2010-2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

SENATE

 

 

 

 

REVISED EXPLANATORY MEMORANDUM

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

 

THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

 

 

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Charging for Australia’s non-renewable resources....... 5

Chapter 2               Overview of the Minerals Resource Rent Tax............... 11

Chapter 3               Core rules............................................................................ 27

Chapter 4               Mining revenue.................................................................. 45

Chapter 5               Mining expenditure............................................................ 73

Chapter 6               Allowances.......................................................................... 95

Chapter 7               Starting base allowances............................................... 119

Chapter 8               Small miners..................................................................... 145

Chapter 9               Combining mining project interests............................. 151

Chapter 10            Transfers and splits of mining and pre-mining project interests    183

Chapter 11            Winding down and ending of mining and pre-mining project interests    213

Chapter 12            Pre-mining project interests........................................... 225

Chapter 13            Adjustments...................................................................... 225

Chapter 14            Valuations......................................................................... 225

Chapter 15            Accounting for the MRRT............................................... 225

Chapter 16            Entities............................................................................... 225

Chapter 17            Integrity measures........................................................... 225

Chapter 18            Administration of the MRRT........................................... 225

Chapter 19            Miscellaneous consequential amendments............... 225

Index............................................................................................................... 225

 

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The following abbreviations and acronyms are used throughout this combined explanatory memorandum.

Abbreviation	Definition
AFTS Review	Australia’s Future Tax System Review
APA	Advance Pricing Agreement
ASX	Australian Securities Exchange
ATO	Australian Taxation Office
CGT	capital gains tax
Commissioner	Commissioner of Taxation
CPI	consumer price index
GST	goods and services tax
GST Act	A New Tax System (Goods and Services Tax ) Act 1999
ITAA 1936	Income Tax Assessment Act 1936
ITAA 1997	Income Tax Assessment Act 1997
LTBR	long term bond rate
LTBR + 7 per cent	long term bond rate plus 7 per cent
MRRT	Minerals Resource Rent Tax
MRRT (CA&TP) Bill	Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011
MRRT Bill	Minerals Resource Rent Tax Bill 2011
MRRT customs imposition Bill	Minerals Resource Rent Tax (Imposition-Customs) Bill 2011
MRRT excise imposition Bill	Minerals Resource Rent Tax (Imposition-Excise) Bill 2011
MRRT general imposition Bill	Minerals Resource Rent Tax (Imposition-General) Bill 2011
OECD	Organisation for Economic Co-operation and Development
OECD Guidelines	OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
PAYG	pay as you go
PRRT	Petroleum Resource Rent Tax
TAA 1953	Taxation Administration Act 1953

Minerals Resource Rent Tax

The Minerals Resource Rent Tax (MRRT) is a tax on the economic rents miners make from the taxable resources (iron ore, coal and some gases) after they are extracted from the ground but before they undergo any significant processing or value add.  ‘Economic rent’ is the return in excess of what is needed to attract and retain factors of production in the production process.

The MRRT is a project-based tax, so a liability is worked out separately for each project the miner has at the end of each MRRT year.  The miner’s liability for that year is the sum of those project liabilities.

The tax is imposed on a miner’s mining profit, less its MRRT allowances, at a rate of 22.5 per cent (that is, at a nominal rate of 30 per cent, less a one-quarter extraction allowance to recognise the miner’s employment of specialist skills).

A project’s mining profit is its mining revenue less its mining expenditure.  If the expenditure exceeds the revenue, the project has a mining loss.  Mining revenue is, in general, the part of what the miner sells its taxable resources for that is attributable to the resources in the condition and location they were in just after extraction (the ‘valuation point’).  Mining revenue also includes recoupments of some amounts that have previously been allowed as mining expenditure.

Mining expenditure is the cost a miner incurs in bringing the taxable resources to the valuation point.

Mining allowances reduce each project’s mining profit.  The most significant of the allowances is for mining royalties the miner pays to the States and Territories.  It ensures that the royalties and the MRRT do not double tax the mining profit.

In the early years of the MRRT, the project’s starting base provides another important allowance.  The starting base is an amount to recognise the value of investments the miner has made before the MRRT.

Other allowances include losses the project made in earlier years and losses transferred from the miner’s other projects (or from the projects of some associated entities).

If a miner’s total mining profit from all its projects comes to less than $75 million in a year, there is a low profit offset that reduces the miner’s liability for MRRT to nil.  The offset phases out for mining profits totalling more than $75 million.

Date of effect :  The MRRT applies from 1 July 2012.

Proposal announced :  The MRRT was announced in the Treasurer’s Media Release No. 055 of 2 July 2010.

Financial impact :  The MRRT will have these revenue implications:

Compliance cost impact :  This measure is expected to impose significant compliance costs on taxpayers in the iron ore and coal sectors (approximately 320 taxpayers).  In the first year of the MRRT’s operation, taxpayers will need to value their starting base and modify their accounting procedures.  Ongoing compliance costs will reduce over the medium to long term.

 

Outline of chapter

1.1                   This chapter explains the rationale for charging for Australia’s non-renewable resources.

Australia’s non-renewable resources

1.2                   Australia is naturally endowed with a large, high quality non-renewable resource base.

1.3                   Non-renewable resources are stocks of minerals and petroleum that are exhaustible and depletable.

1.4                   The majority of Australia’s non-renewable resources are publicly owned.  The rights to these non-renewable resources are vested in the Crown.

Non-renewable resources and taxation

1.5                   It is the characteristic of non-renewability that allows exploitation of these resources to generate economic rent or above normal profit.  Economic rent can generally be taxed without distorting the decisions of investors if the tax is well designed.

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.

1.8                   Royalties therefore may only recover a portion of mining rents when mining profits are high, but will also tax mining operations where no economic rent is present, such as when profits are low.

Resource rent taxes

1.9                   Resource rent taxes are profit-based, cash flow, taxes.  They 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.

(i)      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.

(ii)    The tax rate determines the portion of economic rent that the government collects, and the value of the refund that they provide.

1.11               Under a Brown tax, the government is effectively sharing in the profits and costs of the mining project in proportion to the tax rate.

1.12               However, the Brown tax model is difficult to implement because of the immediate nature of the refund.  So governments typically rely on other models of resource rent taxes that mimic the effect of the Brown tax.

1.13               The Garnaut — Clunies-Ross resource rent tax is a resource rent tax model that attempts to replicate the effects of a Brown tax.  It is named after the Australian economists Ross Garnaut and Anthony Clunies-Ross.  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 or the taxpayer is making a loss.  Instead, losses are carried forward and ‘uplifted’ by an interest rate, so that they can be used as a deduction against positive cash flows in later years.

1.14               The uplift rate preserves the value of the taxpayer’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.

1.15               The Petroleum Resource Rent Tax (PRRT) is an example of a Garnaut — Clunies-Ross resource rent tax.

Background to the Minerals Resource Rent Tax

1.16               The Minerals Resource Rent Tax (MRRT) has its origins in the recommendations of the Australia’s Future Tax System (AFTS) Review.

1.17               The AFTS Review found that the royalty regimes applied by the States and Territories were among the most distorting taxes in the Federation.  In addition, royalty regimes are not particularly flexible.

1.18               As a consequence of being distorting and relatively inflexible, royalties tend to be set at rates low enough for the mining industry to continue to operate in periods of low to average commodity prices.  However, this means that royalties will often fail to provide an adequate return to the community when commodity prices are high.

1.19               The company tax is a profits-based tax, which generally applies to incorporated businesses and will tend to raise more revenue from mining operations when profits are high.  However, the AFTS Review found that there would be benefits to the economy more broadly through lowering the company tax rate to assist in attracting internationally mobile capital investment.

1.20               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.

1.21               In response to the AFTS review, the Government decided that, from 1 July 2012, the MRRT would apply to profits from coal and iron ore operations, while the PRRT would be extended to all offshore and onshore gas and oil projects, including coal-seam methane.  These commodities account for the bulk of Australia’s mineral wealth.

1.22               The detailed design of the MRRT is based on the recommendations of the Policy Transition Group.  The Policy Transition Group was chaired by Don Argus AC and the Hon Martin Ferguson AM MP, Minister for Resources, Energy and Tourism.  The Policy Transition Group consulted extensively across Australia on the new resource tax arrangements and reported to the Government in December 2010.

The Minerals Resource Rent Tax

1.23               The MRRT is a type of resource rent tax based on the Garnaut — Clunies-Ross model.

1.24               Under the MRRT, the government taxes positive cash flows, or mining profits, and allows taxpayers to carry forward and uplift losses with interest for use in later years.

1.25               As the MRRT taxes profits from minerals that are commonly subject to State and Territory royalties, it provides a credit for royalties.

1.26               The tax base for the MRRT is confined to net profits at the valuation point.  The valuation point is the point in the mining production chain that separates upstream and downstream operations.

1.27               As the MRRT is intended to apply only to upstream profits, it is a tax on a narrow portion of mining profits unlike, for example, the income tax, which seeks to tax all sources of income comprehensively.

1.28               The MRRT is a tax on realised profits.  As the proceeds from the sale of a resource are typically realised downstream of the valuation point, the MRRT requires taxpayers to determine the amount of those proceeds that are reasonably attributable to the resource and upstream operations for tax purposes.  The tax is not intended to tax the value added in downstream activities.

1.29               To calculate the MRRT profit at the valuation point, the sales proceeds are reduced by an amount that recognises the arm’s length value of the downstream operations using the most appropriate and reliable method.  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.

1.30               If losses and royalty credits cannot be used within an MRRT year, they are transferred where possible, or carried forward to later years with the relevant uplift rate applied.

1.31               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 on the profit attributable to the resource in the state it was in at the valuation point.

1.32               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 valuation point, and 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 achieved through the combined effect of the features of the tax, including the tax rate, the extraction factor, the valuation point, the interest allowance (uplift) and the scope of assessable revenues and allowable deductions.

1.33               An overview of the operation of the MRRT is provided in Chapter 2.

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 of taxable resources, or would have been made if the resources had been sold instead of being exported or used, 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.

2.7                   The third case shows how the MRRT operates for miners with multiple projects.  It introduces the concepts of pre-mining losses and 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 economic 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, 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 non-renewable resource.  The main kind of mining project interest is an entitlement to share in the output of a mining venture 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, under an Australian law, 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 interest 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 the mining expenditure exceeds the mining revenue, the excess is a mining loss .

Mining revenue

2.11               The main type of mining revenue a mining project interest can have comes from selling, exporting or using taxable resources (or things produced from taxable resources) extracted from the project area.  The proceeds are mining revenue to the extent they are reasonably attributable to the taxable resources at a particular point in the production chain (called the ‘valuation point’).

2.12               Under the MRRT, the valuation point is typically just before the taxable resource leaves the run-of-mine stockpile (also called the ROM stockpile or ROM pad).  The run-of-mine stockpile is where the resource is stored after extraction ready for the next stage of production.  The next unit of production could be transportation but is often some form of processing.  However, not all mining operations use a run-of-mine stockpile.  Where a project has no run-of-mine stockpile, or it is by-passed for any reason, the valuation point is generally just before the first beneficiation process starts.

2.13               Mining operations that occur before the valuation point are upstream mining operations ; those that occur afterwards are downstream mining operations .

Diagram 2.1 :  The valuation point

In this diagram, the dashed line represents the valuation point at the run-of-mine stockpile.  Upstream and downstream mining operations are illustrated.

2.14               The MRRT is a tax on proceeds from selling a taxable resource (or on the proceeds which would have been realised if the resources had been sold instead of exported or sold) but only on that part of those proceeds that is reasonably attributable to the condition and location of the resource when it was at the valuation point.  That amount must be attributed using the most appropriate and reliable method having regard to the miner’s circumstances, the available information and certain statutory assumptions (to the extent to which they are relevant in applying a particular method).  The statutory assumptions are that the downstream operations are carried on by a separate entity who has no interest in the resource and who deals independently with the miner in a competitive market.

2.15               Miners can elect to use a safe harbour method under which the mining revenue amount is worked out by reducing the amount realised from selling the resource (or, the arm’s length value of the resource when it is exported or used) by the cost of its downstream mining operations — being its operating costs, any depreciation and its cost of capital (being its weighted average cost of capital).

2.16               An alternative, and simpler, valuation method is provided for smaller miners and miners who transform resources they mine in an integrated operation, such as steel manufacturing or electricity generation, to work out the mining revenue attributable to their resources.

2.17               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.  Miners who have not elected to use the alternative valuation method may 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 using those prescribed for the alternative valuation method.

Mining expenditure

2.18               The MRRT recognises the majority of upstream costs incurred by the miner in extracting the non-renewable resource and getting it to the valuation point.

2.19               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 valuation point (such as dump trucks and conveyor belts).

2.20               Under the MRRT, upstream capital expenditure is immediately deductible.  Unlike income tax, capital assets do not have to be depreciated over their effective lives.

2.21               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

2.22               Miners reduce their mining profit by their MRRT allowances , to arrive at a net amount, which, for convenience, is referred to in this chapter as the MRRT profit.

2.23               In the vanilla case, the relevant allowances are royalty allowances and mining loss allowances.

Royalty allowances

2.24               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.

2.25               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 this 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.

2.26               Where the full royalty credits for the year cannot be applied as a royalty allowance, the unused portion is uplifted and carried forward to be applied in a later year.  The uplift rate is the long term bond rate plus 7 per cent (LTBR + 7 per cent).

Mining loss allowances

2.27               If a mining project interest has a loss for the 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

2.28               If the MRRT profit is above zero after deducting the allowances, the mining project interest is subject to tax under the MRRT.  The MRRT liability for the interest is calculated by multiplying the MRRT profit by the MRRT rate.

2.29               The MRRT rate is 30 per cent.  However, the MRRT recognises that miners employ specialist skills to extract the resource and bring it to the valuation 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 2.2 :  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 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.

Example 2.1 :  The basic MRRT calculation

In a particular year, Midcap Mining Co. receives $500 million of mining revenue from its mining project interest.  It incurs $120 million in upstream expenses and pays a royalty of $37.5 million to a State.  It has $50 million of losses carried forward from the previous year.  The long term bond rate (LTBR) is 6 per cent.

Mining revenue	$500m
Mining expenditure	($120m)
Mining profit		$380m
Royalty allowance [royalty payable/0.225]	($166.7m)
Mining loss allowance [earlier loss Ã— (LTBR + 7%)]	($56.5m)
Total allowances		($223.2m)
MRRT profit		$156.8m
MRRT liability [MRRT profit × 0.225]		$35.3m

In this example, Midcap Mining Co. is liable to pay MRRT of $35.3 million.

Offset for low profit miners

2.30               If a miner’s mining profit is $75 million or less, it is entitled to a low profit offset that will reduce its total MRRT liability to nil.  If its mining profit is over $75 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.

2.31               Even though a miner’s mining profit might be under $75 million, it still deducts its allowances and carries forward any remainder.

The second case — treatment of existing investments

2.32               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 mining profit.

2.33               The starting base for a mining project interest may be calculated using the miner’s choice of two methods.

2.34               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.

2.35               There are some other key differences between the two methods apart from their different values:

•        the market value method includes the value of the mining right, 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 unable to be applied in the year are uplifted at the consumer price index (CPI) rate, while they are uplifted at LTBR + 7 per cent under the book value method.

Diagram 2.3 :  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 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 MRRT profit multiplied by the MRRT rate.

Example 2.2 :  The MRRT calculation with a starting base

In a particular year, Eisenfluss Mining receives $600 million of mining revenue from its mining project interest.  It incurs $120 million in upstream expenses, pays a royalty of $37.5 million to a State, and has a market value starting base of $3 billion, which it writes off over 25 years at $120 million a year.  It has $50 million of losses carried forward from the previous year.  The LTBR is 6 per cent.

Mining revenue	$600m
Mining expenditure	($120m)
Mining profit		$480m
Royalty allowance [royalty payable/0.225]	($166.7m)
Mining loss allowance [earlier loss Ã— (LTBR + 7%)]	($56.5m)
Starting base allowance	($120m)
Total allowances		($343.2m)
MRRT profit		$136.8m
MRRT liability [MRRT profit × 0.225]		$30.8m

In this example, Eisenfluss Mining is liable to pay MRRT of $30.8 million.  Its existing investment in its mining project interest has reduced its MRRT liability by $27 million.

2.36               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 change in CPI.  If the starting base was valued at book value, the uplift rate is LTBR + 7 per cent.

Example 2.3 :  Carrying forward starting base losses

In year 1, Big Mountain Pty Ltd receives $100 million of mining revenue from its mining project interest.  It incurs $50 million of mining expenditure, and pays a royalty of $7.5 million to a State.  It has no mining losses in year one.  Its market value starting base is valued at $500 million, which it is writing off over 25 years.  In year 1, $3.3 million of Big Mountain’s starting base loss 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 increased by 2.5 per cent.

In year 2, Big Mountain receives $250 million of mining revenue from its interest.  It incurs $50 million of mining expenditure and pays a state royalty of $15 million.  Big Mountain has no mining losses from year 2, as all project expenses were deducted.

	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	109.9m
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)) = ($23.38m)

The third case — multiple interests or pre-mining expenditure

2.37               The third case involves miners with pre-mining expenditure and miners with more than one mining project interest.

Pre-mining expenditure

2.38               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.

2.39               Pre-mining 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 expenditure occurs, it is recognised for MRRT purposes.  However, it is recognised in different ways.

2.40               Pre-mining 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 producing the same resource.

2.41               Pre-mining expenditure incurred in relation to a pre-mining project interest 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 generally be able to transfer pre-mining losses that come with it to any of its mining project interests producing the same taxable resource.

2.42               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.

2.43               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 10 years.  After that, any remaining pre-mining loss is uplifted at the LTBR.

Transferring losses

2.44               A miner with two or more mining project interests that produce the same taxable resource must transfer unused 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 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.

2.45               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.

2.46               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.

Diagram 2.4 :  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 2.4 :  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 (MPI) 1 has mining revenue for the year of $35 million and mining expenditure of $120 million.  It also pays a State royalty of $2.5 million.

MPI 2 has mining revenue of $90 million and mining expenditure of $30 million.  It pays a State royalty of $5.7 million.

The pre-mining project interest has pre-mining expenditure of $7 million and no revenue.

MPI 1 has a mining loss of $85 million.  Its royalty payment converts into a royalty credit of $11.1 million.  It has no profit, so cannot use it as an allowance.  Since it also cannot be transferred, it will be uplifted and carried forward to the next year.

MPI 2 has a mining profit of $60 million.  It has a royalty allowance of $25.3 million, which reduces its mining profit to $34.7 million.  It then transfers in the $7 million pre-mining loss from the pre-mining project interest as a pre-mining loss allowance.  It still has $27.7 million of its mining profit remaining, so it next transfers in $27.7 million of the mining loss from MPI 1 as a transferred mining loss allowance.  That reduces MPI 2s MRRT profit to nil and MPI 1s mining loss to $57.3 million.  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 allowance	0	(7m)	0
Transferred mining loss allowance	0	(27.7m)	0
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 part of the mining loss from MPI 1, are transferred to MPI 2 to reduce its MRRT profit to nil.  Both transfers are possible because the transferring and receiving interests relate to the same type of taxable resource.

^† After transferring $27.7 million to MPI 2.

^* After transferring $7 million to MPI 2.

Combining project interests

2.47               A miner with several mining project interests must combine them into a single mining project interest if they meet the integration criteria (and satisfy other conditions designed to prevent interests combining if that would effectively transfer allowances that are not otherwise transferable).

2.48               There are two possible ways that a miner’s separate mining project interests can be integrated.  First, they will be integrated if:

•        each interest produces the same taxable resource; and

•        each of the interests relates to the same mine or proposed mine.

2.49               Second, a miner’s interests will be integrated if:

•        each interest produces the same taxable resource;

•        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.

2.50               In deciding whether a miner conducts the downstream operations of the mining project interests as one operation, an important consideration will be the extent to which the relevant infrastructure is used in an integrated way to produce a saleable, exportable or usable resource commodity.

2.51               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 mining loss that arose when the two interests were not in common ownership.

Diagram 2.5 :  Integrated mining project interest

In this diagram, the miner has four MPIs relating to the same resource.  If they all relate to a single mine or proposed mine, they would be upstream integrated .  If they are not a single mine or proposed mine, 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 choice.

If the four interests were integrated in either of those ways, they would combine into one MPI.  However, if one of the MPIs has a starting base, a royalty credit or a mining loss attributable to a time when it was not in common ownership with each of the other interests, it could not be part of the combined interest.

Transferring and splitting mining project interests

2.52               Mining project interests can be transferred (for example, by sale).  A mining project interest is transferred if the whole entitlement comprising the mining project interest passes to another entity.

2.53               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.

2.54               When a mining project interest is transferred, any 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.

2.55               When a mining project interest splits, any mining revenue and mining expenditure for the mining project interest to the date of the split, 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.

2.56               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

2.57               The MRRT recognises that some miners may be below the $75 million profit 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.

2.58               Those miners may choose to avoid any MRRT liability for a particular year if either:

•        their earnings before interest and tax, and that of the entities connected to or affiliated with them, totals less than $50 million for that year; or

•        their earnings before interest and tax (and that of those related entities) totals less than $250 million and every mining project interest of those entities has royalties amounting to at least 25 per cent of the interest’s earnings before interest and tax.

2.59               A miner who chooses to use the simplified MRRT method loses any starting base, starting base losses, mining losses, pre-mining losses and royalty credits for all its 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 method.

 

Outline of chapter

3.1                   This chapter explains the framework for calculating how much Minerals Resource Rent Tax (MRRT) a miner must pay for an MRRT year.  It also explains some of the basic building blocks of the MRRT, such as ‘mining project interest’, ‘project areas’, ‘production right’, ‘Australia’, ‘taxable resources’ and ‘valuation point’.

3.2                   All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 unless otherwise indicated.

Summary of new law

General liability

3.3                   An entity that has a mining project interest is a ‘miner’.

3.4                   The key element in working out a miner’s liability for MRRT for a year is to work out the MRRT liability on the mining profits of each of its mining project interests for the year.

3.5                   Mining revenue, mining expenditure and MRRT allowances are calculated in respect of each mining project interest that a miner has.

3.6                   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.

3.7                   If there is a mining profit for the mining project interest for the year, that profit may be reduced to nil by MRRT allowances that relate to the interest.  MRRT allowances are applied in a particular order.  Applying MRRT allowances has the effect of reducing the MRRT liability the miner has for the mining project interest. 

3.8                   A miner’s overall MRRT liability for a year may be reduced to nil by the low profit offset or the rehabilitation tax offset.  If there is an excess rehabilitation tax offset, this may result in a refund for the miner. 

Mining project interest

3.9                   A miner is an entity that has a mining project interest.

3.10               An entity has a mining project interest if it is entitled to a share of taxable resources (or things produced from taxable resources) produced by a mining venture in which the entity is a participant. 

3.11               A mining venture is an undertaking a purpose of which is to extract some or all of the taxable resources from an area covered by one or more production rights and to produce an output which includes taxable resources or something produced using taxable resources.

3.12               If a mining venture relates to one or more production rights, participants in that venture have separate mining project interests in relation to each production right.

3.13               Alternatively, if there is no mining venture in relation to the extraction of some of the taxable resources from an area covered by a production right, an entity has a mining project interest to the extent to which it is entitled to extract taxable resources from that area.

Project areas

3.14               The project area for a mining project interest that is an entitlement to share in the output of a mining venture is the area covered by the production right to which the mining venture relates. 

3.15               The project area for a mining project interest that is an entitlement to extract resources is so much of the area covered by the production right in respect of which an entity is entitled to extract taxable resources.

Production right

3.16               A production right is an authority or right under Australian law to extract a taxable resource from a particular area in Australia or, if such a right is not required for that area, it is an interest in land that allows a person to extract a taxable resource from the area. 

Meaning of Australia

3.17               Australia, when used in a geographical sense, includes all the external Territories (except the Australian Antarctic Territory) and the offshore areas as defined in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 .

Taxable resources

3.18               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.

Valuation point

3.19               For coal and iron ore, the valuation point is just before it leaves the mining project interest’s run-of-mine stockpile.

3.20               If there is no run-of-mine stockpile, or if it is bypassed in a particular case, the valuation 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.

3.21               For any gas that is a taxable resource, the valuation point is when it exits the wellhead.

3.22               If there is a supply of the resources before they reach their valuation point, the point of supply becomes the valuation point.

Detailed explanation of new law

A miner’s liability for MRRT

3.23               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 and the rehabilitation tax offset.  [Sections 10-1, 10-15 and 225-25]

3.24               An MRRT year is a ‘financial year’ as defined in section 995-1 of the ITAA 1997, starting on or after 1 July 2012, adjusted to allow for substituted accounting periods.  [Section 10-25]

3.25               A miner’s MRRT liability for a mining project interest is worked out by applying the MRRT rate to the mining project interest’s mining profit reduced by any MRRT allowances applicable to the mining project interest.  MRRT allowances cannot reduce a MRRT liability below nil.  [Section 10-5]

3.26               The MRRT 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.  The effective MRRT rate is therefore 22.5 per cent.  [Section 300-1, definition of ‘MRRT rate’, section 4 of the Minerals Resource Rent Tax (Imposition — General) Bill 2011 (MRRT general imposition Bill); section 4 of the Minerals Resource Rent Tax (Imposition — Customs) Bill 2011 (MRRT customs imposition Bill); and section 4 of the Minerals Resource Rent Tax (Imposition — Excise) Bill 2011 (MRRT excise imposition Bill)]

3.27               Each of the MRRT allowances are made up of allowance components [section 300-1, definition of ‘allowance component’] .  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 .

3.28               The MRRT allowances must be applied in a particular order.  Broadly, the principle is that project specific allowances must be applied before allowance components can be transferred from another project.  This is consistent with the design of the MRRT as a project-based tax.  [Section 10-10]

Example 3.1 :  Order of MRRT allowances

Francis Mining Co has a $500 million mining profit in respect of a mining project interest in the 2012-13 MRRT year.  

Francis 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, reducing the mining profit to $310 million.

Francis’ MRRT liability is $69.75 million, worked out as

22.5%  ×  $310m. 

3.29               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 [section 10-20] .  Assessed MRRT for an MRRT year is due and payable on the first day of the sixth month after the end of the MRRT year and extra assessed MRRT is due and payable 21 days after the Commissioner gives the miner notice of the charge [section 50-5] .  A miner may also be liable to pay shortfall interest charge and general interest charge [sections 50-10 and 50-15] .  A miner must pay instalments towards that assessed MRRT liability on a quarterly basis during the MRRT year [Schedule 1, item 8, to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), Division 115 of Schedule 1 to the Taxation Administration Act 1953] .

3.30               A miner will not be liable to pay MRRT for a year if the miner has elected to use the simplified MRRT method.  [Division 200]

Imposing the MRRT

3.31               The MRRT is imposed by three different imposition Bills.  One imposes MRRT to the extent that it is a duty of customs [section 3, MRRT customs imposition Bill] ; one imposes MRRT to the extent that it is a duty of excise [section 3, MRRT excise imposition Bill] ; and one imposes MRRT to the extent that it is neither a duty of customs nor one of excise [section 3, MRRT general imposition Bill] .  This reflects the constitutional requirement that laws imposing duties of customs shall deal only with duties of customs and that laws imposing duties of excise shall deal only with duties of excise (see section 55 of the Constitution).  However, there is only one assessment Act.

3.32               The approach of enacting a single assessment Act with multiple imposition Acts when a tax law could be a duty of customs, a duty of excise, as well as some other type of tax, complies with the Constitution.  The same approach was followed for the enactment of the goods and services tax legislation.

3.33               MRRT is not imposed on property belonging to a State.  That ensures that the MRRT complies with section 114 of the Constitution, which prohibits the Commonwealth from imposing a tax on any kind of property of a State.  In practice, this will only have an effect to the extent that a State mines its own taxable resources.  In that case, the State will not be subject to MRRT.  [Section 5 of the MRRT customs imposition Bill; section 5 of the MRRT excise imposition Bill and section 5 of the MRRT general imposition Bill]

Mining project interest

Share of a mining venture to extract taxable resources 

3.34               An entity has a mining project interest to the extent that the entity is entitled to share in the output produced by a mining venture in which the entity participates.  [Subsection 15-5(1)]

3.35               An undertaking is a mining venture if it is an undertaking or endeavour whereby the entity, alone or together with other entities, actively or otherwise, extracts, or plans to extract, taxable resources from a particular area covered by one or more production rights, with a view to producing a commodity which the entity and the other participants in the undertaking can each enjoy.  [Subsection 15-5(3)]

3.36               If the mining venture in which the entity participates covers more than one production right, then the entity will have a separate mining project interest in relation to each of the production rights to which the venture relates.  [Subsection 15-5(2)]

3.37               The kinds of commodities that might be the output of such a mining venture 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.

3.38               The existence and extent of a mining venture is a question of fact.  That question should be determined having regard to:

•        the areas from which taxable resources are extracted;

•        the nature of the extraction and production activities carried out;

•        the degree to which these activities are conducted and operated as financially and technically interdependent business units;

•        relevant contractual arrangements; and

•        the commodities that are produced. 

3.39               Most typically, but not necessarily, a mining venture will be a joint venture to extract and produce resource commodities. 

Example 3.2 :  A vanilla joint venture

ExplorerCo enters into a joint venture with DiggerCo (the joint venturers) to produce coal from an area in Australia.  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. 

The joint venture is a mining venture.  Each of the joint venturers is a participant in that mining venture and each of them has a mining project interest for which they will be liable to MRRT.

3.40               The same participants may be engaged in separate mining ventures.

3.41               Usually a participant in a mining venture would risk money, property or skills in the venture in exchange for a right to share in the commodity produced by the venture.  It is possible, however, that a participant may be gifted, or otherwise transferred, a right to share in the output of the venture.

3.42               An entity is not required to have a production right to be a participant in a mining venture. 

Example 3.3 :  Non-vanilla 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. 

DiggerCo and ExplorerCo are participants in a mining venture.  They each have mining project interests and both will be liable for MRRT. 

3.43               An entity that merely provides a service or accommodation to a mining venture would not itself be a participant in the venture.  To be a participant in a mining venture the entity must share the risks of extracting the resources.

Example 3.4 :  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. 

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 mining venture.  BigBank does not therefore have a mining project interest. 

This would remain the case if, instead of paying cash, DiggerCo chose to discharge its loan obligations to Big Bank by delivering to Big Bank ore equal in value to its loan obligations.

Example 3.5 :  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 it extracts for MinerCo. 

DiggerCo does not share the risks of extracting the resource and is not itself a participant in MinerCo’s mining venture.  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. 

3.44               An entity is not entitled to an output of a mining venture merely because it is entitled to a royalty for the taxable resources extracted by the mining venture or to a private mining royalty comprising a share of the profits of the mining venture.  [Subsection 15-5(6)]

Example 3.6 :  Profit sharing

DiggerCo has a mining venture comprising the extraction and production of 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 the net profits it makes 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 venture and does not have a mining project interest.

More than one mining venture

3.45               There may be more than one mining venture to extract taxable resources in relation to a single production right.

Example 3.7 :  Multiple mining ventures

DiggerCo and CrusherCo have a joint venture to extract coal from a particular area within a larger area covered by a production right they jointly hold.  They are each entitled to take an equal share of the resources which they extract.  DiggerCo and CrusherCo are participants in a mining venture and each has a mining project interest.

CrusherCo also has a separate undertaking to mine another part of the area covered by the production right (DiggerCo takes the view that mining in that area would be too risky). 

CrusherCo would be viewed as having a second mining venture and would have a second mining project interest comprising its right to the output of that separate venture. 

Residual mining project interests

3.46               To the extent to which there is no mining venture to extract certain taxable resources from the area covered by a production right, an entity that has the right to extract the taxable resources from the area would have a mining project interest, to the extent of its entitlement.  [Subsection 15-5(4)]

3.47               Mining project interests of this kind are a form of ‘residual’ interest.  They do not exist to the extent to which the entitlement to extract relates to resources in respect of which there is a mining venture. 

3.48               Typically, the owners of a production right will have the residual mining project interests (if any) for particular production right areas.  It is possible, however, that such interests may be transferred or split to one or more other entities (for example, under a sublease).  Transfers and splits are discussed in Chapter 10.

Example 3.8 :  No mining ventures to extract resources

ExplorerCo holds a production right over an area but it does not have any immediate 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 residual mining project interest.

3.49               The start of a mining venture relating to the extraction of taxable resources in respect of which an entity has a residual mining project interest will be treated as a mining project transfer (if the venture relates to all of the resources), or otherwise a mining project split.  These situations are discussed in Chapter 10.  [Sections 120-25 and 125-35]

Acquiring a further share in a mining project interest

3.50               If an entity that has a mining project interest because it participates in and shares in the output of a mining venture acquires an additional right to share in the output of the venture, it will have a separate mining project interest that corresponds to that further entitlement.  [Subsection 15-5(5)]

Example 3.9 :  Acquiring a further share

DiggerCo and CrusherCo are participants in a mining venture with each other.  They have rights 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 venture to CrusherCo.

By acquiring DiggerCo’s share of the venture CrusherCo acquires a separate mining project interest.

3.51               Similarly, if an entity that has a mining project interest because it has an entitlement to extract taxable resources from a particular area (a residual interest) 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 15-5(5)]

Special rules for mining project interests

3.52               There are circumstances in which it is possible to combine, transfer or split mining project interests.  Combinations are discussed in Chapter 9 and transfers and splits are discussed in Chapter 10.  [Divisions 115, 120 and 125]

3.53               There are also special rules to deal with the winding down of mining project interests and the ending of mining project interests.  The winding down and ending of mining project interest are discussed in Chapter 11.  [Divisions 130 and 135]

Mining project interests to be kept separate

3.54               A mining project interest cannot relate to both iron ore and coal.  Mining project interests that would otherwise relate to both iron ore and coal constitute separate mining project interests.  [Section 15-10]

Production right

3.55               A production right is any authority, license, permit or right under an Australian Law granted by the Commonwealth, a State or a Territory (or, in some instances, a private land owner) that permits an entity to extract taxable resources from a particular area in Australia [subsection 15-15(1)] .  It does not matter that the right to extract is issued subject to environmental approval.

3.56               In deciding whether an entity has been granted the right to extract taxable resources from an area, the term ‘extract’ should not be construed narrowly.  To extract taxable resources means to extract them by any means and would include recovering them from the surface of the place where they occur.  [Section 300-1]

3.57               The various State and Territory Acts use different terms to describe a ‘production right’, including ‘mining leases’ and ‘mining licences’.

3.58               A production right should be distinguished from an authority, license, permit or other right 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’ or ‘retention leases’.  A ‘production right’ does not include rights of this kind.  [Subsection 15-15(2)]

3.59               For the purposes of the MRRT, interests in these other rights are ‘pre-mining project interests’.  [Section 70-25]

Project area

3.60               A production right authorises the extraction of taxable resources from a particular area in Australia.

3.61               The project area for a mining project interest that is an entitlement to share in the output of a mining venture is the area covered by the production right to which the mining venture relates.  [Paragraph 15-20(a)]

3.62               If the mining venture relates to more than one production right there will be a separate mining project interest in relation to each production right.  The project area for each of those interests will be so much of the area covered by each of the production rights to which the mining venture relates.  [Subsection 15-5(2) and paragraph 15-20(a)]

3.63               The project area for a residual mining project interest that is an entitlement to extract taxable resources from an area covered by a production right in respect of which there is no mining venture, is so much of the area covered by the production right in respect of which an entity is entitled to extract taxable resources.  [Paragraph 15-20(b)]

Definition of Australia

3.64               A production right that is issued in respect of an area in Australia will result in a mining project interest.

3.65               Australia , when used in a geographical sense, includes:

•        all the external Territories (except the Australian Antarctic Territory); and

•        ‘offshore areas’ as defined in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 .

[Section 300-1, definition of ‘Australia’]

External territories

3.66               Australia has seven external territories:

•        Christmas Island;

•        Cocos (Keeling) Islands;

•        Norfolk Island;

•        Coral Sea Islands;

•        Ashmore and Cartier Islands;

•        Heard Island and McDonald Islands; and

•        the Australian Antarctic Territory.

3.67               The Australia Antarctic Territory is excluded from the MRRT definition of Australia as no Australian law allows for production rights to be issued in respect of this area.  This is consistent with Australia’s international obligations under the Protocol on Environmental Protection to the Antarctic Treaty (The Madrid Protocol), which prohibits mining within Antarctica.

Offshore areas

3.68               The Offshore Minerals Act 1994 provides for production rights to be granted in respect of minerals in offshore areas.  To ensure mining in such areas is covered by the MRRT, the MRRT aligns with the definition of ‘offshore areas’ relevant for that Act.

3.69               The Offshore Minerals Act 1994 relies on the definition of ‘offshore areas’ in the Offshore Petroleum and Greenhouse Gas Storage Act 2006.  Such offshore areas generally extend to the outer limits of the continental shelf.  The continental shelf, which takes its meaning from paragraph 1 of Article 76 of the United Nations Convention on the Law of the Sea, is either the outer edge of the continental margin or 200 nautical miles where the continental margin does not extend out to that distance.

3.70               Such offshore areas do not include the Joint Petroleum Development Area ^[1] or the offshore areas of the Australian Antarctic Territory.

Taxable resources

3.71               The MRRT is a tax on profits a miner makes from extracting certain non-renewable resources.  Those non-renewable resources are called ‘taxable resources’.

3.72               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.

[Subsection 20-5(1)]

3.73               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.

3.74               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.

3.75               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 20-5(2)]

3.76               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).

3.77               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 20-5(3)]

The MRRT and gases

3.78               Most petroleum gases are not taxable resources under the MRRT.  Instead, most of them are 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 Petroleum Resource Rent Tax (PRRT). 

3.79               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 20-5(1)(d)]

3.80               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.

3.81               Sometimes coal seam gas is drained from a potential coal mine as a pre-mining activity.  Where that drainage occurs as a preliminary step in 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 taxable resource under the MRRT and would be taxed under the PRRT regime instead.

3.82               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’.

3.83               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.  [Paragraph 20-5(1)(c)]

3.84               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.

Valuation point

3.85               The valuation point is the point in the mining process that sets the form and location of the taxable resources used for working out what part of the proceeds of selling the resources is included in mining revenue.  The valuation 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 deductible, although it may be relevant to working out how much of the sale price of the resources is mining revenue).

Normal valuation point for coal and iron ore

3.86               The usual valuation point for coal and iron ore is immediately before it leaves the run-of-mine stockpile.  [Subsection 40-5(1)]

3.87               This means that expenditure on moving the resources to the stockpile, and expenditure on managing and maintaining the stockpile, is upstream of the valuation 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).

3.88               ‘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’.

3.89               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.

Valuation point for coal and iron ore with no stockpile

3.90               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.

3.91               In those cases, the valuation point is immediately before the coal or iron ore enters the first mine site beneficiation process [paragraph 40-5(2)(a)] .  If there is no beneficiation process at the mine site, the valuation point is instead when the resource leaves the point of extraction [paragraph 40-5(2)(b)] .

3.92               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.

Valuation point for gases

3.93               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.

3.94               The valuation point for those gases is when they exit the wellhead.  [Subsection 40-5(3)]

3.95               ‘Wellhead’ is not defined in the legislation but 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 valuation point is when the gas exits the wellhead, expenditure on the wellhead is upstream of the valuation point and is therefore deductible.

Valuation point for earlier supplies

3.96               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 valuation point.  If that happens, the valuation point is immediately before that supply.  [Subsection 40-5(4)]

 

Outline of chapter

4.1                   This chapter outlines the concept of mining revenue in the Minerals Resource Rent Tax (MRRT).

4.2                   All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 unless otherwise indicated.

Summary of new law

4.3                   Mining revenue is a fundamental concept in the tax as it feeds directly into the calculation of the mining profit for a mining project interest for an MRRT year.

4.4                   The main type of mining revenue comes from consideration (or deemed consideration) for supplying or exporting taxable resources, or supplying, exporting or using something produced from taxable resources.  Mining revenue is the part of the consideration attributable to the resources at their valuation point.

4.5                   Other types of mining revenue include recoupments of mining expenditure and compensation for loss or destruction of taxable resources.

Detailed explanation of new law

What is a miner’s mining revenue?

4.6                   Mining revenue for an MRRT year is calculated separately for each mining project interest of the miner.  [Section 30-5]  

4.7                   The mining revenue of a mining project interest in respect of an MRRT year is the total of the amounts included in the mining revenue for that interest for that year [section 30-5] .  This drafting approach is taken to facilitate the calculation of the mining profit for a mining project interest [section 25-5] .

4.8                   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 amount relates to the resources as they were at the valuation point;

•        the supply, export or use of something produced using the taxable resources, to the extent the amount relates to the resources as they were at the valuation point;

•        economic recoupment of mining expenditures for the mining project interest;

•        compensation for loss of taxable resources for the mining project interest; and

•        an amount received under a take or pay contract that cannot be related to the supply of a particular quantity of taxable resource.

4.9                   Other amounts may also be mining revenue, such as amounts arising out of balancing adjustment events for starting base assets and from other adjustments where circumstances change.  [Divisions 160 and 165]

4.10               An amount to be included in a miner’s mining revenue does not include any goods and services tax 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 30-75]

4.11               The same amount cannot be double counted.  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 30-60]

4.12               An amount is not mining revenue unless a provision of the MRRT law includes it in mining revenue.  For instance, a hedging gain that is separate from a supply contract is not mining revenue in the same way that a hedging loss that is separate from a supply contract is not mining expenditure (see Chapter 5).

Revenue from the supply, export or use of taxable resources

4.13               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.  [Section 30-10]

4.14               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 valuation point, is not sufficient in itself to attract the tax in a particular MRRT year.

4.15               Three possible mining revenue events can result in an amount relating to taxable resources being included in a miner’s revenue for an MRRT year .  [Section 30-15]

4.16               The first way is by the miner making an initial supply of the taxable resource prior to its exportation or use [paragraph 30-15(1)(a)] .  For example, if a miner sold coal to an export customer on free on board terms, where risk and title passes ‘over ship’s rail’, such a sale would be a supply prior to export.

Example 4.1  

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.

4.17               The second way is by the miner exporting resources when there has been no initial supply at or before that time.  [Paragraph 30-15(1)(b)]

Example 4.2  

Francis Resources exports 20,000 tonnes of iron ore to its storage facility in China.  It later sells the ore to a third party.

4.18               The third way is by the miner making an initial supply of, using, or exporting, something produced using the taxable resource if an event has not been triggered by an initial supply or export of the taxable resource.  [Paragraph 30-15(1)(c)]

Example 4.3  

Francis Energy extracts 50,000 tonnes of coal from an MRRT project and feeds the coal directly into a power plant for the production of electricity, which it supplies into the wholesale electricity market. 

4.19               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.  There will be one, and only one, mining revenue event for each quantity of resources extracted in Australia that is not otherwise consumed in mining operations.  [Section 30-15]

4.20               The approach taken is to focus on, in order, whether there has been an initial supply of the resource and, if not, an export of the resource, and, if neither of those, an initial supply, export, or use of something produced using the taxable resource.

Supply

4.21                ‘Supply’ has the meaning given by section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 and subsection 995-1(1) of the Income Tax Assessment Act 1997 , but is to be interpreted in the context of the MRRT.  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. 

Initial supply

4.22               The usual way that the revenue provisions will be triggered is by the miner making the initial supply of the taxable resource.  [Paragraph 30-15(1)(a)]

4.23               The initial supply of a taxable resource extracted under the authority of a production right is generally the initial supply that a miner makes after it has extracted the taxable resources .  [Subsection 30-20(1)]

4.24               An initial supply must be a supply of taxable resources made by a miner who has a mining project interest that relates to the taxable resources.  Typically, therefore, it would not include a supply made by the owner of the resource in situ (unless the owner is also a miner). 

4.25               A supply is not an initial supply if it does not result in a change in the ownership of the taxable resource.  For instance, if a miner blends a quantity of iron ore from one of its mining project interests with iron ore from another of its mining project interests, the blending will not constitute a supply; only once the blended ore is sold would there be an initial supply .   [Paragraph 30-20(2)(b)]

4.26               The concept of an initial supply is also subject to an exception relating to supplies made between participants in the course of an undertaking that is a mining venture.  This mainly affects joint venture arrangements.  [Paragraph 30-20(2)(a)]

4.27               The exception ensures that, if a supply of taxable resources is made between participants in a mining venture, and the supply is made in the course of that venture, the supply is not an initial supply.  The initial supply would be the next supply of those resources.

Example 4.4

X Co and Y Co are participants in a joint venture undertaking where X Co undertakes the extraction activities and Y Co the blending activities.  Each takes a share of the resulting resource.  The joint venture undertaking is a mining venture.  The supply of the resource from X Co to Y Co (giving Y Co possession) is not treated as an initial supply of the resource as it occurred in the course of the joint venture undertaking.

Example 4.5  

Taking the facts in Example 4.4, if, after the extraction and blending activities have occurred and the respective shares of X Co and Y Co determined, X Co sells its share in the resource to Y Co, this supply is not excepted because it did not occur in the course of the joint venture undertaking.  So, that sale would be the initial supply of the resource.

Example 4.6  

In a separate situation, 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 initial supply.

4.28               A supply is not excepted from being an initial supply if it is made between participants in separate undertakings.

Example 4.7  

Taking the facts in Example 4.4, a supply by X Co to a participant in another mining venture in which X Co is also a participant would be an initial supply.  That is because it would not be a supply between participants in the course of a single mining venture; it would be a supply between participants in two different mining ventures.  It would make no difference if the separate mining ventures both relate to the same production right.

4.29               When a supply occurs, the time of the supply is taken to be the earliest of when consideration for it is received or becomes receivable, when the resource is delivered, and when ownership passes in the resource .  [Section 30-35]

4.30               However, if consideration for the supply is received or becomes receivable at a time before 1 July 2012, the time of the supply is taken to be the earliest of when the resource is delivered, and when ownership passes in the resource .  [Schedule 4, item 2  to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill)]

Export

4.31               If the miner exports the taxable resource from Australia before there has been an initial supply, the export will trigger a mining revenue event.  [Paragraph 30-15(1)(b)]

4.32               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.

4.33               In general, a miner ‘exports’ resources if they are exported while the miner has ownership or title to them.

4.34               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.

4.35               Similarly, the miner ‘exports’ the resource even if the miner is not actually responsible for the exporting activities.  The time of ‘export’ determines whether it (or a supply that occurs at the same time or earlier) is the relevant mining revenue event.  [Paragraph 30-15(1)(b)]

4.36               Export occurs when the resource finally clears Australia’s territorial limits (which will usually be its coastal waters).  Merely leaving the final Australian port is not sufficient to constitute export.

4.37               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, a miner will export resources when it transfers them to one of its overseas branches.

4.38               More complicated cases can arise where a transaction has occurred prior to the resource leaving Australia.  In those cases it must be determined whether the relevant mining revenue event is the initial supply or the export.

4.39               A sale under which ownership passes at the port or while the ship is in Australian waters is dealt with under the ‘initial supply’ test, not the ‘export’ test.  So, for instance, sales of coal or iron ore using free-on-board or cost-insurance-freight will usually be dealt with under the ‘initial supply’ test.

4.40               In this regard, it should be noted that, while an initial supply does not occur until ownership passes 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.  For example, if a miner is entitled to invoice a customer once the resource crosses the ship’s rail, that point will be the time of supply.  Alternatively, if the point at which the consideration is received or receivable has not arrived but the miner has delivered the resource to an agent of a customer for transport to a destination outside Australia, that point will be the time of supply.  [Section 30-35]

4.41               If title does not pass in the resource until after it leaves Australian coastal waters, and consideration for a supply has not yet been received or become receivable, and there has not yet been a delivery of the resource, the export test will apply.

Example 4.8 :  When export is the relevant mining revenue event

Redrock Resource Co. sells iron ore to an export customer under terms that pass title in the ore at the destination port.  Title to the ore passes on delivery of the ore at the destination but, if consideration is received or receivable before then, the supply will be taken to have occurred at that earlier time.  If that is before the ore is exported (that is, before it leaves Australia’s territorial waters), the relevant mining revenue event will be the supply.  If consideration is received or receivable only when the ore reaches the destination port, the relevant mining revenue event will be the export.

Use

4.42               The ‘use’ of something produced from the taxable resource is a revenue event if an event has not already been triggered by an initial supply or export of the taxable resource or thing.  [Paragraph 30-15(1)(c)]

4.43               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 use of the electricity rather than the coal that triggers the mining revenue event.

4.44               If, however, the miner uses the thing produced from the resource in carrying on mining operations or transformative operations (for example, if the miner uses electricity in it mining operations that it has produced from coal it extracts), the use of the electricity is not treated as a mining revenue event .  That is because the consumption of the electricity is not an expenditure and will not, therefore, give rise to a deduction.  [Subsection 30-15(2)]

4.45               ‘Use’ takes its ordinary meaning in the context of the MRRT. 

Working out the amounts to be included in a miner’s revenue

4.46               The amount to be included in a miner’s revenue for a particular mining revenue event that has happened is determined through a two-step process:

•        first, the ‘revenue amount’ for the mining revenue event is determined (Step 1); and

•        second, so much of the revenue amount as is reasonably attributable to the taxable resource in the form and place the resource was in when it was at its valuation point (Step 2).  This amount is worked out using the most appropriate and reliable measure of that amount.

[Subsection 30-25(1)]

4.47               The two-step process ensures that the profits that are brought to tax under the MRRT law will be profits that relate to the resources in the form and the place they were in when they were at their valuation point.  The MRRT law does not seek to tax profits from operations conducted downstream of the valuation point.  [Section 1-10]

4.48               Price increases in the taxable resource that occur after the resource has passed the valuation point and which are reflected in the consideration realised by the miner for selling the resource or things produced using the resource (or which would have been realised if the miner had sold the resource or the thing produced instead of exporting or using it) will be captured as mining revenue.  Conversely, price decreases after the valuation point that are reflected in the consideration realised by the miner (or would have been if there had been a supply) will reduce the amount of mining revenue.

4.49               Although the legislation does not prescribe the use of any particular method for attributing the revenue amounts, the method used must produce the most appropriate and reliable measure of the amount, having regard to, amongst other things, the functions performed, assets employed and risks assumed by the miner across its value chain and the information that is available.  [Subsection 30-25(3)]

4.50               There are also a number of statutory assumptions which must be made, but only to the extent to which they are relevant in applying the method that is the most appropriate and reliable method.  The assumptions are that the things done by the miner in carrying on its downstream mining, transformative and resource marketing operations (as applicable) are done by a distinct and separate entity that does not own the taxable resource and which deals wholly independently with the miner in a competitive market for the things done.  [Subsection 30-25(4)]

4.51               There is also a safe-harbour method which, if chosen by the miner, is taken to give the most appropriate and reliable measure of the amount to be attributed.  [Subsection 30-25(5)]

Arm’s length principles and methodologies

4.52               The arm’s length principle plays an important role in determining amounts to be included in a miner’s mining revenue. 

4.53               The arm’s length principle requires that the profits derived by an enterprise should be consistent with the profits that the enterprise would have derived had its commercial and financial dealings been consistent with the commercial and financial dealings that independent enterprises would have had in comparable circumstances.

4.54               The arm’s length principle can apply at three points:

•        to test whether the revenue amount for a supply is an arm’s length amount [Division 205] ;

•        to impute a revenue amount where the mining revenue event is the export of a taxable resource or the export or use of something produced using a taxable resource [subsection 30-25(2), items 2 and 3 in the table] ; and

•        to work out how much of a revenue amount is attributable to a taxable resource as at its valuation point [subsection 30-25(3)] .

4.55               The Organisation for Economic Co-Operation and Development (OECD) has provided guidelines for the application of the arm’s length principle using arm’s length methodologies.  The OECD Guidelines are titled the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines ).

4.56               The methods outlined in the OECD Guidelines were developed to assist tax administrations and multinational enterprises deal with cross-border transfer pricing of transactions.  Regard may be had to the OECD Guidelines, adapted as appropriate, for the MRRT law.

4.57               Arm’s length methodologies that may be relevant in applying the MRRT law, alone or in combination, and as direct or indirect methods, include the comparable uncontrolled price method, the cost-plus method, the resale price method, the transactions net margin method and profit-split methods.  These methods are outlined in more detail in Chapter 17 in the context of the anti-profit shifting rules.

4.58               In some cases other methods, not described in the OECD Guidelines, but which are consistent with the arm’s length principle, may produce a result which is the most appropriate and reliable method.

4.59               Because the working out of the mining revenue starts with the revenue amount, this is discussed first, and then there is a discussion about how the revenue amount should be attributed to the taxable resource as at the valuation point.

Determining the revenue amount

4.60               There are two broad categories of mining revenue events for which revenue amounts must be determined:  actual supplies, and imputed supplies for exports of resources and dealings in things produced from resources.  [Subsection 30-15(1)]

Supplies

4.61               Where the mining revenue event is a supply, the revenue amount will be the actual consideration received or receivable for the supply.  [Subsection 30-25(2), item 1 in the table]

4.62               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 30-70]

4.63               The consideration received or receivable could be adjusted if the anti-profit shifting rules apply.   [Division 205]

4.64               In effect, the revenue amount operates as a ‘cap’ on the amount that can be attributed to the taxable resources, ensuring that only realised profits of the miner can be brought to tax.

Imputed supplies

4.65               In the remaining revenue events there is no actual transaction.  An arm’s length consideration is worked out instead.

4.66               Where the mining revenue event is an exportation of the resource or a thing produced from the resource, the revenue amount is the amount that would be the arm’s length consideration if the miner had supplied it at the time and place the taxable resource or thing is loaded for export .  [Subsection 30-25(2), item 2 in the table]

4.67               Where the mining revenue event relates to the use of a thing produced from the taxable resource, the revenue amount is the amount that would be the arm’s length consideration if the miner had supplied the thing at the time and place of the use.  [Subsection 30-25(2), item 3 in the table]

Meaning of arm’s length consideration

4.68               The arm’s length consideration for a supply is the amount that the miner would reasonably expect to receive if, instead of exporting or using the resource or a thing produced from the resource, it had sold the resource or thing to another entity with which it was dealing wholly independently .    [Subsection 30-30(1)]

4.69               The taxpayer must use the most appropriate and reliable method to determine the arm’s length consideration.  Regard must be had to all the miner’s relevant circumstances, including:

•        the characteristics of the resource at the point of export or use;

•        a functional and factual analysis of the economically significant activities undertaken by the miner in its mining operations and, if relevant, its transformative and resource marketing operations;

•        market conditions;

•        the miner’s market strategies;

•        the terms and conditions of arrangements entered into; and

•        the degree of comparability that exists between the controlled and the 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.

[Paragraph 30-30(2)(a)]

4.70               Regard, must also be had to the availability, coverage and reliability of data necessary to apply particular methods.  [Paragraph 30-30(2)(b)]

4.71               For these purposes, the concept of mining operations is broadly defined.  Mining operations are all those activities or operations that are ‘preliminary or integral to’ or ‘consequential upon’ extracting or producing taxable resources for sale or export or for producing taxable resource to be applied in producing some other thing for sale, export or use [section 35-20] .  A detailed explanation of mining operations is in Chapter 5.

4.72               Transformative operations are those activities and operations that involve the application of taxable resources in the production of some other thing that is subject to a mining revenue event when sold, exported or used.  [Subsection 30-25(6)]

4.73               Resource marketing operations are operations or activities involved in marketing, selling, shipping and delivering taxable resources (or things produced using taxable resources) that are sold or exported.  [Subsection 30-25(7)]

4.74               The most appropriate and reliable method must produce an arm’s length result that is reasonable and makes sense on a commercial basis in all the circumstances of the miner and its dealings in taxable resources or (things produced from taxable resources). 

4.75               If, however, it is not possible to work out the arm’s length consideration, the revenue amount is the amount that is fair and reasonable in the opinion of the Commissioner of Taxation (Commissioner).  [Subsection 30-30(3)]

Determining how much of the revenue amount is attributable to the taxable resource

4.76               Having ascertained the revenue amount, the task is then to determine how much of that amount is reasonably attributable to the taxable resources in the condition and place they were in when they were at the valuation point. 

4.77               If there is an initial supply of the taxable resources just after the valuation point [subsection 40-5(4)] the whole of the mining revenue amount will be reasonably attributable to the resources at the valuation point and the mining revenue amount will, subject to the application of the anti-profit shifting provisions, correspond with the consideration received or receivable for the supply.

4.78               In other cases, the revenue amount must be attributed to the taxable resources using the method that produces the most appropriate and reliable measure of the amount.  That method must be chosen having regard to:

•        the circumstances of the miner, including a functional and factual analysis of the economically significant activities undertaken by the miner in its mining operations and, if relevant, in its transformative and resource marketing operations; and

•        the availability of reliable information needed to apply the selected method or methods.

[ Subsection 30-25(3)]

General approach

4.79               Revenue amounts will be attributable to taxable resources to the extent to which the resources, and the activities involved in getting them to the valuation point in the condition they were in at the valuation point, are the factors that have, in substance, generated the revenue amounts.

4.80               To work out when this is the case, a functional and factual analysis of the economically significant functions performed, assets used, and risks assumed by the miner across its entire value chain would be required.  [Paragraph 30-25(3)(a)]

4.81               This is the same analysis that is required when working out the revenue amount for taxable resources (and things produced from taxable resources) that are exported before they are sold or used.  [Section 30-30]

4.82               The next step would be to allocate those functions, assets and risks across the miner’s value chain — that is upstream and downstream of the valuation point.  Only objectively relevant and material circumstances need to be taken into account. 

4.83               Obviously the allocation of functions, assets and risks between two parts of what is a single value chain poses conceptual and practical difficulties. 

4.84               One approach to the problem would be to construct a hypothetical separate and independent entity fitting the circumstances of the downstream operations (being the downstream mining operations, transformative operations and resource marketing operations).

4.85                On this approach the downstream operations would be considered in the context of the miner’s overall operations and certain dealings between the hypothetical entity and the miner may be hypothesised.  For example, it may be hypothesised that the downstream entity provides services to the miner. 

4.86               Once a separate entity has been hypothesised it becomes simpler to apply standard arm’s length methods.  Those methods can be applied to all of the notional entity’s activities, including its dealings with other entities and its hypothesised dealings with the miner.

4.87               This is broadly the approach adopted by the OECD for attributing profits to a ‘permanent establishment’ of a non-resident enterprise: the profits to be attributed to the permanent establishment are the profits that the permanent establishment would have earned at arm’s length if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions.  Treating the permanent establishment as a separate entity focuses attention on the economically significant activities performed by the permanent establishment and the way it interacts with the broader enterprise. 

4.88               Having allocated the functions, assets and risks between the upstream and downstream, the most appropriate and reliable method should be chosen.  The choice should be informed by the functional analysis and, amongst other things, by reference to:

•        the characteristics of the resource at the point of supply or equivalent;

•        the terms and conditions of arrangements entered into by the miner;

•        the degree of comparability that exists between controlled and uncontrolled dealings or between entities undertaking the dealings, including all the circumstances in which the dealings took place and whether adjustments can and should be made;

•        the nature and extent of any assumptions that must be made; and

•        the availability of reliable information needed to apply the selected method.

[Subsection 30-25(3)]

Statutory assumptions

4.89               The MRRT law includes certain assumptions which must be used to the extent to which they are relevant to the application of a particular method.  [Subsection 30-25(4)]

4.90               The statutory assumptions are that:

•        a distinct and separate entity (the notional downstream entity) does all the things (including using all the assets) that the miner actually does in carrying on the downstream operations;

•        the downstream entity does not acquire any interest in the taxable resource; and

•        the downstream entity and the miner deal wholly independently with one another under competitive market conditions.

[Subsection 30-25(4)]

4.91               These assumptions are assumptions about the nature of the downstream operations and the functions performed, the assets employed and the risks assumed in those operations.  As such, it would be expected that the assumptions would be relevant to any method that requires (or takes into account, expressly or implicitly) a valuation of the downstream operations (for example, where a deductive method is used to netback from the revenue amount).

4.92                Such assumptions would not, however, be relevant in applying methods that do not rely on things that happen in the downstream operations.  For example, where there is a comparable uncontrolled price for the taxable resource at the valuation point.

Distinct and separate independent entity assumption

4.93               As discussed above, the assumption that the things done by the miner downstream of the valuation point are done by a distinct and separate entity dealing wholly at arm’s length with the miner establishes a basis for the use of arm’s length methods to determine an appropriate price or value for those things.  [Paragraphs 30-25(4)(a) and 30-25(4)(c)]

4.94               Specifically, arm’s length methods may assist in working out what the miner would have paid a separate entity to do those things.

4.95               The separate entity assumption only applies to the things done by the miner in carrying on its downstream mining, transformative and resource marketing operations.  It does not apply to things done by separate entities from whom the miner has procured services.

Example 4.9 :  Miner procures another entity to provide downstream operations

X Resources Pty Ltd contracts Y Mining Services Pty Ltd to crush and screen the iron ore it extracts from its iron ore mine.  X Resources pays Y Mining Services $15 million for these services.  While the crushing and screening activities constitute mining operations for X Resources’ mining project interest, and the service fee represents expenditure incurred by X Resources in carrying on those operations, the things done by Y Mining Services are not things that are taken to have been done by X Resources. 

The separate entity assumption only applies to the things done by X Resources in procuring the mining services from Y Mining Services Pty Ltd.

Resource assumption

4.96               The MRRT law is a resource rent tax.  The underlying principle is that risks relating to the value of the taxable resource are borne upstream of the valuation point ^[2] . 

4.97               Consistent with this, an arm’s length method cannot be used if it relies on an assumption that the notional downstream entity has acquired an interest in the resource.  [Paragraph 30-25(4)(b)]

4.98               A hypothesis that the notional downstream entity acquired the resource would produce an unreliable measure of the profits attributable to the taxable resources and could result in resource rents arising from price changes occurring after the resource passes the valuation point, but before the revenue event, being attributed downstream.

Competitive market assumption

4.99               The assumption of a competitive market for the provision of the downstream operations, transformative operations and resource marketing operations carried on by the notional downstream entity ensures that resource rents cannot be attributed downstream as a result of the assumed exercise of market power by the separate entity.

4.100           In a competitive market the notional downstream entity would be expected to make a return sufficient to induce an entity to enter the market to do the things the entity is taken to have done.  The return would be commensurate with the non-diversifiable risks borne in doing those things and would be no more or less than would be sufficient to justify the continued commitment of that capital.  [Paragraph 30-25(4)(d)]

4.101           A non-diversifiable risk is a systematic or market risk that cannot be diversified away.  For example, the risk that an asset could become stranded may be non-diversifiable to the extent that the stranding results from market wide events such as a reduction in demand associated with changes in movements in interest rates or changes in commodity prices.  Such risks (including any non-diversifiable risks associated with the resource) should be compensated for in the returns that the notional downstream entity would make.

4.102           Characteristics of a competitive market that are relevant in determining the amounts that a miner would pay a separate entity to provide downstream operations are freedom of entry and the presence of many potential service providers, none of whom individually can affect price.  Freedom of entry implies that costs can be recovered, if it were otherwise this would increase the risk for new entrants and so deter entry. 

4.103           A comparable uncontrolled price for the provision of downstream operations is unlikely to be appropriate where the price reflects the exercise of market power by the provider. 

Possible methods

4.104           As discussed above, there are different methods that may, depending on the miner’s circumstances, alone or in combination, provide an appropriate and reliable method for working out the miner’s mining revenue.  The method that is used should be the method that is the most appropriate and reliable method.  [Subsection 30-25(3)]

4.105           Although the attribution methodology requires a reasonable attribution to be made of a revenue amount, this does not mandate a ‘net back’ from the revenue amount although this is likely to be the most reliable method in many cases. 

4.106           Arm’s length methodologies that may be relevant include the comparable uncontrolled price method, the cost-plus method, the resale price method, the transactions net margin method and profit-split methods.  There may be others.

4.107           For example, to the extent to which there are comparable transfers of taxable resources in the form the resources were in when they were at their valuation point, between unrelated parties in comparable markets, then a comparable uncontrolled price, as at the time of the mining revenue event, and adjusted for any material differences, would be an appropriate and reliable method.

Example 4.10 :  Comparable uncontrolled price at the valuation point

An independent enterprise sells iron ore of a similar type, quality and quantity at the same time and the same stage of the production chain as those produced by the taxpayer.  Assuming no other material differences, the price received by the independent iron ore producer, as at the time of the mining revenue event, would be considered a comparable uncontrolled price.

4.108           In many cases, however, a netback from the mining revenue event to the valuation point is likely to be the most appropriate and reliable method. 

4.109           In a netback, the revenue amount would be reduced for the arm’s length value of the downstream operations that reasonably relates to the resources (or the things produced from taxable resources).  The residual amount would be the mining revenue. 

4.110           Applying a netback approach would support neutrality in the application of the MRRT law to miners who ‘buy in’ their downstream operations and those who provide them ‘in-house’.

4.111           To the extent to which the miner carries on its downstream operations in-house, a net back could be undertaken by reference to the price that a hypothetical service provider would seek to recover for providing those operations to the miner on an arm’s length basis.

4.112           A miner that adopts this approach should value the downstream operations using the most appropriate and reliable method.  This could be using a comparable uncontrolled price for equivalent downstream operations or worked out by reference to the miner’s actual operating and capital costs (for example, by applying an arm’s length cost-plus or transactional net margin method). 

Example 4.11 :  What a miner would pay a distinct and separate entity — comparable uncontrolled price

Daly Resources Pty Ltd performs all of the crushing, processing and transporting of the ore it extracts from its iron ore mine before it is exported.  These are the only downstream activities undertaken before the ore is sold. 

Daly Resources observes that there are other iron ore miners in the same region that procure comparable crushing, processing and transporting services from independent service providers.  The market for the services is a competitive market. 

Having regard to the prices charged by those service providers, Daly Resources determines that it would need to pay $18 million to procure the same crushing, processing and transporting activities as it directly carries out itself.  The $18 million is a comparable uncontrolled price being a price arrived at having regard to the comparable activities performed by parties dealing independently with one another under materially the same circumstances.

During the same year Daly Resources obtains $40 million from selling the iron ore.  It would be reasonable to include $22 million in Daly Resource’s mining revenue ($40m - $18m).

4.113           Where the miner procures its mining operations from a third party then, assuming those operations are procured on an arm’s length basis, the amounts paid for the mining services would form the basis for the net back.  Allowance would also be made for the functions performed by the hypothetical separate entity in procuring and administering the service contracts. 

Example 4.12 :  Miner procures another entity to provide downstream operations

X Resources Pty Ltd contracts Y Mining Services Pty Ltd to perform all downstream mining operations leading to the export of the ore it extracts from its iron ore mine.  During the MRRT year starting on 1 July 2012, X Resources pays $15 million to Y Mining Services to conduct the downstream mining activities.  X Resources deals with Y Mining Services on an arm’s length basis.

X Resources also incurs costs in managing its contract with Y Mining Services.  During the same year, X Resources derives consideration of $35 million from exporting the iron ore.  The revenue that is reasonably attributable to the ore as at the valuation point for the year is $35 million less the $15 million paid to Y Mining Service and an arm’s length charge for the procurement functions actually performed by the miner in its downstream operations.

4.114           If the miner procures services from a third party on a non-arm’s length basis then, unadjusted, the amounts paid for the mining services would not form the basis of an appropriate or reliable net back method (note, also, the potential application of the anti-profit shifting rules in Division 205).

4.115           A full net back from the revenue amount may not be the most appropriate and reliable method for a vertically integrated transformative operation (for example, the production of electricity or steel).  However, a netback from the point at which the mining operations end and the transformative operations commence may be appropriate and reliable if there are comparable uncontrolled prices for the sale of the resources in the form they are in when they are first applied to the transformative operations.

Example 4.13 :  Separate entity providing transformative operations — comparable uncontrolled price

E Energy Pty Ltd owns and operates a coal fired power station.  It supplies the power station with coal from its own coal mine.  It also acquires coal, of similar quality and in similar quantities, on an arm’s length basis, from other miners who have mines near E Energy’s mine. 

Assuming no other material differences, the price that E Energy pays for the coal from the other miners would be a comparable uncontrolled price for the coal it has mined itself.

E Energy also finds a way of working out the arm’s length value of its processing and transporting operations.  For example, it may be able to find a comparable uncontrolled price for those services.  Alternatively, a cost-plus or transactional net margin method may provide an appropriate and reliable method for pricing those services.

In these circumstances, it would be reasonable for E Energy to work out its mining revenue by taking the comparable uncontrolled price for its own coal (adjusted to the date that the coal is stockpiled at the power station) and reducing it by the arm’s length value of its own downstream processing and transporting operations (being those operations that are downstream of the valuation point but which end when the coal arrives at the power station). 

The residue would be an amount that is reasonably attributable to the coal when it was at the valuation point (to the extent it does not exceed the revenue amount).  

4.116           Another possible method is a profit-split method.  A profit-split method, is a method that takes a combined profit and splits it on an economically valid basis that approximates the division of profits that would have been anticipated between independent enterprises.  This economically valid basis may be supported by independent market data (for example, uncontrolled joint-venture agreements) or by internal data.

4.117           Profit-split methods are only available to be used if they are the most appropriate and reliable measure of the revenue amount to be attributed to the taxable resource at its valuation point.

4.118           When the supply chain is not highly integrated, the importance of the mining rights and the upstream mining operations relative to the downstream would tend to favour the use of other methods over a profit-split method.

4.119           However, the position may be different in the case of a highly integrated operation, such as a transformative coal to electricity generation.

4.120           In applying a profit-split method in the context of the MRRT law, it would be expected that the mining rights, and the capital contributed in the upstream and downstream, would provide a more appropriate bases for analysing a split of profits as compared to other bases, such as operating costs.  That is because of the capital intensive nature of the mining industry and the significant value attributable to mining rights.

4.121           Although capital contributed would be reasonably observable, the value of mining rights increase and decrease with variations in commodity prices.

Example 4.14 :  Profit split ratio

A profit-split calculation, for attributing revenue amounts, could be based on the ratio: mining right value plus upstream capital asset values/mining right value plus upstream and downstream capital asset values

Safe-harbour method

4.122           To improve certainty and reduce compliance costs, the MRRT law provides a safe-harbour method for working out how much of the revenue amount is attributable to the taxable resource at the valuation point.  If the method is chosen by a miner, it is taken to be the most appropriate and reliable method.  [Subsection 30-25(5)]

4.123           There may be circumstances in which the safe-harbour method would be the most appropriate and reliable method in any event (that is, without recourse to the safe-harbour provision).

4.124           The method takes the revenue amount and reduces it by an amount that, having regard to the required assumptions (including the arm’s length dealings assumption, the resource assumption and the competitive market assumption), the miner’s circumstances and the available information, is sufficient for the notional downstream entity to recover the costs of the operations it is taken to have carried on such as reasonably relate to the taxable resource (or things produced from the taxable resource).

4.125           The costs that the notional downstream entity can recover are:

•        its operating costs;

•        any depreciation of the assets used in those operations; and

•        a cost of capital sufficient to justify the continued commitment of the capital it employs in those operations.

[Paragraph 30-25(5)(a)]

4.126           This is a method that is commonly used to set prices for access to infrastructure and related services.  It adopts a ‘building block’ approach.  It excludes from mining revenue the amounts the service provider would need to recover, over the long run, to meet the costs of those investments (where the costs of an investment includes a return on capital that is commensurate with the ^[3] non-diversifiable risks). 

4.127           Applied in the MRRT context, the method works out a competitive price for the operations taken to have been provided by the notional downstream entity.  To the extent to which those operations reasonably relate to the production of taxable resources (or things produced from taxable resources), the revenue amount for those resources (or things) will be reduced accordingly. 

4.128           There may be a number of different ways of working out the extent to which the downstream operations reasonably relate to taxable resources (or things produced from taxable resources) in relation to which there have been mining revenue events.  For example, it may be reasonable to work out an average price, per tonne, for the iron ore produced and transported in a year.  That price could be applied to each quantity of resource that is sold, exported or used in that year.

4.129           The mining revenue cannot be a negative amount.

4.130            The costs which the notional downstream entity should be able to recover can be expressed as follows:

downstream operating costs  +  depreciation  +  (downstream capital value  Ã—  cost of capital)

4.131           The notional downstream entity’s operating costs would be the non-capital, arm’s length, costs of the downstream operations.  These costs would generally include maintenance costs (although see further discussion below).  [Subparagraph 30-25(5)(a)(i)]

4.132           Depreciation would be the amounts required to compensate the notional downstream entity for the consumption of the assets used in its operations due to physical or economic loss.  It would be expected that the amount of depreciation would be worked out having regard to the economic life of the asset, which may, in turn, depend on the expected life of the mining operation.  The amount of the depreciation will be a recovery of the capital value of the asset over its expected remaining operating life.  [Subparagraph 30-25(5)(a)(ii)]

4.133           The choice of depreciation profile under this approach (for example, straight line or annuity) should be consistent with a reasonably stable path of service charges, consistent with what an independent service provider would set in a competitive market.

4.134           The cost of capital would be the opportunity cost of the capital used to finance the notional entity’s downstream operations (that is, the return on capital required to attract the capital).  It would be expected that the cost of capital would be worked out by applying a weighted average cost of capital to the assets used in the downstream operations, being a rate that is consistent with prevailing market conditions, adjusted for the non-diversifiable risks (also known as systematic risks) involved in those operations, and weighted by the proportions of equity and debt used to fund those operations.  [Subparagraph 30-25(5)(a)(iii)]

4.135           In order to work out depreciation amounts and cost of capital amounts, a capital value for downstream assets is required.  For new assets, the most appropriate value will be the cost of acquisition or installation.  For existing assets, a market valuation based on an approach that is consistent with the method used to value starting base assets should be used (albeit subject to the operation of the competitive market assumption). 

4.136           There are a number of different approaches for working out the capital value of assets.  Methods commonly used include depreciated actual cost, depreciated optimised ^[4] replacement cost, optimised replacement cost or full replacement cost. 

4.137           The question as to which is the most appropriate method for valuing assets in a particular case will depend on the circumstances of the assets, the notional entity, and the industry and on the other assumptions made. 

4.138           The three integers — operating costs, depreciation and costs of capital — are interdependent.  Their combined operation should ensure that the service provider is not over- or under-compensated, over time.  Assumptions made in working out one integer will generally affect the other. 

4.139           For example, the operating costs that could be recovered should be commensurate with the assumptions made in valuing the asset.  That is, it would not be appropriate to recover the full costs of maintaining an old asset if the assets have been valued, as new, at full replacement cost.  Nor would it be appropriate to recognise any capital expenditure on assets valued at full replacement cost other than where the expenditure expands or improves the functionality of the asset.  That is because the expenditure would already be reflected in the replacement cost of the asset. 

4.140           Replacement cost should not be used where it exceeds market value.  If the cost of replacing an asset is more than the cost of a cheaper alternative, an owner would not replace it.  For example if, say, a rail transport asset is underutilised and/or the mine it services has limited remaining economic life, a valuation based on the net present value of the cost of transporting the resource by road would be appropriate if this option is cheaper than replacing the existing rail asset.

4.141           In valuing downstream assets, discounted cash flow methods should generally not be used.  That is because those methods require assumptions to be made about the service charges for the use of the assets.  In effect, the service charge is the thing that the statutory method is trying to determine. 

Example 4.15 :  What a miner would pay a distinct and separate entity

Katherine Mining Pty Ltd installs an iron ore crusher ready for use from 1 July 2011 and commences crushing ore from the run-of-mine pad.  Katherine Mining determines that its operating costs in performing this activity are $700,000 in 2012-13. 

The cost of the crusher was $2 million and its effective life is 25 years, so in determining the capital costs the separate entity would incur, Katherine Mining determines an amount of $80,000 for depreciation of the crusher for that year.  The return on capital invested in the crusher would be worked out having regard to the risks the separate entity would incur and the assumption that there is a competitive market for the provision of the crushing services to Katherine. 

Katherine Mining determines that a pre-tax return on the capital invested in the crusher of 13 per cent would be sufficient for a separate entity to continue to employ its capital in that undertaking. 

Katherine Mining determines the amount that it would pay a distinct and separate entity to provide ore crushing services in 2012-13 to comprise the operating costs, depreciation and the return on capital as determined above: a total of $1,029,600 ($700,000 operating costs plus $80,000 depreciation and $249,600 return on the depreciated cost of the crusher).  The sum of this and the amounts Katherine Mining pays, or would pay, for other downstream operations, reduces the revenue amount for the sale of the iron ore that will be included in its mining revenue.

4.142           Any costs associated with a particular operation that relate to operations that are not taken into account in working out the revenue amount should be added back.  [Paragraph 30-25(5)(b)]

Example 4.16 :  Costs not reflected in the revenue amount for a supply

Assume there is a supply of taxable resources at a port in Australia but the miner incurs the costs of carriage and insurance.  Further assume that the miner invoices the purchaser for these costs separately from the resources.

The miner would be required to add back any costs that relate to the things it did in delivering and insuring the resources. 

Example 4.17 :  Costs not reflected in the revenue amount for resources exported

Assume a miner exports coal to an offshore customer.  Title to the resources passes on delivery and the miner bears the cost of carriage and insurance. 

The revenue amount is the amount for which the miner would have sold the coal had it sold it at the time the coal was loaded for export.  Assume the miner sells coal of the same quality (and in similar quantities) to other customers on free on board terms and uses the price of that coal to work out the revenue amount for the coal it has exported. 

The miner would be required to add back any of its costs that relate to the things it did in delivering and insuring the resources. 

Other mining revenue

4.143           Other forms of mining revenue include:

•        amounts that recoup or offset mining expenditure and payments that give rise to royalty credits [sections 30-40 and 30-45] ;

•        compensation for loss of taxable resources [section 30-50] ; and

•        amounts that do not relate to a particular taxable resource [section 30-55] .

Recoupments and offsets

4.144           Mining revenue includes amounts that recoup or offset mining expenditure of the mining project interest.  It does not matter whether the recoupment was received or receivable by the miner who has the interest or by one of its associates.  It also does not matter whether the expenditure recouped arose in the past or will arise in the future.  This ensures that mining expenditure is only recognised to the extent that the miner actually bears the economic cost of that expenditure.  Treating recoupments of future expenditure in the same way avoids the need to track each recoupment against a particular amount of expenditure.  [Subsection 30-40(1)]

Example 4.18 :  A subsidy recoups mining expenditure

Lawrie Longwall Mining  (Lawrie) receives a government subsidy for expenditure it incurs in employing apprentices to work on its mining project interest.  The cost of employing the apprentices is mining expenditure, so the recoupment by way of the subsidy is mining revenue.

Example 4.19 :  Sale of emissions units recoups mining expenditure

O’Toole Coal purchased 5,000 emissions units sufficient to offset CO ₂ emissions attributable to upstream mining operations.  It paid $125,000 ($25 per unit) for the units and included this amount in its mining expenditure in its 2017 MRRT year.  However, it only needed to surrender 3,000 units to offset its 2017 carbon emissions.  In 2018, O’Toole Co sold 2,000 units for $46,000 (at $23 per unit).  The recoupment of this mining expenditure is mining revenue.    

4.145           A recoupment is not included in mining revenue if the amount gives rise to an adjustment.  As the adjustment rules deal with such recoupments, this ensures the amount is not double counted.  [Paragraph 30-40(1)(c)]

4.146           Where an amount is received that recoups an expenditure that is only partly deductible, the proportion of the recoupment included in mining revenue matches only the proportion of the expenditure that is deductible.  [Subsection 30-40(2)]

Example 4.20 :  Recoupment is only partly for upstream expenses

Continuing Example 4.18, if Lawrie’s costs in employing apprentices were incurred 60 per cent for upstream mining operations and 40 per cent for downstream mining operations, only 60 per cent of the costs would be mining expenditure, so only 60 per cent of the subsidy would be mining revenue.

4.147           An amount received or receivable before the start of the MRRT that recoups or offsets mining expenditure is included in mining revenue.  [Schedule 4 to the MRRT (CA&TP) Bill, item 3]

4.148           Amounts that recoup or offset a liability that gives rise to a royalty credit will normally reduce royalty credits [section 60-30] .  However, if there are insufficient royalty credits to reduce, the excess recoupment, grossed-up by the MRRT rate, is included in mining revenue [section 30-45] .

Compensation for the loss of taxable resources

4.149           A miner who obtains, or whose associates obtain, an amount of insurance, compensation or indemnity relating to the loss, destruction or damage of an extracted taxable resource or something produced from it, must include mining revenue to the extent that, if the compensation had been consideration for a supply, it would have been included, as mining revenue.  [Section 30-50]

4.150           This reflects the fact that, from the miner’s perspective, compensation amounts for the loss, destruction or damage of resources is equivalent to consideration for supplying them.

4.151           Amounts included as mining revenue are limited to compensation for loss, destruction, or damage of resources after 1 July 2012 and before there has been a mining revenue event for the resources.  Resources that were lost, destroyed or damaged before 1 July 2012 would not have generated mining revenue, so compensation for their loss or destruction would similarly not be mining revenue [Schedule 4 to the MRRT (CA&TP) Bill, item 4] .  Resources lost, destroyed or damaged after their mining revenue event will already have generated an amount of mining revenue, so treating the compensation as mining revenue would be double counting.  [Section 30-50]

Amounts that do not relate to a particular mining revenue event

4.152           Amounts received or receivable by a miner for the supply, or proposed supply, of taxable resources that do not reasonably relate to a mining revenue event for a particular quantity or quantities of taxable resources are treated as mining revenue.  [Section 30-55]

4.153           Typically, this will occur where a purchaser makes a scheduled payment under a take or pay contract but does not take delivery of any resources.

Example 4.21 :  Take or pay contract

X Energy Co entered into a long-term supply contract to pay for a fixed annual quantity of coal from New Resources Pty Ltd, whether or not X Energy takes delivery of that quantity of coal.  For the year beginning 1 July 2012, X Energy pays the fixed annual amount, but, because of reduced demand for energy from its coal-fired power station, X Energy takes delivery of only ¾ of the coal contracted for and it obtains a credit that can be applied to future coal deliveries.

New Resources treats ¾ of the payment as a revenue amount that must be attributed to the coal that was supplied and the balance as an amount which must be included directly in mining revenue.

New Resources would not have to include any further amount in its mining revenue if it later has to supply the remaining ¼ of the coal to X Energy (although there would be a change in the circumstances relating to the payment included directly in mining revenue such as may warrant an adjustment under Division 160).

Expenditure causing revenue to be received

4.154           An amount that would otherwise be included in mining revenue in respect of a mining project interest is reduced to the extent that the miner necessarily incurred the expenditure in enforcing the miner’s entitlement to receive the amount, provided that the expenditure:

•        does not relate to any other amount;

•        was not mining expenditure for the mining project interest; and

•        was not excluded expenditure.

[Section 30-65]

4.155           This ensures that the mining profit for a mining project interest properly reflects the net mining revenue and mining expenditure for the interest.

4.156           For example, if litigation costs incurred in seeking compensation for damages to taxable resources are not mining expenditure, they would reduce the mining revenue for the mining project interest from which the resources were extracted.

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.

5.2                   All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) unless otherwise indicated.

Summary of new law

5.3                   A miner’s mining expenditure for a mining project interest includes expenditure necessarily incurred in carrying on mining operations upstream of the valuation point.  However, such expenditure is specifically excluded if it is:

•        a cost of acquiring an interest in a mining project interest;

•        a royalty (other than some private mining royalties);

•        a cost of finance;

•        a payment under a hire purchase agreement;

•        capital expenditure on non-adjacent land or buildings for administrative or accounting activities;

•        hedging or currency losses;

•        a rehabilitation bond or trust payment

•        a payment of income tax or goods and services tax; or

•        a unit shortfall charge.

Detailed explanation of new law

Mining expenditure

5.4                   Mining expenditure is a fundamental concept because it feeds directly into the calculation of a miner’s mining profit for a mining project interest in respect of a Minerals Resource Rent Tax (MRRT) year and therefore its total MRRT liability for an MRRT year.  [Sections 10-1 and 25-5]

5.5                   The mining expenditure for a mining project interest is the sum of all the amounts that are included as mining expenditure for the interest for an MRRT year.  [Subsection 35-5(1)]

5.6                   An amount is only included in mining expenditure once, under the most appropriate provision.  [Section 35-25]

5.7                   Some expenditure is specifically excluded.  [Subsection 35-5(2) and Subdivision 35-B]

General test for mining expenditure

5.8                   A miner’s mining expenditure for a mining project interest includes expenditure to the extent that it is necessarily incurred by the miner in carrying on upstream mining operations in respect of that mining project interest.  [Section 35-10]

5.9                   Unlike income tax, it does not matter whether the expenditure is of a revenue or a capital nature.  All expenditure that satisfies the nexus to upstream mining operations is deductible as mining expenditure when incurred.  This approach is consistent with the ‘cash flow’ nature of rent taxes.   [Subsection 35-10(2)]

Expenditure

5.10               ‘Expenditure’ is a word with several meanings.  In the MRRT context, ‘expenditure’ refers to disbursement of an amount of money (except where the non-cash benefit rules apply).  The term is often coupled with a timing rule, such as ‘incurred’.  In these cases, the expenditure would occur when the timing rule is satisfied.

5.11               ‘Expenditure’ does not include the consumption of assets, which is another possible meaning of the word.  An asset that has been consumed or lost will already have led to an amount of mining expenditure at the time it was purchased for use in upstream mining operations. 

5.12               For example, if explosives are included in mining expenditure at the time of purchase, then the value of those explosives is not included in mining expenditure when they are used because that would double count the miner’s costs. 

5.13               In addition, because miners get an upfront deduction for capital expenditure, there is no depreciation (except in the case of starting base assets).  Indeed, if miners were to depreciate their assets, the expenditure would be counted twice — once at the time of purchase, and again over the life of the asset. 

Necessarily incurred ... in carrying on

5.14               The words ‘necessarily incurred ... in carrying on’ are familiar to business taxpayers as they are integral to the general income tax test for deductibility (see section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).  These words are judicially well tested and therefore provide a high degree of certainty regarding the deductibility of expenses.  The words have been consciously chosen in preference to the approach to deductibility that is a feature of the Petroleum Resource Rent Tax (PRRT) regime and which has given rise to disputes about whether expenses are deductible or not.

5.15               The approach adopted by the courts in interpreting and applying these words in the income tax context is appropriate for MRRT purposes.  This means that, if expenditure is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of upstream mining operations, it is mining expenditure. 

5.16               While there must be a nexus between an expense and upstream mining operations in order for the expense to be mining expenditure, the requirement for expenditure to be necessarily incurred does not impose a narrow test or a test of logical or inescapable necessity.  The Courts have developed a pragmatic approach to interpreting these words.

Example 5.1 :  Approach to deductibility

Wildfire Coal, a UK resident, has Australian mining operations.  After negotiation with a local authority, Wildfire 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 its mine.  While the aquatic centre is for the use of the whole community, it is primarily for use by the miner’s 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 its operations.  The expenditure is incurred as a matter of practical operational necessity and so is mining expenditure to the extent that it is for employees engaged in upstream mining operations.

5.17               However, this does not mean that all expenditure necessarily incurred in carrying on a business that includes the production of a taxable resource is deductible.  This is a resource rent tax, not an income tax — not all revenue is assessable, and not all expenditure is deductible.  Expenditure must be sufficiently connected to upstream mining operations and not the business more generally.  Only expenditure that has the necessary relationship with upstream mining operations is included in mining expenditure.

Example 5.2 :  Expenses incurred in carrying on a business

Continuing the previous example, Wildfire Coal decides to list on the ASX and incurs costs associated with listing.  While these costs may have a connection with Wildfire Coal’s business, they do not have the appropriate connection with upstream mining operations and so are not mining expenditure.

5.18               Importantly, the words ‘necessarily incurred ... in carrying on’ have proven flexible over time.  They are capable of dealing with new situations.

Example 5.3 :  Expenses incurred in meeting environmental obligations

Craig Mining Co owns and operates an iron ore mine in the Pilbara.  During the 2013-2014 MRRT year, it emits 20,000 tonnes of CO ₂ in carrying on its upstream mining operations.  It is therefore required to purchase and surrender 20,000 emission units to meet its obligations under the Clean Energy legislation.  The expenditure is necessarily incurred in carrying on upstream mining operations and so is included in mining expenditure. 

Upstream mining operations

5.19               Upstream mining operations are mining operations to the extent that they relate directly to finding and extracting a taxable resource from the mining project area for the mining project interest.  Any activity or operation directed at doing anything to, or with, the taxable resource after it reaches the valuation point is not an upstream mining operation.  [Section 35-15]

5.20               Extracting the taxable resource incorporates all those activities necessary to free the taxable resource from its in situ location, and so would include recovering resources from the surface of the land, excavating an open cut pit, and digging a traditional underground mine. 

5.21               Also included are activities that are preliminary to extraction, such as exploration, and activities undertaken as a consequence of extraction, such as getting taxable resources to their valuation point.  This would include any initial crushing to make it possible to move the resources to the valuation point, building the road that links the miner to the run-of-mine stockpile, and buying and maintaining the trucks used for the transport. 

5.22               Some particular things that could qualify as upstream mining operations are:

•        negotiations with native title holders as part of the process of obtaining a production right over the project area;

•        exploring for taxable resources in the project area;

•        crushing and weighing taxable resources before they reach their valuation point;

•        head office activities, to the extent that they contribute to getting taxable resources to their valuation point;

•        planning and constructing facilities, and acquiring and maintaining plant and equipment, for use in processing taxable resources before they reach their valuation point;

•        upgrading computer software used in processing taxable resources before they reach their valuation point; and

•        rehabilitating a project area from damage caused by exploring, extracting and moving taxable resources to their valuation point.

5.23               Some activities may be carried on outside the mining project area.

Example 5.4 :  Activities remote from the mine site

Wildfire Coal has automated some activities for producing and handling taxable resources before the valuation 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 are upstream mining operations.

Example 5.5 :  Training upstream staff

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 capital city.  The activities are upstream mining operations to the extent that they relate to the capacity of personnel to carry on upstream mining operations.

Example 5.6 :  Mine planning in a capital city

Wildfire Coal employs staff at its head office in a capital city whose duties include 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 5.7 :  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 is an upstream mining activity as it is preliminary and integral to extracting the taxable resources.  Upstream mining operations may be carried out before or after the taxable resource reaches the valuation point so long as they otherwise have the required relationship to the extraction of the resource and getting it to the valuation point.

If Wildfire has several mining project interests, or some mines not subject to the MRRT, the costs of research that was relevant to all of them would have to be apportioned.

5.24               Activities directed at preparing the mine site are upstream mining operations.

Example 5.8 :  Preparatory 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 stockpile.  This includes earthworks to level and provide access to the run-of-mine stockpile site and drainage work to ensure that any run-off from the run-of-mine stockpile does not contaminate local waterways.  These activities are upstream mining operations.

5.25               Activities directed at expanding a mine are upstream mining operations.  For example, exploration may be undertaken within the area of a production right in order to define and clarify the exact location and extent of a taxable resource within a mining project area.  As this informs decisions made about the operation of the mine in order to extract the taxable resource, it is an upstream mining operation.

Example 5.9 :  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 ore body within the project area.  The drilling is an upstream mining operation.

5.26               Some activities that take place after a mine stops producing taxable resources are upstream mining operations.

Example 5.10 :  Mine site rehabilitation and restoration

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 extracting the taxable resources and so are related to extracting those resources.  Therefore, the activities are upstream mining operations.

Example 5.11 :  Mine site rehabilitation and restoration

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.  The water is removed from the mine to allow for the extraction of the coal and to maintain mine safety.  After the mine closes, Wildfire Coal drains and backfills the tailings pond to restore the site.  These restoration activities are upstream mining operations.

Example 5.12 :  Mine site rehabilitation and restoration

When restoring its mine site, Wildfire Coal removes conveyor belt systems used to transport coal from the coal face to the run-of-mine stockpile.  This is an upstream mining operation.

Mining operations

5.27               The MRRT defines mining operations to include all activities or operations that are ‘preliminary or integral to, or consequential upon’ extracting or producing taxable resources, or producing something else using those taxable resources.  [Paragraph 35-20(1)(a)]

5.28               However, mining operations do not include doing anything to, or with, taxable resources after they reach the form and location they are in when a mining revenue event happens to them, or they are first applied to producing something in relation to which a mining revenue event happens.  [Paragraph 35-20(1)(b)]  

5.29               Mining operations therefore include those 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 are also included .

5.30               Some activities and operations are specifically identified as mining operations for a mining project interest for the purposes of clarifying the scope of the general definition and removing doubt in some cases of particular concern.  This does not limit what is included under the general definition .   [Subsection 35-20(2)]

5.31               The specific activities are:

•        exploration or prospecting for taxable resources in the project area for the mining project interest;

•        extracting taxable resources from the project area;

•        doing anything to, or with, taxable resources recovered from the project area before they reach the form they are in when a mining revenue event happens to them;

•        obtaining access to the project area for mining operations;

•        acquiring, constructing or maintaining anything to be used in the above activities;

•        rehabilitating the project area affected by any of the above activities;

•        closing down any of the above activities; and

•        activities done in furtherance of these activities.

[Subsection 35-20(2)]

5.32               An activity is an activity done in ‘furtherance’ of the other activities specified if it is, from a practical and business point of view, directed at facilitating or enabling those activities to be carried on.  However, the idea of an activity done in furtherance of another activity does not extend to activities that have only a remote or temporal connection with a listed activity.  For instance, obtaining an ASX listing, while an activity that, in a remote sense, furthers the mining activities, would be too remote a connection to be part of the upstream mining operations.

5.33               The definition of ‘exploration or prospecting’ comes from section 40-730 of the ITAA 1997 and therefore includes activities such as geological mapping, geophysical surveys, systematic searching for areas containing minerals, and searching by drilling within those areas.  It includes searching for ore within, or near, an ore-body by drives, shafts, cross-cuts, winzes, rises and drilling.  It further includes conducting feasibility studies to evaluate the economic feasibility of mining minerals once they have been discovered, and obtaining mining or prospecting information associated with the search for, and evaluation of, areas containing minerals.   [Section 300-1, definition of ‘exploration or prospecting’]

Example 5.13 :  Exploring and prospecting

Pick and Shovel Co holds a mining project interest in Western Australia from which it extracts iron ore.  Pick and Shovel conducts a search for additional iron ore near the ore body and within the project area.  The search is part of the mining operations for the mining project interest.

Incurring mining expenditure

5.34               The MRRT operates on an accruals basis.  Mining expenditure is therefore deductible in the year that it is incurred.  This aligns with the treatment of deductible expenditure under the ITAA 1997 and under the PRRT.

Example 5.14 :  Contractor performing services

Wildfire Coal engages Upstream Coal Services (Upstream) in June 2013 to perform activities that would be upstream mining operations.  Under the agreement, Wildfire is to pay Upstream after the work is done and invoiced.  Upstream performs its contractual obligations in July 2013 and immediately issues a tax invoice.  Wildfire incurs this expense in the 2013-2014 MRRT year and can therefore include the amount charged for Upstream’s services in its mining expenditure for that year.

Example 5.15 :  Joint venture funds

Pick & Shovel Co is the operator of an iron ore mine on behalf of joint venturers, SingCo, SangCo, and SongCo.  At the start of each month, Pick & Shovel provides an estimate of expenditure for the following month, and makes a cash call to the joint venturers for their share of the estimated monthly expenditure.  The cash call simply puts Pick & Shovel in funds.  It does not procure the carrying on of any operations.  Any pecuniary liabilities incurred by Pick & Shovel as joint venture operator, so far as they relate to the other joint venturers’ shares, are mining expenditure for each of SingCo, SangCo, and SongCo because Pick & Shovel is acting as their agent.

Therefore, the joint venturers only incur mining expenditure when Pick & Shovel actually incurs a pecuniary liability that bears the necessary relationship to upstream mining operations.

Apportioning mining expenditure

5.35               An asset can be used both in upstream and downstream mining operations and staff can perform functions that are relevant to both upstream and downstream mining operations.  Costs may also relate to more than one mining project interest, or to taxable resources and non-taxable resources.  Only the part of the expenditure incurred in the upstream operations related to taxable resources is mining expenditure and deductible against mining revenue.  Expenditure that also serves other purposes must be apportioned.  Expenditure that is for multiple mining project interests must be apportioned between them.  [Subsection 35-10(1)]

5.36               The words ‘to the extent’, which are also familiar to taxpayers through their frequent use in income tax law, support the apportionment of costs.  [Subsection 35-10(1)]

Example 5.16 :  Activities partly for upstream mining operations

Wildfire Coal uses a loader 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.  Therefore, its cost and the costs of operating and maintaining it must be apportioned between its upstream and downstream roles.

Example 5.17 :  Expenditure incurred in growing forests to generate carbon emission units

Pinder & Co owns and operates a coal mine in the Illawarra region of New South Wales.  Both its upstream and downstream mining operations emit significant amounts of CO ₂ .   

Pinder & Co acquires 1,000 hectares of land in Tasmania at a cost of $1 million to grow forests and generate emission units to meet its emission liabilities.  Based on initial estimates, Pinder & Co will only need 300 hectares of the forest to offset the emissions generated by the upstream operations of its coal mine.  Therefore, Pinder & Co will include $300,000 in its mining expenditure.  

5.37               Apportionment of mining expenditure must be on a fair and reasonable basis.  What will be fair and reasonable is essentially a question of fact to be determined in each case and could include using a proxy, such as revenue, production volumes, direct costs, labour costs, or head counts.

Example 5.18 :  Apportioning between taxable and non-taxable resources

Wildfire Coal operates a coal mine in north 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 purchases a fleet of 10 dump trucks for use in its coal mine, to transport coal to the valuation 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 coal mine and 50 per cent of their time in the copper mine.  The total cost of the dump trucks was $5 million.  The miner must apportion this expenditure between its coal operation and its copper operation.  The miner may only claim $2.5 million as mining expenditure.

Example 5.19 :  Apportioning head office costs

Wildfire Coal operates two coal mines and one nickel mine in Queensland.  It does not engage in any other commercial activities.

During the year, Wildfire 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 valuation points.  The total operating expenditure for the nickel mine is $160 million.

Wildfire also incurs $37 million of costs at its Head Office in Brisbane.  These costs relate to:

ASX listing................................................. $1 million

Interest....................................................... $4 million

Private royalties....................................... $5 million

Business development............................ $5 million

Political donations................................... $1 million

Investor relations..................................... $1 million

Human resources..................................... $10 million

Management............................................ $5 million

Office lease............................................... $5 million

The ASX listing fee, investor relations and political donation costs would not qualify as mining expenditure as they do 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 business development costs relate to researching potential acquisition targets of coal and other mining projects in and out of Australia.  These costs would not be deductible for MRRT purposes on the basis that they were not incurred in respect of a mining project interest or pre-mining project interest and therefore do not have the necessary connection with the coal operations.

The remaining $20 million of human resources, office lease and management expenditure has the necessary connection with the mining operations but needs to be apportioned using a two-step process:  firstly across the three mining operations, and secondly between upstream and downstream, each on a fair and reasonable basis.

Step 1

One basis for undertaking the first step of allocating the human resources, office lease and management expenditure to each of the three mines may be to use a reasonable estimate of the headcount of employees at each of the mines.  A split based on total costs of each of the three mines could also be appropriate.

Another may be to allocate the expenditure to each of the three mines based on the proportion that the operating costs of each of the coal mines ($80 million each) bears to the total operating costs of the three mines ($320 million).  In this case, that would result in the coal mines each being allocated 25 per cent of the costs (or $5 million each).  The $10 million that relates to the nickel mine would never be MRRT expenditure, as nickel is not a taxable resource. 

On the facts of this case, an allocation of the human resources, office lease and management expenditure to the three mines based on the proportion that the revenue or profits from each of the coal mines bears to the total mining revenue of the mines may not be reasonable.  That is because Wildfire’s revenue and profit margin from its coal mines is disproportionately large compared to its profit margin from its nickel mine.  Revenues and profits may not therefore be an accurate proxy for working out the purpose for which the expenditure was incurred. 

Step 2

Once the cost allocation has been made to each of the mine sites, it still needs to be split between upstream and downstream.  This could be done using the proportion of upstream/downstream costs as a proportion of total costs at each mine.  On this basis, the $5 million allocated to each coal mine above would then be split $1.25 million to upstream and $3.75 million to downstream, as 25 per cent of each coal mine’s costs are upstream in this example.  Upstream costs of the two mines would be MRRT expenditure and the downstream costs may be taken into account in determining the MRRT revenue.

Other amounts of mining expenditure

5.38               Amounts may be included in mining expenditure when there is an adjustment to the use of an asset used in upstream mining operations.  For example, if half the cost of an asset was mining expenditure when acquired, based on an expected 50 per cent use each in the upstream and downstream operations of a mining project interest, a later decision to use it fully in the interest’s upstream mining operations would lead to a further amount of mining expenditure.  This is discussed in Chapter 13. [Division 160]

Excluded expenditure

5.39               Certain expenditure is specifically excluded from mining expenditure because of the general design of the MRRT while others are excluded because of the way the MRRT is intended to interact with various claims to the resource right.  These are:

•        costs of acquiring rights and interests in projects;

•        royalties;

•        financing costs;

•        hire purchase payments;

•        costs of non-adjacent land and buildings used in administrative or accounting activities;

•        hedging losses and foreign exchange losses;

•        rehabilitation bond and trust payments;

•        payments of income tax or GST; and

•        unit shortfall charge.

[Subsection 35-5(2) and Subdivision 35-B]

Cost of acquiring rights and interests in a project

5.40               An amount of expenditure is excluded expenditure to the extent it relates to:

•        acquiring an interest in a production right covering an area, unless the expenditure is in relation to the grant of the production right [subsection 35-35(1)] ;

•        acquiring a mining project interest [subsection 35-35(2)] ; or

•        acquiring an interest in profits, receipts or expenditures of, or relating to, a mining project interest [subsection 35-35(3)] .

5.41               Deductions for expenditure incurred in acquiring rights or interests in projects are excluded for reasons of tax symmetry. 

5.42               If a miner sells its right or interest in a project it is not required to include the sale proceeds in its mining revenue (if it were, tax would be imposed on the capitalised value of the future profits).  Accordingly, the acquirer of the right is not entitled to a deduction for any consideration paid to acquire the right (or any costs associated therewith). 

5.43               However, the same issue does not arise with respect to expenditure incurred in association with the initial grant of a right.  Hence, expenditures such as government fees and legal expenses paid in relation to the grant of a right are deductible.

When something is granted

5.44               Something is ‘granted’ when it is bestowed or conferred.  The word ‘grant’ has historically been used to refer to situations in which governments bestow property rights upon citizens (and other entities).  It has not generally been used to describe the transfer of rights.  It has been used here because the types of situations envisaged involve governments granting exploration and production rights.  Generally, such rights can only be granted once.  After they have been granted, they may be sold, but not granted again.

5.45               However, more than one right could be granted over the same area.  For example, an exploration right may lapse and a government may grant a new right.  It is appropriate that expenditure associated with such a subsequent grant be included in mining expenditure; it is not a transfer of an existing mining right.

Royalties

5.46               Mining royalties, private mining royalties, and payments that give rise to royalty credits are excluded expenditure.  [Subsection 35-40(1)]

5.47               Mining royalties are discussed in detail in Chapter 6, which is about allowances.

Private mining royalties

5.48               A private mining royalty is a payment in the nature of a royalty to another person not made under a Commonwealth, State or Territory law.  It could be a payment in kind rather than in cash.  Private mining royalties are 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) [subsection 35-45(2)] .  Examples of private mining royalties include:

•        payments to a party other than under a Commonwealth, State or Territory law for access to the land (sometimes called ‘private override royalties’); and

•        payments under resource profit sharing arrangements.

5.49               Private mining royalty arrangements differ from government imposed royalties in that they are, in substance, profit sharing agreements in respect of the exploitation of a resource, rather than a price the owner earns for selling the resource. 

5.50               Private mining royalties are excluded in order to avoid the need to assess individual royalty recipients against their share of a project’s proceeds, which would be necessary if such payments were deductible. 

5.51               This approach is consistent with the treatment of private royalties under the PRRT.

5.52               However, a private mining royalty payment is not excluded expenditure if:

•        it is given to a contractor for services that form part of upstream mining operations for a mining project interest and does not represent a share of the miner’s profits [subsection 35-40(2)] .  Such expenditure is more appropriately described as a fee for services, rather than as a private mining royalty ;

•        it is paid to an entity under an agreement entered into with the entity before 2 May 2010 and at a time when the entity is a State or Territory body (other than an ‘excluded STB’ within the meaning of section 24AT of the Income Tax Assessment Act 1936 , which would include a municipal corporation, public educational institution, public hospital, or superannuation fund) [subsection 35-40(3)] .  Where these arrangements were entered into prior to 2 May 2010, the miner would not have had the opportunity to take into account the MRRT in striking the relevant agreement; or

•        it is made, by way of consideration for the carrying on of mining operations in the project area, to native title holders, registered native title 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          [subsection 35-40(4)] .

Example 5.20 :  Royalties paid to State or Territory bodies

Voltage Power Co (a State body) operates a coal-fired electricity generation plant.  It holds a mineral development licence over an area of land with significant coal deposits.  Prior to 2 May 2010, it enters into an agreement with Ready, Willing & Able Co, a mining company, to develop part of the coal deposits, with a view to having some of the coal supplied to Voltage Power Co’s electricity plant, and the balance sold into export markets.  Voltage Power Co consents to Ready, Willing & Able Co applying for a mining lease over the relevant part of Voltage Power Co’s licence area, in consideration of Ready, Willing & Able Co entering a contract to supply coal at fixed prices to Voltage Power Co, and also paying a royalty on the export coal sales.

The payments are mining expenditure for Ready, Willing & Able Co because they are the price of obtaining access to the coal deposits, and hence necessarily incurred in carrying on upstream mining operations for the mining project interest.  Although the payments of a share of mining revenues are private mining royalties, and therefore would normally be excluded expenditure, they are not excluded expenditure here because they are paid to Voltage Power Co, a State or Territory body, under an agreement entered into before 2 May 2010.

Example 5.21 :  Private mining royalties and native title holders

Wildfire Coal negotiates an Indigenous Land Use Agreement (the Agreement) with a native title group under the Native Title Act 1993 .  The Agreement is registered.  In accordance with the Agreement, 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 mine 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 payments by Wildfire Coal in accordance with the Agreement are necessarily incurred in carrying on upstream mining operations and so are mining expenditure.  Although the payments of a share of mining revenues are private mining royalties, they are not excluded expenditure because they are paid to a native title holder in consideration for carrying on mining operations on its land.

5.53               Private mining royalties paid to a State or Territory body, or to a native title holder or claimant, that are not excluded expenditures, will be deductible if they satisfy the general expenditure test and irrespective of whether they are paid to acquire an interest in production right or a mining project interest.  [Subsection 35-40(5)]  

Financing costs

5.54               Financing costs and associated payments are not deductible under the MRRT.  Broadly, the types of costs excluded include the principal and interest on a loan, borrowing costs, dividends, capital returns, trust and partnership distributions, and the costs of issuing membership interests in entities.  This is consistent with the treatment under the PRRT.  [Section 35-50]

5.55               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 miner chooses to finance its operations.

5.56               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 valuation point.  Downstream operations are effectively recognised through the process of attributing the revenue to the resource at the valuation point.

5.57               Allowing a deduction for financing costs would therefore amount to a double deduction for the cost of capital unless financiers were also subject to the MRRT on their returns from their financing activities.  It would also distort investment and production decisions, creating a bias towards debt financing instead of equity financing.

5.58               Several types of financing costs are excluded.

Financial arrangement

5.59               Expenditure incurred in relation to an arrangement that gives rise to a financial arrangement is excluded expenditure.  ‘Arrangement’ and ‘financial arrangement’ take their meaning from the ITAA 1997 (see subsection 995-1(1) of the ITAA 1997).  For these purposes a ‘financial arrangement’ is defined to mean an arrangement under which an entity has a legal or equitable right to provide and/or  receive a financial benefit that is cash settlable.  [Paragraph 35-50(a)]

Equity interest

5.60               Expenditure incurred in relation to an ‘equity interest’ that is a financial arrangement is also excluded expenditure, as is expenditure incurred in relation to is a scheme that gives rise to an equity interest issued by the miner.  [Paragraphs 35-50(b) and (c)] . 

5.61               ‘Equity interest’ is defined in the ITAA 1997 (see subsection 995-1(1) of the ITAA 1997).  Broadly, an entity holds an equity interest if the return on the interest is linked to the economic performance of the entity in which the interest is held. 

Hire purchase agreements

5.62               Hire purchase agreements are treated as if they are debt funded property purchases.  Therefore, any payment made in relation to a hire purchase agreement is excluded expenditure.  [Subsection 35-55(1)]

5.63               A miner who enters into a hire purchase arrangement for property with an arm’s length party will be taken to have acquired the property for the amount shown in the agreement as the cost or value of the property.  [Paragraph 35-55(3)(a)]

5.64               If the parties are not dealing at arm’s length, or if the agreement does not specify a cost or value for the property, the miner will be taken to have acquired the property for the amount that could reasonably be expected to have been paid by the miner for the purchase of the property had the hirer actually sold the property to the miner at the start of the agreement, and the parties had dealt with each other at arm’s length.  [Paragraph 35-55(3)(b)]

5.65               The cost of the property is taken to have been incurred, and the asset is deemed acquired, when the property is supplied to the miner.  [Subsection 35-55(2)]

5.66               The result is that the deemed acquisition cost could be mining expenditure, in the same way as it could be if the miner had actually bought the property, but the actual payments made under the hire purchase agreement are excluded expenditure.

5.67               It is important to note that these rules apply to hire purchase agreements entered into before 1 July 2012 [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 5] .  If an asset is deemed to have been acquired, and an amount deemed to have been incurred, prior to 1 July 2012 the interim expenditure rules will apply (see Chapter 7).

Non-adjacent land and buildings used in connection with administrative or accounting activities.

5.68               Capital expenditure is excluded expenditure to the extent that it relates to land or buildings that are not adjacent to the project area for a mining project interest and are used in connection with administrative or accounting activities.  [Section 35-60]  

5.69               The reason for this approach is that land or buildings 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 investment in such assets is a risk associated with the project.  However, the value of non-adjacent land and buildings does not reflect this risk and is likely to appreciate over time.  Therefore, capital payments in relation to these assets are excluded expenditure. 

5.70               However, to the extent that a building used for accounting and administrative functions is also used for upstream mining operations, the expenditure referable to the upstream mining operations is deductible.  This is consistent with the idea that it does not matter where upstream mining operations occur, the expenditure associated with those operations, is deductible.

Capital expenditure

5.71               While the distinction between revenue and capital expenditure is generally not relevant for MRRT purposes, it is here.  Put simply, an expense is of a capital nature if it is directed at the business entity, structure or organisation so that the business can operate; an expense is of a revenue nature if it is directed at the operation of the business (per Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337).  The purchase of land on which a head office is constructed is an example of a capital expense, as too would be the construction of the head office.

Adjacent

5.72               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, safety, and remoteness.

Example 5.22 :  Adjacent 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 away.  All administration for the coal mine is carried on at the administration building in this regional centre.  The company incurs capital expenditure in respect of that administration building.  The expenditure is not excluded expenditure as the building is ‘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 5.23 :  Non-adjacent land and buildings

South & Co Mines operates an iron ore mine in the Pilbara region.  It incurs capital expenditure on a building in Perth from which it conducts the administration associated with the mine.  The capital expenditure for the building is excluded expenditure because the building is not adjacent to the Pilbara mines.

Example 5.24 :  Administrative building used for more than one mine

Pick & Shovel operates a coal mine in Queensland and an iron ore mine in Western Australia.  It has a building adjacent to its iron ore mine in Western Australia, from which it carries out administrative functions that support its iron ore mine, as well as its coal mine in Queensland.  To the extent that the capital expenditure incurred on the building is referrable to its West Australian iron ore mine, Pick & Shovel can claim a deduction.  However, the capital expenditure related to Queensland coal mining operations is excluded expenditure because the building is not adjacent to the coal mine. 

Example 5.25 :  Building used for administrative and technical functions

Remote Controlled Mining operates three iron ore mines in the Pilbara.  It has a building in Perth from which it performs administrative functions.  A number of operating, technical, and geological services integral to upstream mining operations are also performed from this building. 

To the extent that the capital costs of the building relate to upstream operating, technical, and geological services, they can be included in mining expenditure.

Hedging or foreign exchange expenditure

5.73               Expenditure is excluded to the extent that it relates to hedging or foreign exchange arrangements.  [Section 35-65]

5.74               Hedging and foreign exchange arrangements are pure financial transactions which, while they impact on the ultimate profitability of a business, do not affect the value of the resource.  While it is doubtful that such expenditure would ever bear a sufficient relationship to upstream mining operations in order to satisfy the general expenditure test, this provision removes all doubt. 

Hedging arrangements

5.75               Excluded expenditure includes expenditure that relates to a ‘derivative financial arrangement’ (see subsection 995-1(1) of the ITAA 1997) [paragraph 35-65(a)] .  Basically, this is a financial arrangement that changes in value in response to a variable, and in respect of which there is no requirement for a net investment.

Foreign exchange arrangements

5.76               Excluded expenditure also includes expenditure that relates to a ‘foreign currency hedge’ (see subsection 995-1(1) of the ITAA 1997) [paragraph 35-65(b)] .  Put simply, this is a financial arrangement that hedges a risk in relation to movements in currency exchange rates.

Example 5.26  

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 enters into a hedging contract with a 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 relating to the foreign currency hedge is excluded expenditure for MRRT purposes.

5.77               To the extent to which a hedging or foreign exchange arrangement forms part of a sales contract, any expenditure on the hedge would be included in mining expenditure.  That is because the sales contract, as a non-cash settlable arrangement, would not be a ‘derivative financial arrangement’ or a ‘foreign currency hedge’.

Rehabilitation bonds and trust payments

5.78               Amounts provided as security for rehabilitation of the project area for a mining project interest are excluded expenditure for the MRRT.  [Subsection 35-70(1)]  

5.79               To ensure that money put aside for rehabilitation is secure, rehabilitation bonds and trust payments are generally placed in low-risk investments.  Therefore, 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.

5.80               However, if an amount held as security is paid out by a trustee or bondholder, then that amount will be included in the miner’s mining expenditure to the extent that it is for rehabilitation of a project area for the mining project interest the miner has at the time the amount is incurred by the trustee or bondholder.  If more than one miner has a mining project interest in relation to the project area, the miner may include in its expenditure the amount that reasonably relates to its mining project.  Such amounts are considered expenditure of the miner at the time the trustee or bondholder incurs the amount.  [Subsection 35-70(2)]  

5.81               The trustee must provide the miner with a notice containing the information the miner needs to determine the extent to which the amount is mining expenditure for the miner.  [Schedule 1 to the MRRT (CA&TP) Bill, item 8, section 121-12 of Schedule 1 to the Taxation Administration Act 1953] .

Payments of income tax or GST

5.82               Income tax payments under the ITAA 1997 or the ITAA 1936 are excluded expenditure and cannot be deducted against mining revenue.  [P aragraph 35-75(a)]

5.83               Payments of GST, input tax credits and decreasing adjustments are also excluded expenditure.  As with mining revenue, all mining expenditure is deducted on a GST-exclusive basis.  [Paragraphs 35-75(b) and (c)]

5.84               All payments of penalties or interest under tax laws are excluded expenditure.   [Paragraph 35-75(d)]

Unit shortfall charge under the Clean Energy Bill 2011

5.85               The amendments make unit shortfall charges incurred by an entity in relation to its obligations under the Clean Energy Bill 2011 excluded expenditure.  [Schedule 3, item 92 of the MRRT (CA&TP) Bill, section 35-80 of the MRRT Bill)

5.86               A unit shortfall occurs when an entity has not surrendered enough emission units to meet its emissions liability.  Entities liable for a shortfall charge will pay a premium above the value of the unit. 

5.87               The unit shortfall charge is excluded expenditure for MRRT purposes to ensure that the entity liable to the charge bears its full cost and does not have an incentive to defer its emissions liability.

5.88               The amendment to the MRRT Bill commences at the later of the commencement of the Clean Energy Bill 2011 and the commencement of the MRRT Bill. This ensures that both pieces of legislation are enacted before the amendment occurs. [Clause 2 to the MRRT (CA&TP) Bill, item 8 of the table]

 

Outline of chapter

6.1                   This chapter explains how to calculate the individual allowances (apart from starting base allowances, which are explained in Chapter 7) that reduce a mining profit for a Minerals Resource Rent Tax (MRRT) year.  It explains the allowances’ common features and why there are some differences between them.

6.2                   All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) unless otherwise indicated.

Summary of new law

6.3                   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.

6.4                   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 the MRRT liability for a mining project interest 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.

6.5                   Starting base allowances are explained in Chapter 7.

6.6                   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.

6.7                   Allowances reduce the mining profit of a 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.

6.8                   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 these transfers is carried forward to future MRRT years and is uplifted.

Detailed explanation of new law

Allowances generally

6.9                   Under the MRRT, the mining profit of a mining project interest for an MRRT year must be reduced by any available MRRT allowance.  [Sections 60-10, 65-10, 70-10, 75-10, 80-10, 95-10 and 100-10]

6.10               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 10-10]

Allowances only up to the amount of the mining profit

6.11               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 applying any higher ranked allowances.  [Sections 60-10, 60-15, 65-10, 65-15, 70-10, 70-15, 75-10, 75-15, 80-10, 80-15, 95-10, 95-15, 100-10 and 100-15]

Example 6.1 :  Ordering of allowances

Alpha Coal Co has a mining profit for a mining project interest for an MRRT year of $52 million and available royalty credits of $5 million, a pre-mining loss of $3 million and a mining loss of $45 million. 

The $5 million royalty credit is fully applied to calculate a royalty allowance of $5 million, which reduces the remaining mining profit to $47 million.  The pre-mining loss is fully applied to calculate a pre-mining loss allowance of $3 million, which reduces the remaining mining profit to $44 million.  The available mining loss of $45 million is applied to the extent necessary to reduce the remaining mining profit to nil.  That is, a mining loss allowance of $44 million, leaving an available mining loss of $1 million.

6.12               Any remaining royalty credits, mining losses and 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

6.13               If there is more than one royalty credit, more than one mining loss, or more than one pre-mining loss available, they are applied in the order in which they arose.  [Subsections 60-15(2), 65-15(2), 70-15(2), 75-15(2) 95-15(2) and 100-15(2)]

6.14               The miner may choose the order in which to transfer two or more royalty credits, pre-mining losses or mining losses that arose at the same time.  [Subsections 65-15(2), 95-15(2) and 100-15(2)]

Uplifting

6.15               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 the long term bond rate + 7 per cent (LTBR + 7 per cent) each year [subsections 60-25(2) and 75-20(3)] .  The amount of a pre-mining loss is uplifted at the LTBR + 7 per cent for the first 10 years after the loss arises, but only at the long term bond rate (LBTR) thereafter [section 70-50] .

When two interests relate to iron ore or do not relate to iron ore

6.16               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 must either both relate to iron ore or both not relate to iron ore.  This limits transfers to project interests with the same broad groupings:  those that are related to iron ore and those that are related to coal.

6.17               An interest will relate to iron ore if it relates to extracting:

•        iron ore [paragraph 20-5(1)(a)] ; or

•        something produced from a process that results in iron ore being consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

6.18               An interest will not relate to iron ore (that is, it will effectively relate to coal) if it relates to extracting:

•        coal [paragraph 20-5(1)(b)] ;

•        coal seam gas as a necessary incident of mining coal [paragraph 20-5(1)(d)] ; or

•        something produced from a process that results in coal being consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

Example 6.2 :  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 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 .

Since neither of Greater Coal’s pre-mining project interest relates to iron ore, allowances may be transferable between them.

Example 6.3 :  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 the project interests relate neither both to iron ore nor both to something other than iron ore, the mining loss of one mining project interest cannot be transferred to the mining project interest with the mining profit.

Royalty allowances

6.19               A miner has a royalty allowance for a mining project interest if the interest has a mining profit and there are royalty credits that relate to that interest [section 60-10] .  The amount of the royalty allowance is the sum of the available royalty credits up to the amount of the mining profit [subsection 60-15(1)] .  Excess royalty credits are applied in calculating any transferred royalty allowance for another mining project interest of the miner for the MRRT year if that other interest is integrated with the first mining project interest at all times from when the royalty credit arose to the end of the transfer year.  Any remaining royalty credits are uplifted and are available for use in future years.

Royalty credits

6.20               For a liability to be relevant in determining if a royalty credit arises for a mining project interest, it has to be incurred on or after 1 July 2012.  It does not matter whether the resources were extracted on, before, or after that day.  [Subsection 60-20(2); and Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, item 6]

Royalties

6.21               A mining royalty gives rise to a royalty credit for a mining project interest when the miner incurs a liability to pay the royalty in relation to taxable resources extracted under a production right that relates to the interest.  [Paragraph 60-20(1)(a)]

6.22               A mining royalty is a liability payable under a Commonwealth, State or Territory law to make a payment in relation to a taxable resource, extracted under the authority of a production right, that:

•        is a royalty; or

•        would have been a royalty if the taxable resource had been owned by the Commonwealth, a State or Territory just before it was recovered.

[Subsection 35-45(1)]

6.23               The first dot point alludes to the need for a mining royalty to be a ‘royalty’ within the ordinary meaning of that word.  Within its ordinary meaning, a royalty is a payment usually made in respect of a particular exercise of a right to take a substance that is calculated in respect of either the quantity or value taken or the occasions on which it is exercised (see FCT v Sherritt Gordon Mines Ltd 77 ATC 4365 at p. 4372; Stanton v FCT (1955) 92 CLR 630 at p. 642).  So, for instance, a royalty does not include amounts imposed by some State mining legislation by way of interest for late payment of mining royalties, even if those interest payments are described as ‘royalties’ for the purposes of that legislation.

6.24               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 that 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 Australian laws can still be a mining royalty even when payable to private owners of taxable resources in the ground.

6.25               Mining royalties include royalties payable to the Commonwealth, as well as the more common State and Territory royalties.  This is necessary because the MRRT law extends to Australia’s offshore areas, which can be the subject of authorities to extract resources under the Offshore Minerals Act 1994 .  Commonwealth royalties could apply in respect of such resources (see section 4 of the Offshore Minerals (Royalty) Act 1981 ).

Payments by way of recoupment of royalties

6.26               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 extracted under a production right that relates to the interest) to another entity by way of recoupment of a liability of the other entity 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.

[Paragraph 60-20(1)(b)]

6.27               This covers the situation where a miner with a mining project interest but no direct interest in the production right has to compensate the production right holder for the mining royalty it must pay.  It does not matter whether the production right holder itself has a mining project interest in relation to that production right.

Example 6.4 :   Minerals rights agreement

Alister Co owns a mining lease on which it mines mineral sands.  Under a Minerals Rights Agreement, Alister grants Blaster Co an exclusive right to enter the land covered by the mining lease to mine and remove 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 law 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.

6.28               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.  [Paragraph 60-20(1)(b)]

6.29               Whether the holder of the mining project interest obtains a royalty credit for royalties paid by another party (for instance, the production right holder) depends on whether the interest holder pays an amount to the other party to recoup the actual royalty the other party pays.  ‘Recoupment’ is defined by section 20-25 of the Income Tax Assessment Act 1997 (ITAA 1997) and includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described.  [Section 300-1, definition of ‘recoupment’]

Example 6.5 :  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 run-of-mine 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 have got a royalty credit for its payments if it had been a miner.

6.30               A miner reduces its royalty credits in an MRRT year it receives, or becomes entitled to receive, a recoupment of a liability that gave rise to a royalty credit for one of its mining project interests.  Royalty credits are reduced in the order in which they arose.  Only any remaining royalty credits after this reduction can produce royalty allowances and transferred royalty allowances for that year.  [Subsection 60-30(1)]

6.31               In the same way that royalty credits are the grossed-up amount of the royalty liability (this is explained later), recoupments of royalty liabilities are grossed-up before they reduce a miner’s royalty credits.  [Paragraph 60-30(1)(a)]

6.32               If the reduction for the recoupment exceeds the miner’s royalty credits available to be reduced, the excess becomes mining revenue of that year.  [Subsection 60-30(2) and section 30-45]

6.33               The effect of generating royalty credits for royalty payments relating to a production right and for payments to recoup the payer of such royalties, and reducing credits for receiving recoupments of such payments, is that the royalty credit from the actual payment of the royalty is apportioned between the various entities that have a mining project interest related to the production right.  That apportionment might not occur within a single MRRT year.  For example, if a royalty paid in one year was recouped in the following year, there would be royalty credits in the first year and a reduction in royalty credits in the second year.

Example 6.6 :  Royalty recoupment

Smelaya Resources and Malyshka Minerals are jointly developing a mine owned by Smelaya.  They have agreed to share equally the resources they mine and the costs they incur.

In 2014-15, Smelaya is liable for royalties of $5 million to the State but, under the terms of the agreement, is entitled to a $2.5 million reimbursement from Malyshka.  Smelaya generates a royalty credit of $22.22 million ($5 million/0.225) and Malyshka generates a credit of $11.11 million ($2.5 million/0.225) for its liability to reimburse Smelaya.  Smelaya will reduce its credit by $11.11 million for that recoupment.

In 2015-16, the State refunds Smelaya $2 million of its royalty payment as an incentive to further develop the mine.  This recoupment reduces Smelaya’s royalty credits for 2015-16 by $8.89 million ($2 million/0.225).  Because it is liable to pass half of that on to Malyshka, it would also generate a royalty credit of $4.44 million ($1 million/0.225).  Receipt of the refund reduces Malyshka’s 2015-16 royalty credits by $4.44 million.

Initial amount of a royalty credit

6.34               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.  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).  [Subsection 60-25(1)]

Example 6.7 :  Royalty payments and royalty credits

South and Co Mines extracts 500,000 tonnes of iron ore from its 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 per cent giving a royalty credit of $25 million.  Its annual mining profit for 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, which exhausts the royalty credit.

Example 6.8 :  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 on a monthly basis.  Zenat has an available royalty credit of $533,333 [(20,000 × $6)/0.225] that will be applied to calculate its royalty allowance.  The payments to Yady would normally be a private mining royalty but are instead mining royalties because they are paid under State legislation.

Uplifting unused royalty credits

6.35               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 the LTBR + 7 per cent.  [Subsection 60-25(2)]

Using up a royalty credit

6.36               A 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 mining project interests.  [Subsection 60-20(3)]

Transferred royalty allowances

6.37               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 from other interests.  [Section 65-10]

6.38               A royalty credit of one 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 .

[Subsection 65-20(1)]

6.39               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. 

6.40               Whether two mining project interests are integrated is explained in Chapter 9.

6.41               The amount of a royalty credit that can be transferred to a mining project interest cannot exceed the amount of the receiving interest’s remaining mining profit.  [Subsection 65-15(1)]

6.42               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 65-15(2)]

Pre-mining loss allowances

6.43               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 70-10]

6.44               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.  [Subsection 70-15(1)]

6.45               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 MRRT 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 the LTBR + 7 per cent for the first 10 years, and at the LTBR thereafter.  [Section 70-50]

6.46               A pre-mining loss is an available pre-mining loss for a mining project interest if it relates to a pre-mining project interest from which the mining project interest originated.  A mining project interest ‘originates’ from a pre-mining project interest when the mining project interest starts to apply to an area and at the same time the pre-mining project interest stops applying to that area.  [Section 70-20]

6.47               A pre-mining loss ceases to be a pre-mining loss once it has been fully applied in working out pre-mining loss allowances for the mining project interest or transferred pre-mining loss allowances for other mining project interests.  [Subsection 70-30(2)]

Pre-mining project interest

6.48               A pre-mining project interest is an interest in an authority or right for a purpose (other than an incidental purpose) of exploration or prospecting for taxable resources.  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(s).  [Section 70-25]

6.49               Since ‘exploration or prospecting’ is defined to include studies to evaluate the economic feasibility of mining discovered resources, pre-mining interests will include interests in mineral development leases, which are usually held for those purposes.  An interest in a retention lease is also considered a pre-mining project interest, since one of the significant rights conferred under a retention lease is to explore.  [Sections 70-25 and 300-1, definition of ‘exploration or prospecting’]

Pre-mining losses

6.50               An entity 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 MRRT year.  [Subsection 70-30(1)]

6.51               This allows pre-mining project expenditure (for example, exploration expenditure) that is a necessary precursor to the development of a mining project interest to be recognised under the MRRT.

Pre-mining expenditure

6.52               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, and is not excluded expenditure.  [Subsections 70-35(1) to (4)]

6.53               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 [subsection 70-35(5)] .  Upstream mining operations of a mining project interest are discussed in Chapter 5.

6.54               In some circumstances, an entity that holds a pre-mining project can also include amounts in its pre-mining expenditure for the exploration activities carried on by another entity under a ‘farm-out’ arrangement.  A farm-out typically involves an agreement between:

•        an entity that holds a pre-mining project interest (the farmor) wanting to explore that project area; and

•        another entity (the farmee) who incurs expenses exploring the project area, in exchange for an interest in the pre-mining project interest.

6.55               Where the farm-out arrangement results in the farmee being granted an interest in the pre-mining project, then the farmor will include an amount in its pre-mining expenditure at that time to reflect the value of the interest they have given up in exchange for the exploration. ^[5] [Divisions 35 and 195]

Example 6.9 :  Successful farm-out arrangement

Farmor Co holds an exploration permit.  It is interested in exploring the pre-mining project area.  Farmee Co agrees to undertake the exploration work in exchange for a 10 per cent interest in the exploration permit.  Farmee Co agrees to complete the exploration within three years and does so.

Farmor Co may include in its pre-mining expenditure an amount for the exploration services completed by Farmee.  The non-cash benefit rules (in Division 195) operate such that the amount of the deduction will be the market value of the exploration services.  The amount ascertained using the non-cash benefit rules is included in Farmor Co’s pre-mining expenditure when it is necessarily incurred.

However, Farmee Co’s exploration expenses are excluded expenditure because they are its cost of acquiring a right (being its interest in the permit).

6.56               However, in some circumstances the farm-out arrangement will not be completed and the farmor will not be required to give the farmee an interest in the pre-mining project interest.  In those circumstances, the farmor will have obtained the benefit of the exploration without any expenditure.  Specific provision is therefore made to ensure that the costs of the exploration are included in the pre-mining expenditure for the farmor’s interest.  They are included in pre-mining expenditure when it becomes clear that the farmee is not going to be granted the interest.  [Subsection 70-35(7)]

Example 6.10 :  Unsuccessful farm-out arrangement

Farmor Co holds an exploration permit.  It is interested in exploring the pre-mining project area.  Farmee Co agrees to undertake the exploration work in exchange for a 10 per cent interest in the exploration permit.  Farmee Co agrees to complete the exploration within three years but fails to do so. 

At the end of the three years, the amounts incurred by Farmee Co in exploring in the project area are included by Farmor Co in the pre-mining expenditure for the pre-mining project interest. 

No double counting of pre-mining expenditure

6.57               The same amount cannot be included in the pre-mining expenditure of an entity under two or more provisions.  This prevents the double counting that could arise if an amount was otherwise allowable under more than one provision.  [Subsection 70-35(8)]

6.58               Similarly, where the same amount is included in both mining expenditure and pre-mining expenditure it is only to be allowable under the provision that is most appropriate.  To determine which the most appropriate provision is, it will be necessary to have regard to the facts and circumstances of the particular case, including the character of the amount and its relationship to the mining project interest and pre-mining project interest.  [Subsection 70-35(9)]

Pre-mining revenue

6.59               An amount is pre-mining revenue if it would have been mining revenue if the pre-mining interest to which the amount relates had instead been a mining project interest.  For instance, the sale of taxable resources that have been extracted under a mineral development lease will give rise to an amount of pre-mining revenue.  In some instances, the amounts of pre-mining revenue will exceed the amounts of pre-mining expenditure for a pre-mining interest for an MRRT year to produce a pre-mining profit.  Pre-mining profits are discussed in Chapter 12.  [Section 70-40]

Mining loss allowances

6.60               A 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 allowance and pre-mining loss allowance) have been applied and there is an available mining loss for the interest.  [Section 75-10]

6.61               The amount of a mining loss allowance is the lesser of the remaining 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 2013-14 MRRT year.  [Section 75-15]

6.62               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 75-20(1) and (2)]

6.63               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 the LTBR + 7 per cent.  [Subsection 75-20(3)]

Example 6.11 :  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 per cent, so the uplift factor is 1.13 (0.06  +  1.07).

•        There are no other relevant allowances or transferred allowances.

Tax year	2013 $m	2014 $m	2015 $m	2016 $m	2017 $m	2018 $m	2019 $m
Mining profit/loss	(100)	(50)	(200)	(100)	(20)	400	800
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	-	-	-	-	-	-	-
Uplifted prior year 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	-	-	-	-	-	-	-
Remaining mining profit	0	0	0	0	0	0	455.76

The 2018 MRRT year’s mining profit of $400 million 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 uplifted to the 2018 MRRT year ($184.24 million), is applied first.

This is followed by the mining loss for the 2014 year, as uplifted to the 2018 year ($81.52 million).  Then the mining loss for the 2015 year, as uplifted to the 2018 year ($288.58 million), is applied but only to the extent that it reduces the mining profit in the 2018 year to nil.  Therefore, only $134.24m of that loss is used up

($400m − $184.24m − $81.52m)

This remaining $154.34 million of the mining loss for the 2015 year will be uplifted for the 2019 year (to $174.40 million) to be an available mining loss to be applied in calculating the mining loss allowance to be deducted from the $800 million mining profit for the 2019 year.

6.64               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 75-20(4)]

Transferred pre-mining loss allowances

6.65               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 the requirements that transfers occur between interests related to the same type of taxable resource and held by the same entity or by a closely associated entity.  The transfer of pre-mining losses is also capped where they are acquired for an amount that is less than their tax value.

When does a miner have a transferred pre-mining loss allowance?

6.66               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 95-10]

6.67               There are two situations in which a mining project interest can have a transferred pre-mining loss allowance.

6.68               The first is where the miner (or a close associate) has a mining project interest and 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.  [Subsections 95-20(1) and (2)]

6.69               The second is where a miner has a mining project interest that originated from a pre-mining project interest that had a pre-mining project loss.  ‘Origination’ was discussed in more detail above.  In these circumstances, the originating mining project interest inherits the pre-mining loss, which can be applied to work out a transferred pre-mining loss allowance another mining project interest of the miner, or a close associate.  [Subsections 95-20(1) and (3)]

Meaning of closely associated

6.70               An entity is closely associated with another entity at a particular time if they are both members of the same consolidatable group for income tax purposes, or would be if the entities were Australian residents.  Broadly speaking, the concept of a ‘consolidatable group’ in the income tax law is relevant to deciding whether a group of wholly-owned entities could be treated as a single entity for income tax purposes.  However, the income tax concept does not permit foreign residents to be the head or members of a consolidatable group.  However, reflecting the MRRT policy of requiring the transfer of pre-mining losses between all members of a group, the Australian residence requirement of the definition of ‘consolidatable group’ is ignored for these purposes.  [Subsection 95-20(5) and section 300-1, definition of ‘consolidatable group’]

Amount of a transferred pre-mining loss allowance

6.71               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 95-15(1)]

6.72               In calculating the amount of the allowance, pre-mining losses are applied in the order in which they arose.  If there are several pre-mining losses that arose in the same year (because they arose from different pre-mining project interests), the miner can choose which of them to transfer first.  [Subsection 95-15(2)]

Capping the amount of a transferred pre-mining loss allowance

6.73               On the sale of a pre-mining project interest or a mining project interest, any pre-mining losses that exist in relation to that interest will be transferred with it.  These transfers are explained in Chapter 10.

6.74               The purchaser can then apply the pre-mining losses to reduce mining profits of its (or its close associates) mining project interests.

6.75               However, to prevent trading in pre-mining losses that have a greater economic value than the underlying project interest (the loss interest), the extent to which those pre-mining losses can be transferred to another mining project interest (the receiving interest) may be capped when an interest is acquired.  [Sections 95-25 and 95-30]

6.76               The cap applies if either the receiving interest or the loss interest was not held by the miner or a close associate at all times from the start of the loss year until the end of the year in which the loss is being transferred.  This common ownership test is not focused on whether there has been a change in the direct ownership of the interests, nor is it asking if the interests have remained in the one entity or group.  Rather, the test focuses on the relationship between the holders of the two 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 within the period).  [Paragraph 95-25(2)(b) and subsection 95-25(3)]

6.77               The cap only applies to pre-mining losses that arose before the cap arises and which are to be transferred in that year or a later year.  In other words, the cap does not limit the transfer of pre-mining losses that arise for a year after the cap arises.  [Paragraphs 95-25(2)(c) and (d)]

6.78               The cap arises in relation to a loss interest or a receiving interest when an entity starts to have the interest.  However, as an exception to this, the cap does not arise when the interest starts to exist (such as on the initial grant of a production or an exploration right).  The cap also does not apply if the entity starts to have the interest simply because it is the head company of a group that consolidates, or is the entity leaving a consolidated group.  [Paragraph 95-30(1)(a)]

6.79               The cap also arises when the entity that has the receiving interest or the loss interest joins a consolidatable group (or would if the Australian residence requirements of that definition were ignored).  This means that the cap will arise when an entity that holds the loss interest becomes closely associated with a miner that has the receiving interest.   [Paragraph 95-30(1)(b)]

6.80               The amount of the cap is worked out by grossing-up the amount paid for the receiving interest or the loss interest.  Where the entity that has the interest joins a consolidatable group, the cap is worked out by grossing up so much of the amount paid for that entity as is attributable to the interest.  [Subsection 95-30(2)]

Example 6.12 :  Cap on transferable pre-mining losses

Log Jam Co. buys:

•        a mining project interest for $1 million; and

•        a pre-mining project interest for $2 million, which has $10 million of pre-mining losses from an earlier year.

Assume that the mining project interest has sufficient mining profit to utilise any of the pre-mining losses available.  At the end of the MRRT year, Log Jam is required to transfer its pre-mining losses to the mining project interest, subject to the following caps:

•        for the mining project interest — the cap is $4.44 million ($1m/0.225); and

•        for the pre-mining project interest — the cap is $8.88 million ($2m/0.225).

Log Jam must transfer only $4.44 million of its pre-mining losses to the mining project interest.

Transferred mining loss allowances

6.81               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 100-10]

6.82               The amount of a transferred mining loss allowance cannot exceed the remaining mining profit the mining project interest has.  [Subsection 100-15(1)]

6.83               Mining losses that can be transferred must be applied 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 applied.  [Subsection 100-15(2)]

6.84               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 100-20(1)(a)] ;

•        the mining loss is not attributable to an MRRT year in respect of which an election was made to use the alternative valuation method for its mining project interest [paragraph 100-20(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 and vice versa) [paragraph 100-20(1)(c)] .

Example 6.13 :  Order of application of mining losses

Hidden Treasure Mines Ltd has mining project interest A, which it has owned since before the MRRT and which has mining losses for each of the 2013 to 2016 MRRT years.  In the 2014 MRRT year, it acquires mining project interest B.  Mining project interest B has a remaining mining profit (after higher ranking allowances are applied) in the 2016 MRRT year.  Due to the common ownership test, mining project interest A’s mining losses of 2013 and 2014 cannot be applied to mining project interest B.  They will be carried forward (and uplifted) to be used against mining project interest A’s own future mining profits.

In the 2016 MRRT year, the mining losses of project interest A for the 2015 and 2016 MRRT years must be applied against mining project interest B’s 2016 mining profit (after all other allowances have been applied).  The loss for 2015 must be applied first and that for 2016 applied if there is any profit remaining.

Common ownership test

6.85               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 100-25]

6.86               The common ownership test is not focused on whether there has been a change in the direct ownership of the mining project interests, nor is it asking if the 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 within the period).

6.87               This test is similar to the common ownership test that can limit the transfer of some pre-mining losses (discussed above). However, while a pre-mining loss that fails the common ownership test may only be limited in the extent to which it is transferred, a mining loss that fails to meet the common ownership test cannot be transferred at all.

Example 6.14 :  Same miner has both interests

Echo Coal Co is the head of a consolidated group (which consolidated for MRRT purposes in 2012).  Mining project interest P1 has a mining loss for the 2013 year and mining project interest P2 has a mining profit for that year.  Because it is a consolidated MRRT group, both 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’s mining loss is available 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.

Example 6.15 :  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’s consolidatable group.  P1 and P2 have moved from Echo’s consolidated group to Foxtrot’s consolidatable group.  While P1 and P2 have existed in two different groups during the test period, the two 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 since P1 was not in common ownership with P6 and P7 at all times from the start of the year in which the mining loss arose to the end of the year in which the mining loss is to be applied.

Example 6.16 :  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’s group 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 P2’s 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 6.17 :  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 Bravo Coal Co and Hotel 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 P2’s remaining mining profit.