06 Jul 2010

Minerals Resource Rent Tax replaces RSPT

You can download our analysis of the Mineral Resources Rent Tax as a pdf (PDF 721.6KB).

RSPT no more

On 2 July the Australian Government announced that, due to industry concerns, it had scrapped the Resource Super Profits Tax (RSPT) and proposes to replace it with the Minerals Resource Rent Tax (MRRT) to take effect from 1 July 2012.

To fund the changes proposed under the MRRT, the Government has announced that it will reduce the corporate tax rate to 29% from 1 July 2013, with no further reduction (it had originally proposed a further reduction to 28% from 1 July 2014).

The tax rate for "small companies" will also be reduced to 29% with effect from 1 July 2012. No changes are proposed to the superannuation reforms announced on 2 May.

Further work and consultation

Additional work and consultation with the mining industry and other stakeholders is required before all details of the MRRT can be finalised.

In this regard, the Government has announced that it is establishing a Policy Transition Group (PTG) to be headed by the Resources Minister, Martin Ferguson AM, and Don Argus AC. The PTG will consult with industry and provide advice to the Government as to the implementation of the new MRRT and Petroleum Resource Rent Tax (PRRT) arrangements.

Who does the MRRT affect?

Although it differs in substance to the proposed RSPT, the MRRT nonetheless represents a new tax on companies that operate in the Australian mining sector.

However unlike the RSPT, the MRRT will only apply to the mining of iron ore and coal. Onshore and offshore oil and gas projects (including those located in the North West Shelf) along with the coal seam gas industry will be caught by the existing PRRT regime.

Although the effective rate of tax under the MRRT as estimated by the Government will drop to 42.3% over the life of a project (from an estimated effective tax rate under the RSPT of approximately 54-57%), this rate is still higher than the average international tax rates of approximately 36% for iron ore and 39% for coal. (Annexure B contains a working example demonstrating how the MRRT will operate and how the effective rate of 42.3% has been calculated by the Government (PDF 721.6KB)).

It should also be noted that no franking credits will arise under the MRRT as it is not a "corporate income tax".

The current Federal Opposition has indicated that if it wins the next election, it will rescind the MRRT.

Sovereign risk

Much like the RSPT, the introduction of the MRRT can still be seen as a sovereign risk for prospective investors in the Australian mining industry.

However, the Government has largely addressed the issue of retrospectivity by allowing existing projects to elect to transition into the MRRT tax regime by using market values for existing projects, including the value of the resource.

As we understand it, if the MRRT is introduced there is nothing to prevent the proposed resource tax rate of 30% from being increased or the net being widened to increase the number of companies or industries affected by the tax. However, presumably this will require an Act of Parliament to implement.

How is the MRRT different to the RSPT?

The MRRT differs from the RSPT in a number of respects:

  • the tax will only apply to iron ore and coal mining activities;
  • the resource tax rate is 30% rather than 40% as originally proposed (although, we note that due to the 25% "extraction allowance", the effective MRRT rate is likely to be 22.5%). The extraction allowance is described as "compensation for miners for the extra returns from such things as managerial expertise, entrepreneurship and technical innovation captured by the tax";
  • all onshore and offshore (including the North West Shelf) oil and gas projects will come under the current PRRT. Also, the coal seam gas industry will be caught by the PRRT;
  • the uplift factor before the MRRT will apply has been increased from the Long Term Bond Rate (LTBR) to the LTBR plus 7%. The uplift will only apply to transitioned projects electing book value and to carry forward undeducted capital/operating costs together with unused royalty credits;
  • the estimated combined effective tax rate for companies affected by the tax will drop from approximately 54%-57% to between 42% and 45%; and
  • the income tax exploration rebate for exploration companies who cannot offset exploration deductions against other income has been removed.

Refer to Annexure A for a more detailed analysis of the key differences (PDF 721.6KB).

Key outstanding issues

Details - There are a number of issues that still need to be addressed fully and, until Exposure Draft legislation is made publicly available (anticipated to occur in June 2011), it is difficult to assess fully the impact of the MRRT.

Constitutional Challenge - As with the RSPT, there is a still a question of whether the MRRT is constitutionally valid.

Potential impact of MRRT on future investment in Australia’s mining industry

The proposed MRRT is a positive step for investors and mining investment in Australia. After months of uncertainty in relation to the RSPT and how it would be applied, the news that the MRRT will carve out certain commodities provides both reassurance and greater certainty for emerging projects, particularly projects which do not produce iron ore, coal, oil and gas.

Furthermore, the Government’s compromise with the major mining companies ensures that the expansion of existing projects, which were claimed to have been put on hold as a result of the RSPT, are now more likely to go ahead (all other things being equal).

As the MRRT will only be imposed when profits exceed the LTBR plus 7% (compared with the RSPT which kicked in at the LTBR), the MRRT is more reflective of a tax on profits above a risk adjusted rate of return than the so called "super profits tax" (which was a profit above a risk free rate of return).

The increased uplift threshold should not prevent miners from recovering their cost of capital plus a reasonable margin (and therefore meet their required internal rate of return) before being subject to the tax.

As a result, arguably, companies in the mining industry should find it easier to raise capital for new projects (compared to the RSPT), which may positively impact M&A activity in the sector.

When combined with the reduction in the rate of the tax from 40% to an effective rate of 22.5%, and the ensuing effects on mining companies’ expected effective tax rates, the key changes arising under the MRRT regime should also increase Australia’s international competitiveness as compared to the RSPT, which was widely perceived to be a deterrent to international investment in Australian mining.

However, the MRRT has not removed all investor uncertainty generated by the RSPT. A number of issues remain outstanding. Whilst the key headline terms of the MRRT have been negotiated with the major mining companies, the details have yet to be finalised and, by the Government’s own admission, this is expected to be a lengthy process, with the Exposure Draft not being released for public comment until June 2011. Furthermore, the legislation also has to be passed successfully, post-election.

We note that the Opposition remains firmly opposed to the resource tax even in its modified form, while the Greens (who may hold the balance of power in the Senate post-election) have stated that they will closely scrutinise the changes to the tax if/when the Bill is introduced.

Accordingly, a level of uncertainty about the precise form and content of the legislation still exists, which may mean that international investor sentiment remains cautious in the short term. Further, the impact which the months of uncertainty surrounding the RSPT (and its role in the removal of a sitting Prime Minister) may have already had on international investors’ perception of Australia’s political stability and sovereign risk is unknown.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.