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Tax Laws Amendment (2007 Measures No. 2) Bill 2007

CHAIR —The first schedule is schedule 1, which is to amend division 4 of the Income Tax Assessment Act 1997 to align more closely with the decline in the value of deductions for mining rights with other depreciating assets. I invite the Treasury officers to make an opening statement or give us an overview of this schedule.

Mr Flavel —I will give a very brief overview in relation to the effective life of mining rights. I guess this is a reasonably straightforward element of the bill. The schedule to the bill gives effect to changes which were announced in the 2006-07 budget. The Minister for Revenue and Assistant Treasurer put out a press release as part of the budget which noted that a draft taxation ruling had been previously put out by the Australian Taxation Office, which had generated a number of comments from industry and stakeholders about the way in which the law would be applied in relation to the effective life of mining rights.

As a result of taking into account those concerns, the government agreed to make changes to the way that the effective life of mining rights would be treated and announced those changes in the budget. Under the draft ruling which the tax office put out, the holder of a mining right would have had to have written off their right over the whole life of the mine almost irrespective, if you like, of any previous use. They would also have had to have made an annual estimate or re-estimate of the effective life of the mine. The point on both of those things is that they would be inconsistent with the way that other depreciating assets are treated and therefore the changes that the government announced were largely designed to ensure that mining rights would be treated in a similar way to other depreciating assets.

There are a couple of things to note. The estimates of effective life of mining rights were based on industry standards, including professional oversight of those standards to determine the remaining life of the mine. The effective life of a mining right is really the amount of reserves estimated in a particular mine, obviously divided by the extraction rate. There are examples in the explanatory memorandum that give an overview of circumstances and how this would be calculated. Also, the bill makes provision for giving relevant taxpayers a choice for reassessing the life of the mining rights but without actually having to force that to be done on an annual basis.

That is a very brief overview. As I said, I think it is a fairly straightforward provision. You have obviously noted the fact that the Minerals Council has made a submission to the committee. I will leave it to them to make their comments, but we would of course note that we have had very constructive dialogue with the council and stakeholders in relation to this element of the bill. I am not aware of any particular sensitivities or issues that the industry has with these changes.

CHAIR —Thank you. I think we will go straight to the Minerals Council and hear from them, then we will come back to you with any questions. Gentlemen, can I ask you to give a brief overview, if you want to add anything further to your submission.

Mr Rynne —I will briefly give a few introductory remarks and then throw to Anthony. Thank you very much for the opportunity to discuss our position on this very important piece of legislation. We apologise that we could not actually appear in person before the committee today.

CHAIR —With the amount of time it is going to take I suspect that you do not need to apologise to us. We are happy to hear from you via teleconference.

Mr Rynne —Thank you very much. By way of background, the MCA represents Australia’s exploration, mining and minerals processing industries nationally and internationally. MCA member companies produce more than 95 per cent of Australia’s annual mineral output. When I say ‘minerals’ I am referring to commodities such as iron ore, coal, base metals and the like. Whilst one or two in our membership produce oil and gas, we do not represent them in those endeavours. This is important for schedule 1 of this legislation because the legislation pertains to mining, quarrying and prospecting rights and how they are depreciated. We only represent mining, so our comments pertain only to the mining rights and our position in relation to that, not quarrying and prospecting rights.

The MCA strongly supports schedule 1 of the legislation and the accompanying text and the explanatory memorandum, as I said, as it pertains to mining rights. My colleague Anthony Portas has been closely involved with the issue as both a mining tax practitioner and a member of the MCA’s tax committee responsible for advocating the views of the industry to government. He will talk now to two key dimensions—firstly, the technical and practical dimensions of the schedule and, secondly, the benefits of the proposed legislation to the Australian mining industry.

Mr Portas —I am the head of tax in Asia-Pacific for Anglo American PLC. This issue has a little bit of history. Mining rights prior to 1 July 2001 were not actually depreciable for tax purposes at all. That change was made when division 40 was introduced into the act with the uniform capital allowances provisions. Since 2001, we have actually worked very constructively with the Australian Taxation Office and others to come up with appropriate interpretations of how the relevant provisions in division 40 that deal with mining rights should be interpreted. Some of these issues were exacerbated in 2003 when a number of amendments were made to division 40 which particularly impacted on mining rights. That culminated, as Matthew Flavel has commented before, in 2006 when the ATO released a draft ruling which contained some interpretations that the Minerals Council disagreed with. We wrote to both the ATO and the government expressing our concerns. In particular, we were concerned that they were very inconsistent with government policy as it pertains to the treatment of depreciating assets. Our main concerns were, firstly, that the proposed methodology to determine the life of a mine was inaccurate and inconsistent with industry practice, and, secondly, that there was a suggestion that taxpayers had to reassess the effective life of the mining right each year, which is actually not the case for other depreciating assets.

As Mr Flavel said, on 9 May 2006, the Treasurer announced some changes to deal with these anomalies. We have worked with Treasury and other stakeholders to come up with the appropriate fix. From our point of view, what the amendments in the bill do is allow mining rights to be treated in the same way as other assets from a division 40 perspective—that is, to be depreciated for tax purposes over the economic life of the asset as determined on the date of its acquisition. It does this by requiring the taxpayer to assess the life of the mine and then attribute that life of the mine to become the life of the permit for tax purposes. If there is more than one mine then the life of the longest mine becomes the life of the permit for tax depreciation purposes. It is important to note that the effective life of mining rights needs to be self-assessed by taxpayers. If I were buying a truck, I could go to the ATO’s published ruling and use the safe harbour effective life rate for tax depreciation purposes. No such safe harbour rate exists for mining rights, and thus mining companies need to determine the effective life of their mining rights using the rules set out in the amendments before us.

During the consultation process with Treasury and the ATO, one of our main aims was to be able to determine the effective life of the mining rights using principles and practices already used in the mining industry. In fact, we said consistently that we as tax practitioners wanted nothing to do with the effective life determination, nor did we want some separate process to be undertaken to determine it. Rather, what we wanted was to be able to go to our technical personnel—say, our mining engineers or geologists—and say to them, ‘Give us your report on the life of the mine.’ They would have that already prepared and use it for a range of other purposes. We then use that life of mine for tax depreciation purposes. In determining the life of the mine, these mining specialists rely on their experience and training, as well as industry standards and practices, such as the JORC code, to determine the matters that are critical in assessing the life of the mine. They are the personnel in our organisations that are best placed to make the life of the mine assessments. These amendments in schedule 1 now ensure that we can use the existing data produced by these specialists to assess the effective life of the mining rights for tax depreciation purposes.

CHAIR —Thank you very much. Are there any questions for Treasury or the Minerals Council?

Senator BERNARDI —My question is to the Minerals Council. Mr Portas, you might be able to answer it. I understand that there was a significant consultation period entered into between you and Treasury. Are your stakeholders unanimous in their support for this legislation? Are there any concerns about it?

Mr Portas —There are no concerns that I am aware of. All members of the Minerals Council tax committee, which is headed up by the heads of tax of most of the main mining companies in the country, have all had some involvement in this. My understanding is that everyone is comfortable with it.

Senator BERNARDI —It is quite common practice for listed mining companies in particular to reassess their mine life and to extend it. What are the implications if a life of mine is established at the purchase of a tenement or a mine and then later on it is extended? Are there any implications or issues that you think we should consider in relation to those circumstances?

Mr Portas —There are none that we are concerned about. These amendments bring mining rights in line with all other depreciating assets. The general rule for all assets is that you can make a choice at any point in time to reassess the effective life if there are changed circumstances. That is a choice; it is not a requirement to be done every year or even periodically. It is a choice that taxpayers can make. We in the mining industry now also have that choice to reassess if there are changed circumstances.

Senator HURLEY —You say it is a choice if there is a reassessment of the life of the mine. Should there perhaps not be a requirement if there is a significant reassessment to report that to the ATO?

Mr Portas —That is going to a question of policy. We as the Minerals Council asked for as much consistency as is practically possible with other depreciating assets. That is the whole aim of the uniform capital allowances provision: to treat different depreciating assets consistently but recognise that some have different qualities. Our point of view was that it was appropriate that our mining rights be treated consistently with other depreciating assets.

Senator WEBBER —You mentioned that the schedule does not apply to oil and gas. Because I am from Western Australia I am particularly interested in oil and gas—

CHAIR —But you were born in Melbourne—

Senator WEBBER —I was born in Melbourne, absolutely. Does that mean that the concerns of the oil and gas industries are addressed in other legislation, or can we anticipate that, once we pass this legislation, they are going to have a requirement for legislation that addresses their sector?

Mr Rynne —To clarify my comment on that, this legislation does encompass prospecting—which includes oil and gas—quarrying and mining rights. The point I was trying to make is that there is sometimes a perception that MCA looks after companies who have interests across all those three areas, and we do not. We specifically just look after the endeavours of those who have the mining rights. APPEA, the Australian Petroleum Production and Exploration Association Ltd, have been involved. They did not put in a submission, and I understand that they are comfortable with the proposed schedule and explanatory memorandum. They have had input into it.

Senator WEBBER —You mentioned in your opening remarks that there was initially a draft ruling from the ATO and you had some concerns about it. Does this legislation pick up all of your concerns?

Mr Rynne —Yes, it does.

CHAIR —Mr Flavel or Ms Franks, would you like to make any comments on the evidence from the Minerals Council?

Mr Flavel —I have one additional point in response to Senator Webber’s question. My understanding is that there was also consultation with the quarrying industry—the name of the peak body escapes me—and that they had not raised any objections to, or concerns about, the proposed bill either.

CHAIR —It seems that everyone is in agreement with this. Are there any further questions?

Senator WEBBER —I have one question for Treasury. It has been mentioned that prior to 1 July 2001 there was no depreciation. Did that apply to a specific part of the sector or right across it?

Mr Flavel —The point is that, as a result of the review of business taxation, a new regime was introduced to provide a uniform capital allowance—in other words, a uniform arrangement for depreciating assets. Mining rights previously did not have depreciable treatment but that was altered as a result of those broader business tax reforms that were introduced from 1 July 2001.

CHAIR —Thank you to the Minerals Council and to Mr Flavel and Ms Franks for coming in on the teleconference.

Proceedings suspended from 10.21 am to 10.47 am