Administration of minerals resource rent tax (MRRT) instalments for the transitional period

Overview

Disclaimer: Purpose and status of this material This material has been prepared for use in consultation between the ATO and the community as part of the process of considering how the ATO might administer, and how taxpayers might prepare to comply with, the proposed minerals resource rent tax. This information is prepared solely for community consultation. All views in this material are therefore preliminary in nature and should not be taken as representing either an ATO view or that the ATO will take a particular view in the future. Note that this information has been prepared on the basis of the Minerals Resource Rent Tax Bill 2011.* Accordingly, this material is not a publication that has been approved to allow you to rely on it for any purpose and therefore will not provide protection from primary tax. The application of penalties will depend on the final form of any legislation passed by Parliament. However, reliance on the most current version of the information in early guidance materials available at the time will be taken into account in determining the extent to which any penalties and interest imposed might be remitted. * This paper was finalised before this Bill received Royal Assent. The law does not come into effect until 1 July 2012. Community comments are invited up until 1 July 2012. Feedback can be sent to the ATO by email to ATO RRT implementation mailbox. Taxpayer feedback will be reviewed by the ATO in consultation with the NTLG Resource Rent Tax Sub-committee.

The aim of this early guidance is to provide taxpayers with practical information on how the ATO expects aspects of the minerals resource rent tax (MRRT) instalment system will be administered for the transitional period. The transitional period begins on 1 July 2012 and ends when the Commissioner gives the taxpayer an instalment rate following lodgment of the taxpayer's first MRRT return.

This early guidance is based on the instalment requirements of the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 and Explanatory Memorandum of 2 November 2011.

This paper provides information on:

• The application of a default instalment rate for the transitional period
• When and how an instalment rate may be varied
• When the general interest charge applies
• When the Commissioner may exercise his discretion to remit the general interest charge

The application of a default instalment rate for the transitional period

A taxpayer's instalment rate for a quarter during the transitional period will be a default instalment rate unless the taxpayer chooses to vary that instalment rate. The default instalment rate is provided in the Bill¹. A default rate of 8% applies for iron ore and a default rate of 3% applies for other taxable resources. Taxpayers who mine iron ore and another taxable resource will have a default instalment rate that is a blend of the two prescribed rates. This blended rate is calculated by reference to the amount of iron ore instalment income and the other taxable resources instalment income in the relevant quarter.

Instalment income generally includes the gross consideration for supplies arising from mining revenue events that occurred during the quarter.

After a taxpayer lodges its first MRRT return, the Commissioner will usually give the taxpayer an instalment rate based on that return. The Commissioner's instalment rate will apply for and after the quarter in which the taxpayer is notified of the instalment rate. This is likely to be the quarter in which the taxpayer lodges its first MRRT return. The default instalment rate applies for the whole of the transitional period until the Commissioner notifies the taxpayer of its rate or the taxpayer chooses to vary its rate.

When and how an instalment rate may be varied

Under the proposed instalment provisions, a taxpayer can choose to vary its instalment rate for a quarter. A taxpayer may vary its instalment rate to reflect its likely end of year MRRT payable. In choosing whether to vary its instalment rate, the taxpayer should consider that choosing an instalment rate that is too low may make the taxpayer liable to the general interest charge.

Once a taxpayer varies its instalment rate for a quarter, the varied instalment rate is to be used for later quarters in that MRRT year unless the taxpayer chooses another instalment rate in a later quarter.

The taxpayer is required to notify the Commissioner of its varied instalment rate for a quarter on or before the day the instalment is due for that quarter. The taxpayer uses the instalment liability notice for that quarter to notify the Commissioner of the varied rate.

If a taxpayer varies its instalment rate during a quarter and in a later quarter decides that the previously varied rate is too high, it can vary its instalment rate downwards in that later quarter. The taxpayer can then claim a credit for instalments paid in earlier quarters of that MRRT year.

The default instalment rate will apply from the beginning of a taxpayer's second MRRT year, even if a taxpayer has chosen to vary its rate during its first MRRT year. If a taxpayer wants to vary its instalment rate in the second MRRT year, it needs to notify the Commissioner of the varied rate.

When the general interest charge applies

Under the proposed legislation, a taxpayer is liable for the general interest charge if its varied instalment rate for a quarter turns out to be too low. In determining whether the varied instalment rate is too low for a quarter, the taxpayer's benchmark instalment rate for the MRRT year is compared to its varied instalment rate for that quarter. A taxpayer's benchmark rate is broadly its MRRT payable for the year divided by its total instalment income for that year. If the taxpayer's varied instalment rate for a quarter is less than 85% of its benchmark instalment rate, the taxpayer will be liable for the general interest charge for that quarter².

When the Commissioner may exercise his discretion to remit the general interest charge

The Commissioner has discretionary powers to remit all or part of the general interest charge under section 8AAG of the Taxation Administration Act 1953. The general interest charge incurred for a varied instalment rate for MRRT will generally be remitted where the taxpayer took all reasonable steps to ensure that its varied instalment rate was, and remained, correct relative to its expected MRRT payable for the year.

This will require, at least, that the taxpayer's varied instalment rate is based on relevant information current at that time and prepared on a 'best endeavours' basis. Information current at that time could include resource price expectations, production volumes, upstream expenditure and downstream costs. The ATO will expect a varied instalment rate to reflect both the taxpayer's current quarterly position and its likely end of year position.

The taking of all reasonable steps will also require that a varied instalment rate be increased when a taxpayer first becomes aware, or should reasonably have become aware, of a change in circumstances which is likely to result in an underpayment of total instalments relative to the taxpayer's expected MRRT payable for the year.

Additional factors may lend support to an assertion that a taxpayer took all reasonable steps in working out its varied instalment rate, for example, where it is shown that the taxpayer regularly monitors the appropriateness of the varied instalment rate in later quarters, and makes any needed change promptly.

The general interest charge will generally be remitted for the transitional period where the taxpayer has made a reasonable and genuine attempt to comply with the law.

The ATO will expect the taxpayer to keep records documenting the basis of a decision to vary, and how a varied instalment rate was calculated.

Example

Moderate Mining Ltd operates an iron ore mine. Moderate Mining Ltd's instalment income goes down by 15% in the second quarter of Moderate Mining Ltd's first MRRT year due to a significant change in exchange rates. Moderate Mining Ltd expects its instalment income to stay down for the duration of the MRRT year. Moderate Mining Ltd believes that in these circumstances, applying the default rate to work out its instalment liability for each quarter will result in significant overpayment in instalments relative to its expected MRRT payable for the year. Moderate Mining Ltd decides to vary its instalment rate downwards from its second quarter to a rate it expects will reflect more accurately its end of year MRRT payable.

In the final quarter of its first MRRT year, Moderate Mining Ltd's instalment income unexpectedly goes up due to another significant change in exchange rates. Moderate Mining Ltd varies its instalment rate upwards in its final quarter to ensure that its total MRRT instalments payable for the year are approximately equal to its expected MRRT payable. However, the varied instalment rate used by Moderate Mining Ltd in its second and third quarters was less than 85% of its benchmark instalment rate for the year. Moderate Mining Ltd is liable for the general interest charge in each quarter that its varied rate was too low, which in this case is its second and third quarters.

Taking the taxpayer's circumstances into account, the Commissioner is satisfied that:

• Moderate Mining Ltd initially varied its instalment rate based on information current at that time
• Moderate Mining Ltd varied its instalment rate upwards from the quarter in which it first became aware that its instalment rate was too low to ensure that its total instalments payable for the year are approximately equal to its expected MRRT payable, and
• Moderate Mining Ltd could not reasonably have anticipated that its low varied instalment rate would be less than 85% of its benchmark instalment rate for the year.

In this case, as Moderate Mining Ltd made a reasonable and genuine attempt to comply with the law, it could expect the Commissioner to exercise his discretion to remit the general interest charge it would have been liable for in its second and third instalment quarters of its first MRRT year.

Example

Common Coal Company is operating a relatively high cost coal mine at the beginning of its first MRRT year and its profit margins are low. It believes that using the default rate will result in its paying too much in instalments relative to its expected MRRT payable for the year. On this basis, Common Coal Company chooses a varied instalment rate for its first quarter that is lower than the default rate. Six months into the year, Common Coal Company purchases a low cost second coal mine. The purchase of the second mine substantially increases Common Coal Company's profit margins but Common Coal Company does not vary its instalment rate and continues to use the varied rate chosen in its first instalment quarter throughout the year.

At the end of its MRRT year, the varied instalment rate used by Common Coal Company for each quarter is less than 85% of its benchmark instalment rate for the year. Common Coal Company will be liable for the general interest charge in all four quarters of its first MRRT year.

In these circumstances the general interest charge will not be remitted as Common Coal Company did not take reasonable steps to ensure the varied instalment rate was correct in light of Common Coal Company's changed circumstances (that is, Common Coal Company's increased profit margins).

Example

Wallaby Ridge Mining, an iron ore miner, believes that using the default instalment rate of 8% to calculate its instalment liability for each quarter will result in its paying too much in total instalments relative to its expected end of year MRRT payable.

Wallaby Ridge Mining's accounting period ends on 31 December and, as a result, its first MRRT year is only six months (two quarters) long. Wallaby Ridge Mining seeks advice from a suitably qualified professional on an issue of interpretation which will affect its MRRT payable for its first year and, therefore, the total amount of instalments it needs to pay. In preparing the advice, the advisor thoroughly researches the issue, including reviewing relevant legislation and guidance provided by the ATO and applies that research to the specific facts for Wallaby Ridge Mining to establish a position.

Wallaby Ridge Mining follows the advice given to it and chooses a varied rate of 6% from the first quarter of its first MRRT year. Wallaby Ridge Mining uses the rate of 6% consistently during both quarters of its first MRRT year.

In the first quarter of its second MRRT year, Wallaby Ridge Mining varies its rate for the quarter to 6% as it believes, on the basis of the advice received in its first MRRT year, that a rate of 6% will result in its paying total instalments for the year close to its expected MRRT payable for its second MRRT year.

Following lodgment and payment of Wallaby Ridge Mining's first instalment for its second MRRT year, the ATO releases guidance on the interpretative issue Wallaby Ridge Mining considered at the beginning of its first MRRT year. The ATO's interpretation is different from Wallaby Ridge Mining's interpretation.

In preparing its MRRT return for its first MRRT year, and before lodging its second instalment for its second MRRT year, Wallaby Ridge Mining realises that its varied instalment rate has resulted in its paying too little in instalments relative to its MRRT payable for its first MRRT year. Wallaby Ridge Mining is liable for the general interest charge for each of the quarters that its instalment rate was too low. It further realises that continuing to use the rate of 6% chosen for the first quarter of its second MRRT year will result in its underpaying instalments for its second MRRT year as well.

To avoid an underpayment in instalments for its second MRRT year, Wallaby Ridge Mining chooses a varied rate for its second quarter that is higher than the chosen rate of 6% for its first quarter to ensure that its total instalments payable for its second year are approximately equal to its expected MRRT payable for the year. (Wallaby Ridge Mining did not receive the Commissioner's instalment rate until the third quarter of its second MRRT year.)

As Wallaby Ridge Mining made a reasonable and genuine attempt to comply with the law, it could expect the Commissioner to exercise his discretion to remit the general interest charge it would have been liable for in each quarter of its first MRRT year.

This draft information is for use in community consultation on how the ATO may administer the proposed minerals resource rent tax.

¹ Subdivision 115-F, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011.

² Section 115-65 of Sch 1, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011