Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)Chapter 12 Pre-mining project interests
Outline of chapter
12.1 This chapter explains how the general rules that apply to mining project interests also apply to pre-mining project interests. It also explains the special rules that exist for pre-mining project profits and royalty credits in Division 140.
12.2 All legislative references throughout this chapter are to the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) unless otherwise indicated.
Summary of new law
12.3 Many aspects of the MRRT Bill apply to pre-mining project interests in the same way they apply to mining project interests. In particular, the Minerals Resource Rent Tax (MRRT) law taxes the pre-mining profit of a pre-mining project interest in the same way as it taxes the mining profit of a mining project interest.
12.4 Other aspects of the MRRT law which apply to pre-mining project interests in the same way they apply to mining project interests include:
- •
- low profit offsets;
- •
- rehabilitation tax offsets;
- •
- non-cash benefits, currency translation and substituted accounting periods;
- •
- valuation principles; and
- •
- anti-profit shifting and the anti-avoidance rules.
12.5 Other rules in the MRRT have been specially adapted to treat pre-mining project interests in a similar way to mining project interests.
- •
- A liability to pay a mining royalty in relation to a pre-mining project interest gives rise to a royalty credit for that interest in the same way it would have if the interest had been a mining project interest and the exploration right had been a production right (see below).
- •
- Pre-mining expenditure and revenue arises for a pre-mining project interest in a similar way to the mining expenditure and revenue that arises for a mining project interest. A difference, however, is that special provision is made to recognise pre-mining expenditures associated with failed farm-out arrangements.
- •
- Pre-mining losses can arise for pre-mining project interests in a similar way to the losses that arise for mining project interests. While mining losses are only transferable if they satisfy a common ownership test, pre-mining losses are transferable even if they fail to meet the test (though in some cases the losses that can be transferred are capped).
- •
- A starting base can arise in relation to pre-mining project interests that existed on 2 May 2010 in the same way it arises in relation to mining project interests. However, the starting base does not begin to produce starting base losses before a mining project interest originates from the pre-mining project interest. A further difference is that, when applying the market value approach to mining project interests, a miner must work out the base value of its starting base assets by undertaking a market valuation of those assets. However, when applying the market value approach to pre-mining project interests, an entity can instead choose to work out the base value of its starting base assets by using a 'look-back' approach.
- •
- Pre-mining project interests are taken to end, transfer and split in a similar way to mining project interests.
12.6 Finally, there are some aspects of the MRRT law for which there is no equivalent treatment for pre-mining project interests. For instance, pre-mining project interests cannot combine with other pre-mining project interests (nor with mining project interests). This is explained in Chapter 9.
Detailed explanation of new law
Treatment of pre-mining profits
12.7 The MRRT law taxes the pre-mining profit of a pre-mining project interest in the same way as it taxes the mining profit of a mining project interest.
12.8 An entity works out its total MRRT liability for an MRRT year by adding together the MRRT liabilities from its pre-mining project interests and its mining project interests. [Sections 10-1 and 140-10]
12.9 It works out the MRRT liability for a pre-mining project interest in much the same way as it works it out for a mining project interest. It deducts the interest's pre-mining expenditure from its pre-mining revenue to get to its pre-mining profit. It subtracts the MRRT allowances for the interest from that pre-mining profit and multiplies the result by the MRRT rate to work out the interest's MRRT liability. [Sections 10-5, 140-5 and 140-10]
12.10 A pre-mining project interest is an interest in an exploration right (that is, a right to explore for taxable resources, other than a production right). This is explained in more detail in Chapter 6. [Section 70-25]
12.11 A pre-mining profit is the amount by which a pre-mining project interest's pre-mining revenue exceeds its pre-mining expenditure for an MRRT year. The concepts of pre-mining revenue and pre-mining expenditure are also explained in more detail in Chapter 6. [Section 140-5]
12.12 To allow an entity to treat pre-mining project interests in the same way as mining project interests for the purpose of working out its MRRT liability, the MRRT law applies as if:
- •
- its pre-mining project interests were mining project interests and its exploration rights, to which the pre-mining project interest relates, were production rights [paragraphs 140-10(2)(a) and (f)] ;
- •
- its pre-mining profits were mining profits [paragraph 140-10(2)(b)] ; and
- •
- it were a miner (that is, as if it had a mining project interest) for that MRRT year and earlier years [paragraph 140-10(2)(g)] .
12.13 The result is that allowances that would arise for a mining project interest also arise for a pre-mining project interest. Royalty liabilities for the interest can give rise to royalty allowances; its pre-mining losses from earlier years can give rise to pre-mining loss allowances; and the mining losses and pre-mining losses of other interests can give rise to transferred pre-mining loss allowances and transferred mining loss allowances, just as they do for a mining project interest.
12.14 However, in working out the MRRT liability of a pre-mining project interest, some specific differences between the MRRT treatments of mining project interests and pre-mining project interests are preserved. The fact that a pre-mining project interest is being treated as a mining project interest does not mean that:
- •
- it is treated as having originated from itself as a pre-mining project interest. That is, it does not attract the rules that apply when a mining project interest originates from a pre-mining project interest [paragraph 140-10(2)(c)] ;
- •
- its pre-mining losses from earlier MRRT years are treated as mining losses, or that it can start to generate starting base losses for that MRRT year or any earlier MRRT year [paragraph 140-10(2)(d)] ; and
- •
- it is integrated with mining project interests it could not integrate with as a pre-mining project interest [paragraph 140-10(2)(e)] .
12.15 An allowance applied in working out the MRRT liability of a pre-mining project interest is not available to be used again for a mining project interest or another pre-mining project interest. [Section 140-15]
A mining project interest originating from a pre-mining project interest
12.16 In the MRRT year that a mining project interest originates from a pre-mining project interest, the year's pre-mining profit is still worked out for the first part of the year but it is added to the mining project interest's mining revenue. There is no need to work out a separate MRRT liability for the pre-mining project phase of the year. [Section 140-20]
12.17 If there is a pre-mining profit, this treatment is akin to treating the pre-mining revenue and pre-mining expenditure as mining revenue and mining expenditure. However, the slightly more complex approach of working out the separate amount from the pre-mining phase of the year is used to ensure that any pre-mining loss for that period is not converted into a mining loss.
Example 12.140 : Mining project interest originates from a pre-mining project interest
Bronmore Exploration Co has a single development licence over an area from which it has extracted and supplied small quantities of taxable resources and paid State mining royalties when it supplied them. Halfway through the year, Bronmore is issued with a production right over the area. At that point, a mining project interest originates from its pre-mining project interest.
Bronmore works out its pre-mining profit for the first part of the year by deducting its pre-mining expenditure from that period from its pre-mining revenue for that period. Then it includes this pre-mining profit as mining revenue for the mining project interest. Bronmore then deducts the royalty credits arising from the entire year (along with any pre-mining losses the interest has from earlier years) and multiplies the result by the MRRT rate to work out the interest's MRRT liability.
Treatment of pre-mining royalty credits
12.18 A liability to pay a mining royalty in relation to a pre-mining project interest gives rise to a royalty credit for that interest in the same way it would have if the interest had been a mining project interest and the exploration right had been a production right. [Section 140-25]
12.19 The amount of a royalty credit for a pre-mining project interest is worked out in exactly the same way as it is for a mining project interest. Royalty credits are used up in reducing the pre-mining profit of a pre-mining project interest in the same way as they are used up in reducing the mining profit of a mining project interest. [Subsection 140-25(2)]
Treatment of farm-out arrangements
12.20 Farm-out arrangements are common during the exploration phase of a project. 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.
12.21 Costs incurred by farmees during the exploration phase will sometimes be included in the farmor's pre-mining expenditure [Divisions 35 and 195, and subsection 70-35(7)] . This is explained in Chapter 6.