation to any mining project interest(s) it has at 1 July 2012 that relate to the area covered by Beta.
After making the election, Bay Co. identifies that it actually held three mining project interests on 1 July 2012, as it had been mistaken about the ability to combine two mining project interests (Gamma and Delta) into the one mining project interest Beta.
Bay Co.’s election to use the market value approach validly applies to Gamma and Delta as these mining project interests relate to an area covered by the election, notwithstanding the irrevocable nature of the election which it originally thought applied to Beta.
Example 1.6: Election covering more than one mining project interest
Port Co. has two mining operations, Epsilon and Zeta, which it initially considers to be separate mining project interests. The start time for each is 1 July 2012.
Port Co. elects to use the book value approach in relation to Epsilon, and to use the market value approach in relation to the other mining project interests it has at 1 July 2012. At a later time, Port Co. identifies that it actually held one mining project interest on 1 July 2012, as it had been mistaken about the ability to separately identify Epsilon and Zeta, which should have been identified as a single mining project interest, Omega.
Port Co.’s election to use the market value approach in relation to the other mining project interests it has at 1 July 2012 validly applies to Omega, notwithstanding the irrevocable nature of the elections which it originally thought applied to Omega.
1.7 The consequences of not making a valid election are outlined below.
Restrictions on when a miner can choose the book value approach
7.52 Any miner can choose the market value approach to work out the value of their starting base assets. However, a miner can only choose the book value approach if an audited financial report was prepared in relation to the mining project interest during the 12 months before 2 May 2010. [Paragraph 75-10(1)(a)]
7.53 This financial report must also relate to a financial period that ended in the 12 months prior to 2 May 2010. This would preclude the use of a financial report that relates to a financial period that ended before
96 Starting base allowances
2 May 2009, even if the report was prepared in the 12 months prior to 2 May 2010. [Paragraph 75-10(1)(b)]
7.54 The miner (or the consolidated entity of which it is a part) must have prepared the financial report in accordance with the accounting standards. The financial report must also have been audited in accordance with the auditing standards. [Paragraphs 75-10(1)(a) and (c) and subsection 75-10(2)]
7.55 A ‘financial report’ means an annual financial report or a half-year financial report prepared under Chapter 2M of the Corporations Act 2001. Either of these are acceptable, though the initial book value would be the value of the asset recorded in the most recent audited accounts available before 2 May 2010. [Paragraph 77-15(2)(a)]
7.56 ‘Accounting standards’ and ‘auditing standards’ are both defined in section 995-1 of the ITAA 1997 as having the same meaning as in the Corporations Act 2001. ‘Consolidated entity’ is also defined in the Corporations Act 2001 to mean a ‘company, registered managed investment scheme or disclosing entity together with all the entities it is required by the accounting standards to include in consolidated financial statements’.
What happens if a miner does not make a valid election?
7.57 Where a miner fails to make a valid starting base election it is taken to have chosen the book value approach [subsection 75-15(2)]. This reflects the difficulty expected with imposing the market value approach as a default, since a miner that fails to make an election is unlikely to have undertaken a market valuation of its starting base assets.
7.58 Where a miner does not make a valid election, but it was entitled to choose the book value approach, it may be able to use the values recorded in its audited financial report as the initial book value for its starting base assets. Where a miner does not make a valid election, and was not entitled to choose the book value approach, it will not have an initial book value for its starting base assets. [Section 77-15]
7.59 In either case, where a miner does not make a valid election, any interim expenditure incurred on starting base assets would still be written off according to the book value approach. Interim expenditure and the book value write off are explained below.
97 Explanatory material: Minerals Resource Rent Tax
How to work out the decline in value of starting base assets
7.60 As discussed above, the starting base loss will be based on the decline in value of the starting base assets. The decline in value of a starting base asset is worked out using the following formula [section 77-5]:
7.61 The ‘base value’ of an asset represents the value of the asset that can be further declined. It is a year-end amount on which the decline in value for the year can be worked out. The base value of a starting base asset will depend on whether the miner has elected to use the book value approach or the market value approach. This is explained further below.
7.62 ‘Starting base days’ are the days in the year (other than those that occur before the start time) in which the miner held the starting base asset and either used it, had it installed ready for use, or was constructing it, for any purpose [subsection 73-55(6)]. This part of the formula apportions the decline in value where an asset is held for less than the full MRRT year (such as where it is disposed of during the year). Consistent with other parts of the tax law, this apportionment is done over 365 days, regardless of whether the year is a leap year. As explained above, where a miner uses its starting base asset for purposes other than upstream mining operations, this will not affect the decline in value but it will affect the amount of the starting base loss.
7.63 The ‘write off rate’ of a starting base asset will depend on whether the miner has elected to use the book value approach or the market value approach.
Write-off rate under the book value approach
7.64 The following table lists the annual write off rates under the book value approach. [Section 77-8]
Table 1.1: Annual write off rates under the book value approach
For this MRRT year: The write-off rate is: the MRRT year in which the start time for 36% the asset occurs the first MRRT year commencing after the 37.5% start time for the asset occurs the second MRRT year commencing after 37.5% the start time for the asset occurs the third MRRT year commencing after 60%
98 Starting base allowances
the start time for the asset occurs the fourth MRRT year commencing after 100% the start time for the asset occurs
7.65 These rates are based on those announced on 2 May 2010. However, the rates have been adjusted to reflect the declining balance approach used in the formula above.
7.66 The 2 May 2010 announcement stated that depreciation was to occur over 5 years with the following profile: 36 per cent; 24 per cent; 15 per cent; 15 per cent; and 10 per cent. However, this profile assumed a fixed balance being depreciated in each year. Under the declining balance approach, the equivalent write off rates are: 36 per cent; 37.5 per cent; 37.5 per cent; 60 per cent; and 100 per cent.
7.67 The results under each approach are identical. However, the declining balance approach has been chosen as a more efficient legislative expression, given the need to make adjustments to increase the base value of an asset for any interim expenditure and the LTBR + 7 per cent uplift.
Write off rate under the market value approach
7.68 Under the market value approach, the write off rate of a starting base asset for an MRRT year is worked out by reference to its remaining effective life, according to the following equation [subsection 77-11(1)]:
7.69 The ‘remaining effective life’ of an asset that is a depreciating asset (under Division 40 of the ITAA 1997) is any period of its effective life that is yet to elapse as at the start of the MRRT year. [Paragraph (a) of the definition of remaining effective life in subsection 77-11(1)]
7.70 For this purpose, the effective life of a starting base asset is the period worked out under Division 40, as at the asset’s MRRT start time. This may require a miner to reassess the effective life of its assets at the start time, rather than relying on its original assessment for income tax purposes. This may be significant when the original assessments have not taken into account changes in the way the assets are used.
7.71 The term ‘effective life’ describes the length of time over which any entity could reasonably expect to use the particular asset. The estimated effective life of an asset is expressed in years. Part years are expressed as a fraction, and are not rounded to the nearest whole year.
99 Explanatory material: Minerals Resource Rent Tax
7.72 Under Division 40 of the ITAA 1997, a taxpayer usually has the option to use an effective life determined by the Commissioner or to work out the effective life of the asset themselves according to how long the asset can be used to produce income. An exception is the effective life of a mining, quarrying or prospecting right, which is the period over which the taxpayer reasonably expects the reserves can be extracted from the mine. [see section 40-95 of that Act]
7.73 Transitional provisions may be needed for mining, quarrying or prospecting rights that were held before 1 July 2001, to ensure that these assets use an effective life calculated under subsection 40-95(10) of the ITAA 1997 as at the MRRT start time as they are not subject to Division 40 of the ITAA 1997.
7.74 The remaining effective life of the combined starting base asset (explained above) is taken to be the longest effective life of any of the constituent assets are that are depreciating assets (ie, the rights and interests that are depreciating assets, and any mining, quarrying or prospecting information (goodwill is not a depreciating asset)). If none of the constituent assets are depreciating assets, then the combined asset will not be taken to be a depreciating asset. [Subsection 77-11(3)]
Example 1.1: Effective life of the starting base asset that includes the mining project interest and mining information
Tool Co. has a single starting base asset that consists of its interest in production right Kappa, and another interest in production right Sigma. The remaining effective life of the single starting base asset is worked out according to the longest effective life of these rights, as worked out under Division 40 of the ITAA 1997 at the start time.
On 1 July 2012 (the start time), Tool Co. works out the effective life of Kappa to be 15 years, and Sigma to be ten years (according to Tool Co’s estimates, on 1 July 2012, about the reserves of the different mines to which each right relates).
The remaining effective life of the starting base asset is based on the period of the effective life of Kappa that is yet to elapse. Therefore, at the end of 30 June 2013, the remaining effective life of the starting base asset is fourteen years.
7.75 The remaining effective life of a starting base asset is capped to the shorter of the following:
• the longest remaining effective life of any right or interest that makes up the mining project interest; and
100 Starting base allowances
• the period until 1 July 2037 (which is 25 years after the MRRT commences).
7.76 In other words, an asset with a remaining effective life that exceeds any of these caps is taken to have a remaining effective life equal to the shorter of the caps.
7.77 Starting base assets that are not depreciating assets (and so do not have an effective life for income tax purposes, such as land and many intangibles) will also be taken to have a remaining effective life equal to the shortest of those caps. [Paragraph (b) of the definition of remaining effective life in subsection 77-11(1) and subsection 77-11(2)]
7.78 The remaining effective life of an asset cannot be less than one year [subsection 77-11(3)]. This ensures that the write off rate does not exceed 100 per cent so that the decline in value cannot exceed the asset’s base value for the year [subsection 77-5(2)].
Base value under the book value approach
Base value for the year in which the start time occurs 7.79 Under the book value approach, for the MRRT year in which the start time occurs, the base value of a starting base asset that was held in relation to the mining project interest at all times in the interim period is:
• the initial book value of the asset [paragraph 77-15(1)(a)]; and
• any additional valuation amounts (uplifted interim expenditure) [paragraph 77-15(1)(b)].
7.80 If the starting base asset was not held at all times in the interim period (because it was acquired during this period), then its initial base value is simply the sum of additional valuation amounts (uplifted interim expenditure). ‘Interim period’ is explained below.
Initial book value 7.81 The initial book value of a starting base asset is:
• the amount recorded in the accounts that produced the most recent audited financial report available before 2 May 2010, uplifted from the date of that report until the end of the year in which the start time occurs; or
• if the auditor’s report recorded another value in relation to the asset — that value, uplifted from the date of the auditor’s
101 Explanatory material: Minerals Resource Rent Tax
report until the end of the year in which the start time occurs. [Subsections 77-15(2) and (4)]
7.82 The uplift factor is the LTBR + 7 per cent. [Subsection 77-15(2)]
Additional valuation amounts 7.83 Additional valuation amounts include the interim expenditure (explained below) in relation to starting base assets, uplifted by LTBR + 7 per cent for the period between when the amount is incurred and the end of the year in which the start time for the asset occurs. [Subsections 77-15(5) and (6)]
Base value for later years 7.84 For every later MRRT year, the base value of the asset is reduced by the decline in value, and the result is then uplifted by the LTBR for the previous year + 7 per cent. [Section 77-30]
Base value under the market value approach
7.85 Under the market value approach, the base value of a starting base asset reflects its market value as at 1 May 2010, plus any interim expenditure in relation to the asset. [Subsection 77-50(1)]
Base value for the year in which the start time occurs 7.86 For the MRRT year in which the start time occurs, the base value of a starting base asset that was held in relation to the mining project interest at all times from 2 May 2010 to 30 June 2012 is:
• the market value of the asset on 1 May 2010 [paragraph 77-50(1)(a)]; and
• any interim expenditure [paragraph 77-50(1)(b)].
7.87 If the starting base asset was not held at all times in the interim period (because it was acquired during this period), then its initial base value is simply the sum of interim expenditure.
Market value of the asset 7.88 ‘Market value’ is not defined in the draft legislation, though its ordinary meaning is modified for the effect of GST and the costs of converting non-cash benefits (see Subdivision 960-S of the ITAA 1997). [Paragraph 77-50(1)(a)]
102 Starting base allowances
7.89 The common law definition of market value (discussed in Spencer v Commonwealth of Australia (1907) 5 CLR 418) is based on the principles of:
• the willing but not anxious vendor and purchaser;
• a hypothetical market;
• the parties being fully informed of the advantages and disadvantages associated with the asset being valued; and
• both parties being aware of current market conditions.
7.90 The market value of a starting base asset will be the amount worked out using these principles. However, there are different methods commonly used in market valuations. A miner (or its valuer) should select the most relevant valuation method for the circumstances in which the asset is held and used from the range of methods and practices that are generally accepted by industry and the Commissioner.
7.91 In selecting a valuation methodology, the miner (or its valuer) should give consideration to factors such as:
• the nature of the valuation;
• the development status of the mineral assets; and
• the extent and reliability of available information.
7.92 The Commissioner has also published information on market valuations for tax purposes and is developing early guidance material on the MRRT for consultation.
7.93 To undertake a market valuation, a number of input factors may need to be estimated, including resource to reserve conversion ratios, production and sales forecasts, forecasts of commodity prices, exchange rates, interest rates, inflation and costs, and various discount rate parameters. As valuations are to be undertaken as at 1 May 2010, there are some market-based inputs that will be common across the industry, and others that differ according to the facts and circumstances.
7.94 For some of the common factors, industry information existed at 1 May 2010 that provides a reference benchmark for individual valuations. Articulating such reference benchmarks could assist in making the valuation process more objective, consistent and transparent, and thereby reduce compliance costs and provide greater certainty to a miner.
103 Explanatory material: Minerals Resource Rent Tax
7.95 These benchmarks would not constrain a miner’s choice of valuation methods or their ability to use alternative estimates where they are justified. The actual forecasts and assumptions used in individual valuations might differ from any reference benchmarks for a range of reasons and the existence of such benchmarks should not prevent miners (and valuers) using different assumptions where they are appropriate.
7.96 The principles used to market value starting base assets should be consistent with those used in determining the value of the resource at the taxing point. In other words, to the extent that the determination of the market value of a starting base asset is relevant for determining mining revenue, the market value methodology should be applied consistently to work out the most reasonable value for the asset for each purpose. Conversely, if a miner intends to use a netback methodology to determine its mining revenue it should also apply that methodology in the valuations of their upstream and downstream starting base assets to the extent appropriate.
7.97 The market value of a starting base asset that is (or includes) a mining project interest should be worked out ignoring any liability to pay a private mining royalty [subsection 77-50(2)]. Mining royalties are explained in Chapter 5.
7.98 For private mining royalties agreed prior to 2 May 2010 it may not be possible for the miner to renegotiate the terms of the royalty agreement, in which case they would bear an MRRT liability in respect of profits they do not earn. This is addressed by valuing any starting base asset that is (or includes) a mining project interest as if it were not encumbered by the private royalty liability. This will lead to additional starting base losses that provide an equivalent shield to that otherwise available to the royalty recipient.
7.99 Where such an arrangement is renegotiated on or after 2 May 2010, this may be recognised as a partial disposal of the starting base asset, which will mean its base value is reduced to the same extent. The rules about part disposals of starting base assets are explained below.
Interim expenditure 7.100 The initial base value of a starting base asset will also include any interim expenditure incurred in relation to it. In contrast to the book value approach, under the market value approach interim expenditure is not uplifted for the period between when it is incurred and the end of the year in which the start time for the asset occurs. [Paragraph 77-50(1)(b)]
104 Starting base allowances
Base value for later years 7.101 For every later MRRT year, the base value of a starting base asset is its base value for the previous year less the decline in value for the previous year. In contrast to the book value approach, under the market value approach this amount is not uplifted for the year. [Section 77-60]
Interim expenditure
7.102 Under either the book value approach or the market value approach, the base value of a starting base asset will include ‘interim expenditure’. Interim expenditures are certain amounts incurred on starting base assets in the interim period — being the period ending on 1 July 2012 and starting on:
• under the book value approach — the earlier of 2 May 2010 and:
– the date of the accounts that are reflected in the audited financial report; or
– the date of the auditor’s report, if it contains a value that is inconsistent with those accounts; and
• under the market value approach — 2 May 2010.
7.103 Interim expenditure includes amounts incurred on assets held throughout this period, as well as expenditure on assets that start to be held in this period.
7.104 Interim expenditure includes the following kinds of amounts incurred in this period in relation to a starting base asset:
• if the starting base asset is a ‘depreciating asset’ for income tax purposes — amounts included in the ‘cost’ of that asset for income tax purposes [subparagraph 77-75(1)(a)(i)]; or
• if the starting base asset were a ‘CGT asset’ (but not a depreciating asset) for income tax purposes — amounts included in the ‘cost base’ of that asset for income tax purposes, except for ‘third element’ costs (which are the costs of owning the asset, such as interest costs — see subsection 110-25 of the ITAA 1997) [subparagraph 77-75(1)(a) (ii) and subsection 77-75(2)].
7.105 Interim expenditure also includes mine development expenditure that relates to the mining project interest.
105 Explanatory material: Minerals Resource Rent Tax
Mine development expenditure 7.106 Mine development expenditures are the amounts a miner incurs in the interim period in developing the project area of its mining project interest [subsections 73-35(1), (2) and (5)]. In particular, it includes expenditure incurred in:
• removing overburden from the project area;
• excavating a pit in the area; and
• sinking a mineshaft in the area.
7.107 To the extent it is not interim expenditure on another starting base asset, the mine development expenditure itself is taken to be a starting base asset [paragraph 73-35(1)(c)]. The deemed asset is taken to be held for as long as the miner has the mining project interest, and is taken to be used in the upstream mining operations [subsections 73-35(3) and (4)]. The deemed asset is not a depreciating asset and so, if the market value approach is chosen, will be written off accordingly [paragraph (b) of the definition of remaining effective life in subsection 77-11(1)].
7.108 Mine development expenditure cannot itself be interim expenditure relating to another amount of mine development expenditure [subsection 77-75(4)]. That is, any amount of mine development expenditure that does not relate to another starting base asset (other than one deemed to be an asset because it was another amount of mine development expenditure) is taken to be a separate starting base asset.
Example 1.1: Mine development expenditure is taken to be a starting base asset
Mystic Mining Co. incurs mine development expenditure on 1 June 2011. The expenditure does not relate to any of its other starting base assets for the mining project interest. Therefore, the expenditure is taken to be a new starting base asset that Mystic Mining Co holds and uses in the upstream mining operations of the mining project interest.
Mystic Mining Co incurs another amount of mine development expenditure on 1 July 2011. The expenditure does not relate to any of its other starting base assets for the mining project interest. The expenditure cannot be considered interim expenditure relating to the new starting base asset (ie, the earlier mine development expenditure). Instead, the expenditure is taken to be another new starting base asset that Mystic Mining Co holds and uses in the upstream mining operations of the mining project interest.
106 Starting base allowances
Other reductions to base value
Recoupment of base value 7.109 The base value of a starting base asset is reduced to the extent there is any economic recoupment of the asset’s base value [section 77-85]. This is equivalent to the recoupment of mining expenditure in Division 19 (which is explained in Chapter 5).
Example 1.1: Recoupment of the base value of a starting base asset
Continuing the example above, on 30 June 2011 Mystic Mining Co receives a government grant that subsidises the activities on which Mystic Mining Co had incurred the mine development expenditure. The base values of the starting base assets that were taken to have arisen when the expenditure was incurred are each reduced by half of the subsidy (which is the proportion of the grant that has the effect of offsetting the base value for each asset).
Partial disposals of starting base assets 7.110 The base value of a starting base asset is also reduced to the extent that any interest in the asset is disposed of, or any liability arises in relation to the asset [section 77-80]. This ensures that the impaired value of an asset is reflected in a lower base value for the asset.
7.111 For example, if a miner enters a contract that has the effect of transferring some of its benefits under the production right it holds (and continues to hold), the base value of that right is reduced to that extent. This is a part disposal of the asset.
7.112 Where a miner simply stops holding a starting base asset (or the asset is no longer used, installed ready for use, or being constructed) there is a balancing adjustment. The rules to support this balancing adjustment are being developed.
107 Chapter 8 Small miners
Outline of chapter
8.1 This chapter outlines the low profit offset which relieves miners from MRRT liability where their mining profits are below $50 million in an MRRT year. The value of the offset is phased-out for miners with mining profits between $50 million and $100 million.
8.2 This chapter also outlines the operation of the simplified MRRT method and the consequences of its use.
Summary
8.3 There is no MRRT liability for miners with group mining profits below $50 million. This is achieved by a low profit offset that reduces a miner’s MRRT liability to nil.
8.4 The $50 million threshold test includes mining profits from coal and iron ore and is applied on an annual basis.
8.5 To reduce potential distortions to the production behaviour of an entity approaching the $50 million threshold, the MRRT liability is phased-in in respect of annual mining profits between $50 million and $100 million.
8.6 The simplified MRRT method provides miners with a simple method of demonstrating that they should not be liable to pay MRRT for a particular year by making a yearly election to comply with a regime with reduced record-keeping requirements.
8.7 These reduced requirements relate mainly to keeping track of profits for simplified MRRT method purposes for operations involving MRRT commodities, in addition to keeping track of royalty expenses to ensure that the MRRT profit is more closely approximated.
108 Small miners
Detailed explanation of new law
Low profit offset – mining profits not greater than $50 million
8.8 The low profit offset shields miners from an MRRT liability where their group mining profits are below $50 million in an MRRT year [section 31-5].
8.9 The low profit offset test is applied annually to a miner’s group coal and iron ore mining profits.
8.10 Group mining profits include the mining profits of entities that are connected or affiliated with the miner in the way described in Subdivision 328-C of the Income Tax Assessment Act 1997.
8.11 A miner has a mining profit for a mining project interest if its mining revenue for the interest exceeds its mining expenditure. Where the mining expenditure exceeds the mining revenue, the miner has a mining loss.
8.12 The calculation of group mining profits does not take into account mining project interests that have operated at a loss for a year. Mining project interests for which a miner has a mining loss are disregarded for integrity reasons. Instead, the losses are uplifted by the MRRT uplift rate, and can be offset against future mining profits a miner may have.
8.13 The existence of the low profit offset is not a mechanism for reducing compliance costs. However, a miner with group mining profits below $50 million may be eligible to use the simplified MRRT method.
Low profit offset – mining profits between $50 million and $100 million
8.14 If an entity were fully liable for MRRT on mining profits once its group mining profits exceeded the $50 million threshold, an incentive would exist for the entity to delay production in order to remain below the threshold.
8.15 To remove this distortion, the offset phases-out for profits between $50 million and $100 million. [Section 31-10]
8.16 The phase-out reduces the maximum possible tax offset provided by the low profit offset by $0.225 for every $1 of group mining profit above $50 million.
109 Explanatory material: Minerals Resource Rent Tax
8.17 The entitlement to a low profit offset is calculated as a group offset and apportioned between each of the mining projects interests in the group by reference to each interest’s share of the group’s mining profits. A miner with an interest that has a mining loss is not entitled to a share of the offset.
8.18 The low profit offset is calculated once the group’s MRRT allowances have reduced the group’s mining profit.
8.19 The formula used to calculate the offset for a miner with group mining profits between $50 million and $100 million is as follows.
Formula 8.1
骣骣 Miner’s share 琪琪$50 million-Taper - Miner’s group of group mining 琪琪 amount MRRT allowances 桫桫 profit 8.20 The taper amount is the amount of the group’s mining profits between $50 million and $100 million. Subtracting the taper amount from $50 million produces the maximum deduction before group MRRT allowances. All applicable group MRRT allowances are then deducted.
8.21 Where the result is less than zero, there is no entitlement to a low profit offset. Where the result is greater than zero, the miner is entitled to a share of the offset amount calculated by reference to their percentage share of the group’s mining profits. The low profit offset entitlement of the miner is then calculated as:
amount calculated in formula 8.1 x the MRRT rate
8.22 Once the low profit offset entitlement is determined, it is applied to reduce the miner’s MRRT liability for the year.
110 Small miners
Example 1.1: Entitlement to a low profit offset where mining profits are greater than $50 million and less than $100 million
In the 2013-14 MRRT year, Strayan Ltd operates Project B. Strayan Ltd is a subsidiary of Bigger Strayan Resource Corporation, which owns Project A and Project B.
Project A Project B Group Total $m $m $m Mining profits $20.00 $60.0 $80.00 0
Royalty allowance $4.40 $8.00 $12.40
Project carry forward $0.10 $0.00 $0.10 losses
Starting base allowance $0.10 $0.20 $0.30
Total MRRT allowances $4.60 $8.20 $12.80
Calculate whether Strayan Ltd is entitled to a low profit offset by using the following steps:
Step (i): Calculate group mining profits by adding the mining profits of Project A and Project B. Calculate the group MRRT allowances by adding the total allowances of Project A and Project B. As group mining profits are greater than $50 million and less than $100 million, a low profit offset entitlement may exist.
Step (ii): Calculate the formula parameters as follows:
Taper $80 m amount: illion - $50 m illion = $30 million
Miner’s $4.60 million + $8.20 million group MRRT = $12.80 million allowances:
Miner’s share $60 m of group illion mining /
111 Explanatory material: Minerals Resource Rent Tax
profits: $80 m illion = 75 per cent
Step (iii): Work out if there is an entitlement to a low profit offset.
= ($50 million - $30 million) – $12.80 million× 75 per cent
= $5.40 million
Simplified MRRT method
Entities that can use the simplified MRRT method
8.23 To qualify for the election for a given MRRT year, the miner must satisfy one of two alternative tests.
8.24 Under the first test, the aggregate of the miner and the miner’s related entities’ profit for simplified MRRT purposes for MRRT commodity operations must be less than $50 million for the year [subsection 125-15(1)].
8.25 A miner that satisfies these requirements is unlikely to have an MRRT liability in the year the election is made because their MRRT profits should be sufficiently low so as to fall below the $50 million threshold for the low income offset.
8.26 Under the second test, the aggregate of the miner and the miner’s related entities’ profits for simplified MRRT purposes, termed the ‘group profit’, must be less than $250 million, and the State and Territory royalties for each mining project interest held by the miner and related entities must exceed 25 per cent of that mining project interest’s profit for simplified MRRT method purposes [subsection125-15(2)].
8.27 A miner that satisfies these requirements is unlikely to have an MRRT liability in the election year because the State and Territory royalties should provide a sufficiently high royalty allowance that an MRRT liability should not arise.
8.28 The 25 per cent royalty test must be applied separately to each mining project interest held by the miner’s consolidated group related entities, because royalty allowances cannot be transferred between separate mining project interests.
8.29 If a miner satisfies the requirements to make the election, they may make it in the approved form on or before the due date of lodgement
112 Small miners of the MRRT return of the year to which the election relates (or within such further period of time as the Commissioner allows) [subsection 125-15(5)].
8.30 ‘Approved form’ takes the same meaning as that in section 388-50 of the TAA 1953.
Entities that are related to each other
8.31 An entity is related to the miner for the purposes of the application of the above tests if the entity is:
• connected with the miner (or an affiliate of such a connected entity); or
• affiliated with the miner (or connected with such an affiliated entity); or
• an entity of which the miner is an affiliate (or connected with such an entity) [subsection 125-15(1)].
8.32 The words ‘affiliate’ and ‘connected with’ take the same meaning as in section 995-1 of the ITAA 1997.
Meaning of profit for simplified MRRT purposes
8.33 An entity’s profit for simplified MRRT method purposes is an entity’s profit from MRRT commodities, determined in accordance with general accounting principles, and adjusted for interest, taxation, royalties and extraordinary items [section 125-20].
8.34 The profit for simplified MRRT method purposes is intended as a reasonable proxy for an entity’s MRRT profits.
8.35 The profit taken into this calculation is the entity’s accounting profit from business operations relating to the sale, export, or use of an MRRT commodity.
8.36 Given this segment of the business includes operations necessary to bring the resource to the point of sale or export, it is unlikely to coincide with the operations upstream of the taxing point.
8.37 The adjustments for interest, taxation and extraordinary items are made in order to produce an amount that is a reasonable estimate of the entity’s earnings before interest and taxation (EBIT). The further adjustment for royalties is to align the EBIT amount with the non- deductibility of royalties under the MRRT.
113 Explanatory material: Minerals Resource Rent Tax
Consequences of using the simplified MRRT method
8.38 The effect of a miner electing to use the simplified MRRT method is to remove the miner’s operations from the MRRT for the year of the election thereby avoiding any MRRT liability for that year [paragraph 125-10(a)].
8.39 A miner who elects in to the simplified MRRT method will lose its entitlements to any mining losses, pre-mining project losses, starting base losses, or royalty credits. These allowance components will be extinguished once and for all upon the miner making its election. [Paragraph 125-10(b)].
8.40 The allowance components are extinguished because a miner who elects into the simplified MRRT method will have limited records from which the historical tax attributes of a mining project interest can be ascertained.
8.41 Taxpayers that no longer satisfy either of the requirements for electing into the simplified MRRT method or who opt not to elect into it in a subsequent year would need to comply with their full MRRT obligations in that subsequent year.
114 Chapter 9 Alternative valuation method
Outline of chapter
9.1 This chapter explains the alternative method for working out the MRRT revenue that is available to some smaller miners and miners with vertically integrated transformative operations.
Summary
9.2 Miners producing less than 10 million tonnes of saleable taxable resources in a year can choose to use an alternative valuation method to work out a mining project interest’s MRRT revenue from resources for that year. Miners who produce more than that can still choose to use the method but only for any vertically integrated transformative operation (that is, an operation that both extracts the resources and turns them into a different product) that existed before 2 May 2010.
9.3 The alternative valuation method is a variant of the netback method. It starts with the consideration for supplies of taxable resources and deducts the project interest’s post-taxing point (downstream) operating costs, depreciation on its downstream assets and a return on its downstream capital. The rate of return is the same as the rate used to uplift carried forward mining losses and royalty credits (that is, LTBR + 7 per cent).
Detailed explanation of new law
Alternative valuation method
9.4 It can sometimes be difficult to apply the normal methodologies for working out what part of the consideration for selling resources is attributable to the condition and location of the resources at their taxing point. The difficulties may be greater for smaller miners who have less access to the specialist advice necessary to apply those methodologies properly. They can also be greater for miners who transform resources they mine in an integrated operation, such as steel manufacturing or electricity generating.
115 Explanatory material: Minerals Resource Rent Tax
9.5 Accordingly, an alternative, and simpler, valuation method is provided for those miners to work out the MRRT revenue attributable to their resources. [Section 120-1]
The alternative method is a choice
9.6 The alternative valuation method is a choice, available to a miner who satisfies the conditions, in relation to each of its mining project interests. A miner can elect to use the method for some interests but not for others. [Paragraph 120-10(2)(a)]
9.7 The election is also available on an annual basis. A miner can elect to use the method for some years but not others [paragraph 120-10(2) (b)]. However, choosing to use the method for a mining project interest in one year could affect the future transferability of allowance amounts arising in that year and whether the interest can combine with other interests in later years.
9.8 A miner must make the choice by the time it lodges its MRRT return for that year, or by the time it was due to provide its MRRT return if it does not lodge it within time. The Commissioner can allow further time. This is a standard approach to elections under tax laws, so the Commissioner’s usual processes for deciding whether to extend time can be expected to apply. [Subsection 120-10(3)]
9.9 A choice to use the alternative valuation method for a mining project interest for a year, once made, is irrevocable. This ensures that miners consider carefully whether to make the choice, rather than seeking to undo it later if circumstances change. [Subsection 120-10(4)]
Effect of making the choice
9.10 If a miner makes the choice for a mining project interest for a year, the revenue relating to the interest’s resources is worked out using the alternative valuation method rather than the other methods that might otherwise be used. The resources would still have to be supplied, exported or used before any amount would be included for them in MRRT revenue. [Section 120-20]
Conditions for making the choice
9.11 Before it can choose to use the alternative valuation method, a miner must either:
• have group production of saleable taxable resources of less than 10 million tonnes in the year; or
116 Alternative evaluation method
• carry on an operation, which existed before 2 May 2010, that supplies things made using the resources extracted from the mining project interest’s project area.
[Subsection 120-10(1)]
9.12 If a miner’s saleable group production is 10 million tonnes or more in the year, it cannot make the choice generally but it could still make it for each mining project interest that is part of an operation the miner carries on that uses the resources to produce something if it existed just before 2 May 2010.
9.13 If a single mining project interest uses some resources in such a vertically integrated transformative operation and supplies some resources directly, a miner whose group production is 10 million tonnes or more would have to split the interest into two mining project interests if it wanted to make the choice for the vertically integrated part. This issue is discussed later.
Group production 9.14 A miner’s group production includes the production across all its mining project interests and those of all the entities connected to, or affiliated with it. [Subsection 120-15(1)]
9.15 Broadly, entities are connected to or affiliated with one another if either controls the other (or both are controlled by a third entity) or if it is reasonable to expect that one would act in accordance with the wishes of the other. These concepts are dealt with by sections 328-125 and 328-130 of the ITAA 1997.
9.16 A project area for a miner’s mining project interest could also be the project area for another miner’s interest (for example, in a joint venture). In such cases, only the miner’s share of the resources extracted from that project area would be counted towards the 10 million tonnes (unless, of course, the miners in question were connected to or affiliated with each other). [Subsection 120-15(1)]
9.17 The weight of taxable resources is measured when they reach the form in which they are to be supplied, exported or used in producing something else. In many mining processes, the weight of the taxable resource extracted declines during processing as waste material is separated and discarded. The 10 million tonnes is determined, not by reference to the weight of the resource at extraction, but by reference to its weight after it has reached the relevant point in the operation. This is commonly referred to as ‘saleable tonnes’ in the mining industry. [Paragraph 120-15(1)(b) and subsection 120-15(2)]
117 Explanatory material: Minerals Resource Rent Tax
9.18 The 10 million tonnes is also measured regardless of the type of taxable resource. It includes the cumulative weight of all the taxable resources produced: the tonnes of gas extracted as an incident of coal mining as well as the tonnes of coal and iron ore. [Subsection 120-15(1)]
9.19 However, for gas subject to the MRRT because it is converted from coal in situ, the tonnes of coal consumed in the gas production are measured (rather than the weight of the gas) and they are measured when they are consumed. [Subsection 120-15(3)]
9.20 Obviously, coal in the ground cannot actually be weighed but there are accepted methods for estimating the weight of the coal consumed based on relevant factors, such as the amount of gas produced. Using such method is sufficient for this purpose.
Vertically integrated transformative operations 9.21 Some miners supply something they produce using the coal or iron ore they mine rather than supplying the coal or iron ore itself. The most common cases are operations that convert iron ore into steel, and operations that burn coal to produce electricity.
9.22 It can be more difficult than usual to work out the value of the taxable resources at their taxing point in such operations because of the extent of capital investment after the taxing point, and the less direct relationship between the value of the resources and that of the product sold.
9.23 The legislation recognises this by allowing miners with such operations to access the alternative valuation methodology even if their group production exceeds 10 million tonnes. This only applies to miners whose vertically integrated transformative operation produces something other than a taxable resource. It would not apply, for example, to a miner who simply refines iron ore or produces coal briquettes. [Subparagraph 120- 10(1)(b)(i)]
9.24 The operation in question must have existed before 2 May 2010, so the method is not available to newly created vertically integrated transformative operations (which would have the opportunity to establish an advance pricing agreement with the ATO). However, it is not necessary that the miner with the operation is the same miner who had it just before 2 May 2010 [subparagraph 120-10(1)(b)(ii)]. This ensures that the legislation does not affect commercial decisions about selling an operation that qualifies for the alternative valuation method.
9.25 Whether an operation is one that existed before 2 May 2010 will be a question of fact. Some things are clear, for instance, the mine and the
118 Alternative evaluation method
power station or steel foundry must both have been run by the same miner or joint venture before 2 May 2010. It would not satisfy the requirement if a miner put together an integrated operation after that date using components that existed beforehand.
9.26 Judgments will have to be made about whether the current vertically integrated transformative operation is the same one that existed before 2 May 2010. Replacement of buildings, plant and staff would probably not change the operation, even if upgrades were involved, but significant expansion of capacity would probably change the operation.
Example 1.1: Steel making operation
Renewing the mining lease in an operation that mines iron ore and uses it to produce steel would be unlikely to change the operation but replacing the mining lease with a mining lease over a different mine would mean that it was no longer the same operation.
Example 1.2: Power generating operation
Replacing a power station’s generator in an operation that mines the coal and generates the electricity would be unlikely to change the operation, but adding a new power station, or extra generating capacity to the existing power station, would mean it was no longer the same operation.
Vertically integrated transformative operations for miners with 10 million tonnes or more 9.27 If a miner produces less than 10 million tonnes of taxable resources, it will be able to choose the alternative valuation method for each of its operations.
9.28 However, if it produces 10 million tonnes or more in a year, it will only be able to choose the alternative valuation method for its vertically integrated transformative operations.
9.29 If an operation only transforms some of the taxable resource into something else (for example, if some of the operation’s taxable resources are sold without being transformed), the miner will have to split that mining project interest into two interests: one for the vertically integrated part and one for the rest. How to split a mining project interest is discussed in Chapter 11. [Subsections 120-50(1) and (2)]
9.30 Special quarantining rules prevent the mining losses and royalty credits from vertically integrated projects being transferred to other mining projects. [Paragraphs 48-100(1)(b) and 93-100(1)(b)]
119 Explanatory material: Minerals Resource Rent Tax
9.31 Lower than normal resource values could be generated by the alternative valuation method (because the prescribed rate of return on downstream capital could be too high for a particular operation). Splitting the mining project interest into two and quarantining the mining losses and royalty credits from the vertically integrated part of the interest ensures that mining losses and royalty credits available because of those low values cannot be used to shield the mining profits of another project, limiting the effects of any inappropriately low resource values.
9.32 A mining project interest that is split in this way could re-combine into a single mining project interest in a later year if the two parts are no longer subject to any rules that would require their continued separation (such as having unused royalty credits or mining losses from previous years) – see Chapter 10. [Subsection 120-50(3)]
What is the alternative valuation method?
9.33 The alternative valuation method is a version of the ‘netback’ method, which starts with a verifiable price and deducts costs to ‘net back’ to the value at an earlier point. Most miners who have not elected to use the alternative valuation method will use the netback method to value their taxable resources, but they will have to work out the inputs using the most appropriate method instead of those prescribed for the alternative valuation method.
9.34 The alternative valuation method starts by working out the amounts for supplying the miner’s resources (or something produced using the resources) for the year. These are the same amounts used as the basis for working out mining revenue under section 19-25:
• the consideration received or receivable for a supply to a party dealing with the miner at arm’s length; or
• the arm’s length consideration for a supply to a party not dealing with the miner at arm’s length; or
• what would be the arm’s length consideration for a supply at the time the resources are (or something produced using the resources is) exported from Australia; or
• what would be the arm’s length consideration for a supply of something produced using the resources at the time the thing is used by the miner.
[Section 120-25, steps 1 and 2 and section 120-30]
9.35 How those amounts are worked out is discussed in Chapter 4.
120 Alternative evaluation method
9.36 The miner then reduces that amount by leaving it with the mining revenue from the taxable resources. The downstream costs are:
• the miner’s downstream operating costs;
• depreciation on the miner’s downstream assets; and
• a return on the miner’s downstream capital costs.
[Section 120-25, steps 3 and 4]
9.37 It is important to note that the legislation only ‘reduces’ the amount by those costs; it is not a mathematical subtraction. The difference is that a reduction cannot produce a figure below zero, while a subtraction could produce a negative result. That means the value of the taxable resources worked out under the alternative valuation method will never be less than zero.
Downstream operating costs 9.38 The miner’s downstream operating costs for a mining project interest are the expenditures the miner necessarily incurs in carrying on those activities related to the taxable resources from the interest that occurs after the resources have passed the taxing point [paragraph 120-35(1) (a)]. They do not include any expenditure of capital or of a capital nature [paragraph 120-35(1)(b)].
9.39 Expenditure cannot be deducted as a downstream operating cost if it would be excluded expenditure in working out the upstream expenses. This ensures there is a symmetrical treatment of upstream and downstream expenditure. [Subsection 120-35(2)]
Depreciation of assets 9.40 The alternative valuation method allows a deduction for the depreciation of assets held by the miner that are used, or installed ready for use, in relation to a mining project interest’s activities after the taxing point and before the resources are supplied, used or exported [subsection 120-40(1)]. The assets themselves might not be depreciating assets but the calculation will provide a depreciation deduction as if they were [paragraph 120-40(3)(a)].
9.41 Depreciation is worked out using the broad approach described in the uniform capital allowance provisions in Division 40 of the ITAA 1997 but is not limited to the prime cost and diminishing value methods that can be chosen under that Division. The alternative valuation method allows any method of depreciation that is accepted for the particular asset in accordance with accounting principles (for example, the units of
121 Explanatory material: Minerals Resource Rent Tax
production method could also be available). [Subsections 120-40(2), (3) and (5)]
9.42 However, the miner must use a consistent depreciation method for a particular asset; it cannot use one method in one year and a different method in the next. [Subsection 120-40(4)]
9.43 If the miner chooses to use the alternative valuation method in the 2012-13 year (the first MRRT year), the depreciation of assets the miner held immediately before 1 July 2012 starts from a value at that date worked out using the depreciated optimised replacement cost method. In effect, that value becomes the asset’s opening adjustable value for the year and it would be written-off over the remainder of the asset’s effective life. Assets the miner did not hold at that time would be depreciated from the time they are acquired, and from their cost. [Paragraph 120-40(3)(d)]
9.44 If a miner does not choose to use the alternative valuation method in the first MRRT year but chooses to use it in a later year, the method would depreciate the miner’s downstream assets from their opening adjustable value for that later year.
9.45 The opening adjustable value for that case is not legislated. However, to fairly reflect the value of the interest’s whole operation, the opening adjustable value of such assets would have to be based on the same valuation option chosen for that mining project interest’s starting base assets. That is, such an asset’s opening adjustable value when the miner elects into the alternative valuation method would be its 1 July 2012 market value or book value, or its cost if it was acquired later, written-down to the start of the year. This reduces the incentive for miners to switch between the alternative valuation method and the normal netback method to gain a tax advantage.
9.46 The legislation does not define ‘depreciated optimised replacement cost’ but relies on its meaning within the valuation industry. Broadly, an asset’s depreciated optimised replacement cost is the amount it would cost to buy a modern equivalent asset, written-down to reflect the shorter remaining life of the actual asset. The reference to the cost being ‘optimised’ means that it is adjusted to account for the existing asset having excess capacity or being redundant. In other words, the depreciated optimised replacement cost of an operation’s assets reflects the cost of replicating the whole operation in the most efficient way possible, then allowing for the age and extent of use of the existing assets.
9.47 A proportion of the asset’s opening adjustable value will be depreciated in each year, worked out according to the asset’s remaining effective life, as is done under Division 40 of the ITAA 1997. The year’s depreciation will then be apportioned in accordance with the extent of use
122 Alternative evaluation method
of the asset (or its installation for use) in relation to the mining project interest’s downstream activities. [Subsection 120-40(6)]
9.48 Therefore, if an asset is used in both a mining project interest’s upstream and downstream activities, its depreciation will be apportioned to reflect only the downstream use. If an asset is used in relation to several mining project interests, its depreciation will be apportioned between them.
Return on capital costs 9.49 The final amount deducted to produce the value of the resource under the alternative valuation method is the return on capital costs.
9.50 The return is equal to the adjustable value of the assets for which depreciation was allowed under the previous step, multiplied by LTBR + 7 per cent: Total adjustable values x LTBR + 0.07
[Subsection 120-45(1)]
9.51 This is the same rate of return used to uplift mining losses and royalty credits that cannot be applied as allowances in a MRRT year.
9.52 If the depreciation allowed for an asset is reduced because it was not fully used (or installed ready for use) on the mining project interest’s downstream activities for the year, the return on capital for the asset is reduced by the same proportion. [Subsection 120-45(2)]
Example 1.1: Applying the alternative valuation method–under 10 million tonnes
Wind Sun Energy Pty Ltd operates a coal mine that supplies coal to Wind Sun’s power station. In the MRRT year starting on 1 July 2012, it produces 9 million tonnes of coal, 1 million tonnes of which it sells to another power station and the rest it uses in its own power station.
Its downstream operating costs for the year are $100m. The opening adjustable value of its downstream assets (namely the plant at its power station) worked out using the depreciated optimised replacement cost, comes to $1.5b and their remaining effective life is 20 years.
Wind Sun sells the 1 million tonnes for $120m. It sells the electricity it generates using the rest of the coal for $600m.
Because its production in the year is less than 10 million tonnes, it can choose to use the alternative valuation method for that year.
123 Explanatory material: Minerals Resource Rent Tax
To work out the MRRT revenue for the coal it extracts, it would start by adding together the amounts it derived from selling the coal and the electricity ($720m). From that, it would deduct its $100m downstream operating costs, its $75m downstream depreciation ($1.5b/20 years – it chooses to use the prime cost depreciation method), and its $180m return on downstream capital ($1.5b x 0.12, assuming a long term bond rate of 5%). That gives Wind Sun MRRT revenue of $365m for the taxable resources it produced in that year.
Example 1.2: Applying the alternative valuation method–10 million tonnes or more
Continuing the previous example, in the next year, Wind Sun is acquired by another mining company that produces 20 million tonnes of coal a year. Wind Sun cannot use the alternative valuation method for its whole operation because its group production is now 29 million tonnes. However, it could use the alternative valuation method to work out the value of its integrated electricity generation operation. If it did that, it would have to split its operation into two because the part of its operation that sells coal cannot use the method.
Wind Sun chooses to use the alternative valuation method for its vertically integrated transformative operation. It would have to separate its downstream assets into those used for each operation (some might have to be apportioned between the two). Let’s assume that, of the $1.425b opening adjustable value of its downstream assets ($1.5b - $75m for last year’s depreciation), $1.2b relates to the integrated electricity generation operation. Of its downstream operating costs, $75m relate to that operation.
For that operation, Wind Sun would start with $600m for its electricity sales and deduct its $75m downstream operating costs, its $63.16m depreciation ($1.2b/19) and its $144m return on capital ($1.2b x 0.12). That gives it MRRT revenue for the resources used in its electricity generation operation of $317.84m. It would also work out the MRRT revenue for the coal it supplied but would have to use the normal valuation methods to do that.
124 Chapter 10 Combining mining project interests
Outline of chapter
1.8 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 MRRT.
1.9 The combined interest will be the basis upon which MRRT liability is determined. Mining revenue, mining expenditure and MRRT allowances will be tracked in relation to the combined interests.
Summary
Combining mining project interests
1.10 A mining project interest is the basis upon which a miner’s MRRT liability is determined. The mining project interest is the anchor for the operation of the MRRT. If a miner has mining revenue, mining expenditure, allowance components or starting base assets it will have them for a mining project interest.
1.11 In its most discrete form, a miner will have a mining project interest in respect of their entitlement to share in the output of taxable resources extracted from the area of land covered by a production right. If a miner has such an entitlement in respect of the taxable resources extracted from the area of land covered by two production rights, it would have two mining project interests. A miner will also have two mining project interests if it later acquires a further entitlement to a share of the output of the undertaking with respect to the same production right that the original mining project interest relates to.
1.12 Two mining project interests may be integrated if the mining operations of the mining project interests are integrated. If a miner has one or more mining project interests that are integrated, the mining project interests may be able to combine to form a combined mining project interest.
1.13 Integrated mining project interests can only combine if the combination will not result in the effective transferability of otherwise quarantined allowance components.
125 Explanatory material: Minerals Resource Rent Tax
1.14 If mining project interests can combine, they must combine.
1.15 Integrated mining project interests can only combine if:
• all royalty credits (if any) are transferable between the integrated mining project interests; and
• all mining losses (if any) are transferable between the integrated mining project interests; and
• any of the integrated mining project interests have a starting base loss or starting base asset, the integrated mining project interests (or the pre-mining project interest from which they derive) have existed on 2 May 2010 and have been held by the same miner as each other from that time.
1.16 The combined mining project interest will then become the basis upon which MRRT liability is determined. The combined interest will inherit the tax history of the constituent interests. The combined mining project interest will aggregate each type of the like allowance components that it inherits from the constituent interests.
1.17 A miner that has a combined mining project interest will no longer have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the integrated mining project interests. Instead, the miner will only need to track these amounts for the combined mining project interest.
1.18 To put integrated mining project interests that are unable to combine in a similar position, prospectively in regards to royalty credits, as they would have been had they been able to combine, royalty credits that arise while the interests are integrated can be applied as transferred royalty allowances (see Chapter 6 Allowances).
Detailed explanation
Integration of mining project interests
1.19 Integration is one of the conditions that must be met before mining project interests can combine. Only integrated mining project interests can combine.
1.1 Integration tests the relation between two mining project interests. [Section 105-30 and 105-35]
126 Combining mining project interests
1.2 Whether mining project interests are integrated is a question of fact on a particular day. Interests can be integrated on one day and then cease to be integrated on the next day. Interests will cease to be integrated if they stop being integrated on any day. (Chapter 11 mining project transfers and splits deals with mining project splits which occur when interests cease being integrated.)
1.20 Two mining project interests will be integrated on a day if:
• the same miner has the two interests [paragraphs 105-30(1)(a), 105-30(2)(a) and 105-35(1)(a)]; and
• the interests relate to the same type of taxable resource (that is, relate to iron ore or relate to coal) [paragraphs 105-30(1)(c), 105-30(2)(b) and 105-35(1)(b)]; and
• the interests:
– relate to the same production right [paragraphs 105-30(1)(b]); or
– are integrated in their upstream mining operations [paragraphs 105-30(2)(c)]; or
– are integrated in their downstream mining operations (or the mining operations as a whole are integrated) and have made the downstream integration election [paragraphs 105- 35(1)(c) and 105-35(1)(d)].
1.21 Each of these conditions must be satisfied for two mining project interests to be integrated. Integration is automatic when all these conditions are satisfied.
1.22 If a group has elected to be consolidated for the MRRT, then all the mining project interests that are within the group will be taken to be mining project interests of the head entity of the group.
Same miner has the mining project interest
1.23 The same miner must have each of the mining project interests for the interests to be integrated [paragraphs 105-30(1)(a), 105-30(2)(a) and 105-35(1)(a)]. The miner will have two or more mining project interests if it is the entity that has each of the interests [section 9-5)].
1.24 If a group has elected to be consolidated for the MRRT, then all the mining project interests that are within the group will be taken to be the interests of the head entity of the group.
127 Explanatory material: Minerals Resource Rent Tax
Mining project interests relate to the same type of taxable resource
1.3 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 not relate to iron ore, that is, it will relate, in some way, to coal. [Paragraphs 105-30(1)(c), 105-30(2)(b) and 105-35(1)(b)]
1.25 A mining project interest will relate to iron ore if what is extracted from the production right area is:
• iron ore [paragraph 13-5(1)(a)], or
• anything produced from consuming or destroying iron ore in situ [paragraph 13-5(1)(c)].
1.26 A mining project interest will not relate to iron ore, that is, it will relate to coal, if what is extracted from the production right area is:
• coal [paragraph 13-5(1)(b)], or
• coal seam gas (extracted as a necessary incident of coal mining) [paragraph 13-5(1)(d)], or
• anything produced from consuming or destroying coal in situ [paragraph 13-5(1)(c)].
Example 1.1: Mining project interest relating to iron ore
Rocky Resources has 2 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 right A and B both give Rocky Resources the ability to extract iron ore.
The two mining project interests that Rocky Resources has relate to iron ore.
Example 1.2: Mining project interest relating to coal
Col Co has 2 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.
Neither mining project interest that Col Co has relates to iron ore. Therefore, they both do not relate to iron ore.
128 Combining mining project interests
Example 1.3: Mining project interests that do not relate to the same type of 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 iron ore mining project interests.
Relate to same production right
1.4 Two mining project interests may be integrated interests if they relate to the same production right [paragraph 105-30(1)(b)]. Two mining project interests will relate to the same production right if the taxable resources that are the subject of the mining project interest are extracted under the authority of the same production right.
1.5 This may be the case where more than one undertaking (that is, more than one mining project interest) exists in relation to the one production right area. It may also occur when a miner acquires a further share of an entitlement, for instance, another mining project interest in relation to the same production right.
Example 1.4
On 1 July 2012, Lloyd Resources and Mineral Co each have a mining project interest as they have an undertaking, a joint venture, to extract, process and sell coal extracted from a project area covered by one production right.
On 1 October 2012, Lloyd Resources buys out Mineral Co’s entitlement to the output of the venture. As a result, Lloyd Resources becomes further entitled to the output from the production right and therefore it has another mining project interest. Mineral Co no longer has a mining project interest.
Lloyd Resources has both mining project interests. The mining project interests both relate to coal, therefore they do not relate to iron ore. Additionally, the two mining project interests relate to the same production right.
Both interests are integrated mining project interests.
129 Explanatory material: Minerals Resource Rent Tax
Upstream mining operations are integrated (more than one production right)
1.6 Two mining project interests may be integrated interests if the upstream mining operations of the interests are integrated [paragraph 105-30(2)(c)].
Upstream mining operations 1.7 Upstream mining operations are the mining operations that are necessary to getting the taxable resource extracted from the project area to the taxing point. This would include activities that are preliminary to obtaining the resource, such as exploration, construction of upstream facilities, removal of overburden to expose a coal seam or iron ore body. It also includes those activities and operations that are integral to extracting the taxable resources and any activity or operation necessary to move the resources to the taxing point.
1.8 Upstream mining operations are also the things that are consequential upon getting the taxable resources to the taxing point, which would include rehabilitation of land affected by those upstream operations. For more detail on mining operations and upstream mining operations, see Chapter 5 Mining Expenditure.
1.9 ‘Integrated’ takes its ordinary meaning. The Macquarie Dictionary defines integrated as, ‘of or relating to a balanced personality; whole; harmonious’.
1.10 Whether the upstream mining operations of two mining project interests are integrated is a question of fact, having regard to the upstream mining operations and the manner in which the operations are carried on. [Paragraph 105-30(2)(c)]
1.11 Upstream integration cannot be established by looking only at a discrete upstream activity that is integrated across both mining project interests. Rather it must be demonstrated when considering the upstream mining operations of the two mining project interests viewed as a whole.
1.12 Where mining project interests that relate to separate production rights producing the same commodity, exhibit a degree of integration in the extraction and processing operations and other activities prior to the taxing point, they will pass the upstream integration test.
1.13 For instance, where two mining project interests are operated using shared infrastructure or upstream capital equipment, they will satisfy the upstream integration test. An example would be where the ore from two separate mining project interests are combined at a single ROM
130 Combining mining project interests stockpile. In this case, the two mining project interest pass the upstream integration test.
1.14 In other words, activities comprising the upstream mining operations of two or more mining project interests must be operated as a harmonious whole.
Example 1.5: Insufficient integration
Coal Co has 2 production rights both which entitle it to extract coal. Coal Co has a mining project interests 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 taxing 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.
It is not sufficient for Coal Co to consider only the integration of its human resource management in its consideration of whether the upstream mining operations of the two mining project interests are integrated.
Example 1.6: Integration of production rights not yet producing
Rock Doctor Co has 7 production rights, all entitle it to extract coal. Rock Doctor Co has a mining project interest in relation to each of the production rights.
Rock Doctor Co is producing from production rights 2-6. There are currently 11 open-cut pits across the production rights 2-6. 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 ROM stockpile.
Production rights 1 to 7 have not commenced production, but are part of a single commercial mining operation as evidenced in a life of mine plan under which production is scheduled to commence in a designated period.
The upstream mining operations of the mining project interests relating to all of the production rights are integrated, including 1 and 7 as they
131 Explanatory material: Minerals Resource Rent Tax
are planned to be operated with the other interests as a single mine over time.
Downstream mining operations are integrated
1.15 Two mining project interests may be integrated mining project interests if the downstream mining operations, or the mining operations as a whole for each of the mining project interests are integrated and the miner has made an election to recognise the mining project interests as integrated [paragraph 105-35(1)(c) and 105-35(1)(d)].
1.16 The definition of mining operations is a comprehensive definition of the activities and operations that are relevant under the MRRT. Different points in time distinguish upstream mining operations from downstream mining operations.
1.27 Downstream mining operations are mining operations which are not upstream mining operations. Downstream mining operations are mining operations to the extent they relate to getting the taxable resource extracted from the project area (or something produced from the taxable resource) from the taxing point to the form they are in when the mining revenue event occurs.
1.17 An activity or operation cannot, in the same instance, be both an upstream and a downstream mining operation. However, the costs of the activity may relate to both upstream and downstream operations and may need to be apportioned on a reasonable basis.
132 Combining mining project interests
Diagram 17.1: Mining operations, upstream mining operations, downstream mining operations
1.18 Downstream mining operations are those activities or operations which are necessary to get the taxable resource extracted from the project area (or something produced using a taxable resource) from the taxing point and into the form in which it is when a mining revenue event happens.
1.19 Operations or activities undertaken after the taxable resources, or something produced using the taxable resources, are in the form in which they are in at the mining revenue event, are not downstream mining operations. This means that some operations and activities that are undertaken to get the taxable resource (or something produced from the taxable resources) to its market will not be downstream mining operations.
Example 1.1: End of downstream mining operations - processing
Deanna Coal Co has 2 production rights which both entitle it to extract coal. Deanna Coal has a mining project interest in relation to each production right. The coal extracted from both production rights is exported to a foreign steel maker. The coal is sold as it is loaded onto the ship at the port. The coal extracted from each production right is taken to a separate ROM stockpile.
The coal is removed from each ROM stockpile by a reclaimer and taken by conveyer belts 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 saleable product is then taken from the processing plant, loaded onto a train and transported to port. At port, the coal is offloaded onto 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 other coal).
Deanna Coal’s downstream mining operations begin when the coal is removed from the ROM stockpile (that is, the taxing point) and end
133 Explanatory material: Minerals Resource Rent Tax
when it is taken from the processing plant. This is because the coal, at that point, is in the same form that it is when it is eventually loaded onto the ships at port (the mining revenue event).
Example 1.2: End of downstream mining operations - blending
Fox Fines Pty Ltd has two production rights which entitle it to extract iron ore. Fox Fines Pty Ltd 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 the ships.
The iron ore extracted from each production right is taken to ROM stockpiles, a different stockpile for each production right. The iron ore is removed from the ROM stockpile and taken to separate crushers 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 then taken and loaded onto ships, such that the shipment satisfies the contractual blended requirement.
Fox Fines Pty Ltd’s downstream operations begin when the iron ore is removed from the respective ROM stockpiles and end when the final blended product is produced. This is because it is not until the iron ore is blended that it is in the form that is loaded onto the ship (the form it is in at the mining revenue event). This also means that the process of loading the blended product is not part of the downstream mining operations.
1.20 Integrated takes its ordinary meaning. The Macquarie Dictionary defines integrated as, ‘of or relating to a balanced personality; whole; harmonious’.
1.21 Whether the downstream mining operations or the mining operations of two mining project interests are integrated is a question of fact, having regard to all the relevant operations and the manner in which they are carried on. In other words, activities comprising the downstream mining operations of two or more mining project interests must be operated as a harmonious whole.
1.22 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.
1.23 It would not be sufficient that one or more mining project interests utilise the same downstream infrastructure. They would need to be integrated in the way that infrastructure is used. For example,
134 Combining mining project interests integration may be demonstrated through the scheduling of the use of the infrastructure, or where that is not the case, through the combining of the resource from different mining project interests into a blended product.
Example 1.3: Downstream integration - blended product
Riley Co has 5 mining project interests. Each mining project interest relates to an iron ore production right. Each production right has its own ROM stockpile. In addition each production right extracts iron ore with different iron content.
Riley Co also owns and operates a rail network system which is connected to each of the ROM stockpiles. The iron ore is taken from the various ROM 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 7 production rights 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 specific 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.
To ensure that it has a constant supply of iron ore, with the required iron content, at port to satisfy customers’ orders, Riley Co schedules the extraction activities and transportation of the extracted ore from each of the production rights in a way that ensures it has a constant supply of iron ore of varying iron content at the port stockpiles.
The downstream mining operations of each of the mining project interests that Riley Co has are integrated with each of the other interests that Riley Co has.
Example 1.4: Downstream integration - undertaken by a third party on behalf of the miner
Lachlan Co has 3 mining project interests that relate to coal. Lachlan Co has 5 pits located within the production right areas (at least one it within each production right). Each of the pits has a separate ROM stockpile. Coal from each of the pits is of slightly varying qualities and must be blended to be of a quality to satisfy 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 ROM 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 Limited Pty Ltd (PCSL). PCSL is unrelated to Lachlan
135 Explanatory material: Minerals Resource Rent Tax
Co. Lachlan Co’s coal is stored in stockpiles at the port facility until it is loaded on to ships to fulfil Lachlan’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, PCSL blends the varying quality of the coal to a blend which satisfies the contract description. PCSL provides this service to Lachlan Co for a fee.
Although none of the downstream mining operations are owned or operated by Lachlan Co’s, the transport and blending at port are necessary to get the coal into a form in which it is sold and the downstream mining operations are those of Lachlan Co’s in relation to its mining project interest. Therefore, the downstream mining operations of each of the mining project interests which Lachlan Co has are integrated.
Downstream integration election
1.24 Even if the downstream mining operations of the mining project interests are integrated and the other conditions for integration are satisfied, the interests will not be integrated unless the miner has made an election to treat the interests as integrated. [Paragraph 105-35(1)(d)]
Example 1.5: Integrated operations, but no election
On 1 July 2012, Geologue Jacqueline Pty Ltd has two mining project interests, each relating to coal. The downstream mining operations of the two interests are integrated.
Geologue Jacqueline Pty Ltd has not made the downstream integration election. Therefore, despite the downstream mining operations being factually integrated, the two interests are not recognised as integrated for the MRRT.
1.25 The downstream integration election is irrevocable and does not lapse. Once made, the election will operate to integrate all mining project interests that the miner has, provided that they satisfy the other conditions for downstream integration, including subsequent mining project interests that the miner acquires (provided the subsequent interests also satisfy the other conditions for downstream integration). [Subsection 105-45]
1.26 It should be noted, that while the purchase of additional mining project interests may meet the integration test, they may not satisfy the combination test.
1.27 The election will have effect from the day the election is made, or the day all the other conditions for downstream integration are met, whichever is the latter. Put simply, two mining project interests will be
136 Combining mining project interests integrated when it meets all the downstream integration conditions, including the making of a valid election. [Subsection 105-35(1)]
Example 1.6: Integrated on day of election
Following on from Example 10.11, Geologue Jacqueline Pty Ltd makes the downstream integration election on 27 February 2013. Geologue Jacqueline’s two mining project interests will be integrated with each other from 27 February 2013.
Example 1.7: Election made in advance of integrated operations
On 1 July 2012, Bowen Integrated Materials Co (BIM Co) holds several mineral development licences (MDL) in various locations throughout the Bowen Basin. BIM Co is in the process of obtaining production rights in respect of the MDLs. 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 MDLs. BIM Co, now a miner with mining project interests, also makes the downstream integration election 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 each of the other interests from 1 September 2013.
1.28 There is a transitional rule that allows the downstream integration election to have retrospective effect in limited circumstances. These limited circumstances are where the conditions for integration, excluding the making of the election, are satisfied in respect of mining project interests between 2 May 2010 and 1 July 2012. In such cases, if the miner makes the election 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 are satisfied until the miner makes the downstream integration election. [subsection 105-35(2)]
1.29 This transitional rule takes account of the fact that a miner will not have made a downstream integration election before 1 July 2012. Regardless, two mining project interests should still be able to be treated as integrated at an earlier time. This will enable mining project interests to be integrated from 2 May 2010, despite the miner not having made an election at that time.
137 Explanatory material: Minerals Resource Rent Tax
Example 1.8: Downstream mining operations- transitional election
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 election at the time it lodges its MRRT return in relation to the first MRRT year (1 July 2012 - 30 June 2013).
Despite having not made the downstream integration election on 2 May 2010, Miner Co’s interests will be treated as integrated with each other from 2 May 2010 until the miner makes the election. Once the election is made, the miner will actually be integrated.
Combining mining project interests
1.30 Mining project interests that can combine, must combine. It is not optional. [Subsection 105-10(1)]
1.31 Unlike integration, which tests the relationship between two mining project interest, combination applies to a collection of mining project interests. Mining project interests must combine to the fullest extent possible. A miner cannot choose to only combine two mining project interests, if there are actually four interests that can combine.
1.32 Mining project interests (‘constituent interests’) that combine are taken to be a single mining project interest (‘combined interest’) for the purpose of the MRRT Act (except Division 165). [Subsection 105-10(1)]
1.33 The constituent interests are not recognised as a combined interest for the purpose of Division 165. This is to allow the integration provisions to look-through the combined interest and apply in relation to the constituent interests. If the integration rules were to be applied in relation to the combined interest, a combined interest would never cease to be integrated as the mining operations would always relate to the mining project interest, it would not be a question of whether they are integrated.
1.34 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 105-10(1)]
138 Combining mining project interests
1.35 Combination is not an annual test, rather it is determined at and from a point-in-time. The miner will be liable to pay MRRT for the combined interest as if the constituent interests had been combined from the beginning of the MRRT year. [Subsection 105-10(1) and section 105-50]
1.36 There are a number of conditions that 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 105-10(1)(a)]
1.37 The other conditions that must be satisfied ensure that combination will not enable the transferability of either, quarantined tax history or future starting base losses.
1.38 Integrated mining project interests can only combine if:
• any royalty credits that any of the interests have would be available royalty credits that could be applied in working out a transferred royalty allowance for each of the other interests [paragraph 105-10(1)(b) and section 105-15]; and
• any mining loss that any of the interests have (or would have if the MRRT year were to end at the combining time) would be available mining losses that could be applied in working out a transferred mining loss allowance for each of the other interests [paragraph 105-10(1)(c) and section 105-20)]; and
• there is a starting base loss or a starting base asset for any of the interests; and
– the interest that has the starting base loss or starting base asset existed on 2 May 2010 (or derived from a pre-mining project interest that existed on 2 May 2010) [paragraph 105-10(1)(d) and paragraph 105-25(a))]; and
– all the interests (or pre-mining project interests from which they derive) have been held by the same miner as each other since 2 May 2010 [paragraph 105-10(1)(d) and paragraph 105-25(b))].
1.39 If two mining project interests are integrated with each other and neither interest has a royalty credit, mining loss, starting base loss or starting base asset, the interests can and must combine.
139 Explanatory material: Minerals Resource Rent Tax
Royalty credits must be transferable to combine
1.40 If any of the integrated mining project interests have a royalty credit, they can only combine if all the royalty credits are fully transferable to each of the other interests. [Section 105-15]
1.41 Chapter 6 Allowances explains what a royalty credit is and when one arises.
1.42 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, 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 is not attributable to the alternative valuation method). [Subsection 48-100(1)]
1.43 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 applied. [Paragraph 105-15(b)]
1.44 A royalty credit will be attributable to the alternative valuation method if the royalty credit arose for a mining project interest for an MRRT year in which there was an election to use the alternative valuation method for the mining project interest. [Paragraph 48-100(1)(b)]
1.45 If any of the royalty credits arose while the mining project interests were not integrated or they are attributable to the use of the alternative valuation method, the two mining project interests will be unable to combine.
Example 1.9: Royalty credits not fully transferable
Miner Co has two mining project interests, one which existed at 1 July 2012 and another 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 previous MRRT years. 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 will be able to transfer royalty credits that arise while the two mining project interests are integrated with each other (see Chapter 6 Allowances).
Mining losses must be transferable to combine
1.46 If any of the integrated mining project interests have a mining loss (or would have a mining loss if the MRRT year ended at the combining time) they can only combine if all the mining losses are fully
140 Combining mining project interests transferable to all the other integrated mining project interests. [Section 105-20)]
1.47 Chapter 6 Allowances explains what a mining loss is and when one arises.
1.48 A mining project interest would have a mining loss if the MRRT year were to end at the combining time, if the mining expenditure for the interest for the period from the start of the combination year until the combining time exceeds the mining revenue for the interest for the same period.
1.49 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, 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 is not attributable to a period for which there was an election to use the alternative valuation method. [Subsection 93-100(1)]
1.50 In determining if the mining loss would be transferable it does not matter whether the mining loss would have been used by another mining project interest, if it was actually applied. [Subparagraph 105-20(b)(ii)]
1.51 A mining loss will be attributable to the alternative valuation method if the mining loss arose for a mining project interest for an MRRT year in respect of which there was an election to use the alternative valuation method for the mining project interest. [Paragraph 93-100(1)(b)]
1.52 If the common ownership test is not satisfied or any of the mining losses are attributable to the use of the alternative valuation method, the two mining project interests will be unable to combine.
Example 1.10: Mining losses not fully transferrable
Miner Co has two mining project interests. Miner Co has always had one of the interests but it only acquired the other interest recently. The second interest that Miner Co acquired has a mining loss for a prior 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.
141 Explanatory material: Minerals Resource Rent Tax
Starting base losses — the same miner must have had the interests from 2 May 2010
1.53 If any of the integrated mining project interests have a starting base loss or a starting base asset, they can only combine if they existed on 2 May 2010 and at all times since that time the miner that has each of the interests (or pre-mining project interest from which they derive) is the same miner. [Section 105-25)]
1.54 If the miner acquires a new mining project interest (which did not derive from a pre-mining project interest that the miner had at that date), despite being integrated and having no starting base losses or starting base assets, the new interest will be unable to combine with an interest the miner did have at 2 May 2010 while the old interest has starting base losses or starting base assets. If these mining project interests were able to combine, this would effectively transfer starting base losses from the old interest to the new interest.
1.55 Chapter 7 Starting Base Allowance explains when a miner has a starting base loss and a starting base asset. [Section 73-20 and subdivision 73-C]
1.56 Chapter 6 Allowances explains what a pre-mining project interest is and when a mining project interest derives from a pre-mining project interest.
1.57 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 the interests (or the pre-mining project interests that lead to the interests) existed on 2 May 2010. [Paragraph 105-25(a)]
1.58 This enables all mining project interests 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 1.11: Pre-mining project interest existing on 2 May 2010
Expo Co has an exploration right at 2 May 2010, therefore Expo Co has a pre-mining project interest in relation to the exploration right. Subsequently, Expo Co is granted a production right that covers an area of land that the exploration right covered. The production right is derived from the exploration right, therefore the mining project interest that Expo Co now has was derived from the pre-mining project interest.
The pre-mining project interest from which the mining project interest was derived existed on 2 May 2010.
142 Combining mining project interests
Example 1.12: 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 attain an exploration right. The exploration right was granted on 1 July 2010, there is now a pre-mining project interest. Subsequently, Digger Co is granted a production right that covers an area of land that the exploration right covered. The production right is derived from the exploration right, therefore the mining project interest that Digger Co now has was derived 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.
1.59 If the mining project interests (or the pre-mining project interests from which they derive) existed on 2 May 2010, the interests can combine, if they have always been held by the same miner as each other. [Paragraph 105-25(b)]
1.60 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 allowance. 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, a closely associated miner cannot have the interests. If a consolidated group has elected to be consolidated for MRRT purposes, the head company will be the miner that has all mining project interests that exist within the group.
1.61 Whether there has been a change of ownership is not determinative of itself. Rather, the test focuses on the relationship between the two mining project interests and looks at whether they have always been held by the same miner, regardless of whether the identity of the 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 1.13: Same miner has mining project interests
Miner Co has two mining project interests as at 2 May 2010. Each of those mining project interests have 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 Pty Ltd. CHPP Pty Ltd now has the two interests.
From 2 May 2010 to 20 September 2012, Miner Co had the interests. Then from 1 October 2012 onwards CHPP Pty Ltd had the two interests.
143 Explanatory material: Minerals Resource Rent Tax
Despite different miners having the interests, at all times the same miner has had both of the interests.
Example 1.14: Same miner has not had mining project interests
Head Co is the head entity of a consolidated group for the purpose of income tax. A Co and B Co are subsidiaries of Head Co.
Head Co has not elected to be a consolidated group for the purpose 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 1.15: Combination in the case of acquisition of a group
Assume the facts from Example 10.20. 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 has a mining project interest, respectively, MPI 4, MPI 5 and MPI 6. Because Mega Co has elected to be consolidated 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 miners.
144 Combining mining project interests
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 combine (provided all the other conditions to combination are met) 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 15 July 2010 - 14 2012 July 2012 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 3 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.
145 Explanatory material: Minerals Resource Rent Tax
Pre-mining losses (no barrier to combination)
1.62 If a mining project interest has pre-mining losses, this does not bear upon the ability of that mining project interest to combine with another interest that it is integrated with.
1.63 Pre-mining losses are always transferable within the consolidatable group of the mining project interest that has the loss (see Chapter 6 Allowances). The pre-mining losses are not subject to a common ownership test like mining losses. The wide transferability of pre-mining losses is the reason integrated mining project interests with such losses should be able to combine.
Effects of combining mining project interests
Inherited history
10.1 Combination is not an annual test, rather it is determined at and from a point-in-time. The MRRT liability for the whole MRRT year will fall upon the miner who has the combined interest at the end of the MRRT year. [Section 105-10]
146 Combining mining project interests
MRRT liability
10.2 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 liable to pay MRRT in relation to the constituent interests. [Section 105-50]
1.64 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 7-5]
1.65 The allowance components of the constituent interests are taken to be the allowance components of the combined mining project interest. [Section 105-55]
1.66 Pre-mining losses that the combined interest ‘inherits’ from the constituent interests are aggregated if they relate to the same MRRT year. [Subsection 105-55(2)]
1.67 Mining losses that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year. [Subsection 105-55(3)]
1.68 Starting base losses that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year and have had the same starting base valuation method applied (that is, book value or market value). [Subsection 105-55(4)and 105-55(5) and section 105-60]
Starting base losses – where some starting base assets are subject to book value and others to market value
1.69 The starting base valuation method is an election a miner makes in relation to a mining project interest. The constituent interests that relate to the combined interest may need a different starting base valuation method 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, like pre-mining losses and mining losses. [Subsection 105-55(4) and 105-55(5) and section 105-60]
1.70 The aggregated book value starting base losses will be subject to the book value uplift (LTBR + 7 per cent) and the aggregated market value starting base losses will be subject to the market value uplift (CPI). [Section 105-60]
147 Explanatory material: Minerals Resource Rent Tax
1.71 The starting base losses for the constituent interests that the combined interest is taken to have are not aggregated like pre-mining losses and mining losses. Rather, the starting base losses are only aggregated to the extent they relate to the same valuation approach for an MRRT year. [Subsection 105-55(2)]
1.72 Where some starting base assets are subject to book value and some are subject to 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 105-60]
1.73 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 the constituent interest for the MRRT year. [Subsection 105-60(3)]
1.74 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 the market value. [Section 105-60]
Example 1.1: Aggregating starting base losses with same valuation method
Miner Co has two mining project interests, MPI A and MPI B. Miner Co elected to use the book value starting base methodology for starting base assets that relate to MPI A and MPI B.
From 1 July 2014, MPI A and MPI B are taken to be a combined interest, MPI AB. At the time of combination MPI A had a $200 starting base loss for the 2012 year and a $500 starting base loss for 2013 year. At the time of combination, MPI B had a $100 starting base loss for the 2012 year and a $200 starting base loss for the 2013 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 2012 year of $300 ($200 plus $100) and a book value starting base loss for the 2013 year of $700 ($500 plus $200).
148 Combining mining project interests
Example 1.2: Aggregating starting base losses with different valuation methods
Assume all the same facts as for Example 10.22 except this time Miner Co had elected to use the book value methodology in relation to MPI A and 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 apply in relation to the starting base losses. Therefore, MPI AB will have a book value starting base loss for 2012 and 2013 and a market value starting base loss for 2012 and 2013.
In the 2014 MRRT year MPI AB has a mining profit. Assume MPI AB has a $100 book value and a $100 market value starting base loss for the 2014 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, 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 2012 year (attributable to MPI A), $500 book value starting base loss for the 2013 year (attributable to MPI A), $100 book value starting base loss for the 2014 (attributable to MPI A), $100 market value starting base loss for the 2012 year (attributable to MPI B) and $100 of the $200 market value starting base loss for the 2013 year (attributable to MPI B).
Elections
1.75 The downstream integration election and simplified MRRT election are both made by a miner and apply to all mining project interests that a miner has. When the constituent interests combine, if the miner had made a downstream integration election or a simplified MRRT election, these elections will continue to apply to the combined interest.
1.76 Similarly, the starting base valuation elections, while made in respect of a mining project interest, continue to apply to the starting base assets as per the election made by the miner in relation to the constituent interests.
1.77 An alternative valuation method made in respect of a constituent interest will have no effect on the combined interest. [Section 105-70]
1.78 The miner can, if it meets the requirements, elect to use the alternative valuation method in respect of the combined interest, however,
149 Explanatory material: Minerals Resource Rent Tax
such an election in relation to a combined interest may result in a mining project split. [Subsection 115-15(3)]
Transfer of mining losses to and from combined interest
1.79 There are special rules for transferring mining losses to or from a combined interest. [Section 105-65]
1.80 When a mining loss is seeking to be transferred to, or from, a combined interest, the common ownership test must be satisfied in relation to each of the constituent interests and the other mining project interest that is transferring or accepting the mining loss.
1.81 This rule only applies in relation to a mining loss 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.
1.1 These rules apply regardless of whether a mining loss is otherwise transferable under the general mining loss transfer rules. [Subsection 105-65(3)]
Example 1.3: Unable to transfer mining losses to combined interest
At the beginning of the 2014 MRRT year, Miner Co has five mining project interests (MPI). 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 2013 MRRT year.
Assuming MPI 1-4 do not have any allowance components, they combine from the beginning of the 2015 MRRT 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 2015 MRRT year while MPI 5 makes another mining loss.
The combined interest still has remaining mining profit when it comes time to apply the transferred mining loss allowance. To determined whether the mining loss for MPI 5 for the 2012 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, MPI 1 – 4.
The common ownership test will be satisfied if the same miner had MPI 5 and each constituent interests from the start of the 2012 MRRT year until the end of 2015 (that is, the year for which the mining loss arose until the end of the year for which the mining loss is being transferred).
150 Combining mining project interests
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 2013 MRRT year.
Therefore, the 2012 mining loss of MPI 5 cannot be applied in working out the transferred mining loss allowance of the combined interest for the 2015 MRRT year.
151 Chapter 11 Mining project transfers and splits
Outline of chapter
11.1 This chapter explains when a mining project interest is transferred and when an interest is split. The miner that has a mining project interest after a transfer or split is liable to pay Minerals Resource Rent Tax (MRRT) for that interest.
Summary
11.2 A mining project interest is the basis upon which a miner’s MRRT liability is determined. The mining project interest is the anchor for the operation of the MRRT. If a miner has mining revenue, mining expenditure, allowance components or starting base assets it will have them for a mining project interest.
11.3 A mining project transfer is an arrangement that results in the whole mining project interest being transferred from the miner to one other entity.
11.4 A mining project split is an arrangement that results in the whole or a part of a mining project interest being transferred from the miner to one or more other entities.
11.5 A mining project split also happens if:
• the constituent interests of a combined interest cease being integrated with each of the other constituent interests; or
• an election to use the alternative valuation method only applies in relation to part of the mining project interest.
11.6 A mining project interest that is transferred from a miner to another entity by way of a mining project transfer will be taken to continue in the hands of the new miner. That is, the tax history of the original interest will remain with the new interest after the transfer.
11.7 The miner that has the mining project interest after the transfer is the miner who is liable to pay MRRT for that interest for the entire MRRT year, including the period of that year before the transfer.
152 Mining project transfers and splits
11.8 Similarly, mining project interests that result from a mining project split will be taken to be continuations of the mining project interest that was split. That is, the tax history of the mining project interest will be inherited by the interests that emerge from the split and the miner or miners that have those interests will be liable for the MRRT payable in relation to the original interest in the period of that year before the split.
11.9 The extent to which the tax history and tax liability of the original mining project interest will be inherited by the new interests is determined by applying the split percentage.
11.10 The split percentage is the percentage that best reflects a reasonable approximation of the market value of the new interests relative to the sum of the market values of all the new interests arising from the split.
Detailed Explanation
Mining project transfer
11.11 A mining project transfer is an arrangement that results in a whole mining project interest being transferred from the miner (‘original miner’) to one other entity (‘new miner’). [Section 110-15]
11.12 The arrangement will have the effect of transferring the original miner’s entitlement to share in the output of taxable resources extracted from a project area (‘original interest’) to the new miner. [Section 110-15]
11.13 A mining project transfer can happen in relation to a combined interest, even if the combined interest will not be a combined interest in the hands of the new miner. For example, the new miner may not have made a downstream integration election. This will result in a mining project split in relation to the new interest for the new miner. [Section 110- 15(2)]
11.14 Arrangement has the same meaning as in the Income Tax Assessment Act 1997. [Subsection 995-1(1) of the ITAA 1997]
11.15 The mining project transfer may be effected by a sale, sub-lease, gift, or any other means.
153 Explanatory material: Minerals Resource Rent Tax
MRRT liability
11.16 The effect of the mining project transfer is that the old miner will cease to have the mining project interest and the new miner will start to have the interest. [Section 110-15]
11.17 The mining project interest that the new miner has after the transfer will be taken to be a continuation of the interest that the old miner had just before the transfer. Because the new interest is taken to be a continuation of the old interest, everything that happened in relation to the original interest is taken to have happened in relation to the new interest. For example, MRRT allowances for the original interest are taken to be MRRT allowances of the new interest. This ensures that the tax history of the original interest is inherited by the new interest. [Subsection 110-10(3)]
11.18 The new miner is liable for any MRRT that is payable for the interest for the whole transfer year. This includes being liable for any MRRT that is payable for the interest for the part of the year in which the old miner had the interest. [Subsection 110-5(1)]
11.19 The old miner is not liable to pay any MRRT that is payable for the interest for the transfer year. [Subsection 110-5(4)]
Mining revenue and mining expenditure
11.20 To enable the new miner to determine the MRRT liability for the new interest for the transfer year, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest will instead be taken to be mining revenue and mining expenditure of the new miner in relation to the new interest. [Section 110-20 and 110-25]
11.21 If an amount of mining revenue or mining expenditure comes home to the old miner after the mining project transfer has occurred and the amount is instead taken to be mining revenue or mining expenditure of the new miner in relation to the new interest. [Section 110-45]
11.22 These effects are specifically provided for as they are things that happen to the miner in relation to the mining project interest. They are not things that happen to the mining project interest and therefore will not be covered by the continuation rule. [subsection 110-10(3)]
1.28 The original miner is required to notify the new miner of any such amounts.
154 Mining project transfers and splits
Example 1.1: Mining revenue after transfer
OldMinerCo extracts 50,000 tonnes of iron ore from a project area on 20 September 2012 and the full amount of the ore remains housed at OldMinerCo’s run-of-mine stockpile.
On 21 January 2013, OldMinerCo transfers the mining project interest to NewMinerCo. Old Miner Co does not supply the iron ore before the transfer time.
On 20 February 2013, OldMinerCo supplies the 50,000 tonnes of iron ore to ForeignCo.
If OldMinerCo still had the interest, the amount in relation to this supply would have been included as mining revenue of the mining project interest.
NewMinerCo does not receive any amount in respect of this supply.
The mining revenue in relation to the supply of the 50,000 tonnes of iron ore by OldMinerCo to ForeignCo, will be an amount included in the mining revenue of NewMinerCo in relation to its mining project interest.
OldMinerCo must notify NewMinerCo of the amount.
11.23 If the new miner has elected to use the alternative valuation method or simplified MRRT method in relation to the new interest, the mining revenue that the new miner is taken to have for the new interest may be affected. [Subsection 110-20(2)]
11.24 Excluded expenditure for the old interest will remain excluded expenditure for the new interest. [Subsection 110-25(2)]
Starting time and ownership history 11.25 The new interest will be taken to have started on the same day as the original interest and the same miners as had the original interest will be taken to have had the new interest, at the same times that they had the old interest. [Subsection 110-10(3)] 11.26 Knowing when the interest started and which miners have had the interest is relevant for determining whether a mining loss can be applied in working out a transferred mining loss allowance in relation to the interest.
155 Explanatory material: Minerals Resource Rent Tax
Example 1.1: Inherit ownership history
On 1 July 2012, AlexandraGeo had a mining project interest (MP1). On 1 July 2013, it acquires another mining project interest (‘new interest’) from Rocky Resources.
The new interest is taken to be a continuation of the interest that Rocky Resources had and the new interest will continue to have Rocky Resources’ ownership history. When acquired, the new interest has a mining loss for the 2012 MRRT year.
At the end of the 2013 MRRT year, there is a mining profit for MPI1, while the new interest has made a mining loss. AlexandraGeo needs to determine whether the 2012 or 2013 mining losses for the new interest can be applied as a transferred mining loss allowance for MP1.
In relation to the 2012 mining loss, the mining loss can only be applied if the same miner had the new interest and MPI1 from the beginning of the 2012 MRRT year until the end of the 2013 MRRT year.
As the new interest is taken to be a continuation of the original interest that Rocky Resources had, the new interest will be taken to have been Rocky Resources’ interest for the 2012 MRRT year (before AlexandraGeo had the new interest). Therefore the common ownership test will not be satisfied in relation to the 2012 MRRT year. It would, however, be satisfied in relation to the 2013 MRRT year.
Allowance components
1.29 Any allowance components for the original interest will be taken to be allowance components for the new interest [Subsection 110-10(3)]. All dates that are specific to the allowance components are preserved when they are inherited.
11.27 That is, a mining loss for the original interest for the 2012 MRRT year will remain a 2012 mining loss for the new interest.
11.28 Once the original interest has been transferred, the original miner will not be able to use any allowance components such as may have accrued before the date of the transfer as a transferred allowance for another interest.
11.29 Allowance components of the original interest are any:
• royalty credits;
• pre-mining losses;
• mining losses; and
156 Mining project transfers and splits
• starting base losses.
[Section 190-1]
11.30 If a thing happens in relation to the original miner which would have affected the calculation of the allowance component, if the original miner still had the original interest, the thing is taken to have instead happened in relation to the new miner in relation to the new interest. [Section 110-45]
Limit on pre-mining losses that are transferred 11.31 To prevent pre-mining losses being traded, there is a limit on the amount of pre-mining losses that can be transferred when a mining project transfer occurs.
11.32 Pre-mining losses of the original interest are taken to be pre-mining losses of the new interest when a mining project transfer happens, but only to the extent that the pre-mining losses do not exceed the consideration paid for the new interest by the new miner multiplied by
[section 110-45]
11.33 If there are pre-mining losses that exceed this limit, the pre-mining losses that are transferred will be reduced in the order in which they arise until they reach the limit. [subsection 110-40(2)]
1.30 That is, the pre-mining losses that are reduced will be taken to have been applied and will no longer exist in relation to any mining project interest.
Example 1.1: Recalculation of pre-mining losses
OldMinerCo has a mining project interest that has a $2 million pre- mining loss for the 2012 MRRT year and a $1 million pre-mining loss for the 2013 MRRT year ($3 million pre-mining losses in total).
OldMinerCo sells the mining project interest to NewMinerCo for $500,000.
The amount of pre-mining losses that can be transferred to NewMinerCo’s interest cannot exceed $2,222,222.
$500,000 × (1 / 0.225) = $2,222,222.
The pre-mining losses that OldMinerCo has ($3 million) are reduced so that they do not exceed the limit.
157 Explanatory material: Minerals Resource Rent Tax
The 2012 pre-mining loss is reduced first. It is reduced by $777,778 to $1,222,222. The 2013 pre-mining loss will not be reduced as the 2012 pre-mining loss has absorbed the entire reduction.
Therefore, the new interest will be taken to have a $1,222,222 pre-mining loss for the 2012 year and a $1 million pre-mining loss for the 2013 year ($2,222,222 pre-mining losses in total).
Starting base assets 1.31 If any starting base asset that was held by the original miner in relation to the original interest is, after the mining project transfer, held by the new miner in relation to the new interest, the asset will continue to be a starting base asset in relation to the new interest. The base value of the asset will continue and will be unaffected by the transfer.
1.32 A starting base asset valuation method election that the original miner made in relation to the original interest, will continue to apply in relation to the starting base assets of the new interest. [Subsection 110-10(3)]
Elections
11.34 An alternative valuation method election or a simplified MRRT method election that the original miner made in respect of the original interest will not bind the new interest. Instead, the new miner will have the choice as to whether to make this election in relation to the new interest. [Section 110-30 and section 10-35]
11.35 Although a new miner will not be bound if the original miner had elected to use the simplified MRRT method, the new miner will be affected because the original miner’s election will have extinguished the allowance components that would otherwise have related to the interest. The new miner will not be able to reconstruct the allowance components, they will remain extinguished.
Example 1.1: Old miner made simplified MRRT election
Part way through the year, S&S Resources purchases a mining project interest from HC Minerals. Before the transfer, HC Minerals had elected to use the simplified MRRT method for that year. HC Minerals had made royalty payments in relation to the interest during the pre-transfer part year, but, because of the election there are no royalty credits in relation to the interest.
When S&S Resources acquires the mining project interest, it does not make the election to use the simplified MRRT method. There will be no royalty credits in relation to the new interest for the pre-transfer part year, but there will be royalty credits for royalties paid in the period of the year that follows the transfer.
158 Mining project transfers and splits
11.36 Any other election that the original miner made in relation to the original interest will continue to apply in relation to the new interest, for example, the starting base valuation method election. [Subsection 110-10(3)]
MRRT liability in future years
1.82 In future MRRT years, the new miner will have had the interest from the beginning of the MRRT year and it will be liable to pay MRRT for the interest for the whole year, as it would for any other interest that it has [Subsection 110-10(2)].
Splitting a Mining Project Interest
11.37 A mining project split is an arrangement that results in the whole or part of a mining project interest being transferred from the miner to one or more other entities [subsection 115-10(1)].
11.38 A mining project split also happens if:
• the constituent interests of a combined interest cease being integrated with each of the other constituent interests [subsection 115-15(2)]; or
• an election to use the alternative valuation method only applies in relation to part of the mining project interest [subsection 115-15(3)].
11.39 The arrangement will have the effect of transferring the original miner’s entitlement to share in the output of taxable resources extracted from a project area to one or more other entities. The entities which have a mining project interest after the split will be the new miners in relation to the respective interests.
11.40 Unlike transfers, there will be more than one new interest as a result of the split.
11.41 Arrangement has the same meaning as in the Income Tax Assessment Act 1997. [Subsection 995-1(1) of the ITAA 1997]
11.42 The arrangement may be effected by a sale, sub-lease, gift, or any other means.
11.43 In the additional circumstances where a mining project split will occur, that is, where integration ceases or the alternative valuation method election applies to part of an interest, there does not need to be an arrangement for a split to occur.
159 Explanatory material: Minerals Resource Rent Tax
11.44 A combined interest will split if the constituent interests cease to be integrated with each of the other constituent interests. [Subsection 115- 15(2)]
1.33 Constituent interests will cease to be integrated if they no longer meet all the conditions for integration [section 105-30 and 105-35]. The conditions for integration are discussed in Chapter 10 Combining Mining Project Interest.
11.45 The circumstances in which a mining project split will occur due to an election to use the alternative valuation method are discussed in Chapter 9 Alternative Valuation Method.
Split Percentage 1.34 The consequences of a mining project split are very similar to those of a mining project transfer. The new interests will be taken to be a continuation of the original interest, the new miners will inherit the tax history of the original miner and the new miners will be liable for the MRRT liability.
1.35 The important distinction is that each of these will only happen to the new interests to the extent of their respective split percentages.
1.36 The split percentage is the percentage that best reflects a reasonable approximation of the market value of the new interest, expressed as a percentage of the sum of the market values of all the new interests arising from the split. The market values of the new interests are calculated immediately after the split. Each new interest will have a split percentage. [section 115-20]
Example 1.1: Simple split percentage
ACo sells half its entitlement to share in the output of an undertaking in respect of a production right to BCo. After the mining project split, there are taken to be two new interests each of equal size. Therefore, the split percentage for each of the new interests is 50 per cent.
Example 1.2: Complex split percentage
ACo, a miner, holds a mining project interest (P). ACo sells to BCo an entitlement to the first 1 million tonnes of a taxable resource recovered from the project area for each year. In this case, the entitlement that ACo sells to BCo cannot be expressed as a fixed percentage, rather it will change from year to year.
ACo determines the market value of each of the new interests immediately after the split. ACo’s new interest (P1) is valued at $10.5 billion and the new interest (P2) that BCo has is valued at
160 Mining project transfers and splits
$600 million. The split percentage for ACo’s P1 is approximately 95 per cent and the split percentage for BCo’s P2 will be approximately 5 per cent. 10.5/11.1 = 95 per cent 0.6/11.1 = 5 per cent MRRT liability
11.46 The effect of the mining project split is that the old miner will cease to have the mining project interest and the new miners will start to have the new mining project interests. [Section 115-15]
11.47 The mining project interests that the new miners’ have after the split will each be taken to be a continuation of the original interest, to the extent of their respective split percentages. This ensures that the tax history that is relevant to the original interest is inherited by the new interests to the extent of their respective split percentages. [Subsection 115- 10(3)]
11.48 The new miners are liable to pay any MRRT that is payable for the new interests for the whole transfer year but only to the extent of their new interests. This includes being liable to pay any MRRT that is payable for the interest for the part of the year prior to the split. That is, when the old miner had the interest. [Subsection 115-10(1)]
11.49 The old miner is not liable for any MRRT that is payable for the interest for the transfer year (unless it is one of the new miners, that is, the old miner has retained part of the mining project interest). [Subsection 115-10(4)]
11.50 When a mining project split occurs, the tax attributes, including mining revenue, mining expenditure and allowance components, of the mining project interest should disaggregate and be inherited by each of the new interests to the extent of their respective split percentages [Subsection 115-10(3)].
Mining revenue and mining expenditure
11.51 To enable the new miners to determine the respective MRRT liability for the new interests for the split year, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest will instead be taken to be mining revenue and mining expenditure of the new miner (to the extent of the split percentage) in relation to the new interest. [Section 115-25 and 115-60]
1.37 If an amount of mining revenue or mining expenditure relating to the original interest comes home to the old miner after the mining project split has occurred, the amount is instead taken to be mining
161 Explanatory material: Minerals Resource Rent Tax
revenue and mining expenditure of the new miners (to the extent of their split percentages) in relation to the new interest [section 115-60].
1.38 If a new miner has elected to use the alternative valuation method or simplified MRRT method in relation to the new interest, the mining revenue that the new miner has for the new interest may be affected. [Sections 115-40 and 115-45]
1.39 Excluded expenditure for the old interest will remain excluded expenditure for the new interest. [Section 115-30]
Starting time and ownership history
1.40 The new interests will be taken to have started on the same day as the original interest and the same miners that had the original interest will be taken to have had the new interests at the same times that they had the original interest. [subsection 115-10(3)]
Allowance components
1.41 Any allowance components for the original interest will be taken to be allowance components for each of the new interests, to the extent of their respective split percentages. [Subsection 115-10(3) and section 115-35 and 115-50]
1.42 All the dates that are specific to the allowance components are preserved when they are inherited. That is, a mining loss for the original interest for the 2012 MRRT year, will remain a 2012 mining loss for the new interest.
1.43 The original miner will not be able to use allowance components or apply them before the split. Allowance components of the original interest are:
• royalty credits;
• pre- mining losses;
• mining losses; and
• starting base losses.
[section 190-1]
1.44 If a thing happens in relation to the original miner that would have affected the calculation of an allowance component relating to that original interest, if the original miner still had the original interest, the thing is taken to have instead happened (to the extent of the split
162 Mining project transfers and splits
percentage) in relation to the new miner in relation to their new interest. [section 115-60]
Example 1.1: Applying split percentage to tax attriubutes
Following on from Example 11.6 above, the split percentage for ACos P1 is 95 per cent and the split percentage for BCo’s P2 is 5 per cent.
The tax history of P will be split between P1 and P2 as follows:
Before the split After the split Tax attributes P P1 P2 Mining revenue 500 475 25 Mining expenditure 200 190 10 Royalty credit (2013) 60 57 3 Royalty credit (2014) 10 9.5 0.5 Starting base loss 5 4.75 0.25 Pre-mining loss (2012) 5 4.75 0.25 Limit on pre-mining losses that are transferred 1.45 To prevent pre-mining losses being traded, there is a limit on the amount of pre-mining losses that can be inherited by a new miner as a result of a mining project split. [section 115-55]
1.46 The limit is calculated in the same way as the limit for mining project transfers, but, the amount of pre-mining losses that the new miner is taken to have as a result of a mining project split is affected by the split percentage.
Example 1.1
Coalin’Campbell Resources sells its whole mining project interest, in equal proportions to five different entities. The split percentage for each of the new interests is 20 per cent. Each entity pays Coalin’Campbell Resources $5,000 for the new interests they acquire.
At the time of the mining project split, Coalin’ Pal Resources has a $200,000 pre-mining loss for the 2015 MRRT year.
Applying the split percentage, each of the five new interests will be taken to have a pre-mining loss of $40,000. However, the pre-mining loss that each of the five new miners inherits in relation to each of their new interests cannot exceed $22,222.
$5,000 x (1/0.225) = $22,222
Therefore, the pre-mining loss that each of the five new miners inherits will be reduced by $17,778 to $22,222.
163 Explanatory material: Minerals Resource Rent Tax
Starting base assets 1.47 If any starting base asset that was held by the original miner in relation to the original interest is, after the mining project split, held, to an extent, by a new miner in relation to a new interest, the asset will continue to be a starting base asset in relation to the new interest. The base value of the asset will continue unaffected by the split.
1.48 A starting base asset valuation method election that the original miner made in relation to the original interest, will continue to apply in relation to the starting base assets of the new interest. [Subsection 115-10(3)]
Elections
1.49 As for mining project transfers, an alternative valuation method election or a simplified MRRT method election that the original miner made in respect of the original interest will not bind a new interest, unless a new miner was the original miner. This occurs if the original miner retains a part of the original interest or there was a mining project split due to cessation of integration or the alternative valuation method election applying. In these cases, the election that the original miner made continues to apply to the new interests that they continue to have. [Sections 115-40 and 115-45]
MRRT liability in future years
1.50 For future MRRT years, the new miners will each have had the new interests from the beginning of the MRRT year and they will be liable to pay MRRT for the interest for the whole year as it would for any other interest that they have.
164 Mining project transfers and splits
PARTS STILL TO COME
Pre mining losses
Starting base for pre mining project interests
Non-cash rules
Functional currency
Valuation principles
Revenue from pre-mining project interests
Ending of projects
Closing down expenditure
Adjustment events (incl. for revenue, expenditure and starting base disposals/changes of use
Consolidated groups
Partnerships
Trusts
Profit shifting
Anti-avoidance
Substituted accounting periods
Returns and assessments
Further examples can be provided for inclusion in the Explanatory Memorandum
165