House of Representatives

Minerals Resource Rent Tax Bill 2011

Minerals Resource Rent Tax Act 2012

Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011

Minerals Resource Rent Tax (Imposition - Customs) Bill 2011

Minerals Resource Rent Tax (Imposition - Customs) Act 2012

Minerals Resource Rent Tax (Imposition - Excise) Bill 2011

Minerals Resource Rent Tax (Imposition - Excise) Act 2012

Minerals Resource Rent Tax (Imposition - General) Bill 2011

Minerals Resource Rent Tax (Imposition - General) Act 2012

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Glossary

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

General outline and financial impact

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 $50 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 $50 million.

2011-12 2012-13 2013-14 2014-15
Nil $3,700m $4,000m $3,400m

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.

Chapter 1 Charging for Australia's non-renewable resources

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.

Chapter 2 Overview of the Minerals Resource Rent Tax

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 x (LTBR + 7%)] ($56.5m)
Total allowances ($223.2m)
MRRT profit $156.8m
MRRT liability [MRRT profit x 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 $50 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 $50 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 $50 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 x (LTBR + 7%)] ($56.5m)
Starting base allowance ($120m)
Total allowances ($343.2m)
MRRT profit $136.8m
MRRT liability [MRRT profit x 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 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 is 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 x 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 $50 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.

Chapter 3 Core rules

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 3.5 : 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 as22.5% x $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 3.6 : 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 3.7 : 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 3.8 : 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 3.9 : 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 3.10 : 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 3.11 : 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 3.12 : 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 3.13 : 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)]

Chapter 4 Mining revenue

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 4.14 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 4.15 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 4.16 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 4.17 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 4.18 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 4.19 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 4.20 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 4.21: 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.

·
PARA>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 4.22: 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 4.23 : 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 4.24 : 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 4.25 : 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 4.26 : 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 date (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 4.27 : 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 x 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 4.28 : 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 4.29 : 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 4.30 : 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 4.31 : 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 4.32 : Sale of emissions units recoups mining expenditure O'Toole Coal purchased 5,000 emissions units sufficient to offset Co2 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 4.33 : 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 4.34 : 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 3/4 of the coal contracted for and it obtains a credit that can be applied to future coal deliveries.New Resources treats 3/4 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 1/4 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.

Chapter 5 Mining expenditure

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 5.35 : 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 5.36 : 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 5.37 : 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 Co2 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 5.38 : 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 5.39 : 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 5.40 : 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 5.41 : 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 5.42 : 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 5.43 : 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 5.44 : 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 5.45 : 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 5.46 : 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 5.47 : 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 5.48 : 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 5.49 : 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 5.50 : 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 5.51 : Expenditure incurred in growing forests to generate carbon emission units Pinder & Sons 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 Co2.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 5.52 : 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 $5,000,000. 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 5.53 : 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 1One 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 2Once 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 5.54 : 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 5.55 : 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 Three 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). 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 5.56 : 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 5.57 : 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 5.58 : 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 5.59 : 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 5.60 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. [Paragraph 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]

Chapter 6 Allowances

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 6.61 : 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 6.62 : 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 6.63 : 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 6.64 : 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 6.65 : 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 6.66 : 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 6.67 : 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 6.68 : 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 x $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 6.69 : 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 6.70 : 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 6.71 : 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 6.72 : 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 ($1m/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 6.73 : 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 6.74 : 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.

Same miner has both interests

Example 6.75 : 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.

Transfer of the group containing loss and profit project interests

Example 6.76 : 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.

Loss project interest transferred within same consolidatable group

Example 6.77 : 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.

Loss and profit project interests sold simultaneously

Chapter 7 Starting base allowances

Outline of chapter

7.1 This chapter explains Part 3-5 (Divisions 80, 85 and 90) of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill), which deals with starting base allowances. Starting base allowances reduce a mining project interest's Minerals Resource Rent Tax (MRRT) liability for an MRRT year.

7.2 All legislative references throughout this chapter are to the MRRT Bill unless otherwise indicated.

Summary of new law

7.3 Starting base allowances recognise investments in assets (starting base assets) relating to the upstream activities of a mining project interest that existed before the announcement of the resource tax reforms on 2 May 2010. They also recognise certain expenditure on such assets made by a miner between 2 May 2010 and 1 July 2012.

7.4 A mining project interest has a starting base allowance if it has profit remaining after using all other higher ranked allowances, and it has one or more starting base losses. Unlike other losses, starting base losses are never transferable to other mining project interests.

7.5 A starting base loss reflects the annual depreciation (decline in value) of the starting base assets. If there is insufficient profit to use a starting base loss, it is carried forward and uplifted.

7.6 A miner can choose to work out the starting base losses for its mining project interest based on either:

·
the market value of starting base assets (including rights to the resources) at 1 May 2010; or
·
the most recent accounting book value of starting base assets (not including rights to the resources) available at that time.

7.7 Under the market value approach, a starting base asset is depreciated over the shorter of: the asset's remaining effective life; the life of the mine; and the period until 30 June 2037. The undepreciated value of a starting base asset is not uplifted, though the real value of any unused losses is preserved by uplifting them by the consumer price index (CPI).

7.8 Under the book value approach, a starting base asset is depreciated over five years. The undepreciated value of a starting base asset is uplifted each year by the long term bond rate plus 7 per cent (LTBR + 7 per cent). Any unused losses are also uplifted by the LTBR + 7 per cent.

Detailed explanation of new law

A miner has an allowance when it can use a starting base loss

7.9 A mining project interest has a starting base allowance if it has sufficient profit to use some or all of its starting base losses, after using all other higher ranked allowances [sections 80-10 and 80-15] . Royalty, transferred royalty, pre-mining loss, and mining loss allowances are all higher ranked allowances [section 10-10] .

7.10 A mining project interest has a starting base loss for a year when the miner holds a starting base asset and there is a decline in value of that asset. The loss is reduced to the extent it is applied as a starting base allowance, and ceases to exist when it has been fully applied. [Section 80-20]

Starting base assets produce starting base losses

What is a starting base asset?

7.11 Starting base assets include most tangible and intangible assets that are relevant to the upstream operations of a mining project interest. [Section 80-25]

7.12 A starting base asset is one that is used, installed ready for use, or being constructed for use in carrying on the upstream mining operations in relation to a mining project interest at the 'start time' [subsections 80-25(1) and (2)] . The concept of 'upstream mining project operations' is explained in Chapter 5. The 'start time' is explained below.

7.13 The definition of a starting base asset is based on the income tax definition of a 'CGT asset' (see section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)), which means any kind of property or a legal or equitable right.

7.14 The 'asset' concept is a broad one, encompassing all types of legal property and rights. Where a miner holds an interest in an asset, the interest in the underlying asset is itself capable of being a starting base asset. [Section 250-15]

7.15 Land that is used in upstream mining operations can be a starting base asset. Improvements to land or fixtures on land are treated as separate assets, not as part of the land, regardless of whether they can be removed from the land or are permanently attached. This ensures that a miner can hold these things as starting base assets, regardless of whether it holds the land on which the improvement or fixture exists. [Subsection 80-25(5)]

Some starting base assets are combined under the market value approach

7.16 Notwithstanding that improvements to land are treated as separate to the land, under the market value approach, any improvement to land (but not a fixture) in the project area of a mining project interest is taken to be part of the same starting base asset as the rights and interests constituting the mining project interest. This inclusion reflects the practical difficulty in ascribing a separate market value to improvements to land, which of their nature cannot be dealt with separately from the underlying mining rights. [Paragraph 80-30(1)(d)]

7.17 In further recognition of these valuation difficulties, under the market value approach, an improvement to land that existed on 1 May 2010 is recognised in the starting base even if it is consumed or destroyed before the start time [paragraph 80-25(4)(b)] . In contrast, other starting base assets must be used, installed ready for use, or being constructed for use in the upstream mining operations at the start time [subsection 80-25(1)] .

7.18 For an interest using the market value approach, mining information (as defined in subsection 40-730(8) of the ITAA 1997) is treated as an item of property or a legal or equitable right. This is necessary since information is not otherwise considered a legal asset as it is not capable of assignment (for example, see Hepples v FCT (1990) 90 ATC 4497 and Taxation Determination TD 2000/33). [Paragraph 80-25(4)(a) and section 300-1, definition of 'mining, quarrying and prospecting information']

7.19 Like improvements to land, any mining information relating to a mining project interest is taken to be part of the same starting base asset as the rights and interests that comprise the mining project interest. Again, this reflects the interdependent nature of these assets and the difficulties that would arise if they were to be valued separately. For the same reason, any goodwill that would otherwise be considered a separate starting base asset is instead taken to be part of this single starting base asset. [Subsection 80-30(1)]

7.20 This composite starting base asset is taken to be a depreciating asset (unless none of the constituent assets are depreciating assets), which has an effective life equal to the longest effective life of any of those rights and interests. As a consequence, it will be written off over the shorter of that life and the period until the end of 30 June 2037. [Subsections 90-15(1), (2) and (3)]

Some starting base assets are excluded under the book value approach

7.21 For a mining project interest using the book value approach, the rights and interests that make up the mining project interest itself are not included in the definition of a starting base asset. This reflects the policy to exclude the value of the taxable resources if a miner chooses the book value approach. For the same reason, the value of mining information is also excluded. It is unlikely that goodwill would be an asset that can be meaningfully identified in relation to the upstream operations of a mining project interest (as goodwill is normally associated with a business enterprise as a whole). However, to the extent that it would otherwise be considered a starting base asset, goodwill is also excluded under the book value approach. [Paragraph 80-25(3)(a)]

Mine development expenditure as a starting base asset

7.22 Some expenditure that is incurred between 2 May 2010 and 1 July 2012 is included in the starting base even though it does not relate to another starting base asset. This expenditure, called mine development expenditure, is itself taken to be a starting base asset. It is expenditure incurred in carrying on upstream mining operations that relates to developing a mine. It includes the costs of removing overburden, excavating a pit and sinking a mineshaft, which are generally treated as a revenue expense and so would not otherwise be included in the starting base. Mine development expenditure is discussed further under 'interim expenditure' below. [Section 80-35]

There are no starting base assets unless a starting base return is lodged

7.23 An asset is not considered to be a starting base asset where a miner fails to make a valid choice about whether to use the market value or the book value approach or fails to lodge a starting base return. The starting base choice is described below and the starting base return is discussed in Chapter 18. [Paragraph 80-25(3)(b)]

Assets used, installed ready for use, or being constructed for use

7.24 The concept of an asset being 'used, or installed ready for use' also appears in the depreciation provisions of the income tax law (see section 40-60 of the ITAA 1997).

7.25 The word 'used' takes its ordinary meaning, which in any particular case will depend on the context in which the word is employed and the purpose for which the asset is held (Newcastle City Council v Royal Newcastle Hospital (1956) 96 CLR 493).

7.26 The degree of physical or active use that is required to constitute 'use' will depend to a certain extent on the nature of the asset and the purpose for which it is held. For a tangible depreciating asset, physical or active employment of the asset would generally be expected in order for an asset to be considered to be being 'used'. For an intangible asset, employment of the asset may not be physical and the asset may be considered to be being 'used' in the context of passive use. However, use would generally be expected to involve an exploitation of the inherent character of the asset.

7.27 The phrase 'installed ready for use' is defined in subsection 995-1(1) of the ITAA 1997 and requires not only that the asset be installed ready for use but also that it be 'held in reserve'. In that context, a thing is 'held in reserve' if it is held for future use in an existing operation and the concept of holding in reserve is not 'so wide as to embrace income producing operations which may be undertaken at some future time' (Case X46 90 ATC 378 (at 381)). [Section 300-1, definition of 'installed ready for use']

7.28 In the context of the MRRT starting base, the phrase 'being constructed for use' is intended to cover assets that are in the process of being created by the miner for later use in the upstream operations of the mining project interest. A similar concept exists in section 41-25 of the ITAA 1997 in respect of the investment allowance, and there is case law on the former investment allowance provisions which provides guidance on the concept. See, for example, FC of T v. Tully Co-operative Sugar Milling Association Limited 83 ATC 4495; Monier Colourtile Pty Ltd v. FCT (1984) 84 ATC 4846, and Utah Development Co. v. FCT (1983) 83 ATC 4545.

Start time for starting base assets

7.29 A starting base asset is one that is used, installed ready for use, or being constructed for use in carrying on the upstream mining operations in relation to the mining project interest at the later of:

·
1 July 2012; and
·
the time production (other than incidental production) commences for the mining project interest.

[Subsection 80-25(2)]

7.30 This time is referred to as the 'start time' of the starting base asset. It defines the time from which the asset's decline in value is worked out to produce starting base losses. Before this time, the assets will not be recognised as starting base assets and so will not be capable of producing starting base allowances. In this way, the start time defines the way in which recognition of the starting base is deferred until there is production of taxable resources from a mining project interest.

7.31 Many mining project interests that exist on 1 July 2012 will already be producing taxable resources and so, for them, the start time will be that date.

Production other than incidental production

7.32 However, some mining project interests will be in a development phase on 1 July 2012 and will not be producing until a later time. For these interests, the start time is deferred until that production gets underway.

7.33 The start time does not occur when there has merely been incidental production of taxable resources from the project area of a mining project interest. That is, it is not sufficient that a mining revenue event has occurred in relation to a taxable resource extracted from a project area.

7.34 Whether the extraction of taxable resources amounts to 'production' or merely 'incidental production' is a question of fact that should be determined having regard to the purpose for which, and the manner and volume in which, those resources are being extracted. For instance, the extraction of taxable resources that occurs before the development of a mine may constitute 'incidental production'. However, 'production' is not intended to be necessarily limited to the way in which, and the extent to which, taxable resources are planned to be extracted when the mine is fully developed and operational.

Example 7.78 : Not incidental production Blue Tongue Co. has a mining project interest, which relates to an underground coal mine it is developing on land covered by its production right.On 1 July 2012, Blue Tongue Co. is extracting coal as part of its work to build the shaft and underground development workings of the mine. It is able to sell these resources for $50 million. It is liable to pay MRRT in relation to the sale of these resources.The amount of coal being extracted, and the value at which it is sold is significant enough to represent non-incidental production, notwithstanding that part of the purpose for which the coal is extracted is to further develop the mine.Blue Tongue Co. will be able to recognise and write off its starting base assets from 1 July 2012 even though it has not yet started to produce taxable resources in the volumes it intends when the mine is fully operational. Example 7.79 : Incidental production Tiger Co. holds a production right on which it is considering developing an open cut mine. In assessing the viability of that potential development, Tiger Co. decides to mine enough coal to make a trial shipment to a potential customer in Japan, to test the quality of the coal in a Japanese blast furnace. Tiger Co. mines 20,000 tonnes of coal from the mine and sells it as one cargo for $4 million. It is liable to pay MRRT in relation to the sale of these resources.This production is considered to be incidental production, as it was a single cargo, prior to a commitment to build the coal mine on the area covered by the production right. While it was able to sell these taxable resources, Tiger Co. is not producing resources in sufficient quantities to meet regular orders from customers. As this extraction is merely incidental to a wider purpose of testing the feasibility of a mine it is not production that meets the test for determining the start time of starting base assets.

Start time of a combined mining project interest under the market value approach

7.35 In some cases, a miner can choose to combine mining project interests that are integrated in their downstream mining operations. This is discussed in detail in Chapter 9. The interests that are combined are referred to as 'constituent interests'. Under the market value approach, the start time of an asset that is, or includes, one of these constituent interests is deferred until the time that production commences in relation to that constituent interest. [Paragraph 80-25(2)(b) and subsection 80-30(2)]

7.36 In other words, for a single starting base asset that relates to a constituent interest that, apart from a downstream integration choice, would be a separate mining project interest, the start time is the time production (other than incidental production) commences in the project area of the constituent interest.

7.37 However, where a miner has a mining project interest that includes constituent interests that are combined because they are upstream integrated, and the market value approach is chosen, the start time for the asset that is, or includes, one of these constituent interests is when production commences from any of those constituent interests. So, if a mine covers multiple production rights that meet the upstream integration test, the start time for the single starting base asset comprising those rights is when the production occurs from any of those rights. [Paragraph 80-25(2)(b)]

Example 7.80 : Downstream integration of constituent interests that include upstream integrated interests Nelson Minerals Co. has two separate iron ore mines, Grimley and Stolarek. Grimley mine is made up of two production rights. The production rights making up Grimley mine satisfy the upstream integration test. The two mines are also sufficiently integrated to meet the downstream integration test. Nelson Minerals Co. has chosen to combine the mines into a single mining project interest.At 1 July 2012, Grimley mine is producing taxable resources from an area covered by one of its production rights, but not the other. The start time for the starting base asset that includes the two production rights that relate to Grimley mine is 1 July 2012.At that time, no taxable resources are extracted from the area covered by the production right that relates to Stolarek mine. The start time for the starting base asset that includes that production right occurs when taxable resources start to be produced from that production right.

When does a miner hold a starting base asset?

7.38 The MRRT meaning of 'hold' broadly adopts the income tax definition for depreciation purposes (see section 40-40 of the ITAA 1997), which generally refers to the economic owner of the asset. However, in order to ensure that the entity that will bear an MRRT liability also has the benefit of a starting base, the entity that has a mining project interest is taken to hold the starting base asset that is the rights and interests constituting the mining project interest. [Sections 250-5 and 250-10]

Amount of a starting base loss

7.39 The starting base loss is based on a portion of the value (the decline in value) of the starting base assets. The principles and mechanisms used in the depreciation provisions of the income tax law (Division 40 of the ITAA 1997) have, to the extent possible, been adopted to work out the decline in value of a starting base asset.

Amount of a starting base loss in the year in which it arises

7.40 For the year in which the starting base loss arises, it is worked out as follows:

·
Step 1: Work out the decline in value of each starting base asset the miner held in the year.
·
Step 2: Reduce that result to the extent that the asset is used, installed ready for use, or being constructed for use, for a purpose other than upstream mining operations of the mining project interest.
·
Step 3: Reduce the result further to the extent the asset relates to a use that would not be deductible under the MRRT.
·
Step 4: Add up the resulting amounts for each of the starting base assets.

Step 1 - Decline in value of each starting base asset

7.41 The starting base loss includes an amount equal to the 'decline in value' for a year of a starting base asset that a miner held for any time during the year. This is explained further below. [Subsection 80-40(1)]

Step 2 - Ignore the decline in value to the extent it does not relate to upstream mining operations

7.42 The starting base loss does not include any part of the asset's decline in value that is attributable to the miner using the asset, having it installed ready for use, or constructing it for use, for a purpose other than upstream mining operations in relation to the mining project interest. [Subsections 80-40(2) and (3)]

7.43 Any decline in value that is not attributable to upstream mining operations will not contribute to a loss. However, this does not affect the decline in value itself, which will continue irrespective of the use of the asset. This means that any decline that is attributable to a period when the asset was not used for upstream mining operations is not available to form part of a starting base loss in a later year.

Example 7.81 : Ignore decline in value for downstream use Fran Co. has one starting base asset with a base value for the MRRT year of $10 million. The decline in value of the asset for the year is $1 million.Fran Co. uses the asset 20 per cent in the upstream mining operations of its mining project interest. Therefore, the starting base loss is $200,000 (which is the full decline, reduced by $800,000 to reflect the use of the asset other than in upstream mining operations).Fran Co. has chosen the market value approach for the mining project interest, so the base value of the asset for the next MRRT year is $9 million.

7.44 The narrow base of the MRRT means there is a need to apportion the decline in value. This will be relevant when starting base assets are partly used to mine taxable resources and partly used to mine non-taxable resources, or even when assets used solely to mine taxable resources are partly used for downstream mining operations (that is, activities after the valuation point). As under the general mining expenditure provision (discussed in Chapter 5), this apportionment should be made on a fair and reasonable basis.

Step 3 - Ignore the decline in value to the extent it relates to amounts that would be explicitly not deductible

7.45 The starting base loss does not include any part of the asset's decline in value that would be excluded expenditure if it were an amount that was incurred on or after 1 July 2012 [subsections 80-40(2) and (4)] . So, to the extent that the circumstances which lead to an amount being specifically non-deductible apply in relation to a starting base asset in a year, the decline in value of that asset is so reduced. For an explanation of 'excluded expenditure', see Chapter 5.

Example 7.82 : Ignoring the decline that relates to excluded expenditure Cham Co. has a starting base asset which is a building located away from the project area. In the 2013-14 year, the building is used partly for accounting activities. If Cham Co. had incurred a capital amount during the year in relation to the building it would be excluded expenditure to that extent. As a consequence, to that extent the decline in value of the starting base asset (the building) for the year is not taken into account in working out the starting base loss.

7.46 Expenditure incurred to acquire an interest in a production right is one type of excluded expenditure [section 35-35] . However, if the market value approach is chosen, the decline in value of a starting base asset that is a production right (or an interest in a production right) is not reduced simply because it relates to the production right [subsection 80-40(5)] .

Example 7.83 : Decline that relates to a starting base asset that is a production right Fox Co. chooses to use the market value approach. It has a starting base asset which is an interest in a production right. If Fox Co. incurred an amount during the year to acquire this interest, it would be excluded expenditure. However, the decline in value for the year for the starting base asset (the interest) is not affected in these circumstances.

Step 4 - Add up the remaining amounts for each starting base asset

7.47 The starting base loss is the total of the amounts worked out under steps 1 to 3 for each starting base asset [subsections 80-40(1) and (2)] . In other words, a miner adds together the decline in value of each of the starting base assets of a particular mining project interest to work out the interest's starting base loss for the year (less any reductions under steps 2 and 3). As explained above, this starting base loss produces an allowance to the extent that the interest has sufficient mining profits to offset these losses.

Amount of a starting base loss after the year in which it arises

7.48 In a later year, the starting base loss includes any unused starting base loss for the mining project interest for the previous year, increased by an uplift factor. [Section 80-45]

7.49 An unused starting base loss is any part of a starting base loss that did not become a starting base allowance in the previous year. In other words, it is the amount (if any) by which the starting base loss for the previous year exceeded the mining profit for the previous year, after all higher ranked allowances had been applied.

7.50 the extent that a starting base loss is not used in a year, it is uplifted and carried forward to the next year. The uplift factor that applies is:

·
under the book value option - LTBR + 7 per cent [paragraph (a) of the definition of 'uplift factor' in subsection 80-45(1)] ; and
·
under the market value option - the CPI for the previous year ending 31 March. The CPI is expressed in the same way as in subsection 960-275(1) of the ITAA 1997 [paragraph (b) of the definition of 'uplift factor' in subsection 80-45(1)] .

Example 7.84: Starting base loss for a year after the loss arose Link Co. has a starting base loss of $1 million for the 2015-16 MRRT year. It has no mining profits remaining after it applies its higher ranked allowances, so it carries forward the entire loss to the next year.Link Co. has chosen the book value approach for the mining project interest, so it uplifts the loss by the LTBR + 7 per cent. Assume the long term bond rate (LTBR) for the 2015-16 MRRT year is 6 per cent.Therefore, in the 2016-17 MRRT year, the amount of the 2015-16 starting base loss is $1.13 million ($1m x (0.06 + 1.07)).

Starting base losses of a mining project interest originating from pre-mining project interests with different valuation approaches

7.51 A starting base loss can arise in relation to a pre-mining project interest from which a mining project interest originates. Also, a mining project interest can originate from two or more pre-mining project interests. Where this occurs and a miner has chosen to use the book value approach in relation to one or more of the pre-mining interests and the market value approach in relation to one or more of the other pre-mining interests, then there are two starting base losses that arise in an MRRT year for the mining project interest. One is a starting base loss in relation to any pre-mining interest that uses the book value approach, and the other is a starting base loss in relation to any pre-mining interest that uses the market value approach. Of the two starting base losses that arise in the same year, the starting base losses that relate to book value approach will be applied first, then the starting base losses that relate to market value approach. This is also what happens when two mining project interests that use different valuation methods combine, which is discussed in more detail in Chapter 9. [Section 80-50]

Choosing between the market value and book value approaches

7.52 A miner can choose to value and write off all the starting base assets in relation to a mining project interest using either the market value or the book value approach. [Paragraph 85-5(1)(a), subsection 85-5(2) and section 85-15]

7.53 The choice can also be made in relation to a pre-mining project interest. Although a starting base will not apply in relation to a pre-mining interest, the choice can be exercised in relation to that interest so that a mining project interest originating from the pre-mining project interest can apply that choice. [Paragraph 85-5(1)(b)]

Choice applies to all assets used in a project

7.54 The choice as to which approach to adopt needs to be made by a miner in relation to all the starting base assets in a particular mining project interest. As the choice may need to be made before the start time, it applies to those assets that are not yet, but may become, starting base assets of the mining project interest or of a mining project interest that will originate from the pre-mining project interest. [Subsection 85-5(1)]

7.55 Where a miner has more than one mining project interest, it can adopt different approaches in relation to the different interests. As starting base losses are not transferable between different mining project interests, there is no requirement that the different mining projects of a miner (or a closely associated miner) have adopted the same approach.

Making the choice

7.56 The starting base choice is made by lodging a starting base return in the approved form that specifies the choice to use the market value or book value approach and provides information about the base value of starting base assets. The starting base return is discussed in greater detail in Chapter 18. [Section 85-5 and Schedule 1 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 8, section 117-20 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

7.57 Generally, an entity is able to make its starting base choice and lodge its starting base return up to the earlier of the day its MRRT return for the first MRRT year is due (or would have been due if it was required to lodge a return for that year), or within a further time allowed by the Commissioner of Taxation (Commissioner). However, where the project interest is transferred after 1 July 2012 and before a choice is made, the transferee must make the choice and lodge the starting base return by the same time the transferor would have been required to if it had continued to have the interest.

7.58 The choice is irrevocable [Schedule 1 to the MRRT (CA&TP) Bill, item 8, section 119-10 of Schedule 1 to the TAA 1953] . It applies to the starting base assets of the mining project interest for the first MRRT year and all later years [subsections 85-5(1) and (5)] .

7.59 However, the irrevocable choice could be problematic if there is uncertainty as to what constitutes a mining project interest at the time the choice needs to be made. In these circumstances, there would be compliance and administrative difficulties if an entity was required to specify the particular mining project interests to which a choice applies. For example, at that time there may be doubt as to whether mining project interests were integrated and so able to combine (see Chapter 9 for an explanation of integration and combination). In order to ameliorate these potential difficulties, an entity can choose to use a valuation approach in relation to the mining project interest(s) or pre-mining project interests that relate to a particular area, rather than nominating the project interests directly. [Subsection 85-5(4)]

Example 7.85 : Choice covering an area Bay Co. has two mining operations, Alpha and Beta, which it initially considers to be two mining project interests. The start time for each is 1 July 2012.Bay Co. elects to use the book value approach in relation to any mining project interest(s) it has at 1 July 2012 that relate to the area covered by Alpha.Bay Co. elects to use the market value approach in relation to any mining project interest(s) it has at 1 July 2012 that relate to the area covered by Beta.After making the choice, Bay Co. identifies that it actually held three mining project interests on 1 July 2012, as it had been mistaken about the ability to combine two mining project interests (Gamma and Delta) into the one mining project interest Beta.Bay Co.'s choice to use the market value approach validly applies to Gamma and Delta as these mining project interests relate to an area covered by the choice, notwithstanding the irrevocable nature of the choice which it originally thought applied to Beta. Example 7.86 : Choice covering more than one mining project interest Port Co. has two mining operations, Epsilon and Zeta, which it initially considers to be separate mining project interests. The start time for each is 1 July 2012.Port Co. elects to use the book value approach in relation to Epsilon, and to use the market value approach in relation to the other mining project interests it has at 1 July 2012. At a later time, Port Co. identifies that it actually held one mining project interest on 1 July 2012, as it had been mistaken about the ability to separately identify Epsilon and Zeta, which should have been identified as a single mining project interest, Omega.Port Co.'s choice to use the market value approach in relation to the other mining project interests it has at 1 July 2012 validly applies to Omega, notwithstanding the irrevocable nature of the choices which it originally thought applied to Omega.

Restrictions on when a miner can choose the book value approach

7.60 Any miner can choose the market value approach to work out the value of its starting base assets. However, a miner can only choose the book value approach if an audited financial report was prepared in relation to the mining project interest during the 18 months before 2 May 2010. [Paragraph 85-10(1)(a)]

7.61 This financial report must also relate to a financial period that ended in the 18 months prior to 2 May 2010. This precludes the use of a financial report that relates to a financial period that ended before that time, even if the report was prepared in the 18 months prior to 2 May 2010. [Paragraph 85-10(1)(b)]

7.62 The miner (or the consolidated entity of which it is a part) must have prepared the financial report in accordance with the accounting standards. The financial report must also have been audited in accordance with the auditing standards. [Paragraphs 85-10(1)(a) and (c) and subsection 85-10(2)]

7.63 A 'financial report' means an annual financial report or a half-year financial report prepared under Chapter 2M of the Corporations Act 2001. Either of these is acceptable, though the initial book value would be the value of the asset recorded in the most recent audited financial report available before 2 May 2010. [Paragraph 90-25(3)(a)]

7.64 'Accounting standard' and 'auditing standard' are both defined as having the same meaning as in the Corporations Act 2001 [section 300-1, definitions of 'accounting standard' and 'auditing standard'] . 'Consolidated entity' is also defined in the Corporations Act 2001 to mean a 'company, registered managed investment scheme or disclosing entity together with all the entities it is required by the accounting standards to include in consolidated financial statements'.

What happens if a miner does not make a valid choice?

7.65 As mentioned above, if an entity fails to make a valid choice about whether to use the market value or the book value approach and lodge a starting base return, it will not have any starting base assets [paragraph 80-25(3)(b)] . However, the Commissioner may allow further time for an entity to do this [Schedule 1 to the MRRT (CA&TP) Bill, item 8, subsection 117-20(3) of Schedule 1 to the TAA 1953] .

How to work out the decline in value of starting base assets

7.66 As discussed above, the starting base loss will be based on the decline in value of the starting base assets. The decline in value of a starting base asset is worked out using the following formula: [Section 90-5]

7.67 The 'base value' of an asset represents the value of the asset that can be further declined. It is a year-start amount on which the decline in value for the year can be worked out. The base value of a starting base asset will depend on whether the miner has elected to use the book value approach or the market value approach. This is explained further below.

7.68 'Starting base days' are the days in the year (other than those that occur before the start time or after a starting base adjustment event) in which the miner held the starting base asset and either used it, had it installed ready for use, or was constructing it, for any purpose [subsection 80-40(6)] . This part of the formula apportions the decline in value where an asset is held for less than the full MRRT year (such as where it is disposed of during the year). Consistent with other parts of the tax law, this apportionment is done over 365 days, regardless of whether the year is a leap year. As explained above, where a miner uses its starting base asset for purposes other than upstream mining operations, this will not affect the decline in value but it will affect the amount of the starting base loss.

7.69 The 'write off rate' of a starting base asset will depend on whether the miner has elected to use the book value approach or the market value approach.

Write off rate under the book value approach

7.70 The following table lists the annual write off rates under the book value approach. [Section 90-10]

Table 7.1 : Annual write off rates under the book value approach

For this MRRT year: The write off rate is:
the MRRT year in which the start time for the asset occurs 36%
the first MRRT year commencing after the start time for the asset occurs 37.5%
the second MRRT year commencing after the start time for the asset occurs 37.5%
the third MRRT year commencing after the start time for the asset occurs 60%
the fourth MRRT year commencing after the start time for the asset occurs 100%

7.71 These rates are based on those announced on 2 May 2010. However, the rates have been adjusted to reflect the declining balance approach used in the formula above.

7.72 The 2 May 2010 announcement stated that depreciation was to occur over five years with the following profile: 36 per cent; 24 per cent; 15 per cent; 15 per cent; and 10 per cent. However, this profile assumed a fixed balance being depreciated in each year. Under the declining balance approach, the equivalent write off rates are: 36 per cent; 37.5 per cent; 37.5 per cent; 60 per cent; and 100 per cent.

7.73 The results under each approach are identical. However, the declining balance approach has been chosen as a more efficient legislative expression, given the need to make adjustments to increase the base value of an asset for any interim expenditure and the LTBR + 7 per cent uplift.

Write off rate under the market value approach

7.74 Under the market value approach, the write off rate of a starting base asset for an MRRT year is worked out by reference to its remaining effective life, according to the following equation:

100% / Remaining effective life of the asset

[Subsection 90-15(1)]

7.75 The 'remaining effective life' of an asset that is a depreciating asset (under Division 40 of the ITAA 1997) is any period of its effective life that is yet to elapse as at the start of the MRRT year. [Subparagraph (a)(i) of the definition of 'remaining effective life' in subsection 90-15(1)]

7.76 For this purpose, the effective life of a starting base asset is the period worked out under Division 40, as at the asset's start time. This may require a miner to reassess the effective life of its assets at the start time, rather than relying on its original estimates for income tax purposes. This may be significant when the original estimates have not taken into account changes in the way the assets are used.

7.77 The term 'effective life' describes the length of time over which any entity could reasonably expect to use the particular asset. The estimated effective life of an asset is expressed in years. Part years are expressed as a fraction, and are not rounded to the nearest whole year (see sections 40-100 and 40-105 of the ITAA 1997).

7.78 Under Division 40 of the ITAA 1997, a taxpayer usually has the option to use an effective life determined by the Commissioner or to work out the effective life of the asset itself according to how long the asset can be used to produce income (see section 40-95 of that Act). An exception is the effective life of a mining, quarrying or prospecting right, which is the period over which the taxpayer reasonably expects the reserves can be extracted from the mine.

7.79 The remaining effective life of the combined starting base asset (explained above) is taken to be the longest remaining effective life of any of the constituent assets are that are depreciating assets. If none of the constituent assets are depreciating assets, then the combined asset will not be taken to be a depreciating asset. [Subsection 90-15(3)]

Example 7.87 : Effective life of the starting base asset that includes the mining project interest and mining information Tool Co. has a single starting base asset that consists of its interest in production right Kappa, and another interest in production right Sigma. The remaining effective life of the single starting base asset is worked out according to the longest effective life of these rights, as worked out under Division 40 of the ITAA 1997 at the start time.On 1 July 2012 (the start time), Tool Co. works out the effective life of Kappa to be 15 years, and Sigma to be 10 years (according to Tool's estimates on 1 July 2012 about the reserves of the different mines to which each right relates).The remaining effective life of the starting base asset is based on the period of the effective life of Kappa that is yet to elapse. Therefore, at the end of 30 June 2013, the remaining effective life of the starting base asset is 14 years.

7.80 The remaining effective life of a starting base asset may be capped to the shorter of the following:

·
the longest remaining effective life of any right or interest that makes up the mining project interest; and
·
the period until 1 July 2037 (which is 25 years after the MRRT commences).

[Subsection 90-15(2) and subparagraphs (a)(ii) and (iii) of the definition of 'remaining effective life' in subsection 90-15(1)]

7.81 In other words, an asset with a remaining effective life that exceeds any of these caps is taken to have a remaining effective life equal to the shorter of the caps.

7.82 Starting base assets that are not depreciating assets (and so do not have an effective life for income tax purposes, such as land and many intangibles) will also be taken to have a remaining effective life equal to the shortest of those caps. [Subsection 90-15(2) and paragraph (b) of the definition of 'remaining effective life' in subsection 90-15(1)]

Base value under the book value approach

Base value for the year in which the start time occurs

7.83 Under the book value approach, for the MRRT year in which the start time occurs, the base value of a starting base asset that was held in relation to the mining project interest (or the pre-mining project interest from which the mining project interest originates) at all times in the interim period is:

·
the initial book value of the asset [subparagraph 90-25(1)(a)(i)] ; plus
·
any valuation amounts (uplifted interim expenditure) [subparagraph 90-25(1)(a)(ii)] .

7.84 If the starting base asset was not held at all times in the interim period (because it was acquired during that period), then its initial base value is simply the sum of the valuation amounts (uplifted interim expenditure) [paragraph 90-25(1)(b)] . 'Interim period' is explained below.

Initial book value

7.85 The initial book value of a starting base asset is:

·
the amount recorded in the accounts that produced the most recent audited financial report available before 2 May 2010, uplifted from the date of that report until the end of the year in which the start time occurs; or
·
if the auditor's report recorded another value in relation to the asset - that value, uplifted from the date of the auditor's report until the end of the year in which the start time occurs.

The uplift factor is the LTBR + 7 per cent. [Subsections 90-25(3) and (5)]

Valuation amounts for interim expenditure

7.86 Valuation amounts for interim expenditure include the interim expenditure (explained below) in relation to starting base assets, uplifted by the LTBR + 7 per cent for the period between when the amount is incurred and the end of the year in which the start time for the asset occurs. [Subsections 90-25(6) and (7)]

Base value for later years

7.87 For every later MRRT year, the base value of the asset is reduced by the decline in value, and the result is then uplifted by the LTBR for the previous year + 7 per cent. [Section 90-30]

Base value under the market value approach

7.88 Under the market value approach, the base value of a starting base asset reflects its market value as at 1 May 2010, plus any interim expenditure in relation to the asset. [Subsection 90-40(1) and section 90-35]

Base value for the year in which the start time occurs

7.89 For the MRRT year in which the start time occurs, the base value of a starting base asset that was held in relation to the mining project interest (or the pre-mining project interest from which the mining project interest originates) at all times from 2 May 2010 to 30 June 2012 is:

·
the market value of the asset on 1 May 2010 [subparagraph 90-40(1)(a)(i)] ; plus
·
any interim expenditure [subparagraph 90-40(1)(a)(ii)] .

7.90 If the starting base asset was not held at all times in the interim period (because it was acquired during that period), then its initial base value is simply the sum of the interim expenditure. [Paragraph 90-40(1)(b)]

Market value of the asset

7.91 'Market value' is not defined in the legislation, though its ordinary meaning is modified for the effect of GST and the costs of converting non-cash benefits. [Section 300-1, definition of 'market value']

7.92 The common law definition of market value (discussed in Spencer v Commonwealth of Australia (1907) 5 CLR 418) is based on the principles of:

·
a willing but not anxious vendor and purchaser;
·
a hypothetical market;
·
the parties being fully informed of the advantages and disadvantages associated with the asset being valued; and
·
both parties being aware of current market conditions.

7.93 The market value of a starting base asset will be the amount worked out using these principles. In addition, the general MRRT valuation principles discussed in Chapter 14 are particularly relevant to the determination of the market value of a starting base asset.

7.94 Where a mining project interest originates from a pre-mining project interest that existed on 1 May 2010, the market value of the mining project interest is taken to be the market value of that pre-mining project interest as at 1 May 2010. [Section 90-45]

7.95 The market value of a starting base asset that is (or includes) a mining project interest should be worked out ignoring any liability to pay a private mining royalty [subsection 90-40(3)] . This ensures that these liabilities, which would be excluded expenditure, do not reduce the value of the starting base. However, this does not include private mining royalties paid on or after 1 July 2012 under a pre 2-May 2010 arrangement, as these are not excluded expenditure (explained in Chapter 5).

Market value of starting base assets that relate to a pre-mining project interest that existed on 2 May 2010

7.96 In some circumstances, an entity that has chosen to write off its starting base assets using the market value approach will not be required to actually market value those assets.

7.97 Where the market value approach is chosen for a pre-mining project interest that existed on 2 May 2010, an entity can make a further choice to work out the base value of its starting base assets using a 'look back' approach. The look-back approach is intended to ease compliance costs for entities that would otherwise find it difficult or costly to undertake a proper market valuation of assets. [Subsection 180-5(1)]

7.98 This choice (like the choice to use the market value approach) is irrevocable and needs be made as part of the starting base return (discussed above and in Chapter 18). [Section 180-5 and Schedule 1 to the MRRT (CA&TP) Bill, item 8, sections 117-20 and 119-10 of Schedule 1 to the TAA 1953]

7.99 The look-back choice can only be made in relation to a pre-mining project interest that existed on 2 May 2010. However, the choice itself will be made soon after the end of the first MRRT year. By this time, a mining project interest may have originated from the pre-mining project interest. In this case, the choice applies to the starting base assets that relate to that mining project interest. [Subsection 180-5(1)]

7.100 The effects of the choice to use the look-back approach are that:

·
all the starting base assets are treated as a single asset; and
·
the initial base value of that single starting base asset is taken to be the sum of pre-mining expenditure incurred in the 10 years before 2 May 2010. Chapter 6 explains the types of expenses that are included in pre-mining expenditure.

[Section 180-10]

Interim expenditure

7.101 The initial base value of a starting base asset will also include any interim expenditure incurred in relation to it. In contrast to the book value approach, interim expenditure under the market value approach is not uplifted for the period between when it is incurred and the end of the year in which the start time for the asset occurs. [Section 90-40]

Base value for later years

7.102 For every later MRRT year, the base value of a starting base asset is its base value for the previous year less the decline in value for the previous year. In contrast to the book value approach, this amount is not uplifted for the year under the market value approach. [Section 90-50]

Interim expenditure

7.103 Under either the book value approach or the market value approach, the base value of a starting base asset can include 'interim expenditure'. Interim expenditures are certain amounts incurred on starting base assets in the interim period - being the period ending on 30 June 2012 and starting on:

·
under the book value approach - the date of the accounts that are reflected in the audited financial report; and
·
under the market value approach - 2 May 2010.

[Subsections 90-55(1), (4) and (5)]

7.104 Interim expenditure includes amounts incurred on assets held throughout this period, as well as expenditure on assets that start to be held in this period. [Subsection 90-55(1)]

7.105 Interim expenditure includes the following kinds of amounts incurred in this period in relation to a starting base asset:

·
if the starting base asset is a 'depreciating asset' for income tax purposes - amounts included in the 'cost' of that asset for income tax purposes [subparagraph 90-55(1)(a)(i)] ; and
·
if the starting base asset is a 'CGT asset' (but not a depreciating asset) for income tax purposes - amounts included in the 'cost base' of that asset for income tax purposes, except for 'third element' costs (which are the costs of owning the asset, such as interest costs - see subsection 110-25(4) of the ITAA 1997) [subparagraph 90-55(1)(a)(ii) and subsection 90-55(2)] .

7.106 Interim expenditure also includes mine development expenditure that relates to the mining project interest. [Subsection 90-55(6)]

Mine development expenditure

7.107 Mine development expenditures are the amounts a miner incurs between 2 May 2010 and 1 July 2012 in developing the project area of its mining project interest as part of carrying on its upstream operations. In particular, it includes expenditure incurred in:

·
removing overburden from the project area;
·
excavating a pit in the area; and
·
sinking a mineshaft in the area.

[Section 80-35]

7.108 To the extent it is not interim expenditure on another starting base asset, mine development expenditure itself is taken to be a starting base asset [paragraph 80-35(1)(c)] . The deemed asset is taken to be held for as long as the miner has the mining project interest, and is taken to be used in the upstream mining operations [subsections 80-35(2) and 250-10(2)] . The deemed asset is not a depreciating asset and so, if the market value approach is chosen, will be written off accordingly [paragraph (b) of the definition of 'remaining effective life' in subsection 90-15(1) and subsection 90-15(2)] .

7.109 Mine development expenditure cannot itself be interim expenditure relating to another amount of mine development expenditure [subsection 90-55(7)] . That is, any amount of mine development expenditure that does not relate to another starting base asset (other than one deemed to be an asset because it was another amount of mine development expenditure) is taken to be a separate starting base asset.

Example 7.88 : Mine development expenditure is taken to be a starting base asset Mystic Mining Co. incurs mine development expenditure on 1 June 2011. The expenditure does not relate to any of its other starting base assets for the mining project interest. Therefore, the expenditure is taken to be a new starting base asset that Mystic Mining Co. holds and uses in the upstream mining operations of the mining project interest.Mystic Mining Co. incurs another amount of mine development expenditure on 1 July 2011. The expenditure does not relate to any of its other starting base assets for the mining project interest. The expenditure cannot be considered interim expenditure relating to the new starting base asset (that is, the earlier mine development expenditure). Instead, the expenditure is taken to be another starting base asset that Mystic Mining Co. holds and uses in the upstream mining operations of the mining project interest.

Other reductions to base value

Recoupment of base value

7.110 In most cases where a miner receives an amount for a starting base asset a starting base adjustment will apply (see Chapter 13). However, if a miner receives an amount for a starting base asset that is not part of a starting base adjustment event, then the base value of the asset is reduced to the extent there is an economic recoupment of the asset's base value [section 90-65] . This is equivalent to the recoupment of mining expenditure (which is explained in Chapter 4).

Example 7.89 : Recoupment of the base value of a starting base asset Continuing the previous example, on 30 June 2011 Mystic Mining Co. receives a government grant that subsidises the activities on which Mystic Mining Co. had incurred the mine development expenditure to the extent of 50 per cent. The base values of the starting base assets that were taken to have arisen when the expenditure was incurred are reduced by half of the subsidy (which is the proportion of the grant that has the effect of offsetting the base value for each asset).

Partial disposals of starting base assets

7.111 The base value of a starting base asset is also reduced to the extent that the miner disposes of any interest in the asset before its start time. This ensures that the impaired value of an asset is reflected in a lower base value for the asset. [Section 90-60]

7.112 Where a miner stops holding a part of a starting base asset after the start time, there is a starting base adjustment, which is discussed in Chapter 13.

Starting base and schemes to avoid MRRT

7.113 The general anti-avoidance rule (discussed in Chapter 17) applies to schemes that increase the base value of a starting base asset. This means that the increase in the base value of a starting base asset will be treated as an 'MRRT benefit' for the purposes of applying the general anti-avoidance rule. [Schedule 4 to the MRRT (CA&TP) Bill, item 12]

7.114 The fact that the starting base is recognised over a number of MRRT years (whereas capital expenditure is otherwise recognised immediately under the MRRT) and that starting base losses are not transferable (whereas mining losses are transferable to close associates) means that there will be an incentive for entities to access the value in the starting base more quickly than intended by transferring starting base assets between mining project interests. Such arrangements are also subject to the general anti-avoidance rule, which is discussed in Chapter 17.

Chapter 8 Small miners

Outline of chapter

8.1 This chapter explains:

·
how the low profit offset applies to fully or partially relieve small miners of their Minerals Resource Rent Tax (MRRT) liability for an MRRT year; and
·
the operation of the simplified MRRT.

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

Summary of new law

Low profit offset

8.3 There is no MRRT liability for miners with group mining profits (as measured for MRRT purposes) of $50 million or less. Nil liability is achieved through an offset, called a 'low profit' offset.

8.4 To ensure that the low profit offset does not distort the production behaviour of an entity approaching the $50 million threshold, it phases-out for profits between $50 million and $100 million.

Simplified MRRT

8.5 A miner can use the simplified MRRT method for an MRRT year if its group profit (as measured for accounting purposes) is below certain limits.

8.6 If a miner chooses to use the simplified MRRT method, it will have no MRRT liability for the MRRT year, but its starting base and its allowances are extinguished rather than carried forward.

Detailed explanation of new law

Low profit offset

Mining profits equal to or less than $50 million

8.7 The low profit offset shields miners from an MRRT liability when the miner's group mining profit of each mining project interest is less than or equal to $50 million in an MRRT year. [Subsection 45-5(1)]

8.8 A miner's group mining profits include the mining profits (as measured for MRRT purposes) of entities that are connected to or affiliated with the miner in the way described in Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997). [Subsection 45-5(1)]

8.9 If a miner's group mining profit is less than or equal to $50 million, the offset is the sum of the miner's MRRT liabilities for each of the miner's mining project interests for the year [subsection 45-5(2)] . This reduces a miner's MRRT liability to nil [section 10-15] .

8.10 The reason for basing the test on a miner's group mining profits is to ensure that miner's cannot split their interests between different entities so that each falls below the threshold and is able to access the offset.

Mining profits between $50 million and $100 million

8.11 If an entity were fully liable for MRRT on mining profits once its group mining profits exceeded the $50 million threshold, an incentive would exist for the entity to delay production in order to remain below the threshold. To remove this distortion, this formula phases-out the offset for profits between $50 million and $100 million:

(($50 million - Taper amount) - Miner's group MRRT allowances) x Miner's share of group mining profit

[Subsection 45-10(1)]

8.12 If the miner's group mining profit is over $50 million and the formula produces a positive amount, the miner's low profit offset is:

[amount from the formula] x MRRT rate

[Subsection 45-10(2)]

8.13 A miner's group MRRT allowances is the sum of the MRRT allowances for each mining project interest for the year of the miner and its closely associated entities. [Subsection 45-10(1)]

8.14 A miner's share of group mining profit is the sum of the miner's mining profit for each of its mining project interests for the year, divided by the miner's group mining profit for the year. [Subsection 45-10(1)]

8.15 The taper amount is the difference between the miner's group mining profit for the year and $50 million. [Subsection 45-10(1)]

8.16 Where the result produced by this calculation is less than zero, there is no low profit offset. Where the result is greater than zero, the miner is entitled to a share of the offset amount calculated by reference to its percentage share of the group's mining profits.

8.17 The phase-out reduces the maximum possible tax offset provided by the low profit offset by $0.225 for every $1 of group mining profits above $50 million.

8.18 Once the low profit offset entitlement is determined, it is applied to reduce the miner's MRRT liability for the year. [Section 10-15]

Example 8.90 : Entitlement to a low profit offset where mining profits are greater than $50 million and less than $100 million In the 2013-14 MRRT year, Strayan Ltd operates Project B. Strayan Ltd is a subsidiary of Bigger Strayan Resource Corporation, which owns Project A.

Project A
$m
Project B
$m
Group Total
$m
Mining profits $20.00 $60.00 $80.00
Royalty allowance $4.40 $8.00 $12.40
Mining loss allowance $0.10 $0.00 $0.10
Starting base allowance $0.10 $0.20 $0.30
Total MRRT allowances $4.60 $8.20 $12.80
Strayan Ltd works out if it is entitled to a low profit offset using the following steps: Step 1: It works out its group mining profits as $80 million by adding the mining profits of Project A and Project B and the group MRRT allowances as $12.8 million by adding the total allowances of Project A and Project B. As group mining profits are greater than $50 million and less than $100 million, Strayan Ltd may have a low profit offset. Step 2: It applies the formula as follows:
Taper amount: $80m - $50m = $30m
Miner's group MRRT allowances: $4.6m + $8.2m = $12.8m
Miner's share of group mining profits: $60m/$80m = 75%
[($50m - $30m) - $12.8m] x 75% = $5.4m Step 3: Then it multiplies its share of the group profit by the MRRT rate:$5.4m x 22.5% = $1.215mTherefore, Strayan is entitled to a low profit offset of $1.215 million.

8.19 The low profit offset is not intended to reduce compliance costs. However, a miner with group mining profits below $50 million may also be eligible to use the simplified MRRT method, which is intended to have that effect.

Simplified MRRT method

8.20 Some miners have the prospect of being below the $50 million MRRT threshold for an extended period. Requiring such miners to fully comply with the MRRT would be burdensome. These miners will have the option of electing to use a simplified MRRT method.

Choosing to use the simplified MRRT method

8.21 To be able to make the simplified MRRT choice, a miner must satisfy one of two alternative tests.

8.22 Under the first test, the aggregate of the miner's group profit (as measured for accounting purposes) must be less than $50 million for the year. [Subsection 200-10(1)]

8.23 Therefore, the first test is similar to the low profit offset test. Indeed, a miner that satisfies this requirement is unlikely to have an MRRT liability in the year because its MRRT profits should be sufficiently low as to fall below the $50 million threshold for the low profit offset.

8.24 Under the second test, a miner is eligible for the simplified MRRT method if the sum of the miner's group profits is less than $250 million. However, if the miner's group profits are less than $250 million, but it, or one of its close associates, has a mining project interest with royalty liabilities that are less than 25 per cent of the profit for that interest for the year, the miner is ineligible for the simplified MRRT. [Subsections 200-10(2) and (3)]

8.25 The choice must be made in the approved form and the miner must give it to the Commissioner of Taxation (Commissioner) by the date its MRRT return would have been due, had it been required to lodge one. [Subsection 200-10(4), and Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division 119 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

Group profit measured in accordance with accounting principles

8.26 An entity's profit for simplified MRRT purposes is its profit from activities relating to the mining of taxable resources, determined in accordance with general accounting principles, and adjusted for interest, taxation, royalties and exceptional items. [Section 200-15]

8.27 The adjustments for interest, taxation and exceptional items are made in order to produce an amount that is a reasonable estimate of the entity's earnings before interest and taxation. The further adjustment for royalties is to align the earnings before interest and taxation amount with the treatment of royalties under the MRRT.

8.28 The profit for simplified MRRT method purposes is intended as a reasonable proxy for an entity's mining profits that is simpler to work out.

Consequences of using the simplified MRRT method

8.29 If a miner chooses to use the simplified MRRT method for a year, then:

·
the miner's MRRT liability for each mining project interest the miner has for the year is zero [paragraph 200-5(a)] ;
·
all allowance components the miner has that relate to the mining project interest, or a pre-mining project interest, are extinguished [paragraph 200-5(b)] ;
·
the starting base assets that the miner has that relate to the mining project interest cease to accrue starting base losses [paragraph 200-5(c)] ; and
·
the entity does not have to lodge an MRRT return for the year [Schedule 1 to the MRRT (CA&TP) Bill, item 8, paragraph 117-5(4)(a) of Schedule 1 to the TAA 1953] .

8.30 The allowance components are extinguished because a miner who elects into the simplified MRRT method will have limited records from which the historical tax attributes of a mining project interest can be ascertained.

8.31 Miners that no longer satisfy either of the requirements for electing into the simplified MRRT method or that opt not to elect into it in a subsequent year would need to comply with their full MRRT obligations in that subsequent year.

Chapter 9 Combining mining project interests

Outline of chapter

9.1 This chapter explains when mining project interests can combine and the effects of such combination. What constitutes a mining project interest is fundamental to the operation of the Minerals Resource Rent Tax (MRRT).

9.2 Combined interests supersede the constituent interests as the basis upon which MRRT liability is determined. Mining revenue, mining expenditure and allowance components are tracked in relation to combined interests.

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

Summary of new law

Combining mining project interests

9.4 If a miner has two or more mining project interests that are integrated, the mining project interests may be able to combine to form a combined mining project interest.

9.5 Two mining project interests may be integrated if the mining operations of the mining project interests are integrated.

9.6 Pre-mining project interest cannot be integrated or combine.

9.7 Integrated mining project interests can only combine if the combination will not result in the effective transferability of otherwise quarantined allowance components.

9.8 If mining project interests can combine, they must combine.

9.9 Integrated mining project interests will combine if:

·
all royalty credits (if any) are transferable between the integrated mining project interests;
·
all pre-mining losses (if any) are transferable between the integrated mining project interests;
·
all mining losses (if any) are transferable between the integrated mining project interests; and
·
the integrated mining project interests have starting base losses or starting base assets and certain ownership requirements are met.

9.10 If the integrated mining project interests cannot combine, the miner can choose to cancel the allowance components that are preventing combination to allow the interests to combine.

9.11 A miner that has a combined mining project interest will not have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the constituent interests. Instead, the miner will only need to track these amounts for the combined mining project interest.

9.12 For the avoidance of doubt, mining project interests can combine from 2 May 2010.

Detailed explanation of new law

9.13 A miner that has a combined mining project interest will not have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the constituent interests. Instead, the miner will only need to track these amounts for the combined mining project interest.

9.14 The combined interest will provide the basis upon which MRRT liability is determined. The combined interest will inherit the tax histories of all the constituent interests. The combined mining project interest will aggregate each type of allowance component that it inherits from the constituent interests.

Integration of mining project interests

9.15 Only integrated mining project interests can combine. [Paragraph 115-10(1)(a)]

9.16 Whether mining project interests are integrated is a question of fact. If interests that were combined cease to be integrated there will be a mining project split [paragraph 125-10(3)(d)] . (Chapter 10 deals with mining project splits, which occur when interests cease to be integrated.)

9.17 Two mining project interests will be integrated on a day if:

·
the same miner has the two interests [paragraphs 255-5(a) and 255-10(a)] ;
·
the interests relate to the same type of taxable resource (that is, both relate to iron ore or both relate to coal) [paragraphs 255-5(b) and 255-10(b)] ; and
·
the interests either:

-
relate to the same mine or proposed mine (upstream integration) [paragraph 255-5(c)] ; or
-
are integrated in their downstream mining operations (or the mining operations as a whole are integrated) and the miner has made the choice to be downstream integrated [paragraphs 255-10(c) and 255-10(d)] .

9.18 Each of these conditions must be satisfied for two mining project interests to be integrated. Integration is automatic when all these conditions are satisfied.

The same miner must have the mining project interests

9.19 The same miner must have each of the mining project interests for them to be integrated [paragraphs 255-5(a) and 255-10(a)] . The miner will have two or more mining project interests if it is the entity that has each of the interests [section 15-5] .

9.20 If a group has made the choice to consolidate for the MRRT, then all the mining project interests that are within the group are taken to be the interests of the head entity of the group. This is discussed in Chapter 16. The effect of this is that it allows mining project interests that are held by different subsidiaries in the one MRRT consolidated group to combine (provided they meet all the other combination requirements). [Division 215]

The mining project interests must relate to the same type of taxable resource

9.21 The mining project interests must all relate to the same type of taxable resource. A mining project interest will either relate to iron ore or it will relate in some way to coal. [Paragraphs 255-5(b) and 255-10(b)]

9.22 A mining project interest will relate to iron ore if what is extracted from the production right area is:

·
iron ore [paragraph 20-5(1)(a)] ; or
·
anything produced from consuming or destroying iron ore in situ [paragraph 20-5(1)(c)] .

9.23 A mining project interest will relate to coal, if what is extracted from the production right area is:

·
coal [paragraph 20-5(1)(b)] ;
·
coal seam gas extracted as a necessary incident of coal mining [paragraph 20-5(1)(d)] ; or
·
anything produced from consuming or destroying coal in situ [paragraph 20-5(1)(c)] .

Example 9.91 : Mining project interests relating to iron ore Rocky Resources has two mining project interests. One mining project interest is in respect of production right A, the other mining project interest is in respect of production right B. Production rights A and B both give Rocky Resources the authority to extract iron ore.The two mining project interests that Rocky Resources has relate to iron ore. Example 9.92 : Mining project interests relating to coal Col Co has two mining project interests. One mining project interest is in respect of a production right that entitles Col Co to extract coal. The other mining project interest is in respect of a production right that entitles Col Co to burn the coal in situ and extract the gas produced.The first mining project interest relates to coal. The second mining project interest relates to the gas produced by consuming the coal in situ.Both mining project interests that Col Co has relate to coal, meaning that this integration condition is satisfied. Example 9.93 : Mining project interests that do not relate to the same taxable resource Diverse Co has 10 mining project interests. Nine of the mining project interests relate to iron ore. One mining project interest relates to coal.The nine iron ore mining project interests may be able to be integrated but the one coal mining project interest is not capable of integrating with the other nine mining project interests.

Whether mining project interests relate to the same mine or proposed mine (upstream integration)

9.24 The mining project interests must relate to the same mine or proposed mine to be upstream integrated. [Paragraph 255-5(c)]

What constitutes a mine

9.25 The concept of a mine takes its ordinary meaning.

Usually, a mine is understood to be a combination of resource deposits, workings, and equipment and machinery needed to extract or recover the resource from its naturally occurring state. A mine can include underground excavations and surface workings.

9.26 The question of whether particular operations constitute one or more mines is a question of fact and degree to be determined by reference to all of the circumstances of a particular case.

9.27 The following are factors that may be relevant in determining if one or more mines exists:

·
the extent and location of relevant ore bodies (noting that the existence of a single ore body does not necessarily equate to the existence of a single mine);
·
the geological and other connections between relevant ore bodies;
·
the extent and location of the workings;
·
the extent and location of extraction facilities and the manner in which they are operated;
·
systems for managing the extractive operations; and
·
the existence and content of relevant mine plans, prepared in accordance with the Joint Ore Reserves Committee's Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (commonly known as the 'JORC Code'), governing production in relation to one or more ore bodies.

Example 9.94 : Two separate mines Coal Co has two production rights, both of which entitle it to extract coal. Coal Co has a mining project interest in relation to each of the production rights.Coal Co's head office manages the human resources for employees involved in the upstream mining operations of the two mining project interests without any distinction between the two production rights.Mine Co manages the logistics of the upstream mining operations (that is, extraction and transportation of the taxable resource from the project areas to the valuation point). These activities are managed separately in relation to each production right. There is no shared upstream equipment or infrastructure, nor are the extraction activities undertaken in a coordinated manner.The two mines are distinct and cannot be considered to be the same mine. While Coal Co has both of the relevant interests, and both interests relate to coal, it does not operate the two sites as a single mine. Integrated human resources management alone is not enough to result in there being one mine.As each mining project interest has its own distinct mine, the mining project interests are not upstream integrated. Example 9.95 : One mine MineCo Mining Pty Ltd has two mining project interests in respect of two production rights (A and B). It extracts coal from five open cut pits. Two of the pits are located on production right A and the other three pits are located on production right B.The five pits are managed by a single management group and are covered by a single life-of-mine plan. Mining equipment is shared across the five pits and is continually transferred between pits depending on mining needs at any given time. All production employees are employed under a single enterprise bargaining agreement. All administration and equipment maintenance activities are performed from a central location and are shared across all five pits.All coal extracted from the pits is hauled by trucks to a single run-of-mine stockpile before being beneficiated (screened, dewatered, separated and washed) through a coal processing plant. The coal is then processed through the plant to produce the saleable product and stored on a single product stockpile. The saleable product is then loaded onto a train and transported to port to be loaded for export.Taking all these factors into account, MineCo Mining is operating one mine because infrastructure and equipment is shared, there is a single life-of-mine plan, the operations are managed by a single management team and all the coal is placed on a single stockpile. Therefore, the mining project interests are upstream integrated.

What is a proposed mine

9.28 A proposed mine will be indicated by the existence of an ore body and work preparatory to extraction. Such work might include:

·
clearing the site;
·
installing water, light and power;
·
erecting housing and welfare facilities; and
·
locating equipment or machinery at the site.

Example 9.96 : One mine, multiple mining project interests Rock Doctor Co has mining project interests in relation to each of its seven production rights.The production rights are all governed by a single life-of-mine plan under which production is scheduled to commence on all production rights within a specified period.Two production rights have not commenced production. However, all production rights are planned to be in production concurrently for a significant number of years.Rock Doctor Co is producing from 11 open-cut pits across five of the production rights. Rock Doctor Co has employees that work across all the pits. Similarly, all the trucks and other infrastructure that are used across the production rights are operated in an integrated manner. There is one manager responsible for all 11 pits. All the coal extracted from these pits is taken to the one run-of-mine stockpile. The same staff will also service two non-producing production rights when they commence production.All of the ore bodies are structurally connected and geologically similar.Taking all these factors together, Rock Doctor Co is operating one mine. Despite the fact that there are some timing differences, the ore bodies are all connected and similar; the production rights are all serviced, or will be serviced, by a single staff unit; the ore bodies are being developed concurrently (albeit in a staggered manner); and the operations are economically integrated.Therefore the seven mining project interests are upstream integrated with each other.

Whether downstream mining operations are integrated (downstream integrated)

9.29 Two mining project interests are downstream integrated if either the downstream mining operations for each of the interests, or the mining operations as a whole for each of the interests, are integrated and the miner has made a choice to be downstream integrated. [Paragraphs 255-10(c) and (d)]

Downstream mining operations

9.30 Downstream mining operations are those mining operations that are not upstream mining operations. Downstream mining operations are those activities or operations that are necessary to get the taxable resources from the valuation point and into the form and location in which:

·
a mining revenue event happens to them [subparagraph 35-20(1)(b)(i)] ; or
·
they are first applied to producing something in relation to which a mining revenue event happens [subparagraph 35-20(1)(b)(ii)] .

[Sections 35-15, 35-20 and 255-15]

9.31 An activity or operation cannot, in the same instance, be both an upstream and a downstream mining operation. However, the costs of an activity may relate to both upstream and downstream operations and may need to be apportioned between them on a reasonable basis.

Diagram 9.6 :  Mining operations, upstream mining operations and downstream mining operations

9.32 Operations or activities are not downstream mining operations if they are undertaken after the taxable resources:

·
reach the form and location in which they are in at the mining revenue event; or
·
are first applied to produce something in relation to which a mining revenue event occurs.

[Subsections 35-20(1) and 255-15(1)]

Example 9.97 : Downstream mining operations Deanna Coal Co has a mine covering a single production right from which it extracts coal that is exported to a foreign steel maker. Deanna has a single mining project interest. The coal is sold as it is loaded onto the ship at the port. The coal extracted is taken to a run-of-mine stockpile.The coal is removed from the run-of-mine stockpile by a reclaimer and taken by conveyer belt to a common crusher for easier processing. The coal is then sent to a processing plant where it is screened, de-watered and separated in order to produce the final saleable product. That product is then taken from the processing plant, loaded onto a train and transported to port. At port, the coal is offloaded to stockpiles, from which it is loaded on to ships in the same form that it leaves the processing plant. That is, it is not blended at port with any other coal. The coal is sold as it goes over the rail of the ships.Deanna's downstream mining operations begin when the coal is removed from the run-of-mine stockpile (that is, the valuation point) and end when it goes over the rail at port. This is because the coal, at that point, is in the form and location it is in when it is sold (the mining revenue event). Example 9.98 : Downstream mining operations - several mining project interests Fox Fines Pty Ltd has two production rights which entitle it to extract iron ore. Fox has a mining project interest in relation to each of these production rights. The iron ore extracted from each production right has different iron content. The miner contracts with a foreign steel mill to provide iron ore of specific iron content and the contract specifies that the iron ore is sold as it is loaded on to a ship.The iron ore extracted from each production right is taken to run-of-mine stockpiles, a different stockpile for each production right. Iron ore is removed from a run-of-mine stockpile and taken to a crusher and loaded onto trains operated by a third party. The trains take the iron ore to a port where it is deposited in separate piles. A quantity is taken from each pile, blended into one product which is loaded onto ships, such that the shipment satisfies the contractual iron content.The downstream operations for each of Fox's mining project interest begin when the iron ore is removed from the respective run-of-mine stockpiles and end as it goes over the ship's rail.

Integrated

9.33 'Integrated' takes its ordinary meaning. In essence, things are integrated when separate elements come together in a coordinated or interrelated manner.

9.34 Whether the downstream mining operations or the mining operations of two mining project interests are integrated is a question of fact, but must be determined having regard to the manner in which those operations are carried on, including the way in which infrastructure and equipment is used and operated. [Paragraph 255-10(c)]

9.35 If the mining operations are managed as an integrated operation, demonstrated through the same downstream infrastructure being used or operated in an integrated manner in respect of production from the mining project interests, then the downstream integration tests will be met.

9.36 The integration test would not be satisfied just because two or more mining project interests utilise the same downstream infrastructure. They would need to be integrated in the way they use that infrastructure. For example, integration may be demonstrated through the scheduling and use of the infrastructure, to combine resources from different mining project interests into a blended product.

Example 9.99 : Downstream integration - blended product Riley Co has five mines, each of which is a single mining project interest. Each mine has its own run-of-mine stockpile. In addition, each mine extracts iron ore with different iron content.Riley Co also owns and operates a rail network system which is connected to each of the run-of-mine stockpiles. The iron ore is taken from the various run-of-mine stockpiles and delivered to Riley Co's trains, which travel on the rail network to the port facility, which it also owns and operates. At port, iron ore from each of the mines is delivered to separate holding piles, according to the iron content. Riley Co then blends ore from the various piles in order to load a shipment with the required iron content.Riley Co contracts with overseas customers to deliver iron ore, with specified iron content, to ships at its port. Riley Co's contracts specify that the iron ore is sold to its customers on a free-on-board basis.Riley Co schedules the extraction activities and transportation of the extracted ore from each of the mines in a way that ensures it has a constant supply of iron ore of varying iron content at the port stockpiles.Taking into account the manner in which the operations are carried out and the extensive integration of infrastructure used and operated in carrying out these operations, each of the mining project interests that Riley Co has are downstream integrated. Example 9.100 : Downstream integration - undertaken by a third party on behalf of the miner Lachlan Co has three coal mines, each of which is a separate mining project interest. Coal from each mine is of slightly varying qualities and must be blended to be of a quality that satisfies customer requirements.Lachlan Co has a service agreement with Train Corp (an entity unrelated to Lachlan Co) whereby Lachlan Co delivers coal from each of its run-of-mine stockpiles to Train Corp trains for transport to port. Lachlan Co pays Train Corp a fee for its transport service. Lachlan Co's coal is delivered to a port which is owned and operated by Port Coal Services Pty Ltd (PCS). PCS is unrelated to Lachlan Co. Lachlan Co's coal is stored in stockpiles at the port facility until it is loaded onto ships to fulfil Lachlan Co's contracts with overseas customers. Lachlan Co's sales contracts specify that the coal is sold on a 'free on board' basis. Before Lachlan Co's coal is loaded onto ships, PCS blends the varying quality of coal to a blend that satisfies the contract description. PCS provides this service to Lachlan Co for a fee.Although none of the downstream mining operations are owned or operated by Lachlan Co, the transporting and blending at port are necessary to get the coal into the form and location in which it is sold and are the downstream mining operations of Lachlan Co in relation to its mining project interest. Due to the manner in which the downstream operations are carried on and the integrated way infrastructure is used in carrying out those downstream operations, the downstream mining operations of each of the mining project interests that Lachlan Co has are integrated for the purpose of the MRRT. Example 9.101 : Downstream integration - mining operation as a whole is integrated Mining Co has 10 coal mines, each of which is a separate mining project interest. Each mine is operated under a separate life-of-mine plan and has a separate run-of-mine stockpile. The coal is removed from the run-of-mine stockpiles and taken to separate coal preparation plants.Mining Co has service agreements in place with multiple rail and port operators. Mining Co schedules the transportation of coal on the rail corridors and delivery to the port in a way that ensures that the timing and rate of extraction from each of the mining project interests is managed having regard to the quality, characteristics and volume across the overall system. Contracted capacity for the rail corridors and the port is managed in order to ensure reliable supply to customers in accordance with contract descriptions and market demand.Mining Co has a dedicated production, rail and port infrastructure team that is responsible for managing the outbound supply chain. This team is accountable for the integrated planning of the rail corridors and the port. Sales and operations planning and supply chain performance management is managed for each of Mining Co's mining project interests centrally. The scheduling of activities downstream of the run-of-mine stockpiles is undertaken in an integrated manner.Each of the mining project interest that Mining Co has is integrated because of the way in which it conducts its downstream operations, taking into account the overall mining operations, are highly coordinated. Example 9.102 : Downstream integration - single processing plant Francis Coking Coal has four production rights (A, B, C, and D). There is a mining project interest in respect of each production right. On production right A, there are three underground coal mines (A1, A2 and A3). On production rights B, C and D there are three open cut pits.Premium coking coal is extracted from the three underground mines located in production right A and medium quality coking coal, pulverised coal injection coal and thermal coal is extracted from the three open cut pits (on B, C and D). Each of the underground and open cut pits has its own run-of-mine stockpile. The coal from each run-of-mine stockpile is then conveyed on a series of overland conveyors to a single coal processing plant.All the coal from both the underground and open cut operations is processed through a single coal processing plant in which the coal is beneficiated (screened, dewatered, separated and washed) to produce saleable product. As part of the beneficiation process, lower quality coal from the open cut pits is blended in the processing plant with the premium coking coal from the underground operations to produce a hybrid saleable product. The beneficiated coal is then stored on a common product stockpile area, separated according to the type and quality of coal. The saleable product is then loaded onto trains and transported to port to be loaded for export.Francis Coking Coal's mining project interests are downstream integrated, due to the coordinated manner in which the coal is processed and transported.

Downstream integration choice

9.37 Even if the downstream mining operations of the mining project interests are factually integrated and the other conditions for integration are satisfied, the interests will not be downstream integrated unless the miner has made a choice to treat the interests as integrated. [Paragraph 255-10(d) and section 255-20]

Example 9.103 : Integrated operations, but no choice has been made On 1 July 2012, Geologue Jacqueline Pty Ltd has two mining project interests, each relating to coal. The two interests do not relate to the same mine but their downstream mining operations are factually integrated.Geologue Jacqueline Pty Ltd has not made the choice to downstream integrate. Therefore, despite the downstream mining operations being factually integrated, the two interests are not recognised as integrated for the MRRT.

9.38 The downstream integration choice does not lapse. Once made, the choice operates to integrate all mining project interests that the miner has, including subsequent mining project interests that the miner acquires (so long as they satisfy the other conditions for downstream integration). [Section 255-20]

9.39 The choice will have effect from the day the choice is made, or the day all the other conditions for downstream integration are met, whichever is later. Put simply, two mining project interests will be integrated when they meet all the downstream integration conditions, including the making of a valid choice. [Section 255-10]

9.40 The choice to downstream integrate will cease to have effect in relation to a particular mining project interest after the miner that made the choice stops having the interest. [Subsection 255-20(3)]

Example 9.104 : Integrated on day of choice Following on from the example above, Geologue Jacqueline Pty Ltd chooses downstream integration on 27 February 2013. Geologue Jacqueline's two mining project interests will be integrated with each other from 27 February 2013. Example 9.105 : Choice made in advance of integrated operations On 1 July 2012, Bowen Integrated Materials Co (BIM Co) holds several mineral development licences in various locations throughout the Bowen Basin. BIM Co is in the process of obtaining production rights in respect of the mineral development licences. BIM Co plans to manage the downstream mining operations in relation to each of the production rights as an integrated operation. BIM Co has determined it would want the mining project interests to be recognised as integrated for the purpose of the MRRT (if they are factually integrated in their downstream mining operations).On 23 April 2013, the production rights are granted in relation to each of the mineral development licences. BIM Co, now a miner with mining project interests, also makes the downstream integration choice on that day.BIM Co satisfies all of the other conditions for downstream integration on 1 September 2013. Each of the mining project interests that BIM Co has are integrated with the other interests from 1 September 2013.

Retrospective downstream integration

9.41 A transitional rule allows the downstream integration choice to have retrospective effect in limited circumstances. These limited circumstances are where the conditions for integration, excluding the making of the choice, are satisfied in respect of mining project interests between 2 May 2010 and 30 June 2012. In such cases, if the miner makes the choice on or before the lodgement date for the MRRT return for the first MRRT year, the interests will be taken to have been integrated from the time all the other conditions were satisfied. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), subitem 7(2)]

9.42 This transitional rule takes account of the fact that a miner cannot make a downstream integration choice before 1 July 2012. Regardless, two mining project interests should still be able to be treated as integrated at an earlier time. This enables mining project interests to be integrated from 2 May 2010, despite the miner not having made a choice at that time.

Example 9.106 : Downstream mining operations - transitional choice On 2 May 2010, Miner Co has two production rights which entitle it to extract iron ore. The downstream mining operations in relation to each of the production rights are integrated.Upon commencement of the MRRT, Miner Co will be taken to have two mining project interests in relation to the two production rights at 2 May 2010. Each interest relates to iron ore and the downstream mining operations of the interests are integrated.Miner Co makes the downstream integration choice at the time it lodges its MRRT return in relation to the first MRRT year.Despite having not made the downstream integration choice on 2 May 2010, once it makes the choice Miner Co's interests will be treated as integrated with each other from 2 May 2010.

Combining mining project interests

9.43 For the most part, mining project interests that can combine, must combine. Combination is automatic and not optional. [Section 115-10)]

9.44 Unlike integration, which tests the relationship between two mining project interests, combination applies to a collection of mining project interests. Mining project interests must combine to the fullest extent possible. For example, a miner cannot choose to only combine two mining project interests if there are actually four interests that can combine.

9.45 Mining project interests ('constituent interests') that combine are taken to be a single mining project interest ('combined interest') for the purposes of the MRRT law. [Subsection 115-10(1)]

9.46 The constituent interests are not recognised as a combined interest for the purpose of testing whether they must combine. This is to allow the integration provisions to look-through the combined interest and test whether the constituent interests are integrated. [Subsection 115-10(1)]

9.47 Mining project interests are taken to be a combined interest from the time the constituent interests can combine. This time is called the 'combining time'. [Subsection 115-10(1)]

9.48 Combination is not an annual test. It is determined at and from the combining time. However the miner is liable to pay MRRT for the combined interest as if the constituent interests had been combined from the beginning of the MRRT year. [Subsection 115-10(1) and section 115-40]

9.49 A number of conditions must be satisfied for mining project interests to combine. Integration is the first condition for combination. Only interests that are integrated with each of the other interests can combine. [Paragraph 115-10(1)(a)]

9.50 Integrated mining project interests can only combine if:

·
any royalty credits that any of the interests has would be able to be applied in working out a transferred royalty allowance for each of the other interests [paragraph 115-10(1)(b) and section 115-20] ;
·
any pre-mining loss that any of the interests has (or would have if the MRRT year were to end at the combining time) would be able to be applied in working out a transferred pre-mining loss allowance for each of the other interests [paragraph 115-10(1)(c) and section 115-25] ;
·
any mining loss that any of the interests has (or would have if the MRRT year were to end at the combining time) would be able to be applied in working out a transferred mining loss allowance for each of the other interests [paragraph 115-10(1)(d) and section 115-30] ; and
·
any of the interests that has a starting base loss or a starting base asset:

-
existed on 2 May 2010 (or originated from a pre-mining project interest that existed on 2 May 2010) [paragraphs 115-10(1)(e) and 115-35(a)] ; and
-
has been held, at all times since 2 May 2010, by the same miner as held all the other constituent interests (or the pre-mining project interests from which they originated) [paragraphs 115-10(1)(e) and 115-35(b)] .

9.51 A constituent interest that has had a suspension day is unable to combine. See Chapter 11 for a discussion on suspension days. [Subsection 115-10(3)]

9.52 These conditions must be satisfied to ensure that combination does not enable the transferability of either quarantined tax history or future starting base losses.

9.53 If integrated mining project interests are unable to combine because they have allowance components that do not meet the above criteria, the miner can nonetheless make a choice to combine. However, this would have the effect of cancelling those allowance components that otherwise prevent it from combining. [Section 115-15]

9.54 If two mining project interests are integrated with each other and neither interest has a royalty credit, pre-mining loss, mining loss, starting base loss or starting base asset, the interests can and must combine.

Royalty credits must be transferable to combine

9.55 If any of the integrated mining project interests has a royalty credit, it can only combine if all the royalty credits are fully transferable to each of the other interests. Chapter 6 explains what a royalty credit is and when one arises. [Section 115-20]

9.56 Royalty credits are transferable if they would be available to be applied in working out a transferred royalty allowance for each of the other interests. That is, they are transferable if the mining project interests have been integrated from the time the royalty credit arose until the time the mining project interests are seeking to combine (and the royalty credit did not arise when the interest was using the alternative valuation method). [Subsection 65-20(1)]

9.57 In determining whether the royalty credits would be transferable it does not matter whether the royalty credit would have been used by another mining project interest if it was actually available to be applied. [Paragraph 115-20(b)]

Example 9.107 : Royalty credits not fully transferable Miner Co has two mining project interests, one of which existed at 1 July 2012 and another that was acquired in 2013 from another miner. On 1 July 2014, the interests become integrated in their upstream mining operations. At the time of integration, each interest has royalty credits for the previous MRRT year. The two interests are unable to combine as they each have royalty credits that arose prior to the interests being integrated. (However, the mining project interests may be able to transfer future royalty credits that arise while the two mining project interests are integrated with each other.)

9.58 If any of the royalty credits arose while the mining project interests were not integrated, or they arose when using the alternative valuation method, the mining project interests will be unable to combine unless the miner makes a choice to cancel the royalty credits and enable the combination. This is discussed below. [Section 115-15]

Pre-mining losses must be transferable to combine

9.59 If any of the integrated mining project interests has a pre-mining loss (or would have a pre-mining loss if the MRRT year ended at the combining time) they can only combine if all the pre-mining losses are fully transferable to each of the other integrated mining project interests. Chapter 6 explains what a pre-mining loss is and when one arises. [Section 115-25]

9.60 A mining project interest would have a pre-mining loss if the MRRT year were to end at the combining time, if the pre-mining expenditure for the interest for the period from the start of the combination year until the combining time exceeds the pre-mining revenue for the interest for the same period.

9.61 A mining project interest will only have pre-mining revenue and pre-mining expenditure for the combination year if the mining project interest originated from a pre-mining project interest during the combining year but before the combining time.

9.62 Pre-mining losses are transferable if they are available to be applied in working out a transferred pre-mining loss allowance for the other mining project interests. That is, the mining project interests must relate to the same type of taxable resource (that is, iron ore or coal), the mining project interests must be held by the same miner or by close associates and the common ownership test must be satisfied. [Section 95-20]

9.63 If one of the mining project interests is a combined interest, for the pre-mining loss to be transferable to the combined interest it must be transferable to each of the constituent interests. [Paragraph 115-25(b) and section 115-55]

9.64 In determining if the pre-mining loss would be transferable, it does not matter whether the pre-mining loss would have actually been used by another mining project interest. [Subparagraph 115-25(a)(ii)]

9.65 If the pre-mining losses are not available for transfer, the two mining project interests will be unable to combine, unless the miner makes a choice to cancel the pre-mining losses to enable the combination. This is discussed below. [Section 115-15]

Mining losses must be transferable to combine

9.66 If any of the integrated mining project interests has a mining loss (or would have a mining loss if the MRRT year ended at the combining time) it can only combine if all the mining losses are fully transferable to each of the other integrated mining project interests. Chapter 6 explains what a mining loss is and when one arises. [Section 115-30]

9.67 A mining project interest would have a mining loss if, the MRRT year were to end at the combining time, the mining expenditure for the interest for the period from the start of the combination year until the combining time would exceed the mining revenue for the interest for the same period.

9.68 Mining losses are transferable if they are available to be applied in working out a transferred mining loss allowance for the other mining project interests. That is, they are transferable if the mining project interests relate to the same type of taxable resource (that is, iron ore or coal), the mining project interests satisfy the common ownership test and the mining loss did not arise when the interest was using the alternative valuation method. [Subsection 100-20(1)]

9.69 If one of the mining project interests is a combined interest, for the mining loss to be transferable to the combined interest it must be transferable to each of the constituent interests. [Paragraph 115-30(b) and section 115-60]

9.70 In determining if the mining loss would be transferable, it does not matter whether the mining loss would have actually been used by another mining project interest. [Subparagraph 115-30(a)(ii)]

9.71 If the common ownership test is not satisfied or any of the mining losses arose when using the alternative valuation method, the two mining project interests will be unable to combine, unless the miner makes a choice to cancel the mining losses to enable the combination. This is discussed below. [Section 115-15]

Example 9.108 : Mining losses not fully transferrable Miner Co has two mining project interests. It has always had one of the interests but it only acquired the other interest recently. The second interest it acquired has a mining loss for a previous MRRT year.The mining loss of the second interest cannot be applied in working out a transferred mining loss allowance of the first interest, as the common ownership test is not satisfied.The two interests are unable to combine as the second interest has a mining loss that is unable to be transferred to the first interest.

Starting base losses and starting base assets - the same miner must have had the interests from 2 May 2010

9.72 If any of the integrated mining project interests have a starting base loss or a starting base asset, the interests can only combine if they existed, or originated from a pre-mining project interest that existed, on 2 May 2010 and at all times since that time the miner that has each of the interests (or the pre-mining project interest from which it originated) is the same miner. [Section 115-35]

9.73 If mining project interests that were not held by the same miner at that time but which had starting base losses or assets were able to combine, this would effectively allow starting base losses to be transferred from the old interest to the new interest. Chapter 7 explains when a miner has a starting base loss and a starting base asset. Chapter 6 explains what a pre-mining project interest is and when a mining project interest originates from a pre-mining project interest.

9.74 A mining project interest that has a starting base loss or a starting base asset may be able to combine with another interest, if both interests (or the pre-mining project interests from which they originated) existed on 2 May 2010. [Paragraph 115-35(a)]

9.75 If the mining project interests (or the pre-mining project interests from which they originate) existed on 2 May 2010, the interests can combine if they have always been held by the same miner as each other. [Paragraph 115-35(b)]

9.76 This enables all mining project interests of a miner that relate to exploration or production rights that existed on 2 May 2010 to be capable of combining with other interests that existed on this date (subject to the other conditions).

Example 9.109 : Pre-mining project interest existing on 2 May 2010 Expo Co holds an exploration right at 2 May 2010, in respect of which there is a pre-mining project interest. Subsequently, Expo Co is granted a production right that covers an area that the exploration right covered. The production right originates from the exploration right, therefore the mining project interest that Expo Co now has originates from the pre-mining project interest.The pre-mining project interest from which the mining project interest originated existed on 2 May 2010 and is therefore capable of combining with other interests that existed on 2 May 2010 (subject to the other conditions). Example 9.110 : Pre-mining project interest not existing on 2 May 2010 At 2 May 2010, Digger Co is in the process of finalising its application to obtain an exploration right. The exploration right was granted on 1 July 2010, triggering the existence of a pre-mining project interest. Subsequently, Digger Co is granted a production right that covers an area that the exploration right covered. The production right originates from the exploration right, therefore the mining project interest originates from the pre-mining project interest.The pre-mining project interest from which the mining project interest was derived did not exist on 2 May 2010, it only started to exist on 1 July 2010. Therefore, it is unable to combine with other interests that existed on 2 May 2010.

9.77 Requiring the same miner to have each of the mining project interests is similar to the ownership requirement in the common ownership test for transferred mining loss allowances. One important distinction is that, for the purpose of determining whether mining project interests can combine, the same miner must have the mining project interests; it is not sufficient that a closely associated miner has that interest. If a consolidated group has made the choice to consolidate for MRRT purposes, the head company will be the miner that has all mining project interests that exist within the group.

9.78 A change of ownership does not necessarily stop interests from being combined. Rather, the test focuses on the relationship between the two mining project interests and considers whether they have always been held by the same miner, even if the identity of that miner has changed from time to time. As long as there has been no interruption to the relationship, the mining project interests will have always been held by the same miner.

Example 9.111 : Same miner has mining project interests Miner Co has two mining project interests at 2 May 2010. Each of those mining project interests has starting base assets that will be depreciated in relation to the mining project interests. On 1 October 2012, Miner Co sells the two interests to CHPP Ltd.From 2 May 2010 to 30 September 2012, Miner Co had the interests. From 1 October 2012 onwards, CHPP Ltd had the two interests.Despite different miners having the interests, at all times both interests have been held by the same miner. Example 9.112 : Same miner has not had mining project interests Head Co is the head entity of a consolidated group for income tax purposes. A Co and B Co are subsidiaries of Head Co.Head Co has not made the choice to consolidate for the purposes of the MRRT. Therefore, A Co is a miner as it has mining project interest 1 (MPI 1) and mining project interest 2 (MPI 2). B Co is also a miner as it has mining project interest 3 (MPI 3).A Co and B Co have had their respective MPI's since 2 May 2010.MPI 3 cannot combine with MPI 1 or MPI 2 as the miner that has MPI 3 (B Co) and the miner that has MPI 1 and MPI 2 (A Co) are not the same miner.MPI 1 and MPI 2 can combine as A Co has both the mining project interests.

Same miner has not had mining project interests

Example 9.113 : Combination in the case of acquisition of a group Following on from the example above, Mega Co is the head entity of a consolidated group for the purpose of income tax and the MRRT. Mega Co has three subsidiaries, D Co, E Co and F Co, each of which has a mining project interest, respectively, MPI 4, MPI 5 and MPI 6. Because Mega Co has made the choice to consolidate for the purpose of the MRRT, Mega Co is the miner and has MPI 4, MPI 5 and MPI 6. D Co, E Co and F Co are not entities recognised for MRRT purposes.On 1 July 2015, Mega Co acquires Head Co. Head Co is now part of Mega Co's consolidated group, therefore Mega Co is now the miner in relation to MPI 1, MPI 2 and MPI 3.

Combination in the case of acquisition of a group

Assume all of the mining project interests have starting base assets with base values.Mega Co can, provided all the other combination conditions are met, combine all the mining project interests that it now has, provided the same miner has always had each of the interests.Therefore, Mega Co can combine MPI 1 and MPI 2. It can also combine MPI 4, MPI 5 and MPI 6. MPI 3 is unable to combine as there is no other mining project interest that shares its ownership history.
Which miner has the MPI ? Same miner as each other ?
2 May 2010 - 30 June 2015 1 July 2015 onwards
MPI 1 A Co Mega Co The same miner has always had MPI 1 and MPI 2
MPI 2 A Co Mega Co The same miner has always had MPI 1 and MPI 2
MPI 3 B Co Mega Co No other MPI has the same ownership history as MPI 3
MPI 4 Mega Co Mega Co The same miner has always had MPI 4, MPI 5 and MPI 6
MPI 5 Mega Co Mega Co The same miner has always had MPI 4, MPI 5 and MPI 6
MPI 6 Mega Co Mega Co The same miner has always had MPI 4, MPI 5 and MPI 6
Upon combination, Mega Co will be left with three mining project interests. Two combined interests, one comprising MPI 1 and MPI 2 and the other comprising MPI 4, MPI 5 and MPI 6, and the mining project interest that cannot combine with any of the others, MPI 3.

three mining project interests

Choice to combine - cancellation of allowance components

9.79 If a miner has interests that are unable to combine because doing so would enable the transferability of either quarantined tax history or future starting base losses, the miner can make a choice to combine. [Subsection 115-15(1)]

9.80 The effect of making the choice is that any allowance components that are otherwise preventing the interests from combining are cancelled. This includes reducing the base value of starting base assets to zero. [Subsection 115-15(2)]

9.81 Not all the allowance components are necessarily cancelled, only those which are preventing combination from being allowed.

9.82 This choice is intended to give a miner the ability to combine without first having to use up the allowance components that are preventing it from combining.

Example 9.114 : A miner can choose to combine and cancel relevant allowance components Sprinklingheart Resources is a miner with two integrated mining project interests (MPI 1 and MPI 2).MPI 2 has no allowance components. MPI 1 has unapplied mining losses for the 2013, 2014 and 2015 MRRT years. The 2014 and 2015 losses are transferable to MPI 2, however, the 2013 losses are not.As some of the mining losses are not transferable, MPI 1 and MPI 2 are unable to combine.Sprinklingheart Resources makes a choice to combine. Having made this choice, the carried forward mining losses for the 2013 MRRT year are cancelled. MPI 1 retains the mining losses for the 2014 and 2015 MRRT years.MPI 1 and MPI 2 combine. The combined interest will therefore inherit MPI 1's mining losses for the 2014 and 2015 MRRT years.

Effects of combining mining project interests

Inherited history

9.83 The MRRT liability for the whole MRRT year will rest with the miner who has the combined interest at the end of the MRRT year. [Section 115-40]

MRRT liability

9.84 In the year in which the constituent interests combine, called the 'combining year', the miner that has the combined interest will be liable to pay MRRT that is payable in relation to the combined interest, as if the constituent interests had been combined from the start of the year. The miner is not separately liable to pay MRRT in relation to the constituent interests. [Section 115-40]

9.85 The miner will also be liable to pay MRRT that is payable in relation to the combined interests for future MRRT years (provided the constituent interests remain combined and the miner continues to have the combined interest). [Section 10-1]

9.86 The allowance components of the constituent interests are taken to be the allowance components of the combined mining project interest. [Section 115-45]

9.87 The royalty credits of the constituent interests are inherited by the combined interest. Royalty credits are not aggregated (as they arise for a particular day and not annually for an MRRT year). [Subsection 115-45(1)]

9.88 Pre-mining losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year. [Subsection 115-45(2)]

9.89 Mining losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year. [Subsection 115-45(3)]

9.90 Starting base losses that the combined interest inherits from the constituent interests are aggregated to the extent they relate to the same MRRT year and have had the same starting base valuation method applied (that is, book value or market value). [Subsections 115-45(4) and (5) and section 115-50]

Starting base losses - where some starting base assets are subject to book value and others to market value

9.91 The starting base valuation method is a choice a miner makes in relation to a mining project interest. The constituent interests that relate to the combined interest may have different starting base valuation methods applied to value their starting base assets. Book value and market value starting base losses are subject to different uplift rates and therefore cannot be aggregated in the same way as pre-mining losses and mining losses. [Subsections 115-45(4) and (5) and section 115-50]

9.92 The aggregated book value starting base losses will be subject to the book value uplift long term bond rate + 7 per cent (LTBR + 7 per cent) and the aggregated market value starting base losses will be subject to the market value uplift consumer price index (CPI). [Section 115-50]

9.93 The starting base losses for the constituent interests that the combined interest is taken to have are not necessarily aggregated. Rather, the starting base losses are only aggregated to the extent they relate to the same valuation approach for an MRRT year. [Section 115-50]

9.94 If some starting base assets were initially valued using book value and others using market value, the miner will have two starting base losses for the combined interest for the MRRT year, a book value starting base loss and a market value starting base loss. [Section 115-50]

9.95 The book value starting base loss for an MRRT year will be the sum of the book value starting base losses that would have arisen for a constituent interest for the MRRT year. The market value starting base loss for an MRRT year will be the sum of the market value starting base losses that would have arisen for a constituent interest for the MRRT year. [Subsections 115-50(2) and (3)]

9.96 The two starting base losses will be applied in working out the starting base allowance for the miner. The starting base losses that relate to book value will be applied first, then the starting base losses that relate to market value. [Subsection 115-50(4)]

Example 9.115 : Aggregating starting base losses with same valuation method Miner Co has two mining project interests, MPI A and MPI B. Miner Co made the choice to use the book value starting base methodology for starting base assets that relate to MPI A and MPI B.From 1 July 2015, MPI A and MPI B are taken to be a combined interest, MPI AB. At the combining time, MPI A had a $200 starting base loss for the 2013 year and a $500 starting base loss for 2014 year and MPI B had a $100 starting base loss for the 2013 year and a $200 starting base loss for the 2014 year.Upon combination, MPI AB will be taken to have the starting base losses that relate to MPI A and MPI B and the starting base losses for each year will be aggregated as they apply to the same starting base valuation method. Therefore, MPI AB will have a book value starting base loss for the 2013 year of $300 ($200 + $100) and a book value starting base loss for the 2014 year of $700 ($500 + $200). Example 9.116 : Aggregating starting base losses with different valuation methods Assume all the same facts as the previous example, except this time Miner Co has made the choice to use the book value methodology in relation to MPI A and the market value methodology in relation to MPI B.Upon combination MPI AB will be taken to have the starting base losses that relate to MPI A and MPI B but none of the losses will be aggregated as different starting base valuations applied in relation to the starting base losses. Therefore, MPI AB will have book value starting base losses for 2013 and 2014 of $200 and $500 respectively and market value starting base losses for 2013 and 2014 of $100 and $200 respectively.In the 2015 MRRT year, MPI AB has a mining profit. Assume MPI AB has a $100 book value starting base loss and a $100 market value starting base loss for the 2015 year. When it comes time to calculate the starting base allowance for MPI AB there is $1,000 remaining mining profit, therefore the starting base allowance cannot exceed $1,000.In working out the starting base allowance, the book value starting base losses are applied first, then the market value starting base losses. Therefore, MPI AB will apply the starting base losses in the following order, $200 book value starting base loss for the 2013 year (attributable to MPI A), $500 book value starting base loss for the 2014 year (attributable to MPI A), $100 book value starting base loss for the 2015 (attributable to MPI A), $100 market value starting base loss for the 2013 year (attributable to MPI B) and $100 of the $200 market value starting base loss for the 2014 year (attributable to MPI B). The remaining $100 from 2014 and the $100 from 2014 (both market values starting base losses) will be carried forward to 2016 and uplifted by the CPI.

Choices

9.97 The downstream integration choice and the simplified MRRT choice both apply to all mining project interests a miner has. When the constituent interests combine, if the miner had made a downstream integration choice or a simplified MRRT choice, these choices will continue to apply to the combined interest.

9.98 Similarly, the starting base valuation choice, while made in respect of a mining project interest, continues to apply to the starting base assets as per the choice made by the miner in relation to the constituent interests.

9.99 An alternative valuation method choice made in respect of a constituent interest will have no effect on the combined interest. [Section 115-65]

9.100 The miner can, if it meets the requirements, choose to use the alternative valuation method in respect of the combined interest.

Transfer of pre-mining losses and mining losses to and from a combined interest

9.101 There are special rules for transferring pre-mining losses and mining losses to or from a combined interest. [Sections 115-55 and 115-60]

9.102 When a miner is seeking to transfer a pre-mining loss, or a mining loss, to or from a combined interest, the common ownership tests for the respective losses must be satisfied in relation to each of the constituent interests and the other mining project interest that is transferring or accepting the loss. [Sections 115-55 and 115-60]

9.103 This rule only applies in relation to pre-mining losses and mining losses that arose in an MRRT year before the combining year, as each of the constituent interests will have the same ownership from the time of combination onwards. [Paragraphs 115-55(1)(b) and (2)(b) and 115-60(1)(b) and (2)(b)]

9.104 This rule applies regardless of whether a pre-mining loss or a mining loss is otherwise transferable under the general transfer rules. [Subsections 115-55(3) and 115-60(3)]

Example 9.117 : Unable to transfer mining losses to combined interest At the beginning of the 2016 MRRT year, Miner Co has five mining project interests (MPIs). Since 1 July 2012, Miner Co has always had MPI 1, 2, 4 and 5. Miner Co acquired MPI 3 at the beginning of the 2014 MRRT year.MPIs 1 to 4 became factually integrated from the start of the 2016 MRRT year and do not have any allowance components, so they combine from the beginning of the 2016 year. MPI 5 is unable to combine as it is not integrated with any of the other interests. The combined interest makes a mining profit for the 2016 MRRT year. MPI 5 has a mining loss from 2013 and makes another mining loss in 2016.The combined interest still has a remaining mining profit when it comes time to apply the transferred mining loss allowance. To determine whether the mining loss for MPI 5 for the 2013 MRRT year can be applied in working out the transferred mining loss allowance of the combined interest, the common ownership test needs to be satisfied in relation to MPI 5 and each of the constituent interests, MPIs 1 to 4.The common ownership test will be satisfied if the same miner had MPI 5 and each constituent interest from the start of the year for which the mining loss arose until the end of the year for which the mining loss is being transferred.The common ownership test will not be satisfied for MPI 5 and constituent interest MPI 3 as Miner Co only acquired MPI 3 at the beginning of the 2014 MRRT year.Therefore, the 2013 mining loss of MPI 5 cannot be applied in working out the transferred mining loss allowance of the combined interest for the 2016 MRRT year.

Unable to transfer mining losses to combined interest

Application and transitional provisions

9.105 Mining project interests can combine from 1 July 2012.

9.106 However, there is a transitional provision that ensures mining project interests can be taken to be combined from a time earlier than 1 July 2012, provided they satisfy all the other conditions for combination. [Schedule 4 to the MRRT (CA&TP) Bill, subitem 7(1)]

9.107 Allowing mining project interest to be able to combine from 2 May 2010 is particularly important for the purpose of working out the starting base for mining project interests.

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

Outline of chapter

10.1 This chapter explains when a mining project interest, or a pre-mining project interest, is transferred or split. The miner that has an interest after a transfer or split is liable to pay the Minerals Resource Rent Tax (MRRT) for that interest for the whole year, not just for the period after the transfer or split.

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

Summary of new law

10.3 A mining project interest is the basis upon which a miner's MRRT liability is determined. It anchors the operation of the MRRT. If a miner has mining revenue, mining expenditure, allowance components or starting base assets, it will have them for a mining project interest.

10.4 A mining project transfer is an arrangement that results in the whole mining project interest being transferred from one miner to a single other entity.

10.5 A mining project split is an arrangement that results in the whole or a part of a mining project interest being transferred from one miner to one or more other entities.

10.6 A mining project split also happens if:

·
a production right to which the mining project interest relates is split; or
·
the constituent interests of a combined interest cease being integrated with each other.

10.7 A mining project interest that is transferred from a miner to another entity by way of a mining project transfer is taken to continue in the hands of the new miner. That is, the tax history of the original interest remains with the interest after the transfer.

10.8 The miner that has the mining project interest after the transfer is the miner liable to pay MRRT for that interest for the entire MRRT year, including the period before the transfer.

10.9 Similarly, mining project interests that result from a mining project split are taken to be continuations of the mining project interest that was split. That is, the tax history of the mining project interest is inherited by the interests that emerge from the split and the miners that have those interests are liable for the MRRT payable in relation to the original interest for the entire MRRT year, including the period before the split.

10.10 For a mining project split, the extent to which the tax history and tax liability of the original mining project interest are inherited by the new interests is determined by applying the split percentage.

10.11 The split percentage is a reasonable approximation of the market value of a new interest relative to the total market values of all the interests arising from the split.

10.12 Similar rules deal with pre-mining project transfers and pre-mining project splits.

Detailed explanation of new law

When a mining project transfer occurs

10.13 A mining project transfer is an arrangement that results in a whole mining project interest being transferred from the original miner to another entity, the new miner. [Subsection 120-10(3)]

10.14 The miner's entitlement may be a share in the output of a mining venture or an entitlement to extract taxable resources [section 15-5] . The mining project transfer is effected when a miner gives that particular entitlement, being the share in an output of a mining venture or the entitlement to extract taxable resources, to another entity.

Example 10.118 : Mining project transfer A Co has a mining project interest because it has an entitlement to extract taxable resources from the area covered by a production right (a residual mining project interest).A Co enters into an arrangement that has the effect of transferring its entitlement to B Co. B Co now has the entitlement to extract taxable resources from the area covered by the production right (the residual mining project interest).This is a mining project transfer.

10.15 'Arrangement' has the same wide meaning as in the Income Tax Assessment Act 1997 (ITAA 1997). [Section 300-1, definition of 'arrangement']

10.16 A mining project transfer may be effected by a sale, sub-lease, gift, or by any other means.

10.17 To avoid doubt, a mining project transfer can occur in the period 2 May 2010 to 30 June 2012. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill 2011), item 8]

Deemed mining project transfer

10.18 A mining project transfer will be deemed to have occurred if a miner's entitlement to extract taxable resources (a 'residual interest') is replaced (in its entirety) with an entitlement to share in the output of a mining venture (a 'mining venture interest'). That is, if the type of entitlement the miner had has changed. [Section 120-25 and subsections 15-5(1) and (4)]

Example 10.119 : Deemed mining project transfer Cavier is granted a production right by the State Government. It has a mining project interest (MPI 1) because it has an entitlement to extract taxable resources from the area covered by a production right. MPI 1 is a residual mining project interest.Cavier then undertakes to extract all the taxable resources from the area covered by the production right. Once extracted, it will process the taxable resource before exporting them for sale. This is a mining venture that it participates in on its own. It takes 100 per cent of the output.The commencement of the mining venture gives rise to a new mining project interest for Cavier (MPI 2). MPI 2 is a mining venture interest which is separate and distinct from MPI 1. As the mining venture is in respect of all the taxable resources to which MPI 1 related, MPI 1 no longer exists. MPI 1 has effectively been replaced by MPI 2.The start of the mining venture is taken to be a mining project transfer: MPI 1 is the original interest, MPI 2 is the new interest and Cavier is both the original and the new miner.

10.19 A deemed mining project transfer has all the same effects as a normal mining project transfer.

Effects of a mining project transfer

10.20 The main effect of a mining project transfer is that:

·
the mining project interest in the hands of the new miner is taken to be a continuation of the interest that the original miner had; and
·
the MRRT liability for the interest for the transfer year is payable by the new miner.

[Subsections 120-10(1) and (2)]

Continuation principle

10.21 After a mining project transfer, the original miner will cease to have the mining project interest and the new miner will start to have the interest.

10.22 The mining project interest the new miner has after the transfer is taken to be a continuation of the interest the original miner had just before the transfer. Because the new interest is taken to be a continuation of the original interest, everything that happened in relation to the original interest is taken to have happened in relation to the new interest. For the purpose of applying the MRRT law in the current and future MRRT years, mining revenue, mining expenditure and allowance components for the original miner for the original interest before the transfer are taken to be mining revenue, mining expenditure and allowance components of the new miner for the new interest. This ensures that the tax history of the original interest is inherited by the new interest. [Subsections 120-10(2) and (4)]

10.23 The new interest is taken to have started on the same day as the original interest and the same miners had the original interest will be taken to have had the new interest, at the same times as they had the original interest.

10.24 Knowing when the interest started and which miners have had the interest is relevant for determining whether a mining loss can be applied in working out, for example, a transferred mining loss allowance in relation to the interest.

Example 10.120 : Inherit ownership history On 1 July 2012, AlexandraGeo has a mining project interest (MPI 1). At the start of 1 July 2014, it acquires another mining project interest ('new interest') from Rocky Resources.The new interest is taken to be a continuation of the interest that Rocky Resources had and the new interest will continue to have Rocky Resources' ownership history. When acquired, the new interest has a mining loss for the 2013 MRRT year.At the end of the 2014 MRRT year, there is a mining profit for MPI 1, while the new interest has made a mining loss. AlexandraGeo needs to determine whether the 2013 or 2014 mining losses for the new interest can be applied as a transferred mining loss allowance for MPI 1.In relation to the 2013 mining loss, the mining loss can only be applied if the same miner had both the new interest and MPI 1 from the beginning of the 2013 MRRT year until the end of the 2014 MRRT year.As the new interest is taken to be a continuation of the original interest that Rocky Resources had, the new interest will be taken to have been Rocky Resources' interest for the 2013 MRRT year (before AlexandraGeo had the new interest). Therefore, the common ownership test will not be satisfied in relation to the 2013 MRRT year meaning the 2013 loss will not be able to be transferred. The common ownership test would, however, be satisfied in relation to the 2014 MRRT year and the loss for this year could be transferred.

10.25 Any starting base asset that was held by the original miner in relation to the original interest that is held by the new miner in relation to the new interest (that is, after the mining project transfer), continues to be a starting base asset in relation to the new interest. The base value of the asset continues and is unaffected by the transfer (although a change in use of the starting base asset by the new miner will result in a starting base adjustment).

10.26 A starting base asset valuation method choice that the original miner made in relation to the original interest, continues to apply in relation to the starting base assets of the new interest.

MRRT amounts move with the interest

10.27 For the purpose of working out the MRRT liability of the transfer year and later MRRT years, mining revenue and mining expenditure for the original miner for the original interest are taken to be mining revenue and mining expenditure of the new miner for the new interest. All the dates and amounts that relate to the mining revenue and mining expenditure are preserved when they are inherited. [Subsection 120-10(4)]

10.28 Similarly, any allowance components for the original miner for the original interest are taken to be allowance components for the new miner for the new interest. All dates that are specific to the allowance components are preserved when they are inherited. [Paragraphs 120-10(4)(c) and (d)]

10.29 Allowance components of the original interest are:

·
royalty credits;
·
pre-mining losses;
·
mining losses; and
·
starting base losses.

[Section 300-1, definition of 'allowance component']

10.30 So, a mining loss for the original interest for the 2013 MRRT year remains a 2013 mining loss for the new interest.

10.31 The original miner is not able to use allowance components for the MRRT year in which the transfer occurs. In particular, the original miner would not be able to transfer or apply any allowance components that have accrued for the year to the date of transfer.

MRRT liability for the transfer year

10.32 The new miner is liable for any MRRT that is payable for the interest for the whole transfer year. This includes being liable for any MRRT that is payable for the interest for the part of the year in which the original miner had the interest. [Subsection 120-10(1)]

10.33 The original miner is not liable to pay any MRRT that is payable for the interest for the transfer year. [Subsection 120-10(1)]

10.34 If the original miner and the new miner have different accounting periods, the transfer year may not be the same MRRT year for both the original miner and the new miner. In such cases, the new miner may be liable to pay MRRT for that interest for a period which is longer or shorter than its normal MRRT year, as it will be liable to pay MRRT for the period from the first day of the original miner's transfer year. [Paragraphs 120-10(4)(a) and (b)]

Diagram 10.7 :  Different accounting periods

10.35 To enable the new miner to determine the MRRT liability in the transfer year, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest for its MRRT year are instead taken to be mining revenue and mining expenditure of the new miner in relation to the new interest for its MRRT year. Excluded expenditure for the original interest remains excluded expenditure for the new interest. [Paragraphs 120-10(4)(a) and (b)]

10.36 The information transfer rules require the original miner to notify the new miner of amounts that are relevant to the mining project interest. [Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division 121 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

10.37 However, the information transfer rules do not require such a notice where the original miner and the new miner are the same entity, which would be the case in a deemed mining project transfer. [Section 120-25]

10.38 Chapter 18 has further information on information transfers.

10.39 In future MRRT years, the new miner will have the interest from the beginning of the MRRT year and will be liable to pay MRRT for the interest for the whole year, as it would for any other interest it has. However, this does not mean that the amounts of mining revenue, mining expenditure and allowance components that the new miner is taken to have had for a previous year are no longer relevant. For example, if the new miner sells an asset in respect of which the original miner included an amount as mining expenditure, an amount of recoupment for the new miner would be determined with reference to the mining expenditure that the original miner had (which the new miner is taken to have). [Paragraph 120-10(4)(b) and section 30-40]

Choices

10.40 Choices that the original miner made in relation to the original interest generally continue to apply in relation to the new interest. One example is the starting base valuation method choice.

10.41 There are some exceptions to this general rule.

Downstream integration choice

10.42 If the original miner made a downstream integration choice to treat its mining project interests as downstream integrated, that choice does not affect the interest when the original miner stops having the interest. That is, the new miner is not bound by the original miner's downstream integration choice. [Subsection 255-20(3)]

10.43 If the original miner is the same entity as the new miner, which is the case where there is a deemed mining project transfer, the original miner will not have ceased having the interest and therefore any downstream integration choice will still apply to that interest. [Section 120-25 and subsection 255-20(3)]

Alternative valuation method and simplified MRRT method choices

10.44 If the original miner made one of the following two choices in respect of the mining project interest for the transfer year, the new miner is not bound by the choice for its transfer year (unless the new miner is the same entity as the original miner, which can only occur when there is a deemed mining project transfer):

·
alternative valuation method choice (see Chapter 14); or
·
simplified MRRT method choice (see Chapter 8).

[Subsection 120-10(5) and 120-25(2)]

10.45 After the transfer, the new miner can determine whether or not it wants to make such choices in respect of the new interest for the transfer year. [Subsection 120-10(5)]

10.46 For example, if an original miner has made an alternative valuation method choice for the transfer year and the new miner does not make such a choice for the year, the new miner includes in its mining revenue for the transfer year the raw mining revenue for the mining revenue event (that is, the amounts unaffected by the alternative valuation method).

10.47 Similarly, if the original miner chose to use the simplified MRRT method in the transfer year then the new miner will not be bound by that choice. The new miner is obliged to account for MRRT in the same manner as they would have if the choice had never been made for that MRRT year.

10.48 However, if the original miner, or another miner who held the mining project interest, previously made the choice to apply the simplified MRRT method in a prior MRRT year, then any consequences arising from that choice, that is the cancellation of allowance components and the denial of starting base losses, continue to remain in effect. The new miner will not be able to reconstruct the allowance components for those previous years; they will remain extinguished.

Example 10.121 : The original miner made a simplified MRRT choice Part way through the year, S&S Resources purchases a mining project interest from HC Minerals. Before the transfer, HC chose to use the simplified MRRT method for that year. HC made royalty payments in relation to the interest during the pre-transfer part year, but, because it chose to use the simplified MRRT method, this will not give rise to royalty credits in relation to the interest. HC had also chose to use the simplified MRRT method in previous MRRT years and had a number of other allowance components that were extinguished because of those choices.When S&S Resources acquires the mining project interest, it does not make the choice to use the simplified MRRT method. S&S Resources will be able to have allowance components for the transfer year, including any royalty credits that would have been extinguished if HC continued to have the interest. However, S&S will be unable to reconstruct previous years' allowance components, they will remain extinguished.

Suspension day choice

10.49 If the old miner made a suspension day choice, the new miner will not be bound by that choice in future MRRT years (unless the new miner is the same entity as the original miner, which can only occur when there is a deemed mining project transfer). However, allowance components that have previously been cancelled because of the suspension day will continue to be cancelled, they cannot be reconstructed. Suspension days are discussed in Chapter 11. [Subsection 120-10(6) and 120-25(2)]

10.50 After the transfer, the new miner can determine whether or not it wants to choose to suspend the new interest.

Original miner and new miner are the same entity

10.51 If the original miner and the new miner are the same entity, all choices made by the original miner in relation to the original interest continue to apply to the entity when it is the new miner in relation to the new interest. The entity cannot remake the choice when it is the new miner. [Subsection 120-25(2)]

Events happening to the original miner after the transfer

10.52 If an amount of mining revenue or mining expenditure comes home to the original miner after the mining project transfer has occurred, the amount is taken to be mining revenue or mining expenditure of the new miner in relation to the new interest. The same applies to anything that affects the MRRT liability, including allowance components and the rehabilitation tax offset. This rule also applies if there has been more than one mining project transfer (including pre-mining project transfers), and to all the entities who were previously miners (or explorers) in respect of the interest. [Section 120-20]

10.53 The rule also applies if there has been one or more mining project splits (or pre-mining project splits). In such cases it is subject to the split percentage. [Subsection 120-20(2)]

Example 10.122 : Mining revenue after transfer OldMinerCo extracts 50,000 tonnes of iron ore from a project area on 20 September 2012 and the full amount of the ore remains housed at OldMinerCo's run-of-mine stockpile.On 21 January 2013, OldMinerCo transfers the mining project interest to NewMinerCo. OldMiner Co does not supply any of the 50,000 tonnes of iron ore before the transfer time.On 20 February 2013, OldMinerCo supplies the 50,000 tonnes of iron ore to ForeignCo. NewMinerCo does not receive any amount in respect of this supply.If OldMinerCo still had the interest, the amount in relation to this supply would have been included as mining revenue of the mining project interest.The mining revenue in relation to the supply of the 50,000 tonnes of iron ore by OldMinerCo to ForeignCo, is an amount included in the mining revenue of NewMinerCo in relation to its mining project interest.OldMinerCo must notify NewMinerCo of the amount to be included in the interest's mining revenue.

10.54 These effects are specifically provided for as they are things that happen to the original miner in relation to the mining project interest when the original miner no longer has the interest.

10.55 The information transfer rules require the original miner (or an entity who was previously a miner in relation to the interest) to notify the new miner of amounts that are relevant to the mining project interest. [Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division 121 in Schedule 1 to the TAA 1953]

10.56 However, the information transfer rules do not require such a notice where the original miner and the new miner are the same entity, which would be the case in a deemed mining project transfer. [Section 120-25]

Property transferred with the mining project interest

10.57 When property is transferred from the original miner to the new miner as part of the arrangement that effects the mining project transfer, the part of the consideration for the arrangement that is attributable to the property would ordinarily be mining expenditure of the new miner in relation to the transferred mining project interest [Division 35] . Similarly, the consideration that the new miner paid to the original miner in respect of that property would be a recoupment of mining expenditure for the original miner in respect of the mining project interest [section 30-40] .

10.58 However, under inherited history, the new miner is liable for the MRRT for the mining project interest for the whole transfer year [subsection 120-10(1)] . Therefore, the new miner would have mining expenditure on acquiring the property and would also include the amount recouped by the original miner in the mining revenue of the interest for the year [section 120-20] . This would be somewhat circular.

10.59 To prevent that circularity, a special rule exists to deal with these cases. The intended effect is to cancel out the mining expenditure and the recoupment. [Subsections 120-15(2) and (3)]

10.60 The special rule applies when:

·
any property, or any legal or equitable right that is not property (the transferred property), is transferred to the new miner under the mining project transfer;
·
the original miner used the transferred property in the mining operations of the mining project interest; and
·
the transferred property:

-
gave rise to an amount of mining expenditure for the original miner, or a previous miner, in relation to the interest; or
-
is, or may become, a starting base asset in relation to the interest.

[Subsection 120-15(1)]

Effect of transferring property

10.61 The effect of transferring such property, is that:

·
the original miner is taken not to have received a recoupment [subsection 120-15(2)] ; and
·
the new miner is taken to have an amount of excluded expenditure [subsection 120-15(3)] .

10.62 To avoid doubt, the mining project transfer, and the transfer of transferred property, is not, of itself, an event or circumstance that gives rise to an adjustment. [Subsection 120-15(4)]

10.63 The amount that is taken to not be a recoupment and to be excluded expenditure is the amount of the consideration for the mining project transfer that is attributable to acquiring the particular property.

Example 10.123 : Transferred property Ironman Resources has a mining project interest (MPI 1). In 2015, it sells the interest, along with all the assets used in MPI 1 to Washerman Co. Washerman pays Ironman $150 million for MPI 1 and the associated property. Of the $150 million, $10 million is for a fleet of trucks. Ironman purchased the fleet for $11 million in 2013 and included the $11 million in its mining expenditure for the 2013 MRRT year.The $10 million that Ironman received for the fleet of trucks would normally be a recoupment to be included in the mining revenue of the interest. However, as the fleet of trucks was transferred as part of a mining project transfer, Ironman's recoupment is ignored.Similarly, rather than including the $10 million as mining expenditure for the 2015 MRRT year, the expenditure is excluded expenditure for Washerman.

10.64 Starting base assets that are transferred as part of a mining project transfer continue to be starting base assets in relation to the mining project interests and do not result in an amount of mining expenditure for the new miner. [Section 120-15]

10.65 The new miner inherits the original miner's use of the starting base asset. If the new miner uses the starting base asset differently (for example, uses it more or less than the original miner used it in relation to the mining project interest) this will be reflected in the calculation of the starting base loss. [Division 90]

10.66 Similarly, if the new miner uses a non-starting base asset more or less than the original miner, there would be an adjustment. [Division 160]

When a mining project split occurs

10.67 A mining project split is an arrangement that results in:

·
the whole of the entitlement comprising the mining project interest being transferred from a miner to two or more other entities [paragraph 125-10(3)(a)] ; or
·
a part of the entitlement comprising the mining project interest being transferred from a miner to one or more other entities [paragraph 125-10(3)(b] .

10.68 A mining project split will also happen if:

·
a production right to which the mining project interest relates is split [paragraph 125-10(3)(c)] ; or
·
the constituent interests of a combined interest cease being integrated with the other constituent interests [paragraph 125-10(3)(d)] .

10.69 The entities which have a mining project interest after the split will be the new miners in relation to their respective interests. Unlike transfers, there will be multiple new interests and new miners as a result of a split. However, if the original miner retains part of the interest, it will be a new miner in respect of the part that it retains. [Paragraphs 125-10(3)(b) to (d)]

10.70 'Arrangement', which is necessary in some, but not all, mining project splits, has the same wide meaning as in the ITAA 1997. [Section 300-1, definition of 'arrangement']

10.71 The arrangement may be effected by a sale, sublease, gift, or any other means.

10.72 Constituent interests will cease to be integrated if they no longer meet the conditions for integration [sections 255-5 and 255-10] . The conditions for integration are discussed in Chapter 9.

10.73 A mining project split can occur in the period 2 May 2010 to 30 June 2012. [Schedule 4 to the MRRT (CA&TP) Bill, item 8]

Deemed mining project split

10.74 A mining project split will be deemed to have occurred if a miner's entitlement to extract taxable resources (a 'residual interest') is reduced because an entitlement to share in the output of a mining venture (a 'mining venture interest') in respect of some of those taxable resources starts to exist. [Paragraph 125-35(1)(a) and subsections 15-5(1) and (4)]

10.75 A mining project split will also be deemed to have occurred if a miner stops having an entitlement to extract taxable resources (a 'residual interest') and entitlements to share in the output of a mining venture (a 'mining venture interest') in respect of the taxable resources start to exist for more than one entity (one of which may be the miner who had the residual interest). All the new entitlements to share in the output of the mining venture collectively cover all the taxable resources to which the residual interest previously related. [Paragraph 125-35(1)(b) and subsections 15-5(1) and (4)]

Example 10.124 : Deemed mining project split A Co has three production rights, in respect of which it has three mining project interests (three residual interests).A Co enters into a mining venture with B Co to extract and process taxable resources from an area that spans across parts of each of the production rights. The mining venture is to run for 10 years. A Co will take 70 per cent of the output of the mining venture and B Co will take 30 per cent.

Deemed mining project split

The start of the mining venture gives rise to an entitlement to an output of the mining venture for A Co and B Co. Therefore A Co and B Co have mining project interests in relation to the mining venture ('mining venture interests'). As the mining venture spans across three production rights, A Co and B Co will each have a separate mining venture interest in respect of each production right.As the mining venture is limited to a period of 10 years, the venture covers some but not all the taxable resources that were previously part of MPI 1, MPI 2 and MPI 3, each of these mining project interests will have reduced in value as they now only relate to the taxable resources that are not covered by the mining venture.As the start of the mining venture gives rise to mining venture interests in relation to some of the taxable resources that MPI 1, MPI 2 and MPI 3 covered, there is a deemed mining project split of MPI 1, MPI 2 and MPI 3.MPI 1 will split into three interests; the reduced residual interest of MPI 1, the mining venture interest for A Co (MPI 4) and the mining venture interest for B Co (MPI 5).MPI 2 will split into three interests; the reduced residual interest of MPI 2, the mining venture interest for A Co (MPI 6) and the mining venture interest for B Co (MPI 7).

Deemed mining project split 2

MPI 3 will split into three interests; the reduced residual interest of MPI 3, the mining venture interest for A Co (MPI 8) and the mining venture interest for B Co (MPI 9).At the end of 10 years, when the mining venture ends, each of the mining venture interests (MPI 4, 5, 6, 7, 8 and 9) will also end. However, the residual interests (MPI 1, 2 and 3) will continue in respect of all the area covered by the respective production right, including the area formerly covered by the mining venture.

Effects of a mining project split

10.76 The main effect of a mining project split is that:

·
the mining project interest in the hands of the new miner is taken to be a continuation of the interest that the original miner had; and
·
the MRRT liability for the transfer year is payable by the new miner.

[Subsections 125-10(1) and (2)]

Continuation principle

10.77 The consequences of a mining project split are very similar to those of a mining project transfer. The new interests are taken to be a continuation of the original interest, the new miners will inherit the tax history of the original miner in relation to the interest, and the new miners are liable for the MRRT liability for the new interests for the whole split year. [Subsection 125-10(2)]

10.78 The important distinction is that each of these will only happen to the new interests to the extent of their respective split percentages. This ensures the tax history that is relevant to the original interest is inherited by the new interests to the extent of their respective shares. [Subsection 125-10(4)]

10.79 If any starting base asset that was held by the original miner in relation to the original interest is held by a new miner after the mining project split to some extent, the asset continues to be a starting base asset in relation to the new interest. The base value of the asset continues unaffected by the split (although a change in use of the starting base asset by a new miner will result in a starting base adjustment).

10.80 A starting base asset valuation method election that the original miner made in relation to the original interest continues to apply in relation to the starting base assets of the new interest.

Split percentage

10.81 The split percentage is a reasonable approximation of the market value of the new interest, expressed as a percentage of the total market values of all the new interests arising from the split. The market values of the new interests are calculated immediately after the split. Each new interest has its own split percentage, the sum of which must equal 100 per cent. [Section 125-15]

Example 10.125 : Simple split percentage ACo sells half its entitlement to share in the output of a mining venture in respect of a production right to BCo. After the mining project split, there are two new interests of equal value. Therefore, the split percentage for each of the new interests is 50 per cent. Example 10.126 : Complex split percentage ACo has a mining project interest (P). ACo sells to BCo an entitlement to the first 1 million tonnes of a taxable resource recovered from the project area for each year. This gives rise to a mining project interest for BCo. In this case, the entitlement that ACo sells to BCo cannot be expressed as a fixed percentage because it will change from year to year.ACo determines the market value of each of the new interests immediately after the split. ACo's new interest (P1) is valued at $10.5 billion and the new interest that BCo has (P2) is valued at $600 million. The split percentage for ACo's P1 is 95 per cent and the split percentage for BCo's P2 is 5 per cent:10.5/(10.5 + 0.6) = 95%0.6/(10.5 + 0.6) = 5%

MRRT liability for the split year and later years

10.82 The new miners are each liable to pay any MRRT that is payable for their respective new interests for the whole transfer year but only to the extent of their new interests. This includes being liable to pay any MRRT that is payable for the interest for the part of the year prior to the split. [Subsection 125-10(1)]

10.83 The original miner is not liable for any MRRT that is payable for the interest for the transfer year (unless it is one of the new miners because it has retained part of the interest).

10.84 When a mining project split occurs, the tax attributes (including mining revenue, mining expenditure and allowance components) of the mining project interest are disaggregated and inherited by each of the new interests to the extent of their respective split percentages. [Subsection 125-10(4)]

10.85 If the original miner and the new miner have different accounting periods, the split year may not be the same MRRT year for both the original miner and the new miner. In such cases, the new miner may be liable to pay MRRT for a period that is longer or shorter than its normal MRRT year, as it will be liable to pay MRRT for the period from the first day of the original miner's split year. [Subsection 125-10(4)]

Diagram 10.8 :  Different accounting periods

10.86 In future MRRT years, the new miner will have had the interest from the beginning of the MRRT year and will be liable to pay MRRT for the interest for the whole year, as it would be for any other interest it has.

MRRT amounts move with the interest

10.87 To enable the new miners to determine the respective MRRT liabilities for the new interests for the split year and later years, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest for the split year and previous MRRT years are instead taken to be mining revenue and mining expenditure of the new miners in relation to the new interest (to the extent of the split percentage). Excluded expenditure for the original interest remains excluded expenditure for the new interest. [Paragraphs 125-10(4)(a) and (b)]

10.88 Similarly, any allowance components for the original interest will be taken to be allowance components for the new miners for each of the new interests, to the extent of their respective split percentages. This includes royalty credits that arose in the split year before the split and also any allowance component that the interest was carrying forward from a previous year. [Paragraphs 125-10(4)(c) and (d)]

10.89 All the dates that are specific to the allowance components are preserved when they are inherited. For example, a mining loss for the original interest for the 2013 MRRT year will remain a 2013 mining loss for the new interests.

10.90 The original miner will not be able to use the allowance components or apply them before the split.

Example 10.127 : Applying split percentage to tax attributes Following on from the previous example, the split percentage for ACo's P1 is 95 per cent and the split percentage for BCo's P2 is 5 per cent.The tax history of P will be split between P1 and P2 as follows:

Before the split

($m)
After the split

($m)
Tax attributes P P1 P2
Mining revenue 500 475 25
Mining expenditure 200 190 10
Royalty credit (2013) 60 57 3
Royalty credit (2014) 10 9.5 0.5
Starting base loss 5 4.75 0.25
Pre mining loss (2012) 5 4.75 0.25

10.91 The information transfer rules requires the original miner to notify the new miners of amounts that are relevant to the mining project interest. [Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division 121 in Schedule 1 to the TAA 1953]

10.92 However, the information transfer rules do not require such a notice where the original miner and the new miner are the same entity, which would be the case in some mining project splits.

Choices

10.93 Choices the original miner made in relation to the original interest generally continue to apply in relation to the new interests. One example is the starting base valuation method choice.

10.94 However, there are some exceptions to this general rule.

Downstream integration choice

10.95 If the original miner had made a downstream integration choice to treat its mining project interests as downstream integrated, that choice does not affect the interest (or part of the interest) when the original miner stops having the interest. That is, the new miners are not bound by the original miner's downstream integration choice. [Subsection 255-20(3)]

10.96 If the original miner is the same entity as the new miner, the original miner will not have ceased having the interest and therefore any downstream integration choice will still apply to that interest. [Subsection 255-20(3)]

Alternative valuation method and simplified MRRT method choices

10.97 If the original miner made one of the following two choices in respect of the mining project interest for the transfer year, the new miners are not bound by the choice for their split years (unless the new miner is the same entity as the original miner):

·
alternative valuation method choice (see Chapter 14); or
·
simplified MRRT method choice (see Chapter 8).

[Subsections 125-10(5) and (7)]

10.98 After the split, the new miner can determine whether or not it wants to make such choices in respect of the new interest for the split year. [Subsection 125-10(5)]

10.99 For example, if an original miner has made an alternative valuation method choice for the split year and the new miner does not make such a choice for the year, it includes in its mining revenue for the split year the raw mining revenue (subject to the split percentage) for the mining revenue event (that is, the amounts unaffected by the alternative valuation method).

10.100 Similarly, if the original miner chose to use the simplified MRRT method in the split year then the new miner will not be bound by that choice. The new miner is obliged to account for MRRT in the same manner as they would have if the choice had never been made for that MRRT year.

10.101 However, if the original miner, or another miner who held the mining project interest, had previously made the choice to apply the simplified MRRT method in a prior MRRT year, then any consequences arising from that choice, that is the cancelling of allowance components and the inability to claim starting base losses, continue to remain in effect. The new miner will not be able to reconstruct the allowance components for those previous years; they will remain extinguished.

Suspension day choice

10.102 If the old miner made a suspension day choice, the new miner will not be bound by that choice in future MRRT years (unless the new miner is the same entity as the original miner). However, allowance components that have previously been cancelled because of the suspension day will continue to be cancelled, they cannot be reconstructed. Suspension days are discussed in Chapter 11. [Subsection 125-10(6)]

10.103 After the split, the new miner can determine whether or not it wants to choose to suspend the new interest.

Original miner and new miner are the same entity

10.104 If the original miner and the new miner are the same entity, all choices made by the original miner in relation to the original interest continue to apply to the entity when it is the new miner in relation to the new interest. [Subsection 125-10(7)]

Events happening to the original miner after the split

10.105 If an amount of mining revenue or mining expenditure relating to the original interest comes home to the original miner after the mining project split has occurred, the amount is instead taken to be mining revenue and mining expenditure of the new miners (to the extent of their split percentages) in relation to the new interests. The same applies to anything that affect the MRRT liability, including allowance components and the rehabilitation tax offset. This rule also applies if there has been more than one mining project split (including pre-mining project splits), and to all the entities that were previously miners (or explorers) in respect of the mining project interest. [Section 125-30]

Example 10.128 : Multiple mining project splits Midnight Resource has a mining project interest. Midnight sells half the mining project interest to Sunset Mines. This sale results in a mining project split. Shortly afterwards, Sunset then sells half of its mining project interest to Daybreak Co. This results in another mining project split.

Multiple mining project splits

Midnight Co sells 2 million tonnes of resources that it extracted from MPI 1, which results in $50 million of mining revenue for MPI 1. However, because MPI 1 has been subject to multiple mining project splits, the $50 million is not included (at least not in its entirety) in the mining project interest that Midnight retains.Applying the various split percentages, $25 million would be mining revenue of MPI 3, $12.5 million would be mining revenue of MPI 4 and $12.5 million would be mining revenue of MPI 5.

Applying the various split percentages

10.106 These effects are specifically provided for as they are things that happen to the original miner in relation to the mining project interest when the original miner no longer has the interest.

10.107 The information transfer rules require the original miner (or an entity who was previously the miner in relation to the interest) to notify the new miner of amounts that are relevant to the mining project interest. [Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division 121 in Schedule 1 to the TAA 1953]

10.108 However, the information transfer rules do not require such a notice where the original miner and the new miner are the same entity, which would be the case in some mining project splits.

Property transferred with the mining project interest

10.109 When property is transferred from the original miner to the new miner as part of the arrangement that affects the mining project split, the part of the consideration that is attributable to the property would ordinarily be mining expenditure of the new miners in relation to the new interests [Division 35] . Similarly, the consideration that the new miners paid to the original miner in respect of that property would be a recoupment of mining expenditure for the original miner in respect of the mining project interest [section 30-40] .

10.110 However, under inherited history, the new miners are liable for the MRRT, to the extent of their split percentages, for the mining project interest for the whole split year [subsections 125-10(1) and (4)] . Therefore, the new miner would have mining expenditure on acquiring the property and it would also include the amount recouped by the original miner in the mining revenue for the new interest for the year [section 125-30] . This would be somewhat circular.

10.111 To prevent that circularity, a special rule exists to deal with these cases [section 125-20] . The intended effect is to cancel out the mining expenditure and the recoupment [subsections 125-20(2) and (3)] .

10.112 The special rule applies when:

·
any property, or any legal or equitable right that is not property (the transferred property), is transferred to the new miner under the mining project split;
·
the original miner used the transferred property in the mining operations of the mining project interest; and
·
the transferred property:

-
gave rise to an amount of mining expenditure for the original miner, or a previous miner, in relation to the interest; or
-
is, or may become, a starting base asset in relation to the interest.

[Subsection 125-20(1)]

Effect of transferring property

10.113 The effect of transferring such property, is that:

·
the original miner is taken not to have received a recoupment [subsection 125-20(2)] ; and
·
the new miner is taken to have an amount of excluded expenditure [subsection 125-20(3)] .

10.114 To avoid doubt, the mining project transfer, and the transfer of transferred property, is not, of itself, an event or circumstance that gives rise to an adjustment. [Subsection 125-20(4)]

10.115 The amount that is taken to not be a recoupment and to be excluded expenditure is the amount of the consideration for the mining project split that is attributable to acquiring the particular property.

10.116 Starting base assets that are transferred as part of a mining project split continue to be starting base assets in relation to the new interest and do not result in an amount of mining expenditure for the new miners. [Section 125-20]

10.117 The new miner inherits the original miner's use of the starting base asset. If the new miner uses the starting base asset differently (for example, uses it more or less) than the original miner used it in relation to the mining project interest, this will be reflected in the calculation of the starting base loss. [Division 90]

10.118 Similarly, if the new miner uses a non-starting base asset more or less than the original miner, there should be an adjustment. [Division 160]

MRRT liability for the split interest for an earlier year

10.119 The total MRRT liability that a mining project interest has ever had is relevant in working out a rehabilitation tax offset amount for the interest [section 225-15] . For more detail on the rehabilitation tax offset, see Chapter 11.

10.120 For the purpose of working out the rehabilitation tax offset amount for a mining project interest that has resulted from a mining project split (the new interest), the MRRT liability for the original interest is not necessarily apportioned based on the split percentage. Rather, the previous MRRT liabilities of the original interest should be allocated to the new interests on a reasonable basis. [Section 125-25]

10.121 This special rule recognises that the split percentage is based on market values, which takes into account prospective things, such as future profitability of the new interest. This is appropriate for allocating allowance components but it is not necessarily appropriate for allocating past MRRT liabilities. Previous MRRT liabilities should be attributed to the new interest based on things that have happened in the past, such as past profitability.

10.122 This is particularly relevant for the interests that are split towards the end of their life, where there is limited future earning capacity but large amounts of rehabilitation to be undertaken. If previous MRRT liabilities of the interest were allocated based on the split percentage this may significantly limit the new interests' ability to have a rehabilitation tax offset amount. [Subsection 225-15(4)]

Example 10.129 : Reasonably allocating previous year's MRRT liability Big Miner has a mining project interest (MPI). Throughout its life, MPI has had a total of $50 million MRRT liabilities. One part of the project area has been heavily mined and Big Miner has extracted all the resources it can from that particular area. Coalin' Campbell Resources, however, is resourceful and has very specialised skills to extract the small amounts of remaining resources. Big Miner sells part of MPI to Coalin' Campbell. MPI has been split into two interests, Big Miner retains part of the interest (MPI 1) and Coalin' Campbell has the other part (MPI 2).After extracting the last resources from MPI 2, Coalin' Campbell will be required to undertake rehabilitation in respect of the project area of MPI 2.The split percentage for the split is 99 per cent for MPI 1 and 1 per cent for MPI 2. If previous MRRT liabilities of MPI were divided between MPI 1 and MPI 2 on the basis of the split percentage, MPI 2 will be taken to have had MRRT liabilities of $0.5 million. This does not take into account that the area that now is covered by MPI 2 was both heavily mined by, and extremely profitable for, Big Miner Co. In fact, the area now covered by MPI 2 contributed about 50 per cent of the profits of MPI and consequently 50 per cent of the MRRT liability.For these reasons, the split percentage is not a reasonable basis upon which to determine the allocation of past MRRT liabilities of MPI for the purpose of calculating the rehabilitation tax offset amount. Rather, $25 million of the MRRT liability of MPI (50 per cent) will be allocated to MPI 2 for the purpose of calculating the rehabilitation tax offset amount for MPI 2. This will ensure Coalin' Campbell's ability to have a rehabilitation tax offset amount for MPI 2 is not unduly limited by the split percentage.

10.123 While the allocation of MRRT liability for the calculation of the rehabilitation tax offset amount is not required to be based on the split percentage, this does not mean that there may not be circumstances in which the split percentage would provide the most reasonable basis upon which to allocate past liabilities.

Pre-mining project transfers and splits

10.124 Similar rules provide for the transfer and splitting of pre-mining project interests. [Divisions 145 and 150]

10.125 Pre-mining project transfers and splits can occur in the period 2 May 2010 to 30 June 2012. [Schedule 4 to the MRRT (CA&TP) Bill, item 9]

Pre-mining project transfers

10.126 A pre-mining project transfer is an arrangement that results in the pre-mining project interest being transferred from the original explorer to another entity, the new explorer. [Subsection 145-10(2)]

10.127 Unlike mining project interests, the commencement of a mining venture is not relevant to holding a pre-mining project interest. Accordingly, there are no special rules to deal with that case.

10.128 The new pre-mining project interest is taken to be a continuation of the original pre-mining project interest. [Subsections 145-10(1), 145-15(1) and (2)]

10.129 The new explorer is liable to pay any MRRT for the transferred interest for the whole transfer year (although a pre-mining project interest is less likely to have an MRRT liability). [Section 145-15]

10.130 If the original explorer chose to apply the simplified MRRT method for the transfer year, the new explorer is not bound by this choice. The new explorer can choose whether this method applies to the new interest for the transfer year. [Subsection 145-15(3)]

10.131 A difference between the mining project transfer rules and those for pre-mining project transfers is that the holder of a pre-mining project interest cannot choose to use the alternative valuation method and cannot make a suspension day choice and, therefore, the alternative valuation method and the suspension day choices are not relevant choices for a new explorer.

10.132 Similarly, it is unlikely a pre-mining project interest would make a downstream integration choice.

10.133 The effects of transferring property along with the pre-mining project interest are the same as for mining project interests. [Section 145-20]

10.134 Events happening to the original explorer after the transfer come home to the new explorer. [Section 145-25]

Mining project interest originates from a pre-mining project interest

10.135 A pre-mining project transfer is taken to happen when the mining project interest originates from a pre-mining project interest. See Chapter 6 for further discussion on when a mining project interest originates from a pre-mining project interest. [Section 145-30]

10.136 This ensures that the continuation principle will apply to treat the pre-mining project interest and the mining project interest that originated from it as the same interest, allowing the mining project interest to inherit the tax history of the pre-mining project interest. [Paragraph 145-30(1)(b) and subsections 145-10(1), 145-15(1) and (2)]

Pre-mining project splits

10.137 A pre-mining project split is an arrangement that has the effect of transferring all or part of the pre-mining project interest to one or more other entities. [Paragraphs 150-10(2)(a) and (b)]

10.138 A pre-mining project split may also happen if the exploration right that relates to the pre-mining project interest is itself split. [Paragraph 150-10(2)(c)]

10.139 Unlike mining project splits, a pre-mining project split does not happen because the constituent interests of a combined interest disintegrate, as pre-mining project interests are not subject to the integration rules. [Division 255]

10.140 Unlike mining project interests, the commencement of a mining venture is not relevant to having a pre-mining project interest. Therefore, there is no case in which a pre-mining project split is deemed to have happened.

10.141 The new pre-mining project interests are taken to be a continuation of the original pre-mining project interest, to the extent of the split percentage. [Subsections 150-10(1), 150-15(1) and (2)]

10.142 The new explorer is liable to pay any MRRT for the transferred interest for the whole split year, to the extent of the split percentage. [Subsection 150-15(1)]

10.143 A simplified MRRT choice of the original explorer does not bind the new explorer for the split year. The new explorer can make its own choice as to whether it should apply. [Subsection 150-15(3)]

10.144 A difference between the mining project split rules and those for pre-mining project splits is that the holder of a pre-mining project interest cannot choose to use the alternative valuation method and cannot make a suspension day choice and, therefore, the alternative valuation method and the suspension day choices are not relevant choices for a new explorer.

10.145 Similarly, it is unlikely a pre-mining project interest would make a downstream integration choice.

10.146 A difference between the mining project split rules and those for pre-mining project split rules is that a pre-mining project interest cannot have a suspension day choice and therefore the suspension day choice is not mentioned as one that the new explorer is not bound by.

10.147 The effects of transferring property along with the split of the pre-mining project interest are the same as for mining project interests. [Section 150-20]

10.148 Events happening to the original explorer after the split, being things that would happen in relation to the original interest if the original explorer still had the interest, come home to the new explorer. [Section 150-30]

10.149 The split percentage for pre-mining project interest is worked out on the same basis as it is for mining project interests. [Subsections 150-15(5) to (7)]

10.150 For the purpose of working out a rehabilitation tax offset amount for the pre-mining project interest, previous MRRT liabilities are allocated on a reasonable basis (not necessarily the split percentage), as they are for mining project interests. [Section 150-25]

Mining project interest originates from a pre-mining project interest

10.151 A pre-mining project split is taken to happen when the mining project interest originates from a pre-mining project interest. See Chapter 6 for further discussion on when a mining project interest originates from a pre-mining project interest. [Section 150-35]

10.152 This ensures that the continuation principle will apply to treat the pre-mining project interest and the mining project interest that originated from it as the same interest, allowing the mining project interest to inherit the tax history of the pre-mining project interest (to the extent of the split percentage). [Paragraph 150-35(1)(b), subsections 150-10(1), 150-15(1) and 150-15(2)]

Application and transitional provisions

10.153 For the avoidance of doubt, there is a transitional provision that ensures mining project transfers and splits can occur from a time earlier than 1 July 2012. [Schedule 4 to the MRRT (CA&TP) Bill, item 8]

10.154 Similarly, there is a transitional provision that ensures pre-mining project transfers and splits can occur from a time earlier than 1 July 2012. [Schedule 4 to the MRRT (CA&TP) Bill, item 9]

10.155 A transitional provision exists to ensure the information transfer provisions also apply to mining project transfer, mining project splits, pre-mining project transfers and pre-mining project splits that occur between 1 May 2010 and 30 June 2012. [Schedule 4 to the MRRT (CA&TP) Bill, subitem 14(1)]

10.156 This transitional provision contains a special rule about the date by which entities are required to provide such notices. [Schedule 4 to the MRRT (CA&TP) Bill, subitem 14(2)]

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

Outline of chapter

11.1 This chapter deals with things that become relevant towards the end of a mining or pre-mining project interest's life.

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

Summary of new law

11.3 The Minerals Resource Rent Tax (MRRT) recognises that, towards the end of an interest's life, the activities of the interest will change. From that time on, special rules treat the interest differently.

Suspension day

11.4 The suspension day for a mining project interest is the earliest of:

·
the day chosen by the miner (after commercial production has ceased);
·
ten years after commercial production most recently took place; and
·
the termination day.

11.5 The suspension day has the effect of cancelling allowance components and providing access to the rehabilitation tax offset.

Rehabilitation tax offset

11.6 An entity is entitled to the refundable rehabilitation tax offset if it has a rehabilitation tax offset amount for one or more of its mining project interests or pre-mining project interests and the entity has paid MRRT for a previous year or has MRRT liabilities for the current year.

11.7 An entity has a rehabilitation tax offset amount for a mining project interest if:

·
the suspension day for the interest has occurred;
·
upstream rehabilitation expenditure has been incurred in relation to the interest for the year;
·
the expenditure cannot be applied against mining revenue of the interest or mining profit of another interest; and
·
there has been an MRRT liability for the interest for an MRRT year (regardless of which entity had the interest when the liability arose).

Termination day

11.8 The termination day for a mining project interest is the day no entity has the mining project interest. From the termination day onwards, the last entity to have the interest before it ended is taken to continue to have it for the purpose of accounting for the MRRT. Therefore, the interest will still be capable of having mining revenue, mining expenditure and allowance components.

Pre-mining project interests

11.9 Pre-mining project interests do not have suspension days. They do, however, have termination days. The termination day for a pre-mining project interest is the day no entity holds the pre-mining project interest. The termination day for a pre-mining project interest has the same effect as the suspension and termination days have for a mining project interest.

Detailed explanation of new law

Suspension day

11.10 The suspension day for a mining project interest is a point in the life of a mining project interest from which the interest is taken to be drawing to a close.

11.11 The suspension day for a mining project interest is the earliest of:

·
the day chosen by the miner (after commercial production has ceased);
·
the day 10 years after commercial production most recently took place; and
·
the termination day.

[Subsection 130-10(1)]

11.12 If more than one of the events happen in relation to the mining project interest, the suspension day falls on the earliest day.

Day chosen by the miner

11.13 A miner may choose the suspension day for a mining project interest, provided commercial production of taxable resources from the project area for the interest has ceased. [Paragraph 130-10(1)(a) and subsection 130-10(2)]

11.14 All the general rules for making a choice under the MRRT apply to this choice. In addition, the miner must notify the Commissioner of Taxation (Commissioner) of the choice. [Subsection 130-10(4) and Schedule 1 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill ); item 8, Division 119 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

Ten years after commercial production

11.15 The suspension day for a mining project interest may be the day occurring 10 years after the most recent day on which commercial production of taxable resources took place from the project area. [Paragraph 130-10(1)(b)]

Commercial production

11.16 'Commercial production' takes its ordinary meaning. However, there are certain factors that must be taken into account when considering whether commercial production of taxable resources takes place from a project area.

11.17 The factors that must be taken into account are:

·
past and current production of taxable resources;
·
past and current expenditure relating to the upstream mining operations; and
·
the extent to which upstream mine equipment has been decommissioned.

[Subsection 130-10(3)]

11.18 Other factors that may be relevant in determining when commercial production of taxable resources is taking place include:

·
implementation of closure plans;
·
demolition and removal of infrastructure;
·
reshaping of remaining mining landforms;
·
completion of rehabilitation and remediation processes; and
·
monitoring, measuring and reporting on the performance of closure activities.

11.19 In assessing whether there is commercial production, each situation turns on its own particular facts and no one factor is decisive. All factors must be considered in combination and as a whole. Whether there is commercial production will depend on the larger or general impression gained and whether it has a commercial flavour.

Example 11.130 : Commercial production has ceased Durpy Limited announces the premature closure of its Gaullcos coal mine (a mining project interest) on 10 July 2013. Following the announcement, Durpy Limited commenced preparation of a detailed mine site rehabilitation plan. The rehabilitation plan included the following activities:

·
decommissioning and removing plant and equipment;
·
retaining all mined materials on site and a rehabilitated storage area;
·
ensuring effective waste management;
·
re-contouring and revegetating the land; and
·
ongoing monitoring of soil and water conditions.

The rehabilitation plan will be implemented over 10 years and rehabilitation work begins on 16 December 2013. Consistent with the rehabilitation plan, commercial production from the Gaullcos coal mine ceases on 1 September 2014.From 1 September 2014, Durpy Limited can choose a suspension day. If Durpy Limited does not make such a choice, the suspension day for the mining project interest will be 1 September 2024, or the termination day of the mining project interest, whichever occurs first.

11.20 Commercial production can cease at a mine well before a mine formally closes and before the mining lease has been relinquished.

11.21 In some circumstances, ceasing commercial production may only be temporary, or the mine may enter a period of care and maintenance. Provided the cessation of commercial production does not exceed 10 years (and the miner does not choose a suspension day), it will not result in a suspension day for the mining project interest.

Example 11.131 : Care and maintenance Colecoal Resources Limited operates the Pertep coal mine (a mining project interest). The Pertep mine produces 1 million tonnes a year. Due to an economic downturn, Colecoal places the Pertep coal mine under a care and maintenance program. As part of the care and maintenance program, coal production stops on 29 June 2013.On 29 June 2023, the Pertep mine remains in a care and maintenance program. This will be the suspension day for the mining project interest because it is now 10 years since the last commercial production from the mine.

Recommencing commercial production

11.22 If commercial production recommences before a suspension day for a mining project interest has occurred, there is no consequence, the mining project interest will continue.

11.23 However, if a suspension day has occurred for a mining project interest and the miner undertakes upstream mining operations with a view to recommencing commercial production from the project area for the mining project interest, the interest will be taken to have ceased and a new interest will be taken to have started. The deemed cessation will be a termination day for the old interest. [Subsection 130-20(1)]

11.24 The deemed cessation of the old interest and the deemed creation of the new interest is not a mining project transfer. [Subsection 130-20(2)]

Example 11.132 : Recommencing commercial production Rexneilad Limited operates the Nanihall iron ore mine. As at 11 July 2012, the upstream mining operations of the Nanihall iron ore mine:

·
employed 1,000 people;
·
operated 500 trucks;
·
had annual operating expenditure of $50 million;
·
had $1 billion of capital; and
·
produced 10 million tonnes of iron ore a year.

Iron ore production from the Nanihall mine steadily declines to 1 million tonnes a year in 2013. On 24 December 2013, Rexneilad decides to close the mine and begins rehabilitation of the mine site.On 12 May 2024, the world iron ore price triples and Rexneilad decides to recommence mining. By the end of that year, it:

·
employs 500 people;
·
operates 250 trucks;
·
has operating expenditure of $40 million; and
·
produces 5 million tonnes of iron ore.

By the end of 2025, production has increased to 15 million tonnes.On 8 December 2026, iron ore prices return to long term averages and Rexneilad stops producing iron ore and restarts mine site rehabilitation.Rexneilad, after taking into account all the relevant factors including past production, expenditure and use of mining equipment, determines that commercial production ceased (sometime on or before 24 December 2013). On 12 May 2024, Rexneilad started undertaking upstream mining operations with a view to recommencing commercial production. Commercial production ceased for a second time on 8 December 2026.A suspension day occurs for the interest because there was no commercial production for 10 years (24 December 2013 to 24 December 2023). When Rexneilad decided to recommence commercial production, on 12 May 2024, the interest is taken to have ceased and a new mining project interest is taken to exist. Therefore, the production from 12 May 2024 is an activity of the new mining project interest.

Termination day

11.25 The termination day for a mining project interest is the day on which there is no longer any entity that has the interest [section 135-5] . The termination day may also give rise to the suspension day, if the miner no longer has the interest and a suspension day for the interest has not already occurred [paragraph 130-10(1)(c)] .

11.26 The concept of a termination day is discussed in further detail below. Generally it is the day on which the mining venture or the production right giving rise to a mining project interest no longer exists.

Effect of suspension

11.27 The suspension day is a point in the life of a mining project interest that represents the winding down of the interest. There are two consequences of an interest being suspended.

11.28 First, allowance components can no longer be carried forward and uplifted and, second, rehabilitation tax offsets may be available. [Section 130-15 and Division 225]

Cancelling allowance components

11.29 Allowance components are not intended to be carried forward and uplifted indefinitely. The uplift rate reflects the possibility that a miner may not get to use its allowance components.

11.30 The suspension day signals a new phase of a mining project interest, that is, the beginning of the end (or the end, if the suspension day is also the termination day).

11.31 From the suspension day onwards, the mining project interest will be less likely to be producing amounts of taxable resources and consequently less likely to have mining profits against which its allowance components can be applied.

11.32 A mining project interest that has had a suspension day will still accrue allowance components within each year and will be able to apply those allowances against mining profits for the year, be those its own or those of a related mining project interest.

11.33 In the year in which the suspension day occurs, the mining project interest can use all its allowance components carried forward from a previous year and those that have arisen in the current MRRT year. The interest must apply the allowance components against its mining profit or the components may form part of a transferred allowance for use by another interest. The allowance components that remain unapplied at the end of that year are cancelled. That is, they are not carried forward for use in a future year. [Paragraph 130-15(a)]

11.34 In an MRRT year after the MRRT year in which the suspension day for a mining project interest occurred, allowance components will still arise for the interest and they will be available for use at the end of the year. However, any allowance components that cannot be applied in that year are cancelled and cannot be carried forward. [Paragraph 130-15(b)]

11.35 Beyond the cancellation of the allowance components (and the access to the rehabilitation tax offset which is discussed below), the mining project interest is otherwise unaffected by having a suspension day.

11.36 The interest would continue to exist and the miner would still be liable to pay MRRT. A mining project interest will still be able to accrue allowance components within each year (including starting base allowances and transferred allowances) and have the ability to use them at the end of each year (whether against their mining profit or transferred for use against another interest's mining profit). But any unapplied allowance components (including pre-mining losses attaching to the mining project interest) will be cancelled at the end of the year and not carried forward to the next MRRT year.

Example 11.133 : Cancellation of allowance components Miner A has two mining project interests, MPI 1 and MPI 2. Commercial production has ceased from MPI 1. The miner makes a choice that 1 October 2015 will be the suspension day for the MPI 1.At this time, there are $100 million of mining loss allowances that have been carried forward from previous years in relation to MPI 1. At the end of the MRRT year (30 June 2016) MPI 1 has a $30 million mining profit. MPI 1 uses $30 million of the mining losses to reduce its profit to zero. MPI 2 can absorb $40 million of MPI 1's mining losses. Therefore, MPI 1 transfers $40 million of the losses to MPI 2 for use as a transferred mining loss allowance.MPI 1's remaining $30 million of mining losses cannot be applied for the year. These mining losses are cancelled.

Rehabilitation tax offset

11.37 Rehabilitating a mine site is a necessary condition that is attached to most, if not all, production rights. Some rehabilitation may be undertaken throughout the life of a mining project interest. However, most is commonly undertaken towards the end of the mine's life.

11.38 Throughout the life of a mining project interest, rehabilitation expenditure, to the extent it relates to upstream mining operations, is mining expenditure that is deductible [sections 35-10 to 35-20] . If mining expenditure exceeds mining revenue, a mining project interest makes a mining loss for an MRRT year [subsection 75-20(1)] . Mining losses can therefore be attributable to rehabilitation expenditure.

11.39 While the rehabilitation expenditure is mining expenditure, the time at which it is mostly incurred makes it less likely that the interest will have mining revenue against which the expenditure can be applied. To recognise this, the expenditure may give rise to a rehabilitation tax offset.

Entitlement to a rehabilitation tax offset

11.40 The rehabilitation tax offset is an amount claimed by the miner for an MRRT year. It is an entity level offset and not an offset that is applied against the individual MRRT liabilities of the mining project interests. However, the amount of the offset that the miner is entitled to is determined by reference to the rehabilitation tax offset amounts for each relevant mining project interest. [Section 225-10]

11.41 A miner is only entitled to a rehabilitation tax offset for an MRRT year if:

·
it is, or has been, liable to pay MRRT for any MRRT year [subsection 225-10(2)] ; and
·
it has a rehabilitation tax offset amount for a mining project interest [subsection 225-10(1)] .

Amount of a rehabilitation tax offset

11.42 If a miner is entitled to a rehabilitation tax offset amount for an MRRT year, the amount of the offset is equal to the sum of all the rehabilitation tax offset amounts that the miner has for its mining project interests. [Paragraph 225-10(3)(a)]

11.43 However, the amount of the rehabilitation tax offset that a miner is entitled to for an MRRT year cannot exceed the total MRRT that the miner is or has been liable to pay, in relation to any mining project interest that it has ever had (reduced to take into account the miner's entitlements to offsets). [Paragraph 225-10(3)(b)]

11.44 The offsets that are taken into account in reducing total MRRT liabilities are any:

·
rehabilitation tax offsets for a previous year [subparagraph 225-10(3)(b)(i)] ; and
·
any low-profit offset the miner is entitled to for the current year [subparagraph 225-10(3)(b)(ii)] .

11.45 This limits the miner's ability to claim a refundable tax offset if the miner has liabilities (in the current or previous years) which have been previously offset.

11.46 The rehabilitation tax offset reduces the miner's liability to pay MRRT for the year [subsection 225-25(1)] . If the offset exceeds the amount of MRRT the miner is liable to pay in any particular year, the Commissioner will pay the excess to the miner (provided the miner has no other outstanding tax liabilities) [subsections 225-25(2) and (3)] . Therefore, the rehabilitation tax offset is a refundable tax offset.

Joint and several liability

11.47 When determining the amount of MRRT that a miner is or has been liable to pay, there are some instances in which one or more entities other than the miner may be responsible for discharging the miner's liability. This occurs where the entities have, or are taken to have, joint and several liability. For example, if the head company of an MRRT consolidated group does not pay its MRRT liability, all the members of the group are jointly and severally liable for that liability.

11.48 To ensure that a single liability is not counted by two or more entities when working out their respective rehabilitation tax offsets, only the primary entity is taken to have the liability, regardless of which entity actually pays the debt. [Subsection 225-10(4)]

Rehabilitation tax offset amount for a mining project interest

11.49 A miner has a rehabilitation tax offset amount for a mining project interest for a year if:

·
there was an MRRT liability for the interest for a previous year [subsection 225-15(2)] ;
·
the suspension day for the mining project interest has occurred [paragraph 225-15(1)(a)] ;
·
rehabilitation expenditure was incurred for the interest for the year [paragraph 225-15(1)(b)] ; and
·
a mining loss for the current year is cancelled as a result of the suspension day having occurred [paragraph 225-15(1)(c)] .

11.50 The rehabilitation tax offset amount for an interest is the allowable rehabilitation expenditure multiplied by the MRRT rate. However, the rehabilitation tax offset amount cannot exceed the total MRRT liabilities for the mining project interest (for any year, payable by any miner). [Subsections 225-15(3) and (4)]

11.51 This ensures that a rehabilitation tax offset amount for a mining project interest cannot be greater than the MRRT liabilities that relate to the interest.

Allowable rehabilitation expenditure

11.52 The allowable rehabilitation expenditure is the lesser of:

·
the sum of all the upstream rehabilitation expenditure incurred in relation to the mining project interest for the year [paragraph 225-15(3)(a)] ; and
·
the amount of mining loss for the current MRRT year that was cancelled as a result of the suspension day having occurred [paragraph 225-15(3)(b)] .

11.53 This means that the miner's rehabilitation tax offset amount for a mining project interest, only represents rehabilitation expenditure that has been unable to be applied for the year.

Example 11.134 : Allowable rehabilitation expenditure Lyon Resources has a mining project interest that has had a suspension day. For the 2018 MRRT year, Lyon incurred $27 million on upstream rehabilitation expenditure. The interest has a $50 million mining loss for the year. Lyon is required to transfer $10 million of the loss to a related interest but the remaining $40 million cannot be used. The $40 million mining loss is cancelled. The allowable rehabilitation expenditure for the interest for the year will be $27 million (being the lesser of $27 million and $40 million).The rehabilitation tax offset amount for the interest is $6.075 million (being the allowable rehabilitation expenditure multiplied by the MRRT rate).

Upstream rehabilitation expenditure

11.54 The upstream rehabilitation expenditure that can give rise to a rehabilitation tax offset amount comprises any expenditure on rehabilitating the project area for the mining project interest or any other area affected by an upstream activity. Expenditure cannot give rise to a rehabilitation tax offset to the extent that it relates to rehabilitating areas affected by downstream activities. [Paragraph 225-15(1)(b]

11.55 To be upstream rehabilitation expenditure, the expenditure must be:

·
included as mining expenditure for the interest for the year [subparagraph 225-15(1)(b)(i)] ; and
·
necessarily incurred in carrying on mining operations that are rehabilitation activities, or activities done in furtherance of that rehabilitation [subparagraph 225-15(1)(b)(ii) and paragraphs 35-20(2)(f) and (h)] .

11.56 The first requirement brings in all mining expenditure for the year. The second requirement limits it to the expenditure relating to rehabilitation.

Example 11.135 ReakesFox Resources Limited intends to close down the Surajeeve iron ore mine (a mining project interest). ReakesFox Resources engages an environmental scientist to assist with the rehabilitation of the mine site, being the area affected by the upstream mining operations. The environmental scientist works only on rehabilitating the Surajeeve mine.The costs of employing the scientist are necessarily incurred in carrying on upstream rehabilitation activities of the mining project interest.

11.57 Further examples of upstream rehabilitation expenditure can be found in Chapter 5.

Diagram 11.9:  Calculating the rehabilitation tax offset

Termination day

11.58 A termination day occurs for a mining project interest when no entity has the mining project interest [section 135-5] . A change in the identity of the miner who has the interest will not result in a termination day. However, it will result in a mining project transfer or a mining project split.

11.59 The most obvious time that no entity will have an interest is when there is no longer any production right. However, the cessation of a mining venture may also give rise to no entity having a particular mining project interest.

Example 11.136 : Production right ends A miner has a mining project interest because it holds a production right. The production right expires and is not renewed. This will be the termination day for the mining project interest.

11.60 Whether an interest has ceased to exist should be determined by considering the facts and determining whether the facts fall within the definition of a mining project interest.

11.61 If a suspension day for the mining project interest has not already happened, the termination day will also be the suspension day. [Paragraph 130-10(1)(c)]

11.62 As discussed above, a mining project interest will be deemed to cease if the miner decides to recommence commercial production after the suspension day for the interest has occurred. This will be the termination day for the mining project interest (if it has not already had one). [Subsection 130-20(1)]

No termination day

11.63 A termination day does not occur merely because:

·
there is a change to, or renewal of, the production right;
·
there is a change to, or renewal of, the mining venture; or
·
there is a mining project transfer or mining project split.

[Sections 135-10, 135-15 and 135-20]

Change to, or renewal of, the production right

11.64 A termination day does not occur merely because there is a change to or renewal of the production right to which the mining project interest relates. [Subsection 135-10(1)]

11.65 Production rights typically run for a defined period of time. However, the various mining laws provide for the rights to be renewed (see, for example, section 147 of the Mineral Resources Act 1989 (Qld), section 113 of the Mining Act 1992 (NSW) and section 78 of the Mining Act 1978 (WA)). Similar provisions exist to allow production rights to be changed. The conditions that are attached to the right or the area covered by the right may change.

11.66 When there is a change to, or renewal of, the production right that relates to the mining project interest, the change or renewal does not result in a termination day. [Section 135-10]

11.67 However, if there is an additional area when a production right changes, or is renewed, the additional area does not form part of the mining project interest and forms part of a different mining project interest. [Subsection 135-10(2)]

11.68 If production rights could be expanded, this would be a way of circumventing the combination rules and, effectively, opening up transferability of otherwise quarantined allowance components.

Example 11.137 : Additional area RTIG Co has a mining project interest in respect of a production right. In 2014, the production right is altered to include a small area adjacent to the production right.

Additional area

The mining project interest that relates to the production right does not include the additional area. RTIG Co will have a new mining project interest in respect of the additional area.

Change to, or renewal of, a mining venture

11.69 Similarly, a termination day does not occur merely because there is a change or renewal of the mining venture to which the mining project interest relates. [Section 135-15]

11.70 This rule ensures there is a continuation of the mining project interest when there are changes to, or a renewal of, a mining venture.

11.71 Circumstances which should not result in the termination of a mining project interest are:

·
a change to the entities who are participating in the mining venture;
·
minor changes to the terms of the mining venture; and
·
an extension to the term of the mining venture (renewal).

Example 11.138 : No termination where mining venture extended Queen Co and Duke Resources have a mining venture to extract taxable resources from an area covered by a production right. They each have a mining project interest in respect of their share of output from the mining venture. Queen is the production right holder.The mining venture is for a limited period of three years. Due to bad weather, production has not met expectations and it is going to take another year to complete the mining venture. Queen and Duke agree to extend the mining venture for an extra year.The extension of the mining venture does not result in the termination of the mining project interest.

11.72 This rule is not designed to ensure continuity when the mining venture has substantially changed to the extent that the mining venture can be characterised as a different mining venture.

11.73 If the mining venture changes and the change results in the mining venture covering an additional area, this would result in the miner being entitled to a further extent and there would be a new mining project interest in respect of that extent. [Subsection 15-5(5)]

Mining project transfer and mining project splits

11.74 A mining project transfer or mining project split does not result in a termination day for the mining project interest [section 135-15] . There is a continuation of a mining project interest if it is subject to a transfer or split [subsections 120-10(2) and 125-10(2)] .

Effect of termination

11.75 Even though a mining project interest has had a termination day, the MRRT still operates as usual in respect of that interest. This is achieved by deeming the entity who had the mining project interest when the termination day occurred to continue to have the interest after the termination day. [Subsection 135-25(1)]

11.76 If the entity that last had the interest is no longer a miner, which will be the case if the interest in respect of which the termination day occurred was the only mining project interest that the entity has, that entity will be deemed to be a miner. [Subsection 135-25(2)]

11.77 These rules ensure that, if a mining revenue event occurs after the termination day, the fact that the interest has ended does not result in the mining revenue escaping taxation.

11.78 If a miner extracts taxable resources from a project area but the mining project interest has a termination day before the miner sells the resources, there is still mining revenue despite the interest having ended. All future royalties incurred in respect of those resources are also recognised. Similarly, mining expenditure that is incurred in carrying on mining operations for the interest after the termination day is recognised even if the termination day has occurred before the expenditure is incurred.

11.79 There is nothing stopping a starting base loss arising for a mining project interest that has had a termination day. However, the starting base asset giving rise to the loss would still need to be used in relation to the upstream mining operations of the interest. If there is insufficient remaining profit to offset the starting base loss at the end of the MRRT year, the loss will be cancelled. [Division 90 and section 130-15]

11.80 The effects of the suspension day continue to apply to the interest after it has had a termination day. All allowance components are cancelled at the end of each year and the miner may have a rehabilitation tax offset amount in respect of the mining project interest.

Pre-mining project interests

11.81 Like mining project interests, there are special rules to deal with the operation of the MRRT in respect of pre-mining project interests that are nearing the end of their lives.

11.82 Generally, the rules for pre-mining project interests mirror those for mining project interests. However, there are some differences.

Suspension day

11.83 There is no suspension day for a pre-mining project interest. Of the three events that cause a suspension day for a mining project interest, the termination day is the only one relevant for pre-mining project interest, as such interests would never satisfy the commercial production threshold.

11.84 Therefore, allowance components are cancelled, and access to the rehabilitation tax offset arises, from the termination day for the pre-mining project interest.

Termination day

11.85 There will be a termination day for a pre-mining project interest when no entity holds the interest. [Section 155-5]

11.86 The termination day generally occurs when the exploration right that gives rise to the pre-mining project interest no longer exists. For example, it may have expired.

11.87 Similar to the rules for termination of mining project interests, a termination day will not occur for a pre-mining project interest merely because:

·
there is a change to, or renewal of, the exploration right; or
·
there is a pre-mining project transfer or split.

[Sections 155-10 and 155-15]

Change to, or renewal of, an exploration right

11.88 A termination day does not occur if there is a change to or renewal of the exploration right to which a pre-mining project interest relates [subsection 155-10(1)] . Unlike mining project interests, there is no similar provision for changes to mining ventures, as mining ventures are not relevant to an entity having a pre-mining project interests.

11.89 If the varied or renewed exploration right results in the pre-mining project interest covering an additional area, it needs to be determined whether that additional area is insignificant. [Subsection 155-10(2)]

11.90 The insignificant area test is only relevant to changes to pre-mining project interests (not mining project interests). The insignificant area test seeks to recognise two things. First, alterations of an insignificant nature are frequently made to exploration rights (as distinct from production rights). Second, pre-mining project interests do not have starting base loss allowances and therefore the risk of insignificant changes to an exploration right resulting in the opening up of otherwise quarantined allowance components is relatively low.

Insignificant additional area

11.91 'Insignificant' takes its ordinary meaning. In determining whether an additional area is insignificant, the 'additional area' includes all previous additional areas that have been included in the project area as a result of changes to, or renewals of, the exploration right. This requires all the additional areas to be added together and an assessment made as to whether, when taken together, they constitute a significant change to the area covered by the original exploration right. [Subsection 155-10(3)]

Example 11.139 : Determining insignificance of an additional area RTIG Co holds a pre-mining project interest. In 2014, the exploration right is altered to include a small area adjacent to the original exploration right (on the right).

Determining insignificance of an additional area

There have been other changes to the exploration right over the past 12 months (the striped areas). When considering whether the latest addition is insignificant, all the other previous insignificant additions are also taken into account.

There have been other changes to the exploration right over the past 12 months

While the most recent addition to the area may be insignificant by itself, the test requires all the previous insignificant additional areas to be added together and assessed, collectively, as to whether they constitute an insignificant change.Taking into account the two previous insignificant additions, as well as the most recent addition, the collective area is not insignificant and therefore the most recent addition is an area of another pre-mining project interest.

11.92 If the additional area is insignificant, that additional area will form part of the pre-mining project interest. [Paragraph 155-10(2)(a)]

11.93 However, if the additional area is a significant area, the additional area that is the subject of the most recent change or renewal will be a different pre-mining project interest. [Paragraph 155-10(2)(b)]

Pre-mining project transfers and pre-mining project splits

11.94 A pre-mining project transfer or pre-mining project split does not result in a termination day for a pre-mining project interest [section 155-15] . There is a continuation of a pre-mining project interest if it is subject to a transfer or split [subsections 145-10(1) and 150-10(1)] .

Effects of termination

11.95 Like mining project interests, a pre-mining project interest is taken to continue to be held after the termination day by the last entity to hold it. [Section 155-20]

11.96 For the most part, the MRRT continues to operate in respect of such a pre-mining project interest in the usual way. There are some exceptions.

11.97 From the termination day for the pre-mining project interest, the interest:

·
has all its allowance components cancelled [section 155-25] ; and
·
may have a rehabilitation tax offset amount [paragraph 225-20(1)(a)] .

11.98 The termination day for a pre-mining project interest has the same effect for the pre-mining project interest as a suspension day has for a mining project interest. That is, from the termination day onwards, allowance components of the pre-mining project interest cannot be carried forward and uplifted but the entity may have a rehabilitation tax offset amount for the interest.

11.99 However, there is an exception. The effects of termination do not apply if the termination day for the pre-mining project interest occurs because a mining project interest originated from the pre-mining project interest. [Subsection 155-25(2)]

11.100 Where a termination day occurs because a mining project interest originates from the pre-mining project interest, the allowances that relate to the pre-mining project interest are not cancelled, rather they are inherited by the mining project interest. [Subsection 155-25(2) and sections 145-30 and 150-35]

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.

Chapter 13 Adjustments

Outline of chapter

13.1 This chapter explains the adjustments that are made to:

·
mining revenue, mining expenditure, pre-mining revenue and pre-mining expenditure when, as a result of a change in circumstances, the original amount that was accounted for under the Minerals Resource Rent Tax (MRRT) is no longer appropriate (Division 160); and
·
starting base losses (and, in some cases, to mining revenue) when a starting base asset ceases to be part of a mining project interest's starting base (for example, because the miner disposes of it) (Division 165).

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

Summary of new law

Mining adjustments for changes in circumstances

13.3 If there is a change in the circumstances affecting the amount of a previous item of mining revenue, mining expenditure, pre-mining revenue or pre-mining expenditure, an adjustment is made so that, in net nominal terms, the correct result is achieved.

13.4 In other words, an adjustment applies to the extent that the quantum of the original MRRT amount depended on assumptions or estimates relating to future events or circumstances and those assumptions or estimates turn out to be incorrect.

13.5 The main case in which the rules apply is ensuring that the cost of an asset is only recognised in a mining project interest's net mining expenditure to the extent that the asset is used in the upstream mining operations of the mining project interest. The rules do this by including an amount in mining revenue or mining expenditure to reflect any change in the extent to which the asset is used in the upstream mining operations of the mining project interest.

Starting base adjustments

13.6 Broadly, a starting base adjustment is made when a miner:

·
stops holding a starting base asset; or
·
stops (or never started) using a starting base asset in the upstream mining operations and decides never to so use it in the future.

13.7 In these cases, the termination value of the asset (usually what the miner received to stop holding it) is compared with its adjustable value (which is its base value less its decline in value to that time). If the termination value exceeds the adjustable value, the difference is applied to reduce any starting base losses, with any excess being included in mining revenue. If the termination value is lower than the adjustable value, the difference is included as a starting base loss.

Detailed explanation of new law

Mining adjustments for changes in circumstances

When does a mining adjustment arise?

13.8 A mining adjustment arises when an original amount of mining revenue, mining expenditure, pre-mining revenue or pre-mining expenditure was determined according to some expectation about later circumstances, and those expectations are revised, or the expected circumstances do not eventuate, or they turn out differently. An adjustment is made to reflect any impact that these new circumstances would have had on the original amount so that, in net nominal terms, the correct amount is accounted for under the MRRT overall. The adjustment is made in the MRRT year in which the new circumstances arise. [Subsection 160-10(1)]

13.9 The most common example of this is where the extent to which an item of expenditure relates to the upstream mining operations of a mining project interest changes because a miner so uses an asset to a greater or lesser extent than it initially anticipated. [Subsections 160-10(1) and (3)]

13.10 Under the general mining expenditure rule, both revenue and capital expenditure is immediately deductible to the extent that it is necessarily incurred by a miner in carrying on upstream mining operations for a mining project interest. As discussed in Chapter 5, this is based on the income tax test of deductibility (though the income tax test excludes capital expenditure). Under the MRRT, the extent to which an expense (especially a capital expense) is included in a miner's mining expenditure can depend on the miner's expectations about future circumstances in relation to that expense.

Example 13.141 : Change in extent to which an asset is used in upstream mining operations Shelby Co. is a miner that has one mining project interest. Shelby purchases an asset on the last day of its 2012-13 MRRT year for $1 million. The whole purchase price is included in mining expenditure as it is necessarily incurred in carrying on the upstream mining operations, since Shelby expects (at the time the expense is incurred) to use the asset entirely within the upstream mining operations of its mining project interest. Even though Shelby does not use the asset in 2012-13, the $1 million is still included in its mining expenditure.In 2013-14, Shelby acquires a second mining project interest and begins to use the asset equally in both project interests. This is a change in circumstances which leads to adjustments for both of Shelby's mining project interests since the new circumstances (the change in the way the asset is used) would have affected the amount included in mining expenditure for the mining project interests had those circumstances been anticipated when Shelby purchased the asset.The first mining project interest has an adjustment in relation to the $1 million originally included in its mining expenditure. The second mining project interest has a mining adjustment in relation to the original non-inclusion of any part of the purchase price in its mining expenditure.Example 13.142 : Change in extent to which an asset relates to excluded expenditureDheera Co. is a miner. In its 2012-13 MRRT year, Dheera purchases a building with a view to using it to conduct its administrative and accounting activities. The building is not adjacent to the project area of its mining project interest and so the purchase price is excluded expenditure.In its 2013-14 MRRT year, Dheera does not use the building for its administrative and accounting activities and instead uses it solely to remotely control the upstream mining operations - expenditure on this activity is not excluded expenditure. Had it anticipated these new circumstances, Dheera would have included an amount in its mining expenditure for its mining project interest. Therefore, a mining adjustment arises in relation to the original non-inclusion of any part of the purchase price in its mining expenditure. Example 13.143 : Debt being written off as bad Michelle is a miner. In her 2012-13 MRRT year, she sells taxable resources to Peter who promises to pay her $1 million. Michelle includes an amount in her mining revenue when the $1 million becomes receivable. However, Peter absconds without paying Michelle and, in her 2013-14 MRRT year, Michelle writes off the $1 million as a bad debt.This is a change in circumstances that gives rise to a mining adjustment for Michelle's mining project interest. Had she anticipated that the debt would be written off as bad, Michelle would not have included an amount in mining revenue, as she would not have seen the $1 million as being receivable.

13.11 A mining adjustment only arises where the extent of the original amount included in revenue or expenditure was dependant on the miner's expectations of future events or circumstances. An adjustment does not arise when the original amount was determined by a set of facts that do not change, even when those facts were themselves were decided or settled according to some expectation of the future.

Example 13.144 : Where the original amount is not subject to a mining adjustment Penney Co. is a miner and during the 2014-15 MRRT year enters into a three year contract with a customer for the supply of coal for a fixed price of $120 per tonne. The price was determined by Penney Co. based on estimates regarding the future price of coal which indicated that coal prices were likely to fall. The company includes an amount in its mining revenue over the next three MRRT years having regard to the fixed price in the contract.During the three year contract period, the market price for coal actually increases. Even though Penney Co. took into account expected changes in the price of coal at the time of entering into the contract for the purposes of determining the contract price, the change in the market price of coal does not constitute an event or circumstance that gives rise to an adjustment to mining revenue as it does not change the contracted price agreed between the parties.

What is the amount of the mining adjustment?

13.12 The amount of the mining adjustment is equal to the difference between the original amount and the amount that would have been included had the changed circumstances been taken into account in working out that original amount. [Subsection 160-10(2)]

13.13 For example, if the new circumstances would have reduced the original amount that was included in pre-mining expenditure, then the adjustment is equal to the amount of that reduction.

Example 13.145 : Amount of the mining adjustment In MRRT year 1, a miner incurs expenditure of $100 million on some machinery that the miner expects to use to the extent of 40 per cent in the upstream mining operations of a mining project interest for each of five years, after which the machinery will be sold. On this basis, $40 million is included in the miner's mining expenditure for the mining project interest for MRRT year 1.In MRRT year 2, the miner's use of the machinery in those operations increases to 50 per cent, and the miner expects that extent of use to continue for the rest of the five years. As a result, the extent to which the expenditure relates to the interest increases to 48 per cent (that is, (40% + 50% + 50% + 50% + 50%)/5). Had these circumstances been taken into account in MRRT year 1, the miner would have included $48 million in its mining expenditure. The difference between that amount and the $40 million it did include in its mining expenditure ($8 million) is the amount of its mining adjustment.

What is the effect of the mining adjustment?

13.14 The purpose of the mining adjustment is, to the extent possible without revisiting earlier MRRT assessments, to place a mining project interest in the same MRRT position as if the new circumstances had been taken into account in working out the original amount of mining revenue, mining expenditure, pre-mining revenue, or pre-mining expenditure. However, an adjustment does not account for any uplift or for any transfer of allowance components after the MRRT assessment that included the original amount. That is because the adjustment is made in the year the new circumstances exist instead of amending the original assessment.

13.15 The adjustments give effect to this purpose by including amounts in mining revenue, mining expenditure, pre-mining revenue, or pre-mining expenditure so that overall the correct net MRRT amount has been accounted for. Table 13.1 lists the effects of the different mining adjustments that arise in different cases. [Subsection 160-15(1)]

Table 13.2 : Effect of mining adjustments

If the original amount was included (or not included) in: ... and if the changed circumstance was taken into account in working out the original amount, that amount would: The mining adjustment is included in:
mining revenue increase mining revenue
mining revenue decrease mining expenditure
mining expenditure increase mining expenditure
mining expenditure decrease mining revenue
pre mining revenue increase pre mining revenue
pre mining revenue decrease pre mining expenditure
pre mining expenditure increase pre mining expenditure
pre mining expenditure decrease pre mining revenue

Example 13.146 : Mining adjustment which increases mining expenditure Continuing the previous example, had the new circumstances been taken into account in MRRT year 1, the miner would have increased its mining expenditure from $40 million to $48 million for the mining project interest. The $8 million mining adjustment is included in mining expenditure for the mining project interest in MRRT year 2, so that, overall, a total of $48 million has been included in mining expenditure.

13.16 In practice, a miner may account for these kinds of changes in another way that gives an equivalent outcome. For instance, a miner may account for adjustments that reflect a decrease in a previous amount of mining revenue for its mining project interest by reducing another amount of its mining revenue for that mining project interest, rather than including an amount of mining expenditure.

13.17 In some cases, a mining adjustment will arise in relation to a pre-mining project interest that no longer exists because it has been replaced by a mining project interest. This idea of a mining project interest 'originating' from a pre-mining project interest is discussed in detail in Chapters 6 and 10. Broadly speaking, the mining project interest is taken to be a continuation of the pre-mining project interest, so any adjustment that would have arisen for the pre-mining project interest should instead be attributed to the mining project interest. For this reason, where a mining project interest has originated from a pre-mining project interest, a mining adjustment will give rise to an amount of mining revenue or mining expenditure for that mining project interest, rather than pre-mining revenue or pre-mining expenditure for the pre-mining project interest. [Subsection 160-15(2)]

Accounting for previous mining adjustments

13.18 Only one mining adjustment can arise in relation to a particular expense or receipt in any particular MRRT year, but there may be such adjustments in more than one MRRT year. In these cases, the original amount included in mining revenue, mining expenditure, pre-mining revenue, or pre-mining expenditure is taken to itself be adjusted by the amount of the mining adjustment. [Subsection 160-15(3)]

13.19 This adjusted original amount is then taken to be the original amount against which any later adjustment is worked out.

Example 13.147 : Accounting for previous mining adjustments Continuing the previous example, in MRRT year 3, the miner's use of the machinery on the interest increases to 100 per cent, and the miner expects that extent of use to continue for the rest of the five years. As a result, the extent to which the expenditure relates to the interest increases to 78 per cent (that is, (40% + 50% + 100% + 100% + 100%)/5).The 'original amount' for MRRT year 2 is taken to be the original amount for MRRT year 1 ($40 million of mining expenditure) increased by the adjustment that was made in MRRT year 2 ($8 million of mining expenditure), which is $48 million of mining expenditure.The adjustment in MRRT year 3 is the difference between the $48 million of mining expenditure and the $78 million of mining expenditure that would have been recognised in MRRT year 2 if the new circumstances were known at that time. The mining adjustment is the $30 million difference and, since this would have increased the MRRT year 2 amount of mining expenditure, it is included in mining expenditure for MRRT year 3.

Starting base adjustments

13.20 A starting base adjustment is made when a starting base adjustment event happens. The amount of the adjustment reflects the difference between the adjustable value of the asset and its termination value.

Starting base adjustment events

13.21 A starting base adjustment event occurs for a starting base asset when the miner stops holding the asset. This includes the disposal, sale, loss or theft of the asset. [Paragraph 165-5(1)(a)]

13.22 A starting base adjustment event also occurs when a miner stops using a starting base asset in carrying on upstream mining operations relating to the mining project interest and expects never to use it again in this way. [Paragraph 165-5(1)(b)]

13.23 A starting base adjustment event also occurs when a miner has been using a starting base asset for upstream mining operations and stops:

·
having it installed ready for such use; or
·
stops constructing it for such use,

and the miner expects to never again have the asset installed ready for such use, or never to restart constructing it for such use. [Paragraph 165-5(1)(b)]

13.24 A starting base adjustment event also happens where a miner has never used a starting base asset for upstream mining operations and stops:

·
having it installed ready for such use; or
·
stops constructing it for such use,

and the miner decides never to so use it. [Paragraph 165-5(1)(c)]

13.25 However, there is no starting base adjustment in relation to a starting base asset that:

·
is, or includes, a right or an interest that constitutes a mining project interest (for example, the single starting base asset); or
·
is transferred with such a right or interest.

[Subsection 165-5(2)]

13.26 This exception recognises that, when a mining project interest is transferred from one miner to another, the tax history of the interest will be inherited by the other miner. One consequence of this is that, where starting base assets are transferred as part of the transfer of a mining project interest, those assets will retain their character as starting base assets in relation to the mining project interest.

13.27 Chapter 7 discusses how - under the market value approach -mining information, improvements to land, and goodwill are taken to be part of the same starting base asset as the rights and interests that comprise the mining project interest. As a consequence, there will be no starting base adjustment in relation to any of these things. However, where a miner receives an amount that has the effect of recouping the base value of a part of the single starting base asset (such as on the sale of mining information), this will reduce the base value of the asset. This is also discussed in Chapter 7.

Starting base adjustment amounts

13.28 If a starting base adjustment event occurs for a starting base asset, then:

·
if the asset's adjustable value exceeds its termination value - that excess is included in a starting base loss [subsection 165-10(2), section 165-20 and subsections 165-25(1) and (2)] ; or
·
if asset's termination value exceeds its adjustable value - that excess is applied to reduce any available starting base loss (with any remaining excess being included in mining revenue) [subsection 165-10(1), section 165-20 and subsections 165-25(3) and (4) and section 165-30] .

Adjustable value

13.29 The adjustable value of a starting base asset is the difference between:

·
the base value of the asset for the MRRT year in which the event occurred; and
·
the decline in value of the asset for the part of the year before the starting base adjustment event occurred.

[Subsection 165-10(7)]

Termination value

13.30 The termination value of a starting base asset (usually what was received under a starting base adjustment event) is:

·
if the miner has received or is taken to have received an amount - that amount; or
·
if the miner has not received an amount, or has received an amount under a non-arm's length arrangement - the market value of the asset.

[Subsection 165-10(3)]

Amounts a miner has received or is taken to have received

13.31 Generally, termination value includes the amounts that a miner received (or is taken to have received) in relation to the asset because of the starting base adjustment event, including money or non-cash benefits.

13.32 The main case is simply receiving money under a starting base adjustment event, in which case the termination value is that amount. This covers the most common case, where money is received on the sale of an asset.

13.33 Where a miner receives non-cash benefits under a starting base adjustment event, the market value of those benefits at that time will be included in the termination value under the general non-cash benefit rules. Those rules are explained in detail in Chapter 15.

13.34 When a miner's liability to pay an amount to another entity is reduced (or terminated) because of a starting base adjustment event, this economic benefit is included in the asset's termination value for the miner. [Subsection 165-10(5)]

13.35 If a miner receives an amount for several things that include a starting base asset, only a reasonable part of the amount is to be treated as being for the starting base asset. In other words, the amount will be apportioned between the termination value of the asset and those other things. [Subsection 165-10(6)]

Example 13.148 : Apportioning the amount received for several starting base assets Belluk Resources receives $1 million for the sale of two starting base assets. The $1 million will be apportioned between the termination values of each starting base asset, based on their relative market values.

Where no amount is received or an amount is received under a non-arm's length arrangement

13.36 In some circumstances a miner will continue to hold a starting base asset after a starting base adjustment event. For instance, an adjustment event occurs where a miner stops using an asset in the upstream mining operations of its mining project interest and the miner expects that they will never again use the asset for that purpose. In these cases, the miner will often not receive an amount because of the event and so the termination value will be the market value of the asset at the time of the event.

Example 13.149 : No amount received under a starting base adjustment event Toni Co. operates a coal mine. Due to falling prices for coal, it stops using a conveyor belt it holds (a starting base asset). It expects that coal prices will never recover sufficiently for it to ever use this asset again. This is a starting base adjustment event. The termination value of the conveyor belt is its market value just before the moment Toni Co. formed the expectation that it would never use the asset again.

13.37 In addition, where a miner receives an amount under an arrangement in which it did not deal at arm's length with one or more of the other parties to that arrangement, the termination value is the market value of the asset at the time of the starting base adjustment event. This is an integrity rule to cover non-arm's-length dealings. [Paragraph 165-10(3)(b)]

13.38 Whether parties are dealing at arm's length is a question of fact. It is necessary to look at the nature of the dealing between them to assess whether the outcome of their dealing is the result of real bargaining.

Where the starting base adjustment event gives rise to mining expenditure that exceeds the amounts received

13.39 Alternatively, the termination value will instead be the total of:

·
an amount included in mining expenditure because of the event; and
·
any amount by which that mining expenditure is reduced because of an amount received by the miner,

where this total exceeds the amount the miner received or is taken to have been received. [Subsection 165-10(4)]

13.40 This rule deals with the case where a miner is entitled to an amount of mining expenditure as a consequence of the starting base adjustment event.

Example 13.150 : Mining expenditure arising because of a starting base adjustment event Bridie Co. gives a starting base asset to one of its customers. Under the non-cash benefit rules (explained in Chapter 15), the market value of the asset will be included in mining expenditure for Bridie's mining project interest. So, the termination value for the asset will include that amount.

13.41 The second limb of the rule deals with the case where the mining expenditure is reduced because the miner received something of value as a consequence of the starting base adjustment event.

Example 13.151 : Reduced mining expenditure arising because of a starting base adjustment Continuing the previous example, if Bridie received some cash from its customer for the asset, Bridie's mining expenditure would be reduced by that amount (assuming it was not mining revenue), so the termination value for the asset should include the full value that Bridie received for the asset, being the amount included in mining expenditure as well as the amount by which mining expenditure was reduced.

Reduction for non-mining operations

13.42 The amount of a starting base adjustment is reduced to the extent that the decline in value of the asset has been ignored in working out a starting base loss for the mining project interest for that MRRT year or an earlier year. The reduction is:

[(Sum of reductions) / (Total decline)] x Starting base adjustment amount

[Section 165-15]

13.43 The 'total decline' refers to the sum of all declines in value for the asset up until the time of the starting base adjustment event.

13.44 The 'sum of reductions' is the total of all amounts by which the decline in value of the starting base asset has been ignored in working out a starting base loss. These reductions are explained in Chapter 7. Broadly, the reductions are made to ensure that the starting base loss does not include any part of the asset's decline in value that:

·
is attributable to the miner's use of the asset, or having it installed ready for use, or constructing it for use, for a purpose other than upstream mining operations in relation to the mining project interest [subsection 80-40(3)] ; or
·
would be excluded expenditure if it was an amount that the miner was taken to have incurred on or after 1 July 2012 [subsection 80-40(4)] .

Partial disposals of starting base assets (other than the single starting base asset)

13.45 Further rules deal with partial disposals of starting base assets after the start time. Where a miner stops holding a part of a starting base asset, the general starting base adjustment rules apply to that part in the same way they would apply if that part was a starting base. For this purpose, the adjustable value of the disposed part is taken to be a reasonable proportion of that of the entire starting base asset at the time. [Subsections 165-35(1) and (2)]

Example 13.152 : Partial disposal of a starting base asset Maher and Paher Co. (MPC) uses a starting base asset to the extent of 10 per cent in the upstream mining operations of its mining project interest. The base value of the asset at the beginning of the MRRT year is $10 million and its remaining effective life is 10 years. Halfway through the year, MPC sells a 75 per cent interest in the underlying asset for $6 million.The adjustable value of the asset at the time of the sale is $9.5 million.The adjustable value of the 75 per cent interest is $7.125 million ($9.5m x 75%). The termination value of the 75 per cent interest is $6 million (being the sale price). So, there is a starting base adjustment of $1.125 million that is included in a starting base loss.The base value for the remaining 25 per cent interest is $2.375 million ($9.5m x 25%).Assuming MPC used its 25 per cent interest in the asset for the second half of the year to the same extent (10 per cent in the upstream mining operations of its mining project interest), then it would have a starting base loss equal to $62,500, being the sum of the following:

·
For the use of the asset in the first half of the year:

10% x 1/2 x $1m = $50,000

·
For the use of the 25 per cent interest in the second half of the year:

10% x 1/2 x $250,000 = $12,500.

13.46 After a partial disposal occurs, the general rules for starting base assets apply in relation to the remainder of the asset. For the MRRT year in which the part disposal occurs, the decline in value for the remainder of the asset takes into account both:

·
the decline in value for the entire asset (including the disposed part) for the period in the MRRT year before the part disposal; and
·
the decline in value for the remainder of the asset (not including the disposed part) for the period in the MRRT year after the disposal.

[Section 165-40]

13.47 The decline in value for the entire asset (including the disposed part) for the period in the MRRT year before the part disposal, is worked out as if that period was a MRRT year. [Paragraph 165-40(1)(a)]

13.48 Similarly, the decline in value for the remainder of the asset (not including the disposed part) for the period in the MRRT year after the disposal, is worked out as if that period was the next MRRT year. Although the periods are treated as separate MRRT years to work out the decline in value, there is no uplift of the base value at the end of the earlier period (regardless of whether the book value method is used). [Paragraphs 165-40(1)(b) and (2)(a)]

13.49 Also, if the book value method is used, the same write-off rate applies to each period in the MRRT year as would normally apply to the entire MRRT year (and not the next MRRT year). [Subsection 165-40(4)]

13.50 Where more than one partial disposal occurs in relation to the same starting base asset in the same MRRT year, the periods between those disposals are treated as separate MRRT years in working out the declines in value for the remainder of the starting base asset. For example, where a second partial disposal occurs in relation to the same starting base asset in the same MRRT year, then the period in the entire MRRT year before the first disposal is treated as an MRRT year. The period after the first disposal and before the second disposal is treated as another MRRT year. Finally, the period after the second disposal and before the end of the entire MRRT year is treated as another MRRT year. [Subsection 165-40(3)]

13.51 Following a partial disposal of a starting base asset, the amount of a starting base loss for the remainder of the asset is worked out taking into account the use of the remaining asset, but not taking into account any use of the disposed part. [Section 165-45]

Partial disposal rules do not apply where the entire asset is disposed of

13.52 The partial disposal rules do not apply to a partial disposal that occurs at the same time the miner stops holding all other parts of the starting base asset. For example, if a miner sells a 50 per cent interest in its starting base asset to one entity and another 50 per cent interest to another entity at the same time, then the miner will apply the general starting base adjustment rules to the entire asset it stops holding (rather than applying the partial disposal rules separately to each part it stops holding). [Subsection 165-35(3)]

Partial disposal rules do not apply to the single starting base asset

13.53 As discussed above, a starting base adjustment event does not apply in relation to the single starting base asset under the market value approach. So, a 'partial disposal' of that asset (such as through the sale of mining information that is included in that asset) is not subject to the rule about partial disposals of starting base assets. However, as discussed above, this may represent a recoupment of the base value of the single starting base asset, which will result in the base value of the asset being reduced accordingly. [Paragraph 165-5(2)(a)]

Using a starting base asset in other project interests

13.54 As discussed in Chapter 7, a starting base loss is reduced to the extent that a starting base asset is used, installed ready for use, or being constructed for use, for a purpose other than upstream mining operations of the mining project interest. Where that other purpose includes a use in the upstream mining operations of another mining project interest of the same miner, then the miner can include an amount in mining expenditure for that other interest. The amount included in mining expenditure is so much of the reduction in the decline in value for the first mining project interest as is attributable to that use in the other interest, and as would be included in mining expenditure for the other interest had the miner actually incurred the amount. This ensures that the base value of the starting base asset is realised by the miner to the extent it is used in the miner's upstream mining operations, regardless of whether the asset is used in another mining project interest of the miner in relation to which the asset is not a starting base asset. [Subsection 165-55(1), paragraph 165-55(2)(a), subparagraph 165-55(2)(b)(i) and subsection 165-55(5)]

Example 13.153 : Using a starting base asset in a miner's other mining project interest Crag Co. has two mining project interests, A and B. Crag holds a starting base asset in relation to mining project interest A. In an MRRT year, it uses the asset 50 per cent in the upstream mining operations of mining project interest A and 50 per cent in the upstream mining operations of its other mining project interest B.The starting base loss for mining project interest A does not include half of the decline in value for the asset for the year, reflecting the use of the asset outside of the upstream mining operations of that interest.Crag Co. can include that half of the decline in value for the MRRT year in the mining expenditure of mining project interest B for that year.

13.55 Similarly, a miner can include an amount in the pre-mining expenditure of its pre-mining project interest where it uses a starting base asset in the pre-mining operations of that interest. [Subsection 165-55(1), paragraph 165-55(2)(a), subparagraph 165-55(2)(b)(ii) and subsection 165-55(5)]

Using a starting base asset after a starting base adjustment event

13.56 As discussed above, a miner may continue to hold a starting base asset after a starting base adjustment event. This will occur when the starting base adjustment happens because the miner decides never to use an asset in the upstream mining operations of the mining project interest in the future.

13.57 If, after this time, the miner starts to use the asset in the upstream mining operations of another mining project interest (for which the asset is not a starting base asset), then an amount may be included in the mining expenditure of its other mining project interest. The amount included in mining expenditure will be so much of the asset's termination value from the earlier starting base adjustment event as would be included in mining expenditure if the miner had actually incurred that termination value when it starts to use the asset in the other mining project interest. [Subsections 165-55(3) to (5)]

13.58 If, after a starting base adjustment event (other than ceasing to hold the asset), the miner starts to use the asset in the upstream mining operations of the same mining project interest (for which the asset is a starting base asset), then the starting base asset is taken to have a base value equal to its termination value under the earlier starting base adjustment event. This means that the decline in value for the asset will restart from a value that reflects the basis of the earlier starting base adjustment. This ensures that the entire base value of the starting base asset will be recognised by the miner to the extent it is used in the upstream mining operations of the mining project interest, regardless of whether an earlier starting base adjustment event (other than ceasing to hold the asset) has happened. [Section 165-60]

Chapter 14 Valuations

Outline of chapter

14.1 This chapter describes:

·
the valuation principles in Division 170 that are applied in working out the value of assets, rights and other things for the purposes of the Minerals Resource Rent Tax (MRRT); and
·
the alternative valuation method in Division 175 that is available for working out the MRRT revenue of some smaller miners and miners with vertically integrated transformative operations.

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

Summary of new law

Valuation principles

14.3 MRRT taxpayers may need to value certain assets and rights in order to determine their MRRT liability.

14.4 For example, the value of an asset may be used in determining the starting base of a mining project interest, and as an input in calculating the amount of mining revenue that arises from a particular sale of taxable resources. Valuations are also used when project interests are split or transferred between taxpayers, and when certain non-cash benefits are received.

14.5 Because of their role in determining MRRT outcomes, it is important that these valuations be reasonable, both in isolation and when considered alongside other valuations done in relation to a project interest.

14.6 To this end, valuations must comply with a set of principles, which recognise that reasonable valuations depend on:

·
the consistent application of appropriate assumptions;
·
each thing that is to be valued being counted exactly once; and
·
avoiding hindsight when estimating the value of something at an earlier point in time.

Alternative valuation method

14.7 Miners producing less than 10 million saleable tonnes of taxable resources in a year can choose to use an alternative valuation method to work out the mining revenue attributable to taxable resources from their mining project interests for that year.

14.8 Miners with a vertically integrated transformative operation (that is, an operation that both extracts resources and turns them into a different product) that existed just before 2 May 2010 can always use the alternative valuation method for that operation. If their group production is under 10 million saleable tonnes, they can also use it for the rest of their mining project interests.

14.9 The alternative valuation method is a variant of the netback method. It starts with the consideration for supplies of taxable resources and deducts the project interest's post-valuation point (downstream) operating costs, depreciation on its downstream assets and a return on its downstream capital. The rate of return is the same long term bond rate plus 7 per cent (LTBR + 7 per cent) used to uplift carried forward mining losses and royalty credits.

Detailed explanation of new law

Valuation principles

When the valuation principles apply

14.10 The valuation principles apply broadly, wherever the value of something is used in working out an amount under the MRRT law. [Subsection 170-5(1)]

14.11 An obvious example is the way the value of certain starting base assets is used to determine the starting base losses of project interests that existed on 1 May 2010.

14.12 The starting base is an example where values are used directly in working out an MRRT amount. In other cases, the relationship between the value of an asset and an MRRT amount may be less direct.

14.13 The valuation principles apply whether or not a provision of the MRRT law expressly requires the amount to be worked out by making a valuation. [Paragraph 170-5(3)(b)]

14.14 The valuation principles do not prescribe or prevent the use of any specific valuation method, nor does their operation depend on a certain method being used. They apply in relation to starting base assets, for example, whether the market value or book value approach is chosen by the taxpayer. [Paragraph 170-5(3)(a)]

14.15 However, the valuation principles do not operate to exclude the operation of any specific rules elsewhere in the MRRT law. [Subsection 170-5(2)]

14.16 For example, the alternative valuation method (described below) allows certain taxpayers to calculate MRRT revenue in a specific way, using a version of the 'retail price' or 'netback' method. Under this method taxpayers use a concept of 'total adjustable values' when calculating a return on their capital costs. The specific rule setting out how 'total adjustable values' are to be calculated under this method takes precedence over the valuation principles, in the event of any conflict between them. Similarly, the rule setting out how a mining revenue amount is determined prevails over these principles if there is any inconsistency between the two.

What the valuation principles are

Basic principle

14.17 The valuation principles consist of one basic principle and five supporting sub-principles.

14.18 The basic principle requires each valuation relating to a mining project interest (or pre-mining project interest) to be reasonable, having regard to the objects of the MRRT law. [Subsection 170-10(1)]

14.19 This requirement of reasonableness means that each valuation is to be governed by logic and reflect the application of common sense and sound thinking. Reasonable valuations are also free from contradiction and extreme argument.

Sub-principles

14.20 Each of the five valuation sub-principles is designed to support the basic principle, by explaining in further detail some of the things which must be recognised and criteria which must be satisfied in order for a valuation to be reasonable.

14.21 However, to the extent that there is any conflict between the basic principle and any of the sub-principles, the basic principle applies. [Subsection 170-10(7)]

14.22 The sub-principles require that a valuation done for the purposes of working out an amount under the MRRT law:

·
avoids using hindsight when valuing something as at an earlier point in time;
·
counts each thing that is being valued exactly once;
·
treats identical assets equally;
·
applies appropriate assumptions consistently; and
·
takes into account relevant previous valuations.

Sub-principle 1: The use of hindsight is to be avoided when valuing something as at an earlier point in time

14.23 A taxpayer may use the value of something at a particular point in time for the purpose of working out an amount under the MRRT law. For example, a taxpayer choosing to use the market value method to determine the starting base amount for a project interest uses the market value of certain things as at 1 May 2010.

14.24 Such valuations are generally conducted after the time to which they relate. This is unavoidable and in itself poses no great difficulty provided that the valuation takes into account only those facts, estimates, and predictions which prevailed at the time to which the valuation relates. A valuation of something at a point in time is not valid to the extent it draws on observations made since that time.

14.25 This concept is captured by the first sub-principle, which clarifies that a valuation made as at a particular time may only take into account:

·
things that have actually happened before that time; and
·
things that, as at that time, are reasonably expected to happen after that time.

[Subsection 170-10(2)]

14.26 That is, things only known with the benefit of hindsight cannot be taken into account.

Example 14.154 : Valuations cannot reflect the application of hindsight Block Ore Co has an iron ore mining project interest as at 1 May 2010. As at that time, the market value of the rights and interests which constitute the mining project interest is $1 billion. This figure takes into account all relevant factors, such as the current and anticipated production of the mine and expected iron ore prices and capital and operating costs.In December 2011, the iron ore price received by Block Ore unexpectedly decreases sharply. This reduces the value of its mining rights and interests to $300 million.In February 2012, Block Ore (intending to use the market value method) seeks to determine its starting base amount. In doing so, it has no regard to the unexpected fall in the iron ore price because to do so would be to apply hindsight to the determination of a value at a particular point in time (1 May 2010). The amount to be included in the starting base is $1 billion.

14.27 The avoidance of hindsight in no way means that estimates and assumptions about future events and circumstances are prevented from being taken into account. It only means that their likelihood must be evaluated by reference to information available at the time to which the valuation relates.

Example 14.155 : Assumptions about the future are to be taken into account On 1 May 2010, Seagull Resources has a small pre-mining project interest in remote Queensland. The viability of turning this interest into an operating coal mine depends on whether a railroad is built to service nearby major deposits. The railroad has been talked about as a possibility for some time, but it is generally accepted that it will be built by 2012, or not at all in the foreseeable future. As at 1 May 2010, the chances of the railroad being built are 50 per cent.Without the railroad, Seagull Resources' pre-mining project interest has little value, $5,000. However, if it were known with certainty that the railroad would be built, the value of the interest as at 1 May 2010 would be $20 million.Based on this information, if in 2012 Seagull Resources were to use the market value method to determine its starting base amount, then it would be appropriate to include slightly over $10 million for the pre-mining project interest (being 50 per cent of $20 million plus 50 per cent of $5,000). Although the railroad was not built by the valuation date, the likelihood of it being built in the future should be taken into account, along with the effect that building it would have on the value of the project interest.It would not be valid for Seagull Resources to cite an announcement in early 2012 that the railroad would be built as a justification for increasing its starting base amount towards $20 million, because this fact was not known on 1 May 2010.

Sub-principle 2: Each thing being valued is to be counted exactly once

14.28 The second sub-principle states that the sum of the values of all things in a set must equal the value of the set. This ensures that each thing being valued is counted exactly once. [Subsection 170-10(3)]

14.29 A common situation where this principle is relevant is the use of a residual method to determine the value of the rights and interests of a mining project interest. A valuer might first determine the value of an integrated mining operation (the set, using the language of the principle) and then subtract the value of the physical assets. The residual amount is then attributed, on a collective basis, to those remaining assets which were not valued separately.

14.30 In some situations, the value of an asset within a mining operation may depend not only on its intrinsic qualities, but also on how it functions within the context of the overall operation. The valuation principles do not prevent any synergy value from being recognised, but they do insist that it only be counted once.

Example 14.156 : Valuations must not count the same thing more than once Blob Energy uses a crusher and a railway in its downstream mining operations. The value of the crusher is $100 million. The value of the railway, which is used exclusively in transporting coal from Blob Energy's mine to the port, is $500 million.The value of the crusher and the railway, taken together, is the sum of their respective values, $600 million. It would be invalid to seek to ascribe any additional value to any synergy arising from the use of the crusher and railway in close proximity.

Sub-principle 3: Identical assets are to be valued equally

14.31 The third sub-principle requires identical assets to be treated equally in valuations. It states that identical things in identical circumstances have the same value. [Subsection 170-10(4)]

14.32 In practice, it will be rare to find two assets which are identical in all respects, including the circumstances in which they are used. The conditions of the sub-principle may never strictly be satisfied.

14.33 However, the corollary of the principle is that a difference in two assets' values must be explainable by differences in their nature or circumstances.

14.34 This is essentially another expression of the requirement for valuations to be reasonable when considered alongside other related valuations. Things not relevant to the value of a particular asset, such as whether it operated upstream or downstream of the valuation point in a particular period, should not influence any estimate of the asset's value.

Example 14.157 : Identical assets in identical circumstances have the same value Pod Power Co purchases a fleet of 10 identical new trucks in 2013-14 for use in its coal mining operations. Each truck performs the same tasks as the others: picking up coal, transporting it from one place to another, and unloading it. While five of the trucks operate mostly upstream of the valuation point and the other five mostly downstream, the conditions are equivalent and the trucks operate interchangeably.The total value of the 10 trucks at the end of 2014 is $20 million. The trucks are the same make, model and age. In the absence of any reasonable argument to the contrary, each truck has the same value, $2 million.It would not be valid to suggest the value of the trucks used mostly downstream of the valuation point was greater than the others, because the location of the valuation point is not relevant in determining the value of an asset.

Sub-principle 4: Valuations are to consistently apply appropriate assumptions

14.35 The fourth sub-principle goes to the consistent application of reasonable assumptions and estimates, when valuing a thing to work out an amount under the MRRT law.

14.36 An assumption or estimate relating to a mining project interest or pre-mining project interest:

·
is to be reasonable when considered in isolation;
·
is to be reasonable when considered together with all other assumptions or estimates made in relation to the interest; and
·
is to be made consistently for all things relating to the interest.

[Subsection 170-10(5)]

14.37 The task of valuing an asset usually involves making assumptions and estimates, which are used as inputs in the application of a particular valuation method.

14.38 The basic principle requires the product of this process (that is, the value ascribed to the asset, or other thing) to be reasonable. The sub-principles discussed so far cover matters relating to the reasonableness of the valuation method.

14.39 This sub-principle focuses on the reasonableness of the assumptions and estimates used as inputs to a process of valuation. Its inclusion recognises that even the soundest valuation method will seldom be able to overcome the use of unreasonable inputs to produce a reasonable valuation outcome.

14.40 The first of the three parts of the sub-principle requires each assumption and estimate used in a valuation to be reasonable when considered in isolation. [Paragraph 170-10(5)(a)]

14.41 In practice, there is likely to be a range of views on the most appropriate assumptions to make when valuing something for the purposes of the MRRT. For instance, there is no single universally accepted 'correct' value of expected future exchange rates or commodity prices that a valuer can draw on, or could be compelled to employ.

14.42 It is wholly to be expected, and perfectly legitimate, for views to differ as to the most appropriate assumptions and estimates to use in a given circumstance. However, this does not mean that a taxpayer is free to choose any assumption, no matter how unrealistic or remote the likelihood of it being borne out.

Example 14.158 : Assumptions used in valuations must be reasonable in isolation Iron Grid Co is an exploration company with a pre-mining project interest on 1 May 2010. At that time, the interest had an indicated resource of 1 million tonnes of iron ore.As an input into the determination of its market value starting base for the MRRT, Iron Grid makes an assumption about the proportion of this indicated resource that will ultimately be converted into a measured reserve able to be economically extracted and sold.This assumption must be reasonable, a standard permitting some discretion but not so wide as to include any conceivable possibility. If the demonstrated success of conversion for comparable tenements in recent years had ranged between zero and 15 per cent, it might be considered reasonable for Iron Grid to adopt an assumption lying somewhere between those limits. It would not be reasonable to assume that, say, 90 per cent of the indicated resource would prove economically recoverable.

14.43 The second part of the sub-principle requires each assumption and estimate to also be reasonable when considered together with other assumptions and estimates made in relation to the interest. [Paragraph 170-10(5)(b)]

14.44 This recognises that, as is the case for the values themselves, it is possible for two assumptions or estimates to be reasonable when considered separately but inconsistent (such as being mutually exclusive), and so not reasonable, when taken together.

Example 14.159 : The relationship between assumptions must be taken into account In determining as at 1 May 2010 the market value of its starting base assets, Geordie Minerals Co makes assumptions about future movements in several exchange rates, including those between:

·
the United States dollar and the Australian dollar;
·
the Japanese yen and the Australian dollar; and
·
the United States dollar and the Japanese yen.

Having had appropriate regard to market forecasts and other relevant information, Geordie Minerals considers anything between -20 per cent and +20 per cent would represent a reasonable forecast of the change in the strength of the Australian dollar (A$) relative to the United States dollar (US$) over the period relevant to its valuation. Geordie Minerals considers the same range also captures all reasonable forecasts of the change in the A$ relative to the Japanese yen (¥), and of the change in the US$ relative to the ¥.Geordie Minerals decides to assume that the A$ will remain unchanged against both the US$ and the ¥ over the relevant period. These assumptions are reasonable in the circumstances, both when considered separately and when considered together.It would not be reasonable though, for Geordie Minerals to concurrently assume that the US$ would markedly increase (or decrease) against the ¥. While such an assumption could be reasonable in isolation, it is not reasonable when considered alongside the other assumptions made in relation to the project interest. This is because it would not reflect the very strong correlation observed in practice between the exchange rate movements of highly liquid currencies such as the A$, US$ and ¥.

14.45 The third part of the sub-principle requires each assumption and estimate to be made consistently for all things relating to the interest. [Paragraph 170-10(5)(c)]

14.46 For example, if a forecast increase in the coal price is used to estimate the overall value of an integrated mining operation at a particular time, then this forecast must be applied consistently when valuing the separate assets used within that operation.

14.47 It would not be valid, for example, to assume that interest rates will increase for the purposes of valuing a crusher, while at the same time assuming that interest rates will decrease when valuing a digger used in relation to the same project interest.

Example 14.160 : Assumptions and estimates can reasonably vary over time Boro Coal Co is a miner subject to the MRRT. It takes the value of its mining rights as at 1 May 2010 into account when determining its market value starting base. For the purpose of that valuation, Boro Coal uses its assumption as of 1 May 2010 that the average coal price it will receive over the following five years would be $250 per tonne. It is required to use this assumption (or one consistent with it) when valuing other assets relating to this project interest at that time.In 2013-14, Boro Coal again values its mining rights for the purpose of splitting a mining project interest. It is not required to use the same assumption for future coal prices it used previously. Boro Coal should make an assumption which is reasonable in the circumstances (and then apply that assumption consistently for all its valuations done at that time).

Sub-principle 5: Valuations are to be reconcilable with relevant previous valuations

14.48 The fifth (and final) sub-principle recognises that, just as the estimates and assumptions used in a valuation should be reasonable when considered together, so too should the set of valuations be reasonable.

14.49 The sub-principle states that each valuation done for the MRRT after 1 May 2010 should be reconcilable with certain other valuations relating to the interest (including, if relevant, a valuation relating to a pre-mining project interest from which a mining project interest originated). [Subsection 170-10(6)]

14.50 Only valuations made after 1 May 2010 and for the purposes of working out an amount under the MRRT law are required to be taken into account. [Paragraphs 170-10(6)(a) and (b)]

14.51 In some cases an asset or other thing will have been valued multiple times for the purposes of working out an MRRT amount. The sub-principle requires a new valuation of that thing to be reconcilable only with the most recent relevant valuation, rather than every previous valuation. [Paragraph 170-10(6)(c)]

14.52 Requiring valuations relating to the same project interest to be reconcilable, or broadly consistent, is designed to avoid, over time, a set of valuations which is not reasonable, perhaps because some of its elements are mutually contradictory, despite each individual valuation being reasonable considered in isolation.

14.53 The requirement for valuations done in relation to a project interest to be reconcilable does not mean that they must be the same. It is sufficient that they accord with each other, are compatible, and are free from contradiction.

14.54 In practice, there will be many valid reasons for the value of an asset within a mining project interest to change over time. It is entirely appropriate for a valuation to take into account any changes in circumstances since any previous valuation.

Example 14.161 : Two valuations can be reconcilable without being the same In 2012-13, Buzz Coal Co values a digger at $20 million and a crusher at $10 million.By 2015-16, the collective value of the digger and crusher decreases to $15 million, owing to a change in the configuration of Buzz Coal's operations and the wear and tear placed on the assets due to their continual use. Buzz Coal ascribes this decrease in value between the two assets proportionately, so the digger is now worth $10 million and the crusher $5 million. This is reconcilable with the previous valuation, even though it produces different results.

14.55 In practice, there will nearly always be some change in circumstances and available information from one valuation to the next, even if this change is nothing more than the passage of time.

14.56 This sub-principle does not prevent such changes from being taken into account when an asset is valued. However, it does require a miner performing a valuation of something to have due regard to the value previously ascribed to the thing.

Example 14.162 : A valuation must be reconcilable with previous valuations done in relation to the project interest In 2012, Buzz Coal Co estimates the value as of 1 May 2010 of a digger and a crusher for the purpose of working out the starting base amount for its interest in the Basic Coal project. The digger is used upstream of the valuation point (so its value is used directly in calculating the starting base) and the crusher forms part of its downstream mining operations.Buzz Coal estimates that, collectively, the digger and the crusher were worth $30 million on 1 May 2010. Because the digger and crusher play an interdependent role in an integrated operation, Buzz Coal finds it could split this $30 million in any one of a number of ways, with any valuation of the digger between $10 million and $20 million being reasonable in the circumstances. For the purpose of determining its starting base amount, Buzz Coal values the digger at $20 million, and the crusher (which is not a starting base asset) at $10 million.In 2013, Buzz Coal seeks to use the value of the crusher during the 2012-13 MRRT year for the purpose of splitting a mining project interest. Assume that the circumstances of the Basic Coal project are such that the combined value of the digger and the crusher in 2012-13 remains $30 million. In splitting this value between the two items, Buzz Coal must do so having regard to its earlier valuation. In the absence of any specific factor suggesting otherwise, Buzz Coal would value the crusher at $10 million.If the task of estimating the value of the crusher in 2012-13 were to be looked at in isolation, any value between $10 million and $20 million might be considered reasonable. However, this task is not to be performed in isolation, but in the context of previous valuations done in relation to the project interest. It would be unlikely to be reasonable for Buzz Coal to suggest the value of the crusher was twice as much, say, as the value of the digger, for the purpose of the mining project split, having previously suggested the opposite for the purpose of determining its starting base amount.

Alternative valuation method

14.57 It can sometimes be difficult to apply the normal methodologies for working out what part of the consideration for selling resources is attributable to the condition and location of the resources at their valuation point. The difficulties may be greater for smaller miners who have less access to the specialist advice necessary to apply those methodologies properly. They can also be greater for miners who transform resources they mine in an integrated operation, such as steel manufacturing or electricity generation.

14.58 Accordingly, an alternative, and simpler, valuation method is provided for those miners to work out the mining revenue attributable to their resources. [Section 175-5]

The alternative valuation method is a choice

14.59 The alternative valuation method is a choice, available to a miner who satisfies the conditions, in relation to each of its mining project interests. A miner can choose to use the method for some interests but not for others. [Paragraph 175-10(2)(a)]

14.60 The election is also available on an annual basis. A miner can choose to use the method for some years but not others [paragraph 175-10(2)(b)] . However, choosing to use the method for a mining project interest in one year could affect the future transferability of allowance amounts arising in that year and whether the interest can combine with other interests in later years (see Chapters 6 and 9).

14.61 A miner must make the choice by the time it lodges its MRRT return for that year, or by the time it was due to provide its MRRT return if it does not lodge it within time. The Commissioner of Taxation (Commissioner) can allow for further time. This is a standard approach to choices under tax laws, so the Commissioner's usual processes for deciding whether to extend time can be expected to apply. [Schedule 1 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 8, subsection 119-5(3) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

14.62 A choice to use the alternative valuation method for a mining project interest for a year, once made, is irrevocable. This ensures that miners consider carefully whether to make the choice, rather than later seeking to undo it if circumstances change. [Schedule 1 to the MRRT (CA&TP) Bill, item 8, section 119-10 of Schedule 1 to the TAA 1953]

Effect of making the choice

14.63 If a miner makes the choice to use the alternative valuation method for a mining project interest for a year, the revenue relating to the interest's resources is worked out using the alternative valuation method rather than the other methods that might be used. The resources would still have to be supplied, exported or used before any amount would be included for them in mining revenue. [Section 175-20]

Conditions for making the choice

14.64 Before it can choose to use the alternative valuation method, a miner must:

·
have group production of taxable resources of less than 10 million saleable tonnes in the year; and/or
·
carry on an operation, which existed before 2 May 2010, that supplies things made using the resources extracted from the mining project interest's project area.

[Subsection 175-10(1)]

14.65 If a miner's group production is 10 million saleable tonnes or more in the year, it cannot make the choice generally but it could still make it for each mining project interest that is part of an operation that existed before 2 May 2010 that uses the resources to produce something else.

Group production

14.66 A miner's group production includes the production of taxable resources across all its mining project interests and pre-mining project interests and those of all the entities connected to, or affiliated with, it. [Subsection 175-15(1)]

14.67 Broadly, entities are connected to or affiliated with one another if either controls the other (or both are controlled by a third entity) or if it is reasonable to expect that one would act in accordance with the wishes of the other. These concepts are dealt with by sections 328-125 and 328-130 of the ITAA 1997.

14.68 A project area for a miner's mining project interest could also be the project area for another miner's interest (for example, in a joint venture). In such cases, only the miner's share of the resources extracted from that project area would be counted towards the 10 million tonnes (unless, of course, the miners in question were connected to or affiliated with each other). [Subsection 175-15(1)]

14.69 Resources only count towards the 10 million tonnes if the miner has the interest from which the resources were extracted at the end of the MRRT year. It may not have extracted those resources itself. For example, if a mining project interest is transferred from one miner to another during the year, the resources extracted from it would count towards the threshold for the transferee and not towards that for the transferor. [Subsection 175-15(1)]

14.70 The weight of taxable resources is measured when they reach the form in which they are to be supplied or exported. In many mining processes, the weight of the taxable resource extracted declines during processing as waste material is separated and discarded. The 10 million tonnes is determined, not by reference to the weight of the resource at extraction, but by reference to its weight after it has reached the relevant point in the operation. This is commonly referred to as 'saleable tonnes' in the mining industry. [Paragraph 175-15(1)(b) and subsection 175-15(2)]

14.71 The 10 million tonnes is also measured regardless of the type of taxable resource. It includes the cumulative weight of all the taxable resources produced: the tonnes of gas extracted as an incident of coal mining as well as the tonnes of coal and iron ore. [Subsection 175-15(1)]

14.72 However, for gas subject to the MRRT because it is converted from coal in situ, the tonnes of coal consumed in the gas production are measured (rather than the weight of the gas) and they are measured when they are consumed. [Subsection 175-15(3)]

14.73 Obviously, coal in the ground cannot actually be weighed but there are accepted methods for estimating the weight of the coal consumed based on relevant factors, such as the amount of gas produced. Using such a method is sufficient for this purpose.

Vertically integrated transformative operations

14.74 Some miners supply something they produce using the coal or iron ore they mine, rather than supplying the coal or iron ore itself (they may, of course, supply both). The most common cases are operations that convert iron ore into steel and operations that burn coal to produce electricity.

14.75 It can be more difficult than usual to work out the value of the taxable resources at their valuation point in such operations, because of the extent of capital investment after the valuation point and the less direct relationship between the value of the resources and that of the product sold.

14.76 The legislation recognises this by allowing miners with such operations to access the alternative valuation methodology even if their group production exceeds 10 million tonnes. This only applies to miners whose vertically integrated transformative operation produces something other than a taxable resource. It would not apply, for example, to a miner who simply refines iron ore or produces coal briquettes. [Subparagraph 175-10(1)(b)(i)]

14.77 The operation in question must have existed before 2 May 2010, so the method is not available to newly created vertically integrated transformative operations (which would have the opportunity to establish an advance pricing agreement with the Australian Taxation Office (ATO). However, it is not necessary that the miner with the operation is the same miner who had it just before 2 May 2010. This ensures that the legislation does not affect commercial decisions about selling an operation that qualifies for the alternative valuation method. [Subparagraph 175-10(1)(b)(ii)]

14.78 Whether an operation is one that existed just before 2 May 2010 is a question of fact. This can involve difficult judgments. Obviously, it would not be an existing operation if the miner acquired either the mine or the transformative operation after that date.

14.79 But it is not always obvious even if the same miner did own both of those elements before that date. The question in that case would be whether those two elements were part of a vertically integrated operation at that time.

14.80 Changing components of each of the two elements can also raise difficult problems. Using a different power plant or steelworks would probably change the operation so that it was no longer one that existed at 2 May 2010. But replacing buildings, plant and staff would probably not change the operation, even if upgrades were involved.

14.81 Similarly, using a new mining project interest to supply the transformative operation would probably change the operation. However, combining further interests with an existing mining project interest that was supplying the transformative operation at 2 May 2010 would probably not change the operation because the effect of the combination rules is that it would still be the same mining project interest.

Example 14.163 : Steel making operation As at 2 May 2010, Freiheit Resources owns two adjacent mining leases. Mining lease 1 is being mined and produces ore to supply Freiheit's steelworks. The other lease is inactive. Freiheit has two mining project interests.In 2015, the mining leases are renewed. The renewals do not change Freiheit's vertically integrated operation. The 2 May 2010 elements of the operation are still intact.In 2017, Freiheit extends its mine into the second mining lease. Because both of the mining project interests satisfy the upstream integration tests and were owned by Freiheit on 2 May 2010, the interests are combined into a single mining project interest.Some of the ore from an area covered by the second mining lease is put into the steelworks. Again, the 2010 elements of the operation are intact because the combination of the two mining project interests means that the same mining project interest is still supplying the steelworks (even though the combined interest did not exist at 2 May 2010). The whole of that combined interest can use the alternative valuation method even if Freiheit exceeds the 10 million tonnes limit.In 2018, Freiheit also starts supplying the steelworks with ore from a second, unrelated, mine. The new mine is not part of a vertically integrated operation that existed at 2 May 2010. If Freiheit exceeds the 10 million tonnes limit, it would not be able to use the alternative valuation method for the new mine but it could continue to use it for the old mine (as extended).

Relationship between different mining project interests

14.82 Special quarantining rules prevent the mining losses and royalty credits from vertically integrated projects being transferred to other projects. [Paragraphs 65-20(1)(b) and 100-20(1)(b)]

14.83 Lower than normal resource values could be generated by the alternative valuation method (because the required valuation methodology might inflate the value of the downstream capital or because the prescribed rate of return on downstream capital is too high for a particular operation). Quarantining the mining losses and royalty credits from an interest using the alternative valuation method ensures that mining losses and royalty credits available because of those low values cannot be used to shield the mining profits of other interests, limiting the effects of any inappropriately low resource values.

What is the alternative valuation method?

14.84 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.

14.85 The alternative valuation method starts by working out the amounts for supplying the miner's resources (or something produced using the resources) for the year. These are the same amounts used as the basis for working out mining revenue:

·
the consideration received or receivable for a supply;
·
what would be the arm's length consideration for a supply at the time and place the resources are (or something produced using the resources is) exported from Australia; or
·
what would be the arm's length consideration for a supply of something produced using the resources at the time and place the thing is used by the miner.

How those amounts are worked out is discussed in Chapter 4. [Section 175-25, steps 1 and 2, and section 175-30]

14.86 The miner then reduces that amount by its post-valuation point (or 'downstream') costs, leaving it with the mining revenue from the taxable resources. The downstream costs are:

·
the miner's downstream operating costs;
·
depreciation on the miner's downstream assets; and
·
a return on the miner's downstream capital costs.

[Section 175-25, steps 3 and 4]

14.87 It is important to note that the legislation only 'reduces' the amount by those costs; it is not a mathematical subtraction. The difference is that a reduction cannot produce a figure below zero, while a subtraction could produce a negative result. That means the value of the taxable resources worked out under the alternative valuation method can never be less than zero.

Downstream operating costs

14.88 The miner's downstream operating costs for a mining project interest are the expenditures the miner necessarily incurs in carrying on the activities related to the taxable resources from the interest that occur after the resources have passed the valuation point [paragraph 175-35(1)(a)] . They do not include any expenditure of capital or of a capital nature [paragraph 175-35(1)(b)] .

14.89 Expenditure cannot be deducted as a downstream operating cost if it would be excluded expenditure in working out the upstream expenses. This ensures there is a symmetrical treatment of upstream and downstream expenditure. [Subsection 175-35(2)]

Depreciation of assets

14.90 The alternative valuation method allows a reduction for the depreciation of assets held by the miner that are used, installed ready for use, or being constructed for use, in relation to a mining project interest's activities after the valuation point and before the resources are supplied, used or exported [subsection 175-40(1)] . The assets themselves might not be depreciating assets but the calculation will provide a depreciation deduction as if they were [paragraph 175-40(3)(a)] . Assets that are eligible for depreciation include improvements to, and fixtures on, land as if they were separate assets in the same way they are for income tax purposes [subsection 175-40(7)] .

14.91 Depreciation is worked out using the broad approach described in the uniform capital allowance provisions in Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) but is not limited to the prime cost and diminishing value methods that can be chosen under that Division. The alternative valuation method allows any method of depreciation that is accepted for the particular asset in accordance with accounting principles (for example, the units of production method could also be available). [Subsections 175-40(2), (3) and (5)]

14.92 However, a miner must use a consistent depreciation method for a particular asset; it cannot use one method in one year and a different method in the next. [Subsection 175-40(4)]

14.93 If a miner chooses to use the alternative valuation method in the MRRT year starting on 1 July 2012, the depreciation of assets the miner held immediately before 1 July 2012 starts from a value at that date worked out using the depreciated optimised replacement cost method. In effect, that value becomes the asset's opening adjustable value for the year and it would be written-off over the remainder of the asset's effective life. Assets the miner did not hold at that time would be depreciated from the time they are acquired, and from their cost. [Paragraph 175-40(3)(d)]

14.94 If a miner does not choose to use the alternative valuation method in the first MRRT year but chooses to use it in a later year, the method would depreciate the miner's downstream assets from their opening adjustable value for that later year. [Subsections 175-40(2) and (3)]

14.95 The legislation does not define 'depreciated optimised replacement cost' but relies on its meaning within the valuation industry. Broadly, an asset's depreciated optimised replacement cost is the amount it would cost to buy a new asset of identical or similar utility, written-down to reflect the shorter remaining life of the actual asset. The reference to the cost being 'optimised' means that it is adjusted to account for the existing asset having excess capacity or being redundant. In other words, the depreciated optimised replacement cost of an operation's assets reflects the cost of replicating the whole operation in the most efficient way possible, written-down to reflect the age and extent of use of the existing assets.

14.96 A proportion of the asset's opening adjustable value will be depreciated in each year, worked out according to the asset's remaining effective life, as is done under Division 40 of the ITAA 1997. The year's depreciation will then be apportioned in accordance with the extent of use of the asset (or its installation for use) in relation to the mining project interest's downstream activities. [Subsection 175-40(6)]

14.97 Therefore, if an asset is used in both a mining project interest's upstream and downstream activities, its depreciation will be apportioned to reflect only the downstream use. If an asset is used in relation to several mining project interests, its depreciation will be apportioned between them.

Return on capital costs

14.98 The final amount that reduces the revenue amount to produce the value of the resource under the alternative valuation method is the return on capital costs.

14.99 The return is equal to the adjustable value of the assets for which depreciation was allowed under the previous step, multiplied by the LTBR + 7 per cent:

Total adjustable values x LTBR + 0.07

[Subsection 175-45(1)]

14.100 This is the same rate of return used to uplift those mining losses and royalty credits that cannot be applied as allowances in an MRRT year. However, if the miner is using a transitional accounting period for a particular MRRT year that is longer or shorter than 12 months, it will adjust the return by multiplying it by:

Days in the MRRT year / 365

so that the miner gets a return that properly reflects the actual number of days in its MRRT year. [Subsection 175-45(1)]

14.101 If the depreciation allowed for an asset is reduced because it was not fully used, installed ready for use, or being constructed for use on the mining project interest's downstream activities for the year, the return on capital for the asset is reduced by the same proportion. [Subsection 175-45(2)]

Example 14.164 : Applying the alternative valuation method - under 10 million tonnes Wind Sun Energy Pty Ltd operates two coal mines, one that supplies coal to Wind Sun's power station and another that supplies coal for export. Each is a separate mining venture and therefore each represents a separate mining project interest.The operations are unchanged since 2005. In the MRRT year starting on 1 July 2012, it produces 9 million tonnes of coal, 8 million tonnes of which it uses in its own power station and 1 million tonnes of which is exported.Its downstream operating costs for the year are $100 million. The opening adjustable value of its downstream assets (namely, the plant at its power station), worked out using the depreciated optimised replacement cost, comes to $1.5 billion and their remaining effective lives are each 20 years.Wind Sun sells the 1 million tonnes for $120 million. It sells the electricity it generates using the rest of the coal for $600 million.Because its production in the year is less than 10 million tonnes, it can choose to use the alternative valuation method for that year for both of its mining project interests. To work out the MRRT revenue for the coal it extracts, it would start by adding together the amounts it derives from selling the coal and the electricity ($720 million). From that, it would deduct its $100 million downstream operating costs, its $75 million downstream depreciation ($1.5b/20 years - it chooses to use the prime cost depreciation method), and its $180 million return on downstream capital ($1.5b x 0.12, assuming a long term bond rate of 5%). That gives Wind Sun a total mining revenue of $365 million attributable to the taxable resources it produces from the two interests in that year. Example 14.165 : Applying the alternative valuation method - 10 million tonnes or more Continuing the previous example, in the next year, Wind Sun is acquired by another mining company that produces 20 million tonnes of coal a year. Wind Sun cannot use the alternative valuation method for its whole operation because its group production is now 29 million tonnes (that is, its own 9 million tonnes + its affiliate's 20 million tonnes). However, it could use the method to work out the value of its resources from the mine supplying its integrated electricity generation operation.Wind Sun chooses to use the alternative valuation method for its mine supplying its vertically integrated transformative operation. It would have to separate its downstream assets into those used for each operation (some might have to be apportioned between the two). Assume that, of the $1.425 billion opening adjustable value of its downstream assets ($1.5b - $75m for last year's depreciation), $1.2 billion relates to the integrated electricity generation operation. Of its downstream operating costs, $75 million relate to that operation.For that operation, Wind Sun would start with $600 million for its electricity sales and deduct its $75 million downstream operating costs, its $63.16 million depreciation ($1.2b/19) and its $144 million return on capital ($1.2b x 0.12). That gives it mining revenue for the resources used in its electricity generation operation of $317.84 million. It would also work out the MRRT revenue for the coal it exported but would have to use the normal methods to do that.

Chapter 15 Accounting for the MRRT

Outline of chapter

15.1 This chapter explains the Minerals Resource Rent Tax (MRRT) rules for uncommon accounting situations. It covers the rules in Division 195 about the treatment of non-cash benefits, the Division 185 rules about the treatment of entities that account in a currency other than Australian dollars, and the rules in Division 190 about how the MRRT law applies to an entity using an accounting period other than a financial year.

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

Summary of new law

Non-cash benefits

Barter transactions

15.3 A barter transaction, where an entity provides one non-cash benefit in return for another, is treated as:

·
selling the benefit the entity provides for money equal to the market value of the benefit it receives in return; and
·
using that money to buy the benefit it receives.

Gift transactions

15.4 An entity that gifts a non-cash benefit is treated as:

·
selling the benefit for money equal to its market value; and
·
gifting that money.

15.5 An entity that receives a non-cash benefit as a gift is treated as:

·
receiving money equal to the market value of the benefit it receives; and
·
using that money to buy the benefit.

Currency translation

15.6 A miner's MRRT liability is calculated by measuring amounts in Australian dollars, even where those amounts are denominated in a foreign currency. This is similar to how amounts are measured to determine an income tax liability for the purposes of the income tax law.

15.7 The translation rules for the MRRT are adapted from the translation rules in Subdivision 960-C of the Income Tax Assessment Act 1997 (ITAA 1997), apart from several special MRRT translation rules.

15.8 If an entity has a valid choice in place to use an applicable functional currency for income tax purposes it will be required to work out its instalment income, mining profit, pre-mining profit, allowances and rehabilitation tax offset by reference to that currency rather than Australian currency. It will also use that functional currency to work out its accounting profit for the purposes of choosing whether to use the simplified MRRT.

15.9 If a valid choice to use an applicable functional currency is in place, an entity will use a two-step translation process to calculate these amounts. This is the same process a taxpayer with an applicable functional currency uses to calculate its taxable income for income tax purposes.

Accounting periods

15.10 An entity that uses an accounting period for income tax other than the standard 1 July to 30 June financial year, treats that substituted accounting period as its MRRT year.

15.11 If an entity changes from one accounting period to another, any overlap between the old and new periods is counted as part of the old accounting period, which will therefore be a long MRRT year (greater than 12 months). Any gap between the old and new accounting periods is treated as a separate, short MRRT year (under 12 months). This ensures that every financial year is matched by one, and only one, MRRT year.

15.12 Such 'transitional' MRRT years can be longer or shorter than 12 months. MRRT amounts that are based on a 12 month period (such as the low-profit offset) are proportionately adjusted to reflect the length of a transitional year.

15.13 All entities start their first MRRT year on 1 July 2012, the date from which the MRRT first applies. Entities using a substituted accounting period in their first year will therefore have a short first MRRT year.

Detailed explanation of new law

Non-cash benefits

15.14 The MRRT includes provisions about how to treat transactions that do not involve money. These provisions are necessary because the MRRT law is generally written on the assumption that a quantifiable monetary consideration is involved in a transaction.

15.15 In broad terms, the MRRT non-cash benefit rules convert non-cash transactions into equivalent transactions denominated in money to ensure that an exchange of non-cash benefits gets the same treatment as purchasing those benefits for money (and that a gift of non-cash benefits is treated in the same way as a gift of money that is then put to acquiring those benefits). That ensures that there is neither an advantage nor a disadvantage to using a non-cash transaction. [Section 195-5]

15.16 The non-cash benefit rules deal with two broad types of non-cash transaction:

·
barter transactions, where non-cash benefits are exchanged; and
·
gift transactions, where an entity provides or receives a non-cash benefit for no consideration.

Barter transactions

15.17 A barter transaction involves an entity providing a non-cash benefit under an arrangement in which it also receives a non-cash benefit. In most cases, this would simply be an exchange of non-cash benefits between two entities but it also covers exchanges of non-cash benefits involving more entities. [Subsection 195-10(1)]

Non-cash benefits

15.18 A non-cash benefit is property or services in any form except money [section 300-1, definition of 'non-cash benefit'] . It covers tangible and intangible property, including the property embodied by an enforceable promise (although in practice a promise to provide something that is proximately satisfied would be treated in the same way as the thing actually provided). It also covers any service, including the service of forgiving some or all of a debt or other enforceable obligation.

Promises to pay money

15.19 The barter transaction rules extend to cover promises to pay money more than 12 months in the future. That extension is not necessary in the non-cash benefit rules for income tax, which has separate mechanisms to deal with the tax treatment of delayed monetary payments. It is necessary in the MRRT context, which has no similar mechanism but nonetheless needs to take into account the time value of money (at least when the timing difference is sufficient to make the difference in values significant).[6] [Subparagraph 195-10(1)(a)(ii)]

15.20 The provision does not provide a formula to convert the promise to pay money into a present value, although something of that sort would usually be involved in determining the market value of the promise. To avoid the sort of complexity that can be involved in such calculations, the non-cash benefit rules provide an arbitrary 12 months exception similar to that provided in the income tax law for 'qualifying securities' (see subsection 159GP(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). The result is that promises to pay money within the next 12 months are treated in the same way as immediate payments of the promised amount of money. [Subparagraph 195-10(1)(a)(ii) and subsection 195-10(4)]

Treatment of barter transactions

15.21 The barter rules act to treat an entity as exchanging the non-cash benefits it provides for an amount of money equal to the market value of the benefits it receives. It is then treated as spending that money to buy the benefits it receives. [Subsections 195-10(2) and (3)]

Example 15.166 : Barter transaction Great Southern Mining agrees with Chamarette Excavations to provide Chamarette with five million tonnes of iron ore to allow it to meet its supply contracts, in return for Chamarette's agreement to provide Great Southern with an equivalent amount of ore on demand in the following year. This is a barter transaction: Great Southern is exchanging five million tonnes of iron ore for a right to obtain five million tonnes in the following MRRT year.Great Southern is taken to receive an amount for providing its iron ore equal to the market value of Chamarette's promise to provide ore in the following year. Great Southern is also taken to have used that money to purchase the promise from Chamarette. The purchase of the promise will have no MRRT consequences for Great Southern but some part of the sale price it is taken to have received for its ore will be included in its mining revenue.Similarly, Chamarette will be taken to have sold its promise to provide ore to Great Southern, for an amount equal to the market value of the ore it receives from Great Southern, and to have used the money to buy that ore. The purchase of the ore will have no MRRT implications for Chamarette but the consideration for the promise to supply future ore will give rise to an amount of mining revenue when it makes those future supplies to Great Southern.

15.22 The money value for both sides of the transaction is determined by reference to the value of what is received, not what is provided. This deals with the unusual case where entities exchange things that are not of equal value. If the money value could differ between the two sides, one of the entities would be exposed to double taxation and the other might be able to claim a double deduction.

15.23 If more than one benefit is provided or received as part of the transaction, a money value would be put on the combined benefits. That money value would be apportioned between the individual benefits in proportion to their market values.

Example 15.167 : Multiple non-cash benefits Great Southern Mining enters into a barter transaction with Dickinson Mining Equipment under which it gives Dickinson five of its old mining trucks in return for two new trucks. Great Southern is taken to have sold its five trucks for an amount equal to the market value of the two new trucks. It would apportion that amount between the five old trucks to see how much (if anything) to bring to account as mining revenue by way of a recoupment. That would matter if the trucks had different values for MRRT purposes (for example, if some of them had not yet been fully deducted because they were starting base assets), or if they had different percentages of upstream use, or if they were used in different projects.Great Southern would also be taken to have spent that money on acquiring the new trucks and would apportion that amount between the two according to their market values for the purposes of working out its mining expenditure.

15.24 The provisions also handle the possibility of money forming part of the transaction. For example, one entity might provide one non-cash benefit in return for another non-cash benefit plus cash. In such cases, the money value the rules provide for would be apportioned dollar for dollar to the cash and the remainder would be divided between the non-cash benefits.

Example 15.168 : Barter transaction involving cash Suppose that, in the previous example, Great Southern gave five old trucks plus an amount of money for the two new trucks. The market value of the two new trucks would be apportioned first to the cash on a dollar for dollar basis. The remainder would be divided amongst the five old trucks in proportion to their market values to work out their sale prices.

15.25 If a non-cash benefit is a promise to provide something later, the promise is what is being valued, not the thing that is promised. The value of the promise will be affected by things other than the value of the thing promised. For instance, it would take into account how far into the future the promise will be satisfied and the risk of the promisor defaulting.

15.26 The actual delivery of the thing promised does not have a further MRRT effect (such as an amount of mining revenue or expenditure in the year the thing promised is provided and received). All MRRT effects will have been fully accounted for when the non-cash rules converted the benefits into money, in the same way as if money had actually been paid.

Gift transactions

15.27 The MRRT law includes provisions for non-cash gift transactions largely for the sake of completeness. Although it is possible that there could be some non-cash gifts that are relevant to MRRT activities, they would be fairly rare things.

15.28 The gift provisions work in a similar way to the barter provisions after, of course, taking into account the one-sided nature of a gift.

Receiving a non-cash gift

15.29 If an entity receives a non-cash benefit as a gift, it is taken to have received money equal to the benefit's market value at the time it receives the benefit. It is also taken to have spent that money to acquire that benefit. [Subsection 195-15(1)]

15.30 The money would be treated under the MRRT as if it had been paid and received in the same circumstances in which the benefit was actually given and received. The receipt would seldom result in an MRRT effect for the recipient, although it is conceivable that the particular circumstances of some gifts could produce an effect. For example, if a State government were to gift land to a miner instead of refunding mining royalties, the receipt could produce a reduction of royalty credits or an increase in mining revenue in the same way as a cash refund would.

Example 15.169 : Miner receives free carbon emission units Lonergan Coal receives 20,000 free emission units for its upstream operations from the Commonwealth as part of an industry assistance package under a Clean Energy Package. The units can be used to offset the company's emission liabilities. Lonergan has to acquire 5,000 further emission units on the market to meet its liability for emissions related to its upstream operations.The cost of the 5,000 emission units Lonergan purchases is mining expenditure. It is taken to have received cash equal to the value of the 20,000 emission units it received from the Commonwealth and to have used that cash to acquire the 20,000 units. That 'cost' is also Lonergan's mining expenditure. The gift of the notional cash is an advance recoupment of the notional expenditure, so is mining revenue for Lonergan. The net result in this case is that Lonergan reduces its mining profit by the amount of its actual expenditure on the 5,000 emission units.

15.31 The treatment of the consequent notional payment of money to acquire the non-cash benefit could produce an MRRT effect if an actual purchase of the benefit would have done so. For example, if a farmer gifts a miner some surplus blasting caps for use in its mining activities, the miner's deemed purchase could be mining expenditure in the same way as could an actual purchase.

Giving a non-cash gift

15.32 If an entity provides a non-cash benefit as a gift, it is taken to have sold the non-cash benefit at the time it provides it for money equal to the benefit's market value. It is also taken to have gifted that money in the same circumstances as it gifted the non-cash benefit. [Subsection 195-15(2)]

15.33 There could be an MRRT effect arising from the notional sale of the benefit that is taken to have occurred.

Example 15.170 : Miner gifts a mining vehicle Friendly Mining gifts an old 4-wheel drive vehicle to the local wildlife refuge. It would be taken to have sold the vehicle for money equal to its market value and to have gifted the money to the refuge. If the vehicle had been used 50 per cent in Friendly's upstream mining operation, it would include half the notional amount in its mining revenue as a recoupment, in the same way as if it had actually sold the vehicle. If a real gift of money to the refuge in the same circumstances would have produced an MRRT effect (for instance, as mining expenditure), the notional gift of money produces the same effect.

15.34 The notional gift of the money would seldom produce an MRRT effect. However, in some cases the circumstances of a gift by a miner would be sufficiently related to upstream mining activities to qualify as mining expenditure. That would be determined by reference to the circumstances in which the miner made the non-cash gift.

Currency translation

Translation of foreign currency amounts to Australian dollars

15.35 A miner's MRRT liability is calculated in Australian dollars. Translation rules are required so amounts in foreign currency are appropriately taken into account in calculating this liability.

15.36 The core translation rule provides that, for MRRT purposes, an amount of foreign currency is translated into, or expressed in, Australian dollars. This is similar to the core translation rules for income tax purposes. [Subsection 185-10(1)]

15.37 Foreign currency is defined as a currency other than Australian currency. This is the same definition used for income tax purposes. [Section 300-1, definition of 'foreign currency']

15.38 The translation rule applies to amounts generally and is intended to be interpreted broadly. An amount can include, but is not limited to:

·
an amount of an expense;
·
an amount of an obligation;
·
an amount of a liability;
·
an amount of a receipt;
·
an amount of a payment;
·
an amount of consideration; or
·
a value.

[Subsection 185-10(2)]

15.39 Foreign currency amounts need to be translated into Australian dollars at the applicable exchange rate. The exchange rate that is to be used is the exchange rate that would be applicable if the translation were being done for the purposes of Subdivision 960-C of the ITAA 1997. [Subsection 185-10(3)]

15.40 In some cases, an amount taken into account for MRRT purposes is the sum or the result of two or more other amounts. Any amounts in foreign currency that are elements in the calculation of another amount are translated before calculating the other amount. This is similar to the approach taken for income tax purposes. [Subsections 185-10(4) and 185-15(6)]

15.41 The only exception is calculating an entity's profit for the purposes of the simplified MRRT method. The reason for this exception is to not require the translation of the components of a miner's accounting profit. The accounting rules should determine that profit (which may involve translating amounts according to accounting principles), with the MRRT translation rules only applying to convert the final outcome into Australian dollars (if necessary) on the last day of the MRRT year. [Subsections 185-10(5), 185-15(6) and 185-25(1 ) ( table item 7)]

Functional currency rules

15.42 The functional currency rules in MRRT automatically apply to an entity that has a valid choice in effect to use an applicable functional currency for income tax purposes. The functional currency rules apply to all of the entity's mining project interests and pre-mining project interests while it is required to use an applicable functional currency for income tax purposes. [Subsection 185-15(1)]

15.43 The MRRT functional currency rules allow miners that have made a valid choice under item 1 or item 2 in the table in subsection 960-60(1) of the ITAA 1997 to account for individual MRRT related transactions using a unit of account (being the applicable functional currency) other than Australian dollars. However, the net amount from those transactions is translated into Australian dollars for the purposes of accounting for MRRT.

How are amounts translated using an applicable functional currency?

15.44 Broadly, when an entity is required to use an applicable functional currency for MRRT:

·
all amounts that are not in the applicable functional currency are translated to that currency rather than to Australian dollars; and
·
the instalment income, mining profit, pre-mining profit, mining allowances, accounting profit for the simplified MRRT and rehabilitation tax offsets of the entity are translated from the applicable functional currency to Australian dollars at the end of the MRRT year.

15.45 This follows the approach used for income tax purposes and potentially involves two translations. This is explained below.

First translation rule

15.46 There are situations where an entity undertakes transactions in a currency other than its applicable functional currency. For the purposes of working out:

·
the instalment income of the entity for an instalment quarter in the MRRT year;
·
the mining profit for each mining project interest the entity has in the MRRT year;
·
the pre-mining profit for each pre-mining project interest the entity has in the MRRT year;
·
the amount of an allowance component relating to each mining project interest and pre-mining project interest the entity has in the MRRT year;
·
whether the entity may elect to use the simplified MRRT method for the MRRT year; and
·
the amount of a rehabilitation tax offset for the entity,

an amount that is not in the miner's applicable functional currency must first be translated into that currency, so that a consistent unit of measurement is used to calculate the items. [Subsections 185-15(2) and (3)]

15.47 The amounts that are subject to the first translation rule (translation into the miner's functional currency) include, but are not limited to:

·
an amount of an expense;
·
an amount of an obligation;
·
an amount of a liability;
·
an amount of a receipt;
·
an amount of a payment;
·
an amount of consideration;
·
a value; or
·
a monetary limit or other amount set out in any Commonwealth law.

[Subsection 185-15(4)]

15.48 The exchange rate for translating these amounts is the same exchange rate that would be used if the translation was done for income tax purposes [subsection 185-15(5)] . For income tax purposes, the functional currency translation rules, including the applicable exchange rates, follow the principles set out in the rules for translating foreign currency amounts to Australian dollars (section 960-80 of the ITAA 1997).

Second translation rule

15.49 For income tax purposes, a taxpayer's taxable income is calculated in the applicable functional currency and then translated into Australian dollars. The same methodology has been adopted for the MRRT to calculate:

·
mining profit;
·
pre-mining profit;
·
the amount of an allowance component that is applied to work out an MRRT allowance for the MRRT year; and
·
the amount of a rehabilitation tax offset for the entity.

[Subsection 185-15(7)]

15.50 These amounts are calculated in the applicable functional currency and then translated into Australian dollars at the end of the MRRT year. The exchange rate for this translation is the exchange rate that would be used if the translation was done for income tax purposes. [Subsections 185-15(7) and (8)]

15.51 Only so much of the allowance component that is necessary to reduce the mining profit to nil can be an MRRT allowance in a particular MRRT year. It is only that amount of the allowance component that is applied to form the MRRT allowance for that MRRT year that is translated to Australian dollars. Since the unused portions of any royalty credits, pre-mining losses, mining losses and starting base losses are simply an 'amount' in the calculation of the MRRT allowance, they will stay in the applicable functional currency and are uplifted in that currency.

Example 15.171 : Translating units from functional currency into Australia dollars Langstraat Mining Co (Langstraat) has chosen to use the Euro as its functional currency for the purposes of Subdivision 960-D of the ITAA 1997.All amounts are translated into the Euro in order to calculate Langstraat's mining profit. After translating these amounts, they are:

·
mining revenue of €600 million; and
·
mining expenditure of €120 million.

Langstraat also applies these allowance components to work out its MRRT allowance for the year.

·
royalty credits of €150 million;
·
unused mining losses of €60 million (after uplift);
·
starting base losses of €120 million.

For the purposes of the example, assume the applicable exchange rate is 1A$ = €0.75.In accordance with the second translation rule, the mining profit of €480 million (mining revenue minus mining expenditure) is translated into A$640 million.The allowance components that are applied to calculate the MRRT allowances are translated into Australian dollars in accordance with the second translation rule:

·
Royalty allowance A$200 million (150m/0.75)
·
Mining loss allowance A$80 million (60m/0.75)
·
Starting base allowance A$160 million (120m/0.75)
·
Total allowances = A$440 million

MRRT Profit: A$200 million (mining profit minus allowances)
MRRT Liability: A$45 million (MRRT profit x 0.225)

Foreign resident operating through a permanent establishment

15.52 In some circumstances, a miner may be a foreign resident that is carrying on the operations of its mining project interest or pre-mining interest through a permanent establishment for which the miner has chosen to use a functional currency. The MRRT functional currency rules apply to that permanent establishment. [Section 185-20]

Special translation rules

Translating the amount of instalment income

15.53 The amount of instalment income for a quarter is subject to the second translation rule and is translated from the entity's applicable functional currency into Australian dollars at the exchange rate applicable on the last day of the instalment quarter. [Subsection 185-25(1), item 1 in the table]

Translating the mining profit or pre-mining profit

15.54 The amount of mining profit or pre-mining profit is translated from the entity's applicable functional currency into Australian dollars at the exchange rate applicable on the last day of the MRRT year. [Subsection 185-25(1), item 2 in the table]

Translating the allowance component used for an MRRT allowance

15.55 Any allowance component applied in working out an MRRT allowance in an MRRT year is translated from the entity's applicable functional currency into Australian dollars. Where this happens, these amount(s) are translated into Australian dollars at the exchange rate applicable on the last day of the MRRT year to which the allowance component relates. [Subsection 185-25(1), item 3 in the table]

Translating amounts already recognised for MRRT purposes in a different currency

15.56 There may be instances where an entity is required to take into account an amount that has already been recognised in a previous MRRT year (such as the decline in value of starting base assets). In these cases, an entity will have to translate the amount if it is now accounting for its MRRT obligations in a different currency. The amount is translated at the applicable exchange rate on the first day of the current MRRT year. [Subsection 185-25(1), item 4 in the table, and subsection 185-25(2)]

15.57 For example, where an entity switches from using Australian dollars to an applicable functional currency, amounts that have been taken into account in an earlier MRRT year will need to be translated into the functional currency if they need to be taken into account in the current MRRT year. This may also arise if an entity changes its applicable functional currency to another applicable functional currency, or stops using a functional currency.

Example 15.172 : Starting to use a functional currency At the end of the 2014-15 MRRT year, Black Coal Mining Co has unused mining losses of $100 million. This amount had been recorded and accounted for in Australian dollars as Black Coal has not made a functional currency choice under section 960-60 of the ITAA 1997 that applies in that MRRT year.As a result of a major corporate reorganisation in the 2015-16 MRRT year, Black Coal has a new parent company, Salem Mining. Salem is a foreign resident company based in the United States. Black Coal makes a valid choice to use US dollars as its applicable functional currency under section 960-60 of the ITAA 1997 for the 2015-16 income tax year.As Black Coal has made a functional currency choice for income tax purposes, it is required to use that applicable functional currency for its corresponding MRRT year.Black Coal will need to translate the amount of unused mining losses carried forward from the 2014-15 year, that were previously denominated in Australian dollars, into its applicable functional currency (US dollars). It will need to make that translation using the exchange rate that applied on the first day of the 2015-16 MRRT year.

Transfer or split of a mining project interest or pre-mining project interest

15.58 Special translation rules apply if:

·
there is a transfer or split of a mining project interest;
·
the new miner recognises amounts for MRRT purposes in a currency that is different to that being used by the original miner; and
·
as a result of the transfer or split, the new miner is required to translate an amount.

15.59 Where this happens, the amounts are translated by the new miner at the exchange rate applicable on the day the transfer or split happens. [Subsection 185-25(1), item 5 in the table]

15.60 An equivalent rule applies to the transfer or split of a pre-mining project interest. [Subsection 185-25(1), item 6 in the table]

Events that happened before the current choice took effect

15.61 The need for a constant unit of account, combined with the ability to choose an applicable functional currency, raises the question of how to address an event that precedes the choice but is taken into account after that choice takes effect. For income tax purposes, a special translation rule deals with these cases (subsection 960-85 of the ITAA 1997). A similar rule applies for the MRRT where an entity is required to translate an amount to the applicable functional currency and:

·
the amount is attributable to an event that happened, or a state of affairs that arose, before the current choice took effect; and
·
the amount has not previously been taken into account under the MRRT in relation to a project interest or a pre-mining project interest.

[Subsection 185-25(3)]

15.62 The following two-stage translation process applies if there is no previous choice in effect at the time of the event:

·
First, the amount is translated into Australian dollars at the rate prevailing at the event time.
·
Second, the Australian dollar amount is translated into the functional currency (if necessary) at the exchange rate prevailing at the start of the current MRRT year.

[Subsection 185-25(3), item 1 in the table]

15.63 Where a previous functional currency choice has been made, the same process applies, except the previous applicable functional currency is substituted for Australian currency. [Subsection 185-25(3), item 2 in the table]

Example 15.173 : Events before a functional currency is used Trojan Co has a starting base asset with a base value of A$1 million at the beginning of its 2013-14 MRRT year. It makes a valid choice to use the US dollar as its applicable functional currency from the start of the 2014-15 income tax year. Since the base value of the asset is an amount that is attributable to an event that happened before the functional currency rules for MRRT applied, it is translated into US dollars at the applicable exchange rate at the start of the 2014-15 MRRT year.

Accounting periods

15.64 The standard MRRT year follows a financial year, running from 1 July in a calendar year to 30 June in the following calendar year. This is the same as the standard income year used for income tax purposes.

15.65 However, the income tax law allows taxpayers to use accounting periods that vary from the standard year under section 18 of the ITAA 1936. Historically, these 'substituted accounting periods' were provided for taxpayers in agricultural businesses because the seasonal nature of their activities could conflict with the timing of income tax obligations arising under a standard year. Nowadays, substituted accounting periods are more commonly used to allow a company operating in Australia to align its accounting period with those of its foreign parents and associates, to simplify the tasks involved in group accounting.

15.66 The MRRT law also provides for entities to use substituted accounting periods. However, unlike the income tax model, substituted accounting periods are not optional under the MRRT. Entities that have a substituted accounting period for income tax purposes must use the same substituted accounting period for MRRT purposes. Ensuring that entities use the same accounting period for MRRT and for income tax simplifies the interaction between MRRT and income tax. It is not necessary for entities to track separately their expenses and revenue that are relevant to both taxes if the accounting for both uses the same period. [Sections 190-5 and 190-10]

15.67 Entities use a substituted accounting period once they have applied for, and been granted leave by, the Commissioner of Taxation (Commissioner) to use that period. The Commissioner publishes information outlining the circumstances in which leave is likely to be given.

15.68 A number of exotic entities, such as venture capital limited partnerships, have different accounting periods for income tax purposes under section 18A of the ITAA 1936. These periods stop and start when one of those entities changes its status, ensuring that an entity is of only one type within each accounting period. The MRRT does not use those special accounting periods because the MRRT taxes all entities in the same way. Accordingly, the MRRT annual accounting period is not divided into sub-periods for MRRT purposes, which avoids the additional compliance costs associated with such an approach.

15.69 An entity that uses a substituted accounting period for MRRT purposes still accounts for its MRRT liability on an annual basis but does so over the substituted accounting period rather than the standard MRRT year. It still lodges its MRRT return and pays its MRRT liability by the first day of the sixth month after the end of its MRRT year. It still pays quarterly MRRT instalments by the 21st day after the end of each quarter but its payment dates vary from those of an entity using a standard financial year.

Changing accounting periods

15.70 Substituted accounting periods work just like standard MRRT years as long as the period does not change. The accounting is still done for a 12 month period; but a different 12 month period. Complications occur only when an entity changes from one accounting period to another. This could be when an entity changes from a standard accounting period to a substituted accounting period, or vice versa, or when it changes from one substituted accounting period to a different substituted accounting period.

15.71 The complications arise because an accounting period has to be 12 months long (see section 18 of the ITAA 1936). That means that, when there is a change from one 12 month period to another, there will be a period that either falls into both the old and the new accounting periods or into neither of them.

15.72 There are no income tax provisions that provide an explicit treatment for these situations. The Commissioner administers them by using special assessments under section 168 to ensure that, for income tax purposes, all amounts are properly accounted for and are not accounted for more than once. That treatment is supported by the decision of the Administrative Appeals Tribunal in Norwich Superannuation Services Pty Ltd v FC of T (99 ATC 2015; (1998) 40 ATR 1091).

15.73 In contrast to the income tax law, the MRRT law provides explicit rules to deal with entities changing their accounting periods. It does so either by adjusting the length of the old or new accounting periods, or by creating an interim accounting period [subsection 190-15(1)] . It also proportionately adjusts amounts that require a 12 month accounting period to reflect the adjusted period being longer or shorter than 12 months [sections 190-20 and 190-25] .

Both periods end in the same 1 December to 30 November period

15.74 If the old accounting period and the new accounting period both end within the same 12 months from 1 December of one calendar year to 30 November of the following calendar year, there will be an overlap between the accounting periods. In that case, the old accounting period is extended to the end of the first of the new accounting periods. That means the old accounting period comprises what would have been the old and the new accounting periods and so will be longer than 12 months. Accounting periods after that transitional year are 12 months long (unless the entity changes its accounting period again). This approach ensures that every financial year is matched by one, and only one, MRRT year. [Subsection 190-15(2)]

Example 15.174 : Overlap between old and new accounting periods A miner changes from a standard accounting period ending on 30 June 2014 to an accounting period ending on 30 September 2014. The new accounting period, which replaces the 2013-14 financial year, is called a 'late balance period' because it ends after the end of the financial year.The period from 1 October 2013 to 30 June 2014 falls into both the old and the new accounting periods. Therefore, the old accounting period is extended to the end of the new accounting period. That means the accounting period that matches the 2013-14 financial year will be 15 months long (running from 1 July 2013 to 30 September 2014). Accounting periods after that will run for 12 months, from 1 October to 30 September.

Each period ends in a different 1 December to 30 November period

15.75 If the new accounting period ends in a different 1 December to 30 November period than the old accounting period, there can be either an overlap between the periods or a gap between them. The approach taken to determine the length of the transitional year depends on whether there is an overlap or a gap between the old and new accounting periods. Again, the approach ensures there is one MRRT year to match each financial year.

An overlap between the old and new periods

15.76 If there is an overlap, it is allocated to the old accounting period and taken away from the new accounting period. That means the old accounting period will be 12 months long and the first of the new accounting periods will be shorter than 12 months. [Subsection 190-15(3)]

Example 15.175 : Overlap between old and new accounting periods A miner changes from an accounting period ending on 31 August 2014 to one ending on 31 March 2015. The new accounting period, which replaces the 2014-15 financial year, is called an 'early balance period' because it ends before the end of the financial year.These accounting periods end in different 12 month periods (because 1 December occurs between their end dates) but the periods do overlap (the period from 1 April 2014 to 31 August 2014 falls into both of them).Therefore, the old accounting period ends on 31 August 2014, as usual, but the new accounting period is shortened to the seven months from 1 September 2014 to 31 March 2015. Later accounting periods will be 12 month periods, from 1 April to 31 March.

A gap between the old and new periods

15.77 If there is a gap, the old and new accounting periods each run for 12 months as normal and the gap is treated as a separate MRRT year. [Subsection 190-15(4)]

Example 15.176 : Gap between old and new accounting periods Solldt Mines Pty Ltd changes from an accounting period ending on 30 November 2014 to one ending on 31 January 2016.These accounting periods end in different 12 month periods (because 1 December occurs (twice) between their end dates) but this time the periods do not overlap. Instead, there is a gap between them: December 2014 and January 2015 occur in neither period.Therefore, Solldt's old and new accounting periods run for 12 months as normal and the two months between them are a separate MRRT year. The old accounting period is a late balance period for the 2013-14 financial year. The new accounting period is an early balance period for the 2015-16 financial year. The two months between is the accounting period for Solldt that matches the 2014-15 financial year.

Adjusting amounts for long and short accounting periods

15.78 Many amounts under the MRRT law are designed to work on an annual (12 months) basis. For example, a miner with a mining profit of $50 million or less in a year has a low-profit offset that reduces its MRRT liability to nil for that year. Such amounts would not be calculated correctly if they were based on an accounting period longer or shorter than 12 months. With the low-profit offset, for example, a miner with a transitional accounting period of 18 months would be more likely to be over the $50 million profit than if the period had been 12 months long and so could lose the benefit of the offset. For a short transitional period, it would be easier to come under the $50 million profit threshold.

15.79 To deal with such cases, amounts that count towards thresholds like the $50 million profit are adjusted proportionately to reflect the length of the accounting period. This is done by multiplying them by:

365 / Days in the transitional accounting period

[Subsection 190-20(1)]

15.80 The result is that the amounts are increased for the purposes of working out whether a threshold is crossed in a short transitional accounting period and decreased for such purposes in a long transitional accounting period. This ensures the miner is neither advantaged nor disadvantaged when it changes its accounting period.

15.81 The amounts that are adjusted are those that count towards working out:

·
a miner's 'group mining profit', 'share of group mining profit' and 'group MRRT allowances' for the purposes of working out what low-profit offset the miner is eligible for;
·
whether a miner's 'group production of taxable resources' is under 10 million tonnes for working out its eligibility to use the alternative valuation method; and
·
a miner's profit for the purposes of determining its eligibility to use the simplified MRRT method.

[Subsection 190-20(1)]

Example 15.177 : Low-profit offset in a transitional accounting period New Valley Mining has a transitional accounting period of 15 months for the 2013-14 financial year, ending on 30 September 2014. In that period, it makes a mining profit of $75 million and has MRRT allowances of $10 million. The MRRT year of its affiliate, Old Ridge Mining, is the standard 2013-14 financial year. Old Ridge makes a mining profit of $23 million and has MRRT allowances of $3 million for that year.New Valley would multiply its mining profit and its MRRT allowances by 365/457 for the purposes of working out its eligibility for the low-profit offset. Old Ridge's figures would not be adjusted because it is using a 12 month accounting period. New Valley's adjusted mining profit would be $60 million ($75m x 365/457) and its adjusted MRRT allowances would be $8 million ($10m x 365/457). The group's mining profit would be $83 million ($60m + $23m) and the group's MRRT allowances would be $11 million ($8m + $3m).Applying the low-profit offset formula, would produce an offset for New Valley of $976,500 ($4.34m x .225) and an offset for Old Ridge of $373,500 ($1.66m x .225).

Further adjustment for the low-profit offset

15.82 In the case of the low-profit offset, it is necessary to adjust the amount of the offset before applying it. This addresses the fact that, in calculating the offset, the mining profit is increased for a short accounting period, or decreased for a long accounting period, and therefore results in an annualised offset amount that is not proportionate to the mining profit of the miner for the actual transitional period.

15.83 The further adjustment multiplies the unadjusted offset by:

Days in the transitional accounting period / 365

to proportionately adjust the offset to the right amount for the length of the actual accounting period being used. [Subsection 190-20(2)]

Example 15.178 : Further adjustment for the low-profit offset Continuing the previous example, New Valley would multiply its $976,500 offset figure by 457/365 to get a final offset of $1.22 million.Old Ridge would not adjust its $373,500 offset figure because Old Ridge is using a 12 month accounting period, so its offset and its mining profit are already worked out for a 12 month period.

Special adjustment for the simplified MRRT method

15.84 One of the eligibility tests for using the simplified MRRT method is that:

·
the miner's group profit (that is, the profits of the miner and its related entities) is under $250 million for the year; and
·
neither the miner nor any of those related entities has a mining project interest whose profits for the year are not at least four times its liability for mining royalties for the year (after adjusting for any recoupment of royalties).

15.85 If the miner is in a transitional accounting period, its group profit would be adjusted by the normal rule for annualising transitional accounting period figures. A special adjustment ensures that the same thing is done for the mining royalties (after adjusting for any recoupment) by multiplying them by:

365 / Days in the transitional accounting period

[Subsection 190-20(3)]

Uplifts for transitional accounting periods

15.86 The MRRT law uplifts the values of a number of things from one year to the next. For example, an unused mining loss from one year is uplifted by the long term bond rate plus 7 per cent (LTBR + 7 per cent) for use in the next year.

15.87 In all such cases, the uplift factor for the year following a transitional accounting period is indexed by:

Days in the transitional accounting period / 365

That produces the same result as uplifting the amount on a daily basis, thus properly reflecting the number of days in the transitional period. [Section 190-25]

Example 15.179 : Uplifting a loss from a transitional accounting period Exoform Tunnelling makes a mining loss of $4 million for its 2016-17 MRRT year, which was a nine month transitional accounting period ending on 30 March 2017. Exoform would normally uplift that loss for use in 2017-18 by multiplying it by the 2016-17 LTBR + 7 per cent. Instead, it has to index that uplift figure by 274/365. Assuming the long term bond rate in 2016-17 was 5.5 per cent, it would get an adjusted uplift factor of:(0.055+1.07) 274/365which comes to 1.09. Multiplying 2016-17's $4 million loss by 1.09, would produce an uplifted loss of $4.37 million for Exoform to use in 2017-18.

Application and transitional provisions

Accounting periods

15.88 The MRRT only applies from 1 July 2012. That means that all entities using a substituted accounting period when the MRRT commences on 1 July 2012 have a short first MRRT year covering the period from 1 July 2012 until the end of their accounting period. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, item 10]

15.89 The adjustments applicable for transitional accounting periods apply to entities where their first MRRT year is not a 12 month accounting period.

Chapter 16 Entities

Outline of chapter

16.1 This chapter explains:

·
how Division 215 of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) provides for groups of entities that have formed a consolidated group for income tax purposes to also choose to consolidate for Minerals Resource Rent Tax (MRRT) purposes. An MRRT consolidated group has lower compliance costs because it is treated as a single entity for MRRT purposes; and
·
how the MRRT treats partnerships, trusts and unincorporated associations.

16.2 All legislative references throughout this chapter are to the MRRT Bill unless otherwise indicated.

Summary of new law

Consolidated groups

16.3 A group of entities that is a consolidated group or a multiple entry consolidated (MEC) group for income tax purposes can choose to consolidate for MRRT purposes. It must notify the Commissioner of Taxation (Commissioner) of its decision to do so.

16.4 An MRRT consolidated group is treated as a single entity, so that the group's mining project interests are treated as being those of the head company of the group and the group's internal transactions are usually ignored for MRRT purposes. However, the members of the group will be jointly and severally liable for paying the head company's MRRT liabilities if the head company does not pay them.

16.5 An entity that joins an MRRT group (when the group forms or because it is acquired by the group) transfers its mining project interests and pre-mining project interests to the head company of the group. For MRRT purposes, when an entity leaves a consolidated group, the head company transfers to it the interests (and parts of interests) the entity takes with it.

16.6 Changes in a group's head company, and certain conversions from a MEC group to a consolidated group (and vice versa), lead to rollovers under which the MRRT treatment that applied to the old head company is inherited by the new head company, ensuring a continuity of treatment for the group.

Partnerships, trusts and unincorporated associations

16.7 The MRRT taxes partnerships, trusts and unincorporated associations as entities. Because they are not legal persons, the liability for paying amounts owed by a partnership, trust or unincorporated association, and for satisfying their other MRRT obligations, is imposed on the partners, the trustees, and the members of the association's committee of management respectively.

Detailed explanation of new law

Consolidated groups

16.8 Company groups have been able to consolidate for income tax purposes since 2002. The broad effect of consolidating is that the group is treated as a single entity, with all the assets and activities of the group treated as belonging to the head company for income tax purposes, rather than to the various group entities that actually own those assets or conduct those activities. The effect is that intra-group transactions are ignored for income tax purposes, reducing the group's tax compliance costs.

16.9 The MRRT consolidation rules achieve the same thing, reducing a group's compliance costs by treating the group as a single entity for MRRT purposes. [Section 215-5]

Effects of consolidating for MRRT purposes

16.10 Subsidiary members of a consolidated group, or a MEC group,[7] that has chosen to consolidate for MRRT purposes, are treated as being parts of the group's head company (rather than separate entities) for these MRRT purposes:

·
working out the mining project interests and pre-mining project interests the entities have;
·
working out the MRRT payable in relation to those interests;
·
working out the allowance components that arise for those interests for an MRRT year; and
·
working out the entities' instalment income for an MRRT instalment quarter.

[Section 215-15]

16.11 This means that all the mining project interests and pre-mining project interests of the group are treated as being the interests of the head company. If an interest is transferred between two entities in the group, the transfer is ignored for MRRT purposes in the same way it would be if any single entity reorganised the management of its interests.

16.12 Any other transactions conducted within the group are also ignored. For example, if one group entity provides another with services on one of its mine sites, the MRRT will apply in the same way it would if the head company had provided those services to itself from within its organisation. No mining expenditure will be incurred in relation to that transaction.

16.13 Of course, there could be mining expenditure from the provision of those services. The salaries the service provider pays its employees would be mining expenditure of the head company, as would the costs of the assets the service company acquires from outside the group to use in the group's upstream mining activities.

16.14 Similarly, if taxable resources are supplied by one entity in the group to another, the supply will be ignored in the same way it would if the head company had moved its resources from its mining division to its transport or processing division. No mining revenue will arise from such a supply.

16.15 This does not mean that there can be no consequences from internal group activities. An export of resources to an overseas site owned by a group member would be an export rather than a supply, just as it would be if a single entity exported resources to its own overseas facilities.

16.16 Similarly, transferring a mining asset from a mining project interest of one group member to a mining project interest of another member would still result in adjusting the mining revenue and mining expenditure of each of those interests, just as it would if those interests were actually held by the same entity.

16.17 A group that chooses to consolidate for MRRT purposes will be able to do some things that a group that does not consolidate would not be able to do. For example, the group would combine project interests held by different members of the group if those interests satisfy the upstream integration test or the downstream integration test. Those things could otherwise only happen to interests held by the same entity.

Example 16.180 : The 'single entity' rule King Resources Co and Wills Steelworks Co are subsidiaries of RO Burke Enterprises Pty Ltd. They have formed a consolidated group for income tax purposes and choose to form one for MRRT purposes.King has a mining project interest that provides iron ore to Wills, which transforms it into steel. The steel is supplied to a customer in Australia. Due to the effect of the single entity rule, the mining project interest and the steelworks operation are both treated as being those of RO Burke. Therefore, a mining revenue event happens for the mining project interest when the steel is supplied to the customer, not when the ore is supplied to the steelworks. RO Burke has the MRRT liability for the mining project interest, not King. Example 16.181 : The 'single entity' rule Lewis Coal Co and Clark Mining Co are subsidiaries of Sacagawea Discoveries Pty Ltd. They have formed a consolidated group for income tax purposes and choose to form one for MRRT purposes.Lewis and Clark each has a mine. The coal from those mines is blended to form the final product supplied to their Australian customer. Sacagawea has made the downstream integration choice for the group, so the two mines are treated as a single mining project interest Sacagawea has. When the blended coal is supplied, there will be a mining revenue event that will work out mining revenue for Sacagawea based on the proportion of the consideration that is reasonably attributable to the form and location of the coal when it was at its valuation point. The single entity rule means that Sacagawea will have the MRRT liability for one mining project interest rather than Lewis and Clark having separate liabilities for separate interests.

16.18 When a group consolidates for MRRT purposes, all the mining project interests and pre-mining project interests of the group's subsidiary members are treated as having been transferred to the head company of the group. This is discussed further below. [Section 215-20]

Choosing to consolidate for MRRT purposes

16.19 A group can choose to consolidate for MRRT purposes if it is an income tax consolidated group or MEC group. [Subsection 215-10(1)]

16.20 It must also have previously notified the Commissioner that it has consolidated for income tax purposes. This allows the Commissioner to verify that the group is eligible to consolidate for MRRT purposes. [Subsection 215-10(2)]

16.21 After it chooses to consolidate for MRRT purposes, the group's head company (or provisional head company in the case of a MEC group) must give the Commissioner notice of the choice in the approved form within 21 days (or within such further time as the Commissioner allows). This is different from the position for income tax law (where the choice is notified with the year's income tax return) because of the interaction of the MRRT instalments system and the MRRT consolidation rules. [Subsection 215-10(3)]

16.22 The choice has effect on the day it was made and continues to have effect for as long as the group exists. [Subsection 215-10(4)]

16.23 There are some cases where a group technically ceases to exist because it is converted into a different sort of group. This is the situation with a MEC group that becomes a consolidated group (see section 703-55 of the Income Tax Assessment Act 1997 (ITAA 1997) and with a consolidated group that becomes a MEC group (see section 719-40 of the ITAA 1997). A choice to consolidate for MRRT purposes, made before such a conversion, continues to have effect, despite the group technically ceasing to exist in those cases, because the head company of the group after the conversion inherits the history of things done by the head company before the conversion. [Section 215-55]

16.24 A choice to consolidate for MRRT purposes, once made, cannot be unmade and cannot be altered. [Schedule 1 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 8, section 119-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

Joining and leaving a consolidated group

Joining a group

16.25 Entities can join a consolidated group or MEC group in two broad ways. They can join when the group forms or they can join when the group acquires the entity some time after the group is formed. Complex allocable cost amount calculations can be involved for income tax purposes when an entity joins a consolidated group because the cost bases of the assets the entity brings with it are reset to reflect the joining entity's economic cost to the group. Those calculations do not apply for MRRT purposes when an entity joins a group.

16.26 Instead, the assets the joining entity brings with it will become the assets of the head company because of the single entity rule. The transfer of the assets will not give rise to mining revenue or expenditure for either the head company or the joining entity so that, in effect, the head company will inherit the joining entity's MRRT treatment of the assets. [Sections 120-15 and 215-15]

16.27 When an entity joins a group (whether because the group is formed or because the group acquires the entity), it is treated as transferring its mining project interests and pre-mining project interests to the group's head company. [Section 215-20]

16.28 This attracts the operation of the mining project transfer provisions, thus treating the interests in the head company's hands as a continuation of the interests in the hands of the joining entity. The effect of this treatment is to allow the head company to access the allowance components that come with the interests. Those provisions also transfer the mining revenue and mining expenditure for the transfer year and all earlier years to the head company, so that it acquires the MRRT liability for the interest for the transfer year. The joining entity remains liable for MRRT liabilities that arose in relation to the transferred interest before the transfer year. [Division 120]

16.29 A special rule applies to the transfer of pre-mining losses. Such transfers are subject to a cap, based on the consideration paid for the interest, to prevent entities acquiring interests just to access their pre-mining losses. When a consolidated group forms for MRRT purposes, there is a notional transfer from each joining entity to the head company. If that notional transfer were subject to that cap, no pre-mining losses would be transferred because no consideration is paid for the notional transfer. Therefore, the cap does not apply to the notional transfer. [Subparagraph 95-30(1)(a)(ii)]

16.30 However, the cap does apply if an entity joins a group by being acquired. In that case, a real transfer, occurring on the acquisition of the entity, precedes the notional transfer of the interests from the entity to the head company. The cap would apply to the real transfer and would be adjudged by reference to the consideration the group paid for the joining entity. The cap would not apply to the notional transfer of the interests to the group's head company. [Sections 95-25 and 95-30]

Leaving a group

16.31 When an entity leaves an MRRT consolidated group, the head company is treated as transferring to the leaving entity the interests (and part interests) it takes with it. This attracts the operation of the mining project transfer rules (or the mining project split rules in the case of part interests). [Sections 215-25 and 215-30]

16.32 Those rules treat the transferred interests in the leaving entity's hands as a continuation of the interests in the hands of the head company. The effect of that treatment is to allow the leaving entity to access the allowance components that come with the transferred interests. Those rules also transfer the mining revenue and mining expenditure for the transfer year and earlier years to the leaving entity, so that it acquires the MRRT liability for the transferred interests for the transfer year. The head company remains liable for MRRT liabilities that arose in relation to the transferred interests before the transfer year. [Sections 120-10 and 125-10]

16.33 The assets the leaving entity takes with it become its assets because the single entity rule stops applying when it leaves the group. The transfer of the assets does not give rise to mining revenue or expenditure for either the head company or the leaving entity so that, in effect, the leaving entity inherits the head company's MRRT treatment of the assets. [Sections 120-15, 125-20 and 215-15]

16.34 As with the joining case, there is an exemption from the normal rule that would cap the amount of pre-mining losses that are transferred with an interest by reference to the amount of consideration paid for the interest. The exemption deals with the fact that the leaving entity will have paid no consideration for the interest. [Subparagraph 95-30(1)(a)(ii)]

16.35 The cap should still apply in some form if an entity leaves the group because another entity has acquired it. In that case, a real transfer, occurring on the acquisition of the leaving entity follows the notional transfer of the interests from the head company to the leaving entity. The cap would apply to the real transfer and would be judged by reference to the consideration paid for the leaving entity. The cap would not apply to the earlier notional transfer of the interests from the head company to the leaving entity. [Sections 95-25 and 95-30]

16.36 When an entity leaves a consolidated group, it inherits the most recent MRRT instalment rate the Commissioner gave the group's head company. It would, of course, be free to choose a different instalment rate in the normal way. [Section 215-40]

Transferring from one group to another

16.37 When an entity leaves one consolidated group and joins another at the same time (that is, when one group acquires an entity from another group), the entity is treated as leaving its old group first and then joining its new group. This means that the mining project transfer rules (or the mining project split rules in the case of part interests) transfer the old group's interests to the leaving entity before transferring them from that entity to the head company of the group it has joined. [Section 215-35]

Roll-over rules

16.38 A number of 'roll-over' rules apply under the income tax consolidation provisions to deal with certain changes to a group. Their broad effect is to ensure that the treatment the group had before the change applies to the group after the change, so that there is a continuity of treatment for the group. A number of rules achieve the same result for the purposes of the MRRT.

Changing the head company of a consolidated group

16.39 When the head company of a consolidated group changes, the new head company can choose to treat the consolidated group as continuing in existence (see subsection 124-380(5) of the ITAA 1997). The income tax consequence is that the group is taken not to have ceased to exist and everything that happened in relation to the old head company is taken to have happened instead to the new head company (see sections 703-70 and 703-75 of the ITAA 1997).

16.40 If a group makes the choice under subsection 124-380(5) of the ITAA 1997, identical results apply to the group for relevant MRRT purposes as apply for income tax purposes. The group is taken to continue to exist and the new head company inherits the relevant history from the old head company, just as if the new head company had been the old head company at all relevant times (for example, the new head company would be treated as having been given the instalment rate that the Commissioner gave to the old head company). The old head company becomes a subsidiary member of the group from the time of the changeover. [Section 215-45]

Changing the head company of a MEC group

16.41 Whenever there is a change in the head company or provisional head company of a MEC group, the income tax consequence is that everything that happened in relation to the old head company is taken to have happened to the new head company. This ensures the continuity of the group's treatment despite the change in its head company (see sections 719-75 and 719-90 of the ITAA 1997).

16.42 The same result applies under the MRRT law when there is a change in the head company or provisional head company of a MEC group. For the relevant MRRT purposes , the new head company (or provisional head company) inherits the history from the old head company (or provisional head company) just as if the new head company had been the old head company at all relevant times. The old head company (or provisional head company) becomes a subsidiary member of the group from the time of the changeover. [Section 215-50]

Group conversions

16.43 When a MEC group converts into a consolidated group under section 703-55 of the ITAA 1997, and vice versa under section 719-40 of the ITAA 1997, the income tax consequence is that everything that happened to the head company of the old group is taken to have happened to the head company of the new group (whether it is the same company or a different company). This ensures the continuity of the group's treatment despite the change in the type of group (see sections 719-120 and 719-125 of the ITAA 1997).

16.44 The same result applies for MRRT purposes when a MEC group converts to a consolidated group, and vice versa. For the relevant MRRT purposes, the head company of the new group inherits the history from the head company of the old group just as if it had been the head company at all the relevant times. [Section 215-55]

Partnerships, trusts and unincorporated associations

16.45 The MRRT law applies to partnerships, trusts and unincorporated associations in the same way as it applies to any other entity.

16.46 'Entity' is a defined term in the income tax law (see section 960-100 of the ITAA 1997) and the MRRT law uses that meaning. [Section 300-1, definition of 'entity']

16.47 The income tax law taxes unincorporated associations as entities. In broad terms, they are treated for income tax purposes in the same way as companies.

16.48 Although the income tax law treats partnerships and trusts as entities, it does not tax them as entities. A partnership's taxable income or tax loss is broadly worked out in the same way as that of any other entity but the result (income or loss) is divided amongst the partners, who include their share in working out their own taxable income or loss. Similarly, the net income of a trust is divided amongst those beneficiaries who are entitled to the trust income, and included in their own taxable income calculation; with any remaining part of the net income being taxed to the trustee.

16.49 The MRRT law works out an MRRT liability for each mining project interest and pre-mining project interest. The liability is payable by the entity that has the interest at the end of the MRRT year. Unlike the income tax law, it is not divided amongst the partners of a partnership or the beneficiaries of a trust. Instead, it is payable by the partnership or trust in the same way as any other partnership or trust expense (including liabilities for indirect taxes such as the goods and services tax). That MRRT liability is then taken into account by the partnership or trust in working out its net income or loss for income tax purposes.

Entity status

Partnerships

16.50 Although the MRRT law treats partnerships as entities, they are not legal persons (unlike individuals and companies). Some people may therefore doubt that MRRT liabilities are imposed on a partnership. To put the issue beyond doubt, the MRRT law makes clear that the acts or omissions of partners, when acting in their capacity as partners, are the acts or omissions of the partnership. [Section 220-5] Example 16.182 : The acts of the partners are the acts of the partnershipShelby and Victoria are operating a coal mine as partners. Shelby enters into a contract with an overseas customer to supply it with 3 million tonnes of coal. Entering into the contract on behalf of herself and Victoria is an act Shelby takes as a partner and it is therefore taken to be an act of the partnership. Payment to Shelby and Victoria for the supply is taken to be payment to the partnership.Victoria pays the state $15 million in royalties for coal supplied by the partnership. The payment is made in her capacity as a partner, so is taken to be a payment by the partnership, and generates a royalty credit for the partnership.

Unincorporated associations

16.51 Any doubt about the entity status of unincorporated associations is dealt with by attributing to the association the acts and omissions of the members of the committee of management of the association when they act in that capacity. [Subsection 220-10(1)]

Joint ventures are not unincorporated associations

16.52 Some have argued that a joint venture could be an unincorporated association, a term which is not defined in the income tax law. A 'joint venture' is an arrangement under which two or more parties conduct a single enterprise but do not share in its profits. Instead, they share in the output of the enterprise. In the context of mining, a joint venture would involve the joint venturers dividing the resources they jointly extract before each of them sells its own share.

16.53 The MRRT law does not treat joint ventures as entities; it treats each joint venturer as having its own mining project interest or pre-mining project interest, giving rise to a separate MRRT liability. [Subsection 220-10(2)]

Trusts

16.54 Like partnerships and unincorporated associations, trusts are also not legal persons. A trust is a relationship between a trustee and the objects of the trust in respect of particular property. But, unlike partnerships and trusts, the income tax law makes clear that the legal person who is acting as the trustee is an entity in its capacity as a trustee that is separate from its status as an entity in its own capacity (see subsections 960-100(2) and (3) of the ITAA 1997). In other words, the trust and the trustee are equated as an entity for income tax purposes and there is no room for doubt about the status of the trust. Accordingly, there is no doubt that trusts are entities for the purposes of the MRRT law and so no need for additional provisions to remove any doubt.

Responsibility for partnerships, trusts and unincorporated associations

16.55 Although the MRRT law works by imposing obligations on partnerships, trusts and unincorporated associations as entities, these obligations cannot be enforced against those entities because they have no legal personality. That is, because they are not legal persons, they cannot be sued and cannot be penalised.

16.56 To overcome this, taxation laws usually attach the liability for not satisfying the obligations of these entities to someone who is a legal person and is broadly responsible for the actions of the entity.

16.57 For a partnership, those legal persons are the partners. For a trust, it is the trustee (or the trustees if there is more than one), and for an unincorporated association, it is the members of the association's committee of management.

16.58 Provisions having that effect already exist for the purposes of attaching liability for satisfying the obligations of partnerships and unincorporated associations under indirect tax laws (such as the GST) and under Schedule 1 to the TAA 1953 (see Division 444 of Schedule 1 to that Act).

16.59 Those provisions are extended so that they also apply for the purposes of the MRRT law. [Schedule 1 to the MRRT (CA&TP) Bill, items 34 to 43, subsections 444-5(1), (1A), (1B) and (2), 444-10(1) to (3) and (5), 444-15(1), 444-30(1) to (3), and 444-70(1) and (2), and section 444-1 of Schedule 1 to the TAA 1953]

16.60 In the case of unincorporated associations, the existing provisions are amended to make explicit that, for the purposes of the MRRT law, the members of the committee of management are jointly and severally responsible for paying the MRRT liabilities of the association. This is implicitly already the position for unincorporated associations but it is not explicit as it is for, say, partnerships. The amendments put the point beyond doubt. [Schedule 1 to the MRRT (CA&TP) Bill, item 36, subsections 444-5(1A) and (1B) of Schedule 1 to the TAA 1953]

Trustees are responsible for MRRT obligations of trusts

16.61 Consistent with this approach, the law is also amended to attach the liability for satisfying the MRRT obligations of a trust to the trustees of the trust. The amendment reproduces, in modern language, a provision that has a similar effect for the purposes of the MRRT law as section 254 of the Income Tax Assessment Act 1936 has for income tax purposes. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, section 444-120 of Schedule 1 to the TAA 1953]

16.62 Any obligation imposed by the MRRT law on a trust is imposed on the trustees of the trust. This covers obligations such as lodging MRRT returns, answering requests for information from the Commissioner and providing information to entities to which the trust transfers a mining project interest. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.63 The obligation attaches to any trustees from the time the obligation arose until the time it is satisfied. This timing rule means that responsibility for satisfying the obligation attaches to any new trustee appointed before the obligation is satisfied. The obligation would also remain with any previous trustee back to the time the obligation arose. This ensures that there is always someone responsible for satisfying the obligations of the trust and that a trustee cannot avoid responsibility by the simple expedient of resigning. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.64 The trustees are also responsible for paying amounts that are required to be paid under the MRRT law, such as the MRRT itself, instalments of MRRT, and any penalty and interest charges that arise in relation to the MRRT. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(2) of Schedule 1 to the TAA 1953]

16.65 If more than one trustee is liable for paying those amounts, they are jointly and severally liable for paying them. That means that the Commissioner could sue any of them for payment of the amount or could sue them as a group. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(3) of Schedule 1 to the TAA 1953]

16.66 In suing for amounts owed by a trust, the Commissioner is not limited to recovering against the personal assets of the trustees. He or she can also take action directly against the trust assets. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(4) of Schedule 1 to the TAA 1953]

16.67 Trustees who use their own assets to pay amounts in relation to an obligation of the trust that they are required to satisfy are entitled to be indemnified from the assets of the trust. This reflects the fact that the liability arises in the proper performance of the trustee's obligations as trustee. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(5) of Schedule 1 to the TAA 1953]

16.68 Offences against the MRRT law that are 'committed' by the trust are taken to have been committed by the trustee. This reflects the fact that the trustee is responsible for satisfying the trust's obligations, so that the failure to satisfy those obligations is the trustee's failing. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(6) of Schedule 1 to the TAA 1953]

16.69 Trustees who can prove that they were not knowingly concerned in, or party to, an act or omission of the trust that gave rise to an offence, and did not aid, abet, counsel or procure the act or omission, have not committed an offence. However, they could, of course, still be responsible for satisfying the obligation. [Schedule 1 to the MRRT (CA&TP) Bill, item 44, subsection 444-120(7) of Schedule 1 to the TAA 1953]

Application and transitional provisions

Consolidation

16.70 A group can make a decision to consolidate for MRRT purposes at any time after it satisfies the pre-conditions (including the requirement that it already be consolidated for income tax purposes). Normally, the decision applies for the date on which the group makes that choice.

16.71 However, as a transitional rule, a group can choose to apply its consolidation decision back to the earlier of:

·
when it first satisfied the pre-conditions; and
·
2 May 2010.

That allows the group to be consolidated for MRRT purposes during the period before 1 July 2012 when it undertook activities that affect the operation of the MRRT from 1 July 2012. That can have substantial compliance benefits for the group in accounting for its activities during that pre-MRRT period. [Schedule 4 to the MRRT (CA&TP) Bill, item 13]

16.72 The choice has to be made on 1 July 2012 (or within such further time as the Commissioner allows) and notified to the Commissioner within 21 days of being made. This ensures that, from the start of the MRRT on 1 July 2012, the Commissioner is in a position to take the pre-MRRT period into account in applying the MRRT law to the group. [Schedule 4 to the MRRT (CA&TP) Bill, item 13]

Consequential amendments

Consolidation

Notes about the link between income tax and MRRT consolidation

16.73 Some notes are added to the consolidation provisions in the income tax law to alert readers to that fact that a choice to consolidate a group for income tax purposes is a prerequisite for it to consolidate for MRRT purposes. [Schedule 3 to the MRRT (CA&TP) Bill, items 40 to 43, subsections 703-50(1) and 719-50(1) of the ITAA 1997]

Joint and several liability

16.74 Under the income tax law, income tax liabilities are imposed on the head company of a consolidated group or MEC group. However, the members of the group are jointly and severally liable for paying those liabilities if the head company does not pay them on time (see Division 721 of the ITAA 1997).

16.75 The tax-related liabilities for which the members can be jointly and severally liable are listed in the table in subsection 721-10(2) of the ITAA 1997.

16.76 That table is amended so that the tax-related liabilities include liabilities arising under the MRRT law. The relevant MRRT liabilities are:

·
the liability to pay MRRT itself;
·
the liability for shortfall interest charge on unpaid MRRT;
·
the liability for paying MRRT instalments; and
·
the general interest charge that applies when a head company chooses too low an instalment rate.

[Schedule 3 to the MRRT (CA&TP) Bill, item 44, subsection 721-10(2) of the ITAA 1997]

16.77 The members of a consolidated group or a MEC group only become jointly and severally liable for those MRRT liabilities if the group has chosen to consolidate for MRRT purposes. [Schedule 3 to the MRRT (CA&TP) Bill, item 45, subsection 721-10(4) of the ITAA 1997]

16.78 The result is that Division 721 applies to impose joint and several liability in relation to MRRT liabilities on the members of a group that has consolidated for MRRT purposes in the same way as it does for the other liabilities listed in that table.

16.79 The provisions allocating group liabilities among the members of a group when the head company fails to pay them allow for tax sharing agreements to limit each member's share of the group liability (see sections 721-25 to 721-40 of the ITAA 1997). Those provisions also apply for group liabilities under the MRRT law.

16.80 A pre-condition for those provisions applying to a particular group liability is that the shares under the agreement represent a reasonable allocation of the liability. In deciding whether the shares are a reasonable allocation for income tax purposes, the amount of the liability is reduced by any credit the head company is entitled to for its income tax assessment for payments of income tax instalments (see subsection 721-25(1A)). When working out whether there is a reasonable allocation of liability for MRRT, a similar provision also reduces the liability by the amount of any credits the head company is entitled to for paying MRRT instalments. [Schedule 3 to the MRRT (CA&TP) Bill, items 46 and 47, subsections 721-25(1AA), (1B), (2) and (3) of the ITAA 1997]

Chapter 17 Integrity measures

Outline of chapter

17.1 The Minerals Resource Rent Tax (MRRT) contains two general integrity measures:

·
a general anti-profit shifting rule; and
·
a general anti-avoidance rule.

17.2 Division 205 ensures that a miner's liability to pay MRRT is not reduced because things are done in relation to the miner's mining project interest or pre-mining project interest that would not have been done or would have been done differently had the miner been dealing wholly independently with other entities.

17.3 Division 210 operates to deter avoidance schemes that are designed to obtain MRRT benefits by taking advantage of the MRRT law in circumstances other than that intended by the MRRT law. This ensures that schemes that are artificial or contrived and undertaken with an objective of reducing an entity's MRRT liability, or increasing its MRRT offsets, can be appropriately dealt with.

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

Summary of new law

Anti-profit shifting

17.5 The mining profit, allowance components and offset amounts for a mining project interest are worked out as if the things which are done in relation to the interest are the things which would have been done (or not done) if the miner had been dealing wholly independently with the entities with which it has commercial or financial relations.

17.6 If adjustments are made to amounts because of the profit-shifting rules, the Commissioner of Taxation (Commissioner) can make any compensating adjustments that are fair and reasonable.

General anti-avoidance

17.7 The general anti-avoidance rule applies to schemes that seek to reduce the MRRT liability of an entity for a mining project interest for an MRRT year or to increase a low profit offset or rehabilitation tax offset.

17.8 The Commissioner can make any such scheme ineffective if the scheme was entered into, or carried out, with a sole or dominant purpose of getting an MRRT benefit, or of getting an MRRT benefit and a reduction in a liability to pay any other Australian or foreign tax or mining royalty.

17.9 The Commissioner can also make compensating adjustments to reduce MRRT liabilities that are higher, or to increase offsets that are lower, than they would be apart from the scheme.

Detailed explanation of new law

General profit-shifting rule

When the profit-shifting rule applies

17.10 A miner's liability to pay MRRT must not be smaller than what that liability would be if its commercial and financial relations with other entities were on the same footing as they would have been had the miner been dealing with those entities on a wholly independent basis.

17.11 When entities deal with each other on a wholly independent basis, the conditions of their commercial and financial relations are determined by market forces. When they do not deal with each other in that manner, the MRRT liability of one or more of the parties may be distorted.

17.12 Whether two or more entities have dealt with each other on a wholly independent basis is essentially a factual question which is to be determined by assessing whether the conditions operating between them are the conditions which would operate between independent entities in comparable circumstances that were dealing wholly independently with one another. [Section 205-10]

17.13 This comparison of the conditions that apply in the entities' commercial and financial relations with those which operate in comparable circumstances between independent entities who deal with one another wholly independently is commonly referred to as a 'comparability analysis'. [Subsection 205-10(1)]

17.14 The comparability analysis employed in Division 205 borrows from the arm's length principle used by member countries of the Organisation for Economic Co-operation and Development (OECD) in relation to cross border transactions between resident and non-resident taxpayers.

Commercial or financial relations

17.15 The comparability analysis focuses on the conditions which operate in the commercial or financial relations between the miner and one or more other entities. [Subsection 205-10(1)]

17.16 For these purposes, the 'commercial or financial relations' that must be examined encompasses all aspects of the commercial and financial relationships existing between the miner and the other entities, express or implied.

17.17 The concept is extremely broad and would take in any connections or dealings between the entities that relate to or could otherwise affect the commercial or financial activities of one or all of the entities. It could include a single transaction, a series of transactions, an understanding, an arrangement, things to be done or things not to be done, and practices, whether express or implied and whether or not legally enforceable. It may involve unilateral actions or mutual dealings. It may comprise a strategy.

Example 17.183 : Commercial or financial relations A miner acquires services from Service Co in carrying on the upstream mining operations for its mining project interest. It also sells coal from its mining project interest to Consumer Co. Service Co and ConsumerCo are associates of each other.In ascertaining whether the miner has dealt with each of Service Co and Consumer Co on a wholly independent basis it would be relevant to consider the connection that exists between Service Co and Consumer Co and the impact that connection may have had on the dealings between each of those entities and the miner.

Conditions

17.18 The 'conditions' that operate in the commercial or financial relations between the miner and other entities include, but would not be limited to, the price of any dealings between them, the margins or profits earned by one or all of them, and the division of profits between them. [Paragraph 205-10(1)(a)]

17.19 For example, in simple cases it would include the price at which resources are sold or acquired by the miner, the cost of plant and equipment sold or acquired by the miner, and the fees charged by the miner or another entity to provide services to the other entity or the miner.

17.20 In more complex cases, it may extend to include factors that affect an entity's relative financial strength, such as decisions as to whether dividends should be paid and in what amounts, whether shares should be issued and at what prices, whether loans should be advanced and at what interest rates, and whether royalties should be paid and in what amounts. It would also include decisions that could affect an entity's liquidity, such as the time at which an amount should be paid.

17.21 For the avoidance of doubt, the absence of a condition, in either the miner's financial or commercial relations or in the situation being compared, is a difference in conditions with which the Division is concerned. [Paragraph 205-10(2)(b)]

Dealing wholly independently

17.22 The question of whether parties are dealing with each other on a wholly independent basis is essentially a question of fact. [Paragraph 205-10(1)(b)]

17.23 The question is whether the parties have dealt with each other as independent parties would normally do, so that the outcome of their dealing is a matter of real bargaining: Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 21 ATR 1123 at 1132.

17.24 The relationship between the parties is relevant but not determinative. Thus, parties that are related to each other may deal independently with one another and parties that are not related to each other might not deal independently with one another: Barnsdall v FCT (1988) 81 ALR 173; Furse 21 ATR 1123 at 1132; RAL and FCT (2002) 50 ATR 1076 at [45]-[51].

17.25 Circumstances in which parties that are unrelated to each other are not dealing independently with one another includes where:

·
one of the parties submits the exercise of its will to the discretion of the other, perhaps to promote the interests of the other: Granby 129 ALR 503 at 507;
·
one party is indifferent to an outcome sought by the other party on a particular aspect of their dealings: Collis v FCT (1996) 33 ATR 438 at 443; or
·
the parties collude, or act in concert, to achieve an ulterior purpose or result.

Example 17.184 : Parties not dealing independently with one another Continuing the previous example, if the overall result of the miner's dealings with Service Co and Consumer Co is the product of real bargaining but the price for the upstream services is higher than would ordinarily be charged and the price for the resource is lower than would ordinarily be charged, then the miner could not be said to be dealing wholly independently with either Service Co or Consumer Co.In this case, Service Co and Consumer Co, as related parties, are only concerned with the overall outcome from their combined dealings with the miner. They are indifferent to the allocation of that amount between the services and the resources.

Comparable circumstances

17.26 For the relations existing between independent entities dealing wholly independently with one another to be considered comparable with the commercial and financial relations between the miner and one or more other entities, the economically relevant characteristics of the situations being compared must be sufficiently comparable.

17.27 To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition or conditions being examined (for example, the price or the margin). [Paragraph 205-10(2)(a)]

17.28 This requires, amongst other things, a comparison of the functions undertaken, the assets employed and the risks assumed by the entities in the situations that are being compared. It also requires a comparison of the characteristics and terms of the dealings (if any) that are being compared, of the relevant markets being compared and of the business strategies being pursued by the entities the subject of the comparison. [Subsection 205-10(1)]

17.29 Where differences exist, a situation may be considered comparable if reasonably accurate adjustments can be made to eliminate the effects of such differences on the comparison.

17.30 In determining the degree of comparability, including what adjustments are necessary to establish it, consideration must be given to the range of options that would realistically be available to an independent enterprise in comparable circumstances. That is because an independent enterprise would consider the options available to it and, in comparing one option to another, would consider any differences between the options that would significantly affect the value of one option over the other.

Example 17.185 : Price comparability Before purchasing a truck for $100,000 from Associate Co, an independent enterprise carrying on comparable mining activities to Miner Co in a nearby location would be expected to take into account the fact that it could buy the same truck, on the same delivery and payment terms, for $90,000 from Trucking Co.If, however, Trucking Co offers substantively different terms for delivery and payment to those offered by Associate Co, for example if delivery would be delayed by three months but payment would be on order rather than delivery, then there would exist material differences between the circumstances being compared and an adjustment would be required before the price offered by Trucking Co could be compared to the price charged by Associate Co.

17.31 Although ordinarily, the comparison will be between the commercial or financial relations as they actually exist between the miner and other entities and those which would reasonably be expected between entities dealing wholly independently with one another, they may be some cases in which it will be appropriate to disregard the miner's characterisation of those relations and re-characterise them in accordance with their substance.

Example 17.186 : Reconstructing the actual transaction Uraba Co grants Miner Co a call option that confers a right on Miner Co (or its assignees) to require Uraba Co to sell it a loading unit. Miner Co also grants Uraba Co a put option that confers on Uraba Co a right to require Miner Co (or its assignees) to purchase the asset from it. Subsequently, Miner Co exercises its call option and Uraba Co sells it the loading unit.For the purpose of finding a comparable dealing involving independent entities it might be appropriate to characterise the sale of the loading unit as being a sale under an agreement for sale that was entered into when the options were issued (that is, rather than when the options were exercised).

Methodologies

17.32 Once a comparability analysis has been undertaken, it will inform the choice of methods for working out what the miner's mining profit, allowance components and offsets for the mining project interest would have been (or could reasonably be expected to have been) if the independent conditions had operated instead. [Subsection 205-15(1)]

17.33 For these purposes, the miner must use the method that produces the most appropriate and reliable measure of that amount having regard to:

·
the functions performed, assets used and risks performed by the miner and each other entity in their commercial or financial relations [paragraph 205-15(1)(a)] ;
·
whether the method can reliably adjust for differences between the actual circumstances and those that would apply between entities dealing wholly independently with each other [paragraph 205-15(1)(b)] ;
·
the availability of reliable information required to apply the particular method [paragraph 205-15(1)(c)] ; and
·
the OECD's 18 August 2010 transfer pricing guidelines, or such other document published by the OECD as the Commissioner determines to be a replacement for those guidelines or otherwise to be a transfer pricing guideline [paragraph 205-15(1)(d) and subsection 205-15(2)] .

17.34 The OECD transfer pricing guidelines provide a framework for the application of the arm's length principle. The OECD guidelines are entitled OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Guidelines).

17.35 Miners may have regard to the Guidelines, adapted as appropriate in the context of the MRRT, in working out their mining profits, allowance components and offset amounts.

17.36 The various methods outlined in the Guidelines are set out below. However, these are not necessarily the only methods that could be used. Other methods may be applied provided they accord with the arm's length principle (as explained in the Guidelines), are capable of practicable application, and produce an arm's length outcome that is a reasonable estimate of what would have been the result if the dealings had been undertaken between independent entities dealing wholly independently with one another.

Comparable uncontrolled price method

17.37 The comparable uncontrolled price method compares the price actually charged for property or services that have been transferred with the price that would be charged for materially the same property or services by the same supplier in a comparable dealing with an independent party or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.187 : Resource comparable uncontrolled price method An independent enterprise sells iron ore of a similar type, quality and quantity at the same time and the same stage in the production chain as those produced by the miner. Assuming no other material difference, the price received by the independent iron ore producer would be considered a comparable uncontrolled price

Cost plus method

17.38 The cost plus method provides an estimate of an independent price for property or services by adding an appropriate profit mark-up to the supplier's direct and indirect costs. The profit mark-up is ideally determined by reference to the profit mark-up earned by the same supplier in comparable dealings with independent parties or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.188 : Cost plus for services Crusher Co has contracted to provide crushing, processing and blending services for the miner. An independent price for the services provided by Crusher Co could be worked out by applying the same mark up on Crusher Co's costs as would reasonably be expected to be applied by an independent service provider providing materially similar services in a materially comparable market.

Resale price method

17.39 The resale price method estimates an independent price for property or services by taking the price at which the product is sold to or by independent entities and reducing it by an independent margin. The margin would be determined by reference to the resale price margins earned by the same supplier in comparable dealings with independent parties or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.189 : Resale price margin The miner sells its coal to an associated entity which then on-sells the coal to unrelated purchasers. The associated entity does not undertake any further processing of the resource. Rather, it takes on the risks involved in transporting and distributing the resource into offshore markets.An independent price for the coal sold to the marketing entity could be worked out by subtracting an independent resale price margin from the price at which the marketing entity on-sells the coal. The independent resale price margin would be the margin which an independent reseller would seek in order to cover its operating expenses and allow it an appropriate profit (taking into account the functions it performed, the assets it used and the risks it assumed).

Transactional net margin method

17.40 The transactional net margin method is a transfer pricing methodology based on comparisons at the net profit level between what the taxpayer has achieved with that which independent parties dealing wholly independently in relation to a comparable transaction or dealings would have achieved.

17.41 Comparisons at the net profit level can be made on a single transaction or in relation to an aggregation of dealings between the taxpayer and one or more other entities.

17.42 The transactional net margin method examines the net profit relative to an appropriate base (for example, costs, sales, assets) that a taxpayer realises from an activity or transaction. The transactional net margin method can be applied on a cost plus or a resale margin basis. 'Profit plus appropriate costs' can represent an arm's length sales price for the original transaction or value of the activity, while 'revenue less a net resale margin', adjusted for other costs associated with the purchase of the product, can be regarded as an arm's length purchase price for the original transaction.

Profit split method

17.43 Profit split methods are transfer pricing methods that identify the combined profit of two or more enterprises and then split those profits between the enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement between two enterprises dealing wholly independently with one another.

17.44 The profit split method may be appropriate where different activities make unique and valuable contributions. The profit split method would not be used where one activity is relatively simple and does not make a significant and unique contribution to outcomes as a whole.

Amounts that must be returned

17.45 Having worked out what an amount would have been if the independent conditions had operated between the miner and the other entity or entities, the miner is required to use that amount for the purpose of working out its mining profits, its allowance components, its offsets, and the elements that make up those things. [Subsection 205-10(3)]

17.46 The miner may have to adjust any amount that directly or indirectly affects the calculation of its mining profit, its allowance components or its offsets. For example, it may have to adjust the following amounts:

·
an amount of expenditure that is included in a miner's mining expenditure for a mining project interest;
·
the consideration received or receivable by the miner for a supply of taxable resources, or a thing produced using taxable resources;
·
a downstream cost taken into account in attributing part of the consideration for a supply of resources to the resources' condition and place when they were at their valuation point; and/or
·
an amount that is taken into account in calculating the miner's group profit for simplified MRRT purposes.

Compensating adjustments

17.47 If an amount is adjusted because of the application of the transfer pricing rules, the Commissioner can determine that it would be fair and reasonable to make other adjustments. These adjustments may be to the same miner but for a different MRRT year or to a different miner for that year or another year. [Section 205-20]

Example 17.190 : Adjustment to the same miner for a different year Assume the miner enters into an operating lease for upstream rolling stock, for two years, from a related party. Under the lease agreement, the rental payments are $15 million for the first year and $5 million for the second year. A comparability analysis shows the arm's length amounts are $10 million for each year. Division 205 would apply in the first year to increase the miner's mining profit by $5 million by limiting its deduction for rent to $10 million.In the circumstances, it would be fair and reasonable for the Commissioner to reduce the miner's mining profit for the second year by $5 million by increasing its deduction for rent to $10 million. Example 17.191 : Adjustment to a different miner Miner A pays $10 million to acquire upstream mine equipment from Miner B. Assume Miner B purchased the equipment for $6 million and, at the date of the sale to Miner A, the arm's length price for the equipment is $8 million. Division 205 would increase Miner A's mining profit by $2 million by limiting its deduction for the equipment to $8 million.In the circumstances, it would be fair and reasonable for the Commissioner to reduce Miner B's mining profit by $2 million by reducing the amount recouped by Miner B on the sale of the equipment to Miner A from $4 million to $2 million.

17.48 The adjustments can reduce mining profits or increase an allowance component or an offset. [Paragraphs 205-20(1)(b) and (2)(b)]

17.49 The adjustments would restore those profits, components and offsets to what they would have been if the conditions had been those that would have operated between entities dealing wholly independently with each other. [Paragraphs 205-20(1)(c) and (2)(c)]

The Commissioner's determination

17.50 The adjustments only arise if the Commissioner has determined that they should. The determination must state what the relevant profit, allowance component or offset should be, and what should be the elements of the calculations of those amounts. [Subsection 205-25(1)]

17.51 A determination is not limited to a single MRRT year or to a single profit, allowance component or offset (although it could be in a given case). It is possible for one determination to cover multiple profits, allowance components and offsets, to cover more than one of those things, to cover those things for more than one year, and to cover those things for more than one mining project interest. [Subsections 205-25(1) and (6)]

17.52 The Commissioner gives effect to a determination by taking such action as he or she considers necessary. In most cases, such action would be to amend one or more MRRT assessments. [Subsection 205-25(3)]

17.53 The Commissioner must provide an entity affected by a compensating adjustment with a copy of the determination but a failure to provide it does not mean that the determination is invalid. [Subsections 205-25(4) and (5)]

17.54 An entity can ask the Commissioner to make a compensating adjustment determination if it relates to that entity or to an interest it has. The Commissioner must provide the entity with notice of his or her decision on each such request. If the Commissioner decides not to grant the request, the entity can object against it in the normal way for objecting to matters arising under taxation laws. [Subsections 205-25(2) and (7)]

Pre-mining project interest

17.55 The profit shifting rules apply to pre-mining project interests in the same way that they apply to mining project interests. [Divisions 140 and 205]

General anti-avoidance rule

17.56 The general anti-avoidance rule is designed to protect the revenue against what is commonly considered to be tax avoidance and arrangements that are not bona fide. When it applies, it negates the MRRT benefit an entity obtains from a scheme.

When the general anti-avoidance rule applies

17.57 The general anti-avoidance rule applies where an entity has obtained an MRRT benefit from a scheme (an avoidance scheme) and it is concluded that the scheme was entered into, or carried out, with a purpose of getting an MRRT benefit from the scheme. [Division 210]

17.58 Three requirements must be satisfied for the general anti-avoidance rule to apply:

·
there must be a scheme;
·
an entity must obtain an MRRT benefit from the scheme. That is, there must be:

-
a reduction in MRRT liability for a mining project interest for an MRRT year; or
-
an increase in a low profit offset or rehabilitation tax offset;

and that benefit must not be attributable to making a choice expressly provided for by a taxation law; and
·
it must be reasonable to conclude that, taking into account a list of relevant factors, the scheme was entered into or carried out with the sole or dominant purpose either of obtaining the MRRT benefit, or of obtaining that benefit along with a reduction in any other liability to pay an Australian or foreign tax or a mining royalty.

Requirement 1: There must be a scheme

17.59 Scheme has the same meaning as it does in the income tax law:

·
any arrangement; or
·
any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

[Section 300-1, definition of 'scheme']

Requirement 2: An entity must get an MRRT benefit from a scheme

17.60 An entity must get an MRRT benefit from a scheme. An entity gets an MRRT benefit when:

·
an MRRT liability of the entity for a mining project interest for an MRRT year is (or could be expected to be) smaller than it would be apart from the application of the scheme [paragraph 210-15(1)(a)] ; or
·
the entity has either a low profit offset or a rehabilitation tax offset where the entity would not have had, or could not reasonably be expected to have had, that offset apart from the application of the scheme [paragraph 210-15(1)(b)] .

17.61 A smaller MRRT liability includes a case where the MRRT liability is zero or there is no MRRT liability for the year. [Subsection 210-15(2)]

17.62 However the general anti-avoidance rule does not apply to MRRT benefits to which the exception applies. The exception is where the MRRT benefit that is obtained is attributable to making a choice that is expressly provided for by a taxation law, other than a choice relating to functional currency under Subdivision 960-D of the Income Tax Assessment Act 1997. [Paragraph 210-10(1)(b)]

17.63 The exception for choices does not extend to choices relating to functional currency because an entity can choose to use functional currency for income tax and MRRT purposes notwithstanding that it uses a different currency for accounting purposes.

17.64 The exception for choices also does not extend to schemes entered into or carried out for the purpose of creating the circumstances necessary for the choice to be made. That is, for the exception to apply, the choice must be one genuinely available to the entity, not one that is only available because the scheme entered into or carried out was designed to make the choice available. [Subsection 210-10(3)]

The connection between the MRRT benefit and the scheme

17.65 An entity gets an MRRT benefit from a scheme if an MRRT benefit would not have arisen, or could not reasonably be expected to have arisen, apart from the scheme or part of the scheme. [Subsection 210-15(1)]

17.66 This involves an enquiry into what would have occurred if the scheme or part of the scheme had not been entered into or carried out.

Requirement 3: The purpose test is met

17.67 The scheme, or part of the scheme, must have been entered into or carried out with a particular sole or dominant purpose. That purpose must be either:

·
to get the MRRT benefit the scheme provides; or
·
to get the MRRT benefit and to reduce a liability to pay any other Australian or foreign tax or a mining royalty.

[Paragraph 210-10(1)(c) and subsection 210-10(5)]

17.68 It is not enough that the purpose is an incidental purpose; it must be the only purpose or the dominant purpose (that is, a purpose that is more significant than any other purpose).

17.69 However, it is not necessary that getting the MRRT benefit was the dominant purpose. It is enough that there was a purpose of getting the MRRT benefit and that, taken together with all other purposes of reducing liability to taxes (or to a mining royalty), there was a dominant purpose of getting all those benefits.

17.70 This broad purpose test is unusual in taxation law but is necessary because of the nature of the MRRT as a tax on profits. A scheme might be entered into to reduce profits for the dominant purpose of saving, say, income tax but have the collateral result of also reducing MRRT because it is also dependent on the size of the profits. If a miner could argue that its dominant purpose was to avoid income tax, there would be no way to cancel the collateral MRRT benefit. In an extreme case, it might be possible to argue that there was no dominant purpose because reducing profits had the purpose of avoiding a wide range of profit-based taxes. That risk is not limited to Australian profit-based taxes; it could also include such foreign taxes. For that reason, the purpose test looks to whether there was a dominant purpose of reducing taxes (or mining royalties, which are charges rather than taxes) and at least a purpose of obtaining an MRRT benefit.

17.71 The purpose test is one of objective purpose. The actual purpose of the entity that got the MRRT benefit, and the purpose of any different entity that entered into or carried out the scheme, or part of the scheme, is not relevant. What is relevant is what a reasonable observer would conclude was the purpose of any entity that entered into or carried out the scheme, or part of the scheme. [Paragraph 210-10(1)(c)]

17.72 In reaching that conclusion, eight factors must be taken into account. [Section 210-20]

The eight factors

17.73 The following matters are taken into account in coming to a reasonable conclusion about the purpose or effect of the scheme or part of a scheme:

·
the manner in which the scheme or part of the scheme was entered into or carried out. The terms manner, entered into, and carried out are terms that allow various matters to be taken into account. The terms are not given any restricted meaning. Manner would include consideration of the way in which, and method or procedure by which, the particular scheme or part of the scheme in question was established. The scheme or part of the scheme for these purposes would be the particular means adopted by an entity to obtain the MRRT benefit [paragraph 210-20(a)] ;
·
the form and substance of the scheme or part of the scheme [paragraph 210-20(b)] ;
·
the time at which the scheme was entered into and the length of the period during which the scheme was carried out [paragraph 210-20(c)] ;
·
the effect that the MRRT would otherwise have in relation to the scheme or part of the scheme [paragraph 210-20(d)] ;
·
any change in the entity's financial position that results, or may reasonably be expected to result, from the scheme or part of the scheme [paragraph 210-20(e)] ;
·
any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity that has or had a connection or dealing with the entity, whether the connection or dealing is or was of a family, business or other nature [paragraph 210-20(f)] ;
·
any other consequence for the entity, or an entity of a kind mentioned in the previous paragraph, of the scheme having been entered into or carried out [paragraph 210-20(g)] ; and
·
the nature of the connection (whether business, family or other nature) between the entity and such an entity [paragraph 210-20(h)] .

Limits that are discounted

17.74 The fact that a scheme, or any part of the scheme, is entered into or carried out outside of Australia does not limit the application of the general anti-avoidance rule. [Subsection 210-10(2)]

17.75 Nor is the operation of the general anti-avoidance rule limited by anything in other parts of the MRRT law or in the International Tax Agreements Act 1953. [Subsection 210-10(4)]

17.76 In particular, it is not limited by the operation of subsection 4(2) of the International Tax Agreements Act 1953, which would otherwise ensure that the MRRT law was to be read subject to that Act. [Paragraph 210-10(4)(b)]

Negating the effect of a scheme

17.77 If the general anti-avoidance rule applies, the Commissioner can make the scheme ineffective for MRRT purposes. The Commissioner does that by making a determination that negates the MRRT benefit obtained by the entity under the scheme. [Section 210-25]

17.78 There are two ways a Commissioner's determination can negate an MRRT benefit:

·
It can state that the entity's MRRT liability for a mining project interest for an MRRT year is, and at all times has been, a particular amount [paragraph 210-25(1)(a)] .
·
It can state that the entity's low profit offset and/or its rehabilitation tax offset is, and at all times has been, a particular amount [paragraph 210-25(1)(b)] .

17.79 The Commissioner gives effect to a determination by taking such action as he or she considers necessary. In most cases, such action would be to amend one or more MRRT assessments. [Subsection 210-25(2)]

Determinations compensating an entity or another entity

17.80 If a determination has been made against the entity that got the MRRT benefit in relation to a scheme or part of a scheme, the Commissioner can also make a determination that has the effect of compensating an entity that is disadvantaged by the scheme or part of a scheme if he or she considers it fair and reasonable that the disadvantage be negated or reduced. [Section 210-30]

17.81 Three conditions must be satisfied before the Commissioner can make such a determination that a particular entity should get a compensating adjustment:

·
the Commissioner must have made a determination in relation to an entity's MRRT benefit [paragraph 210-30(1)(a)] ;
·
the Commissioner must consider that entity or another entity gets an MRRT disadvantage from the scheme [paragraph 210-30(1)(b)] ; and
·
the Commissioner must consider it fair and reasonable to negate or reduce that MRRT disadvantage [paragraph 210-30(1)(c)] .

17.82 An MRRT disadvantage is an MRRT liability being higher, or a low-tax or rehabilitation offset being lower, than it would be (or would reasonably be expected to be) apart from the scheme. [Subsection 210-30(2)]

17.83 There are two ways a Commissioner's determination can compensate for an MRRT disadvantage:

·
it can state that an entity's MRRT liability for a mining project interest for an MRRT year is, and at all times has been, a particular amount [paragraph 210-30(3)(a)] ; or
·
it can state that an entity's low profit offset and/or rehabilitation tax offset is, and at all times has been, a particular amount [paragraph 210-30(3)(b)] .

17.84 Statements relating to different compensating adjustments, including for different MRRT years can be included in a single determination. That can also be the same determination that cancels MRRT benefits. [Section 210-35]

17.85 The Commissioner must provide a copy of a determination to each entity that is provided with a compensating adjustment under the determination. Not satisfying this requirement does not affect the validity of the determination. [Section 210-40]

17.86 As with determinations to negate an MRRT benefit, the Commissioner gives effect to a determination to compensate for an MRRT disadvantage by taking such action as he or she considers necessary. Once more, in most cases such action would be to amend one or more MRRT assessments. [Subsection 210-30(6)]

17.87 An entity can ask the Commissioner in writing to make a compensating adjustment determination if it relates to that entity or to an interest it has. The Commissioner must provide the entity with notice of his or her decision on each such request. If the Commissioner decides not to grant the request, the entity can object against it in the normal way for objecting to matters arising under taxation laws. [Subsections 210-30(4) and (5)]

Pre-mining project interests

17.88 The general anti-avoidance rule applies to pre-mining project interests in the same way that it applies to mining project interests. [Division 140]

Application and transitional provisions

Application

17.89 The general anti-avoidance rule (see Division 210) applies to schemes entered into on or after 2 May 2010, the MRRT announcement date. This ensures that it covers all aspects of the MRRT, including those arising before 1 July 2012. Examples include matters concerning the determination of the base value of starting base assets and whether a vertically integrated transformative operation existed at 2 May 2010. [Schedule 4 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 1]

17.90 The general anti-avoidance rule (see Division 210) also applies to a scheme entered into before 2 May 2010 if, had the MRRT law been in force at the time it was entered into, it would be reasonable to conclude that the entity did so with a sole or dominant purpose of obtaining an MRRT benefit, or of obtaining an MRRT benefit together with a reduction in a liability to pay any other tax or mining royalty. [Schedule 4 to the MRRT (CA&TP) Bill, item 11]

17.91 This ensures that Division 210 can apply to avoidance schemes entered into prior to 2 May 2010 that also result in an entity obtaining on MRRT benefit.

Starting base schemes

17.92 The general anti-avoidance rule also applies to schemes that increase the value of a starting base asset beyond what it would be (or would reasonably be expected to be) apart from the scheme. In such cases, it applies as if that result were an MRRT benefit. This is discussed in more detail in Chapter 7. [Schedule 4 to the MRRT (CA&TP) Bill, item 12]

Chapter 18 Administration of the MRRT

Outline of chapter

18.1 This chapter deals with the Minerals Resource Rent Tax (MRRT) administrative provisions and the amendments to existing taxation laws that are necessary to provide the administrative framework for the MRRT.

18.2 All legislative references in this chapter are to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA&TP) Bill) unless otherwise indicated.

Summary of new law

MRRT returns and starting base returns

18.3 An entity must lodge an annual MRRT return that deals with all of its mining project interests and pre-mining project interests. However, there may be circumstances in which the Commissioner of Taxation (Commissioner) will not require an entity, or class of entities, to lodge a return. MRRT returns will be lodged electronically.

18.4 In addition, some entities will need to give the Commissioner a starting base return.

Assessments

18.5 The MRRT is a full self assessment system. The Commissioner will generally accept an entity's MRRT return at face value and an assessment is deemed made when the Commissioner receives the return.

18.6 For the purposes of assessing MRRT, alternative sets of assessment provisions have been drafted. The first set is drafted on the basis that the Taxation Administration Act 1953 (TAA 1953) includes indirect tax assessment provisions that require modification for MRRT purposes. The second set is drafted on the basis that the indirect tax assessment provisions do not receive Royal Assent in time for the commencement of the MRRT. Both sets of provisions have been drafted in generic terms so that they can be used by other taxation laws in the future.

Collection and recovery

18.7 The MRRT will be supported by generic collection and recovery rules that apply generally in relation to Commonwealth taxation laws. This means that penalties can apply to outstanding MRRT obligations, and interest is payable on outstanding MRRT liabilities. The Commissioner can enforce collection of MRRT through the courts if necessary. Collection and recovery is further supported by mechanisms requiring payers to withhold MRRT from certain types of payments.

Instalments

18.8 An entity is liable to pay instalments of MRRT on a quarterly basis if it has mining revenue or pre-mining revenue or if it has a positive instalment rate. The instalments provide the entity with a credit against its MRRT liability for the year. This system ensures that an entity does not have a significant MRRT payment due on assessment.

18.9 The amount of an entity's quarterly instalment is the product of the applicable instalment rate and the entity's instalment income for the quarter. The instalment income is, broadly, the consideration for supplies of taxable resources the entity made in the quarter. Unlike the calculation of MRRT liabilities, the consideration for supplies is not apportioned and there is no deduction for mining expenditure. The accuracy of the result instead depends on the instalment rate used.

18.10 The instalment rate will usually be the rate the Commissioner gives the entity and that will usually be based on the entity's MRRT assessment for the previous year.

18.11 As with pay as you go (PAYG) instalments for income tax, the entity can choose a different rate that it believes better reflects its current trading conditions. The integrity of the system is protected by imposing the general interest charge on shortfalls if the entity chooses a rate that is too low.

18.12 When an entity transfers a mining project interest, or part of one, it can claim a credit for the part of its earlier instalments for the year that relates to the transferred interest. The entity to which the interest is transferred increases its instalment income for the quarter in which the transfer occurs to reflect the fact that it is liable to pay MRRT for the whole year, including the part before the transfer.

Record keeping

18.13 The effective administration of the MRRT requires the Commissioner to have access to the information needed to determine an entity's MRRT payable.

18.14 Fundamental to this is a requirement that entities keep records of their MRRT affairs.

18.15 The main elements of the MRRT record-keeping rules are:

·
a requirement to keep relevant records;
·
a requirement to keep the records in writing in English, or in a form that can be readily converted into writing in English; and
·
a five-year time limit for keeping the records.

18.16 The MRRT record-keeping rules are similar to those of other taxation law record-keeping regimes.

Information transfers

18.17 An entity that transfers a mining project interest or a pre-mining project interest (or part of either of them) to another entity has 60 days in which to also provide that entity with the information it will need to work out its MRRT liabilities for the transferred interest and to satisfy its MRRT obligations.

18.18 If the acquiring entity needs further particulars of the information provided to it after a mining project transfer or split (for example, to enable it to answer enquiries from the Commissioner), it can ask the original entity to provide those further particulars. That request must be answered within 60 days.

Access powers

18.19 In order to administer the MRRT, and in particular ensure compliance, the Commissioner has the power to access premises and documents, and gather information that is held domestically and in foreign jurisdictions.

Service

18.20 The Commissioner can serve documents on entities at addresses provided by them, including electronic addresses. A document is considered served when the Commissioner leaves or posts it.

Making choices

18.21 The MRRT provides a mechanism for taxpayers to make choices about a range of matters in the course of determining their MRRT liabilities.

18.22 Default rules apply to those choices, based on these principles:

·
Entities should be able to make a choice up to the earlier of the day they lodge their MRRT return for the first MRRT year for which the choice applies and the due date for lodging that return.
·
To the extent an MRRT return evidences a choice, that return is sufficient evidence of the choice.
·
A choice does not have to be notified to the Commissioner unless either the Commissioner specifically asks for it or the entity does not have to lodge a return.
·
Entities cannot revoke or vary their MRRT choices.

Rulings

18.23 The existing rulings system applies to the MRRT. Therefore, the Commissioner can issue public rulings about any aspect of the MRRT law. Entities can also apply for private rulings about how the MRRT laws apply to their particular circumstances.

Annual report

18.24 The Commissioner must provide an annual report to the Minister on the operation of the MRRT law.

Detailed explanation of new law

MRRT returns

18.25 Returns are integral to self assessment. They enable entities to inform the Commissioner of their tax position for a period.

18.26 Some conventions exist about the form and contents of returns. They must be in the form approved by the Commissioner, and lodged in a prescribed manner within a certain time limit. Failure to lodge a required return can result in penalties.

Who must give an MRRT return?

18.27 An entity that holds a mining project interest or pre-mining project interest during an MRRT year must give the Commissioner an MRRT return for that year. The return must deal with all such interests the entity had at any time during the year. [Schedule 1, item 8, subsection 117-5(1) of Schedule 1 to the TAA 1953]

18.28 This means that an MRRT return is required even if an entity is not liable to pay MRRT for the MRRT year. [Schedule 1, item 8, subsection 117-5(2) of Schedule 1 to the TAA 1953]

18.29 It also means that an entity that transfers an interest to another entity during an MRRT year will need to lodge an MRRT return covering that interest. This allows the entity to obtain a credit for MRRT instalments it paid, or amounts that were withheld, in respect of the interest.

18.30 However, there are some exceptions to the general rule. Some entities are not required to furnish MRRT returns for an MRRT year. This includes entities that have elected to use the simplified MRRT method for the year (but such entities can lodge a return in order to get a refund for paid MRRT instalments or amounts that were withheld). It also includes entities that belong to a class that the Commissioner has exempted from furnishing an MRRT return for an MRRT year. [Schedule 1, item 8, subsections 117-5(4) and (5) of Schedule 1 to the TAA 1953]

18.31 If an entity is required to lodge an MRRT return, the due date is the first day of the sixth month after the end of the MRRT year. The MRRT payable for the year is also due on that day. For entities operating on the standard MRRT year ending on 30 June, the return and the payment for the year are due on 1 December [Schedule 1, item 8, subsection 117-5(3) of Schedule 1 to the TAA 1953] . As with other tax laws, late lodgement results in penalties.

18.32 However, the Commissioner has discretion to defer lodgement for both individual entities, and classes of entities. [Schedule 1, item 8, paragraphs 117-5(3)(b) and (c), and subsection 117-5(5) of Schedule 1 to the TAA 1953]

The form and contents of the MRRT return

18.33 MRRT returns must be in the approved form. [Schedule 1, item 8, subsection 117-10(1) of Schedule 1 to the TAA 1953]

18.34 The approved form for an MRRT return must require an entity to provide information relating to its:

·
taxable mining profit for the MRRT year; and
·
MRRT payable for the MRRT year.

[Schedule 1, item 8, subsection 117-10(2) of Schedule 1 to the TAA 1953]

18.35 For these purposes a taxable mining profit for a miner for an MRRT year means the sum of the mining profits less any allowances for each of the mining project interests that the miner has for the year. [Schedule 3, item 83, definition of 'taxable mining profit' in subsection 995-1(1) of the ITAA 1997]

18.36 MRRT payable for a miner for an MRRT year means the sum of the MRRT liabilities of each mining project interest the miner has for that year, less the sum of any offsets that the miner has for that year. [Schedule 3, item 72, definition of 'MRRT payable' in subsection 995-1(1) of the ITAA 1997]

18.37 Section 388-50 in Schedule 1 to the TAA 1953, which deals with approved forms, allows the Commissioner to require that a range of other information be included in MRRT returns.

Additional MRRT returns

18.38 The Commissioner can direct an entity to give a further or fuller, or any other, MRRT return for an MRRT year or specified period, whether or not it has already furnished an MRRT return for that period. [Schedule 1, item 8, subsection 117-15(1) of Schedule 1 to the TAA 1953]

18.39 This enables the Commissioner to request a return where, for example, the original return has been lost, has not been lodged, or is otherwise unsatisfactory. It also enables the Commissioner to require a return for part of an MRRT year. It is intended as a power for use in special cases. For example, it might be used where an entity is engaged in aggressive tax planning schemes, or is abandoning its Australian mining operations. It is not intended that the Commissioner require entities to lodge multiple returns for each MRRT year as a matter of course.

18.40 The Commissioner can also request returns from entities acting in the capacity of agent or trustee for an entity. Typically, this would be used for cases where those agents act for foreign residents. [Schedule 1, item 8, subsection 117-15(1) of Schedule 1 to the TAA 1953]

Electronic lodgement

18.41 Entities must lodge their MRRT returns electronically, unless the Commissioner allows otherwise. [Schedule 1, item 8, section 117-25 of Schedule 1 to the TAA 1953]

Returns treated as being duly made

18.42 An MRRT return purporting to be made by or signed by or on behalf of an entity is treated as having been duly made by the entity or with the entity's authority until the contrary is proved. [Schedule 1, item 8, section 117-30 of Schedule 1 to the TAA 1953]

18.43 This rule allows the Commissioner to rely on the contents of an MRRT return, and for the process of self assessment to reach its natural conclusion; that is, it allows a return to become an assessment. However, if an entity proves that a return was lodged without its authority, then there is no return, and both the Commissioner and the entity must proceed as such.

Assessments and starting base assessments

Generic assessment provisions

18.44 The MRRT (CA&TP) Bill contains two alternative sets of provisions, both of which are designed to establish an assessment regime for the MRRT. The reason for this is that new assessment provisions were being written for indirect tax purposes (the indirect tax assessment provisions) at the same time as the MRRT. The indirect tax assessment provisions were being developed as generic assessment provisions that existing and future taxation laws could use. The MRRT is the first of the additional regimes to use these generic provisions.

18.45 However, the indirect tax assessment provisions have yet to be introduced into the Parliament and there is a possibility that they will not receive Royal Assent in time for the commencement of the MRRT. Therefore, a set of generic assessment provisions, based on the MRRT, were developed simultaneously. Whether this alternative set of provisions, or the set that extends the indirect tax assessment provisions to also cover the MRRT is used, depends on whether the proposed indirect tax assessment provisions commence before 1 July 2012. [Clause 2, items 3 and 4 in the table]

18.46 The objective is an MRRT assessment system that is substantively the same as the income tax assessment system (see Part IV of the Income Tax Assessment Act 1936 (ITAA 1936)). Both the Commissioner and those entities subject to the MRRT will essentially have the same rights and obligations in respect to the MRRT as they have with respect to income tax.

18.47 The following explanation proceeds on the basis that the MRRT version of the generic assessment provisions receives Royal Assent before 1 July 2012 and that the proposed indirect tax assessment provisions do not.

Assessments

18.48 An assessment crystallises the amount that an entity is required to pay, or the amount the Commissioner is required to refund.

18.49 An entity's taxable mining profit and the MRRT payable thereon is an assessable amount that is determined by assessment. [Schedule 2, item 22, Subdivision 155-A of Schedule 1 to the TAA 1953]

18.50 The term assessable amount is new. It is an adaptable term that can be leveraged by other tax regimes in the future. At this point it means an entity's taxable mining profit for an MRRT year and the MRRT payable by the entity for that year in relation to that profit.

18.51 The ascertainment of the MRRT assessable amount parallels the assessment process used in income tax. In income tax, an assessment includes the ascertainment of taxable income and the tax payable thereon. In MRRT, an assessment involves the ascertainment of a miner's taxable mining profit and the MRRT payable thereon. [Schedule 2, items 11, 12 and 22, section 155-5 and subsection 155-10(2) in Schedule 1 to the TAA 1953 and the definition of 'assessment' in subsection 995-1(1) of the ITAA 1997]

18.52 To ensure that the system is not overly rigid, the Commissioner may treat part of a tax period as the whole tax period [Schedule 2, item 22, section 155-25 in Schedule 1 to the TAA 1953] . This is equivalent to the Commissioner's power to make special assessments under section 168 of the ITAA 1936, and means that, for example, the Commissioner can assess an entity that wishes to leave Australia prior to the end of the MRRT year, or for part of a year, such as when an entity goes into bankruptcy.

18.53 After an assessment is made, the Commissioner is required to issue a notice of assessment of the assessable amount to the entity as soon as practicable. Similarly, the Commissioner must also issue notices of amended assessment in respect of amended assessments. [Schedule 2, item 22, subsection 155-10(1) in Schedule 1 to the TAA 1953]

MRRT assessments under the proposed indirect tax assessment provisions

18.54 Should the proposed indirect tax assessment provisions receive Royal Assent before 1 July 2012, the MRRT (CA&TP) Bill amends those provisions to specify that an assessable amount includes an entity's taxable mining profit for an MRRT year and the MRRT payable by the entity for that year in relation to that profit. [Schedule 2, items 2 and 3, paragraph 155-5(2)(e) and subsection 155-15(1) of Schedule 1 to the TAA 1953]

18.55 The MRRT (CA&TP) Bill also makes a number of other minor amendments to those provisions to ensure that they work for MRRT purposes. [Schedule 2, items 4 and 21, subsection 155-30(1) and the heading to Chapter 4 in Schedule 1 to the TAA 1953]

Self assessment

18.56 Under a full self assessment system, an entity assesses its liabilities, and the Commissioner generally accepts the entity's assessment at face value. A present example of full self assessment is the assessment of companies for income tax purposes, under which lodgement of a tax return effectively serves as a notice of assessment. The process for assessing MRRT is built on these foundations.

Self assessment under the MRRT assessment provisions

18.57 The assessable amount - an entity's taxable mining profit for an MRRT year and the MRRT payable by the entity for that year in relation to that profit - is treated as having been assessed by the Commissioner on the day an entity lodges its MRRT return for an MRRT year specifying the entity's taxable mining profit and MRRT payable for the year. [Schedule 2, item 22, subsections 155-15(1) and (2), paragraph 155-15(3)(a)]

18.58 The MRRT return that is lodged by an entity is deemed to be a notice of assessment signed by the Commissioner and given to the entity on the day the return is given to the Commissioner. [Schedule 2, item 22, subsection 155-15(4) of Schedule 1 to the TAA 1953]

18.59 However, it should be noted that self assessment does not apply if, for some reason, the Commissioner has issued an assessment on or before the day an entity required to lodge a return meets its obligation to do so. For example, if the Commissioner issues a default assessment. [Schedule 2, item 22, subsection 155-15(5)]

Self assessment of MRRT under the proposed indirect tax assessment provisions

18.60 Should the proposed indirect tax assessment provisions receive Royal Assent before 1 July 2012, then the MRRT (CA&TP) Bill amends those provisions with the effect described above. [Schedule 2, items 2 and 3, subsections 155-15(1) and (2) of Schedule 1 to the TAA 1953]

Default assessments

Default assessments under the MRRT assessment provisions

18.61 A full self assessment system is built on significant levels of trust. The community has demonstrated in the income tax context that that trust is well placed. However, some entities fail to meet their self assessment obligations. When this happens, the Commissioner needs to step in.

18.62 Therefore, the general power to assess may apply where an entity fails to lodge a return and the Commissioner wishes to assess an assessable amount based on information available to him or her [Schedule 2, item 22, section 155-5 in Schedule 1 to the TAA 1953] . This is the same as the Commissioner's power to make default assessments under section 167 of the ITAA 1936.

Default assessments under the proposed indirect tax assessment provisions

18.63 The version of the assessment provisions in the proposed indirect tax assessment provisions is identical to the MRRT version and does not need an amendment to make it applicable for MRRT purposes.

Amending assessments

18.64 Sometimes it is necessary to amend an assessment because a mistake has been made. Amendments can be initiated by a taxpayer or by the Commissioner. They can also be made to give effect to decisions made by courts and tribunals.

Amending assessments under the MRRT assessment provisions

18.65 The Commissioner can amend an assessment during the period of review, which commences on the day the Commissioner gives notice of the original assessment and expires four years after the day after the notice of assessment is issued (unless extended). Where an assessment is self assessed, the period of review will commence on the day the return is lodged, regardless of whether the return is lodged early or late. [Schedule 2, item 22, subsections 155-35(1) and (2) in Schedule 1 to the TAA 1953]

18.66 The period of review ensures that tax disputes have finality and cannot extend indefinitely. The period of four years is consistent with the timeframe applicable to amending the income tax assessments of medium and large business taxpayers.

18.67 However, due to the complexity of some tax disputes, it can be difficult to reach resolution within four years. Therefore, there is scope for the period of review to be extended (including more than once), but this can only be done by way of a Federal Court order or with the entity's consent. A Federal Court order can only be granted if the Court is satisfied that the entity under examination has not played a role in delaying the assessment process. This rule ensures that there is no incentive for entities to stall an examination of its affairs. [Schedule 2, item 22, subsections 155-35(4) to (6) in Schedule 1 to the TAA 1953]

18.68 The term 'examination' is a very broad concept and takes its ordinary meaning; which includes audits, reviews, investigations or enquiries.

18.69 There are also some circumstances in which the Commissioner can amend an assessment after the period of review has expired. For example, if an entity applies for an amendment within the period of review, the Commissioner can amend outside the period of review to give effect to that application [Schedule 2, item 22, section 155-45 in Schedule 1 to the TAA 1953] . In addition, if an entity applies for a private ruling within the period of review and the Commissioner issues the ruling, an assessment can be amended outside the period of review in order to give effect to the private ruling [Schedule 2, item 22, section 155-50 in Schedule 1 to the TAA 1953] .

18.70 Equally, the Commissioner can amend an assessment at any time to give effect to certain types of declarations and determinations. This would include a determination to make a compensating adjustment under the general anti-avoidance rule in the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) [Schedule 2, item 22, section 155-55 in Schedule 1 to the TAA 1953] . That is, where an entity has been involved in an MRRT avoidance scheme that has negatively impacted a second entity's MRRT liabilities, the Commissioner can compensate the second entity.

18.71 The Commissioner can also amend an assessment at any time to give effect to the anti-profit shifting rules in Division 205 of the MRRT Bill [Schedule 2, item 22, section 155-57 in Schedule 1 to the TAA 1953] . This power recognises the complexity of these types of transactions, and the timeframes involved in examining them. Moreover, the power is consistent with income tax law, where the Commissioner has an unlimited timeframe to amend to give effect to transfer pricing rules.

18.72 Importantly, the Commissioner retains a right to amend an assessment at any time to curtail fraud or evasion [Schedule 2, item 22, paragraph 155-60(c) in Schedule 1 to the TAA 1953] . This rule protects the integrity of the MRRT revenue base by ensuring that serious non-compliance is not rewarded.

18.73 The amendment of an assessment - for any of the reasons outlined above - raises a question about the period of review for amending an amended assessment. An amendment to an assessment gives rise to a refreshed period of review for the particular that is amended. A separate refreshed period of review exists for each amended particular. [Schedule 2, item 22, subsection 155-70(1) in Schedule 1 to the TAA 1953]

18.74 However, an amendment to give effect to:

·
a taxpayer-initiated amendment;
·
a private ruling application;
·
anti-avoidance compensating adjustment; or
·
a review, objection or fraud,

does not give rise to a refreshed period of review because the Commissioner can make amendments for these purposes at any time. [Schedule 2, item 22, subsection 155-70(1) in Schedule 1 to the TAA 1953]

18.75 The refreshed period of review starts immediately after the day the Commissioner gives the entity a notice of amended assessment for the last amendment made to the particular during the period of review, and ends four years after that day. The refreshed period of review cannot be extended. [Schedule 2, item 22, subsection 155-70(2) in Schedule 1 to the TAA 1953]

18.76 If the period of review (applicable to the original assessment) has lapsed, and the Commissioner wishes to amend an amended assessment within the refreshed period of review, he or she can only amend in respect to a particular covered by the refreshed period of review [Schedule 2, item 22, subsection 155-70(2) in Schedule 1 to the TAA 1953] . A 'particular' is a constituent element that affects an increase or decrease in the assessable amount.

18.77 An amended assessment can only be amended once in relation to a particular during the refreshed period of review. However, an entity has its rights to object under Part IVC of the TAA 1953. [Schedule 2, item 22, sections 155-70 and 155-90 in Schedule 1 to the TAA 1953]

18.78 Moreover, there may be more than one refreshed period of review if different particulars are amended in the period of review. The amendments giving rise to a refreshed period of review can be initiated either by the Commissioner or on application by the entity. [Schedule 2, item 22, section 155-70 in Schedule 1 to the TAA 1953]

18.79 Finally, it should be noted that the requirements applying to assessments, such as the requirement that the Commissioner issue a notice of assessment for each assessment, also apply to amended assessments. [Schedule 2, item 22, sections 155-80 in Schedule 1 to the TAA 1953]

Amending MRRT assessments under the proposed indirect tax assessment provisions

18.80 Should the proposed indirect tax assessment provisions receive Royal Assent before 1 July 2012, then the MRRT (CA&TP) Bill amends those provisions to specify that assessments of MRRT can be amended. [Schedule 2, items 5 to 7, 14 and 15, sections 155-55, 155-57 and 155-95 in Schedule 1 of the TAA 1953, definitions of 'original assessment' and 'period of review' in subsection 995-1(1) of the ITAA 1997]

General rules

18.81 A range of general rules are necessary for consistency with the rest of the tax system, and to support self assessment; these concern refunds of overpaid amounts, the validity of assessments, and the rights of entities to have taxation decisions reviewed.

General rules under the MRRT assessment provisions

18.82 First, if an amendment of an assessment results in an entity's tax-related liability being reduced, the amount by which the liability is reduced is treated as though it was never payable and the Commissioner must apply that amount in accordance with the rules for running balance accounts under Divisions 3 and 3A of Part IIB of the TAA 1953. [Schedule 2, item 22, section 155-75 in Schedule 1 to the TAA 1953]

18.83 Second, the validity of an assessment is not affected by any non-compliance with the provisions of any other taxation law [Schedule 2, item 22, section 155-85 in Schedule 1 to the TAA 1953] . This rule is consistent with section 175 of the ITAA 1936 and has the effect of ensuring that tax disputes focus on the issue that really matters. That is, has the entity paid the appropriate amount of tax?

18.84 Third, the question of whether an entity has paid the appropriate amount of tax requires a dispute settlement mechanism; as such, assessments are reviewable taxation decisions under Part IVC of the TAA 1953 [Schedule 2, item 22, section 155-90 in Schedule 1 to the TAA 1953] . An entity that is dissatisfied with an assessment has four years after notice of the original assessment is issued to object against the assessment [Schedule 2, item 18, paragraph 14ZW(1)(bg) of the TAA 1953] .

18.85 With respect to an amended assessment, an entity may lodge an objection either within four years of the notice of the original assessment, or 60 days after the relevant notice of amended assessment was given, whichever is later. It should be noted that section 14ZV of the TAA 1953 limits any objection to an amended assessment to the particular or particulars that have been amended. [Schedule 2, item 20, paragraph 14ZW(1B)(b) of the TAA 1953]

18.86 The fact that entities can have MRRT decisions reviewed under Part IVC of the TAA 1953 means that, consistent with the approach taken to other tax laws, decisions in relation to assessments are not reviewable decisions under the Administrative Decisions Judicial Review Act 1977 [Schedule 2, item 10, paragraph (e) of Schedule 1 of the Administrative Decisions Judicial Review Act 1977] .

Applicability of the general rules to MRRT under the proposed indirect tax assessment provisions

18.87 If the proposed indirect tax assessment provisions receive Royal Assent before 1 July 2012, then additional amendments are made to the Administrative Decisions Judicial Review Act 1977 to ensure that MRRT decisions are not reviewable under that Act. [Schedule 3, items 1 and 2, paragraph (e) of Schedule 1 to the Administrative Decisions Judicial Review Act 1977] They will have objection rights under Part IVC [Schedule 2, items 6 and 7, section 155-90 in Schedule 1 to the TAA 1953] .

Miscellaneous consequential amendments under the MRRT assessment provisions

18.88 The Commissioner has a power to retain an amount until an entity has given the Commissioner a notification that affects the refund, or until he or she makes an assessment of the amount. A minor amendment ensures that the Commissioner can retain an amount until he or she makes or amends an assessment. [Schedule 2, item 17, subsection 8AAZLG(2) of the TAA 1953]

Evidence

18.89 The Commissioner issues an extraordinarily large number of documents to give force to decisions. As such, special evidentiary rules exist to protect the validity of those documents and decisions. These rules are consistent with section 177 of the ITAA 1936.

18.90 The purpose of these rules is similar to that regarding the validity of an assessment; that is, these rules ensure that the focus of a dispute about MRRT payable focuses on the key question: has the relevant entity paid the appropriate amount of MRRT? These rules also ensure that where an entity has a tax debt, the Commissioner can have that debt enforced in a Court by producing the relevant assessment.

Evidence rules under the MRRT assessment provisions

18.91 The amount included in an assessment will be conclusive evidence of the assessment of the entity's assessable amount, other than in proceedings commenced under Part IVC of the TAA 1953, such as an objection against the assessment. [Schedule 2, item 25, subsection 350-10(1) in Schedule 1 to the TAA 1953]

18.92 In addition, the production of a:

·
Gazette notice purporting to be issued by the Commissioner is conclusive evidence that the notice was so issued;
·
document, copy of a document, or an extract from a document, issued under the hand of the Commissioner, a Second Commissioner, a Deputy Commissioner or delegate of the Commissioner for the purposes of a taxation law, is conclusive evidence that the document was so issued;
·
notice of assessment is conclusive evidence that the assessment was properly made and is correct, except in Part IVC proceedings; and
·
a determination under the MRRT anti-avoidance or anti-profit shifting rules is conclusive evidence that the determination was properly made and is correct, except in Part IVC proceedings.

[Schedule 2, item 25, subsection 350-10(1) in Schedule 1 to the TAA 1953]

18.93 The production of a certificate that is signed by the Commissioner, a Second Commissioner, a Deputy Commissioner, or a delegate of the Commissioner, and which states that an amount is payable under a taxation law, is prima facie evidence that the amount is payable from the time stated in the certificate, and that the particulars stated in the certificate are correct. [Schedule 2, item 25, subsection 350-10(2) in Schedule 1 to the TAA 1953]

18.94 The production of a document that appears to be a copy of, or extract from, an original document made or given by or to an entity for the purposes of a taxation law, and is signed by the Commissioner, a Second Commissioner, a Deputy Commissioner or a delegate of the Commissioner, is evidence in the same way as the original would have been evidence. [Schedule 2, item 25, subsection 350-10(3) in Schedule 1 to the TAA 1953]

18.95 Judicial notice must be taken of the signature of the Commissioner, a Second Commissioner, a Deputy Commissioner or a delegate of the Commissioner if the signature is attached to an official document. [Schedule 2, part 2, item 19, section 350-15 in Schedule 1 to the TAA 1953]

Applicability of the evidence rules to MRRT under the proposed indirect tax assessment provisions

18.96 If the proposed indirect tax assessment provisions receive Royal Assent before 1 July 2012, then amendments are made to those provisions to ensure that they apply to MRRT-specific documents. [Schedule 2, items 8, 9, 13 and 16, section 350-5 and subsection 350-10(1) in Schedule 1 to the TAA 1953, definitions of 'Deputy Commissioner' and 'Second Commissioner' in subsection 995-1(1) of the ITAA 1997]

Starting base returns and assessments

18.97 The MRRT starting base has been brought into the assessment regime to ensure certainty with respect to starting base allowances. This has benefits for miners and the Commissioner - it means that disputes about starting base valuations cannot extend into the distant future.

18.98 Because of the necessity to assess the starting base, it is also necessary that relevant entities furnish a starting base return.

Starting base returns

18.99 The starting base return is integral to the idea of a starting base assessment, and an entity's capacity to claim a starting base allowance.

18.100 If an entity makes a starting base choice in relation to its mining project interest or pre-mining project interest, then the entity must give the Commissioner a starting base return for the first MRRT year. [Schedule 1, item 8, subsection 117-20(1) of Schedule 1 to the TAA 1953]

18.101 The starting base return must relate to every starting base asset (or thing that may become a starting base asset) relating to the mining project interest, or pre-mining project interest. [Schedule 1, item 8, subsection 117-20(2) of Schedule 1 to the TAA 1953] .

18.102 Generally, if an entity is required to lodge a starting base return, it is due on the first day of the sixth month after the end of its first MRRT year. However, where the project interest is transferred after 1 July 2012 and before a choice is made, the transferee must make the choice and lodge the starting base return by the same time the transferor would have been required to if it had continued to have the interest. Failure to lodge by this date will affect the validity of the return. However, the Commissioner can extend the period for lodgement. [Schedule 1, item 8, subsection 117-20(3) of Schedule 1 to the TAA 1953]

18.103 As is the case with the MRRT return, the starting base return must be in the approved form, which requires the provision of information relating to the base value of each starting base asset an entity has and what would be the base value of notional starting base assets. [Schedule 1, item 8, subsections 117-20(4) and (5) of Schedule 1 to the TAA 1953]

18.104 The return needs to contain enough information to disclose the total of base values, but it does not require that the base value of each asset be recorded separately. As it will not be practical in many circumstances to include asset by asset information in the starting base return it is anticipated that the Commissioner will request summary information of some classes of assets.

18.105 Where a miner has chosen the market value approach, it is required to include the rights and interests that constitute the mining project interest, any mining information, any improvements to land in the project area and any goodwill in a single starting base asset. In addition, the mining project interest itself may be made up of a number of constituent interests that are combined because they are upstream integrated. In these cases, the starting base return requires information about the base value of the composite starting base asset, not necessarily the individual elements of that asset.

Starting base assessments

18.106 A starting base assessment crystallises the starting base available for use in an entity's first MRRT return.

18.107 In accordance with the assessment rules, the base value of a starting base asset for the first MRRT year is an assessable amount. This amount is treated as having been assessed on the day an entity lodges its starting base return for that MRRT year. [Schedule 4, item 15]

18.108 In addition, all of the rules regarding assessments, including those about:

·
self assessment;
·
default assessments;
·
original assessments;
·
amending and amended assessments;
·
refunds of overpaid amounts;
·
the validity of the assessment;
·
objections and judicial review; and
·
evidence,

apply to the starting base assessment in the same way as they apply to an assessment of an entity's taxable mining profit and the MRRT payable.

Collection and recovery

18.109 In order to ensure that taxpayers meet their liabilities under a self assessment system, the system is supported by a range of collection and recovery provisions. The Commissioner can recover unpaid tax (even where a dispute is pending), release taxpayers from their liabilities because of hardship, apply penalties and interest, issue notices to third parties owing money to or holding money for a taxpayer, issue departure prohibition orders, and apply for mareva injunctions.

18.110 Further support comes in the form of withholding provisions, which impose obligations on the payers of certain types of payments to withhold tax on behalf of payees, and by requiring certain classes of taxpayers to pay instalments during the tax year, and by a running balance account that enables the Commissioner to offset credits and debits. The regime also recognises that sometimes taxpayers overpay their liabilities, or pay them early, and interest can be payable on such amounts.

Generic collection and recovery rules

18.111 The following MRRT liabilities are tax-related liabilities for the purposes of the generic collection and recovery rules:

·
assessed MRRT;
·
shortfall interest charge on a shortfall in MRRT; and
·
quarterly MRRT instalments.

[Schedule 1, items 9 and 10, subsection 250-10(2) of Schedule 1 to the TAA 1953]

Withholding tax

Withholding from natural resource payments

18.112 Entities that are foreign residents may have MRRT withheld from natural resource payments - that is, payments that are of a nature described by section 12-325 of Schedule 1 to the TAA 1953. [Schedule 1, item 4, paragraphs 12-330(1)(b) and 12-335(2)(a) of Schedule 1 to the TAA 1953]

Crediting withheld amounts

18.113 If an entity receives a natural resource payment from which an amount has been withheld for MRRT purposes, then the recipient of the natural resource payment is entitled to a credit equal to the amount withheld. [Schedule 1, items 6 and 7, sections 18-10 and 18-49 in Schedule 1 to the TAA 1953]

18.114 Consequential amendments were made to the objects of the PAYG withholding provisions, and the heading of the subdivision dealing with the crediting of withheld amounts. [Schedule 1, items 3 and 5, paragraph 11-1(g) and Subdivision 18-A in Schedule 1 to the TAA 1953]

Shortfall interest charge

18.115 Existing provisions have been modified to make the shortfall interest charge applicable to shortfalls in MRRT. [Schedule 1, items 11, 12 and 14 to 16, sections 280-1, 280-50 and 280-170, paragraph 280-105(1)(a), subsection 280-110(1) of Schedule 1 to the TAA 1953]

18.116 An entity will be liable to pay shortfall interest charge on an additional amount of MRRT that it is liable to pay because the Commissioner amends its assessment for an MRRT year [Schedule 1, item 13, subsection 280-101(1) of Schedule 1 to the TAA 1953] . Shortfall interest charge accrues for each day beginning on the day the entity's first assessment of MRRT for that year was due to be paid, or would have been due if there had been any, and ending the day before the day on which the Commissioner gave the entity notice of the amended assessment [Schedule 1, item 13, subsection 280-101(2) of Schedule 1 to the TAA 1953] .

18.117 However, if an amended assessment reinstates all or part of a liability in relation to a particular that had been reduced by an earlier amendment, the period for the reinstated liability begins on the day on which MRRT under the earlier amended assessment was due to be paid, or would have been due to be paid if there had been any. [Schedule 1, item 13, subsection 280-101(3) of Schedule 1 to the TAA 1953]

General interest charge

18.118 The general interest charge is payable on:

·
the late payment of assessed MRRT or shortfall interest charge;
·
the late payment of MRRT instalments; and
·
any shortfall in MRRT instalments worked out on the basis of a varied rate.

[Schedule 1, items 1 and 2, subsection 8AAB(4) of the TAA 1953]

Interest on overpayments and early payments

18.119 The MRRT has been included as a relevant tax so that interest can be paid on overpayments and early payments. [Schedule 3, items 86 to 89, subsection 3(1) and section 3C of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

Liability to penalty

18.120 The administrative penalty provisions apply to the MRRT. Such penalties apply when entities make false or misleading statements, take positions that are not reasonably arguable, enter into schemes, and refuse to provide documents to the Commissioner.

18.121 Minor amendments were required to ensure that entities which take MRRT positions that are not reasonably arguable are subject to higher administrative penalties when they have a shortfall in their MRRT payable. [Schedule 1, items 17 to 23, sections 284-30 and 284-35, paragraphs 284-75(2)(a) and (b), subsections 284-80(1) and 284-90(1) in Schedule 1 to the TAA 1953]

Instalments

18.122 The MRRT instalments system provides for paying quarterly instalments towards the annual MRRT liability of entities with mining project interests or pre-mining project interests, in the same way that companies pay instalments towards their income tax liability. Unlike income tax, no entities will pay MRRT instalments annually or half-yearly.

18.123 Like the PAYG instalments system for income tax, MRRT instalments are intended to ensure the efficient collection of MRRT by providing entities with a simple and convenient way to meet their annual MRRT liability as their mining revenue is derived. A quarterly payment system avoids the problems of large end-of-year MRRT debts and provides the Commonwealth with revenue throughout the year. The instalments are not precise calculations of ultimate liability but aim to get as close as possible to the ultimate liability, within a system that is simple and convenient. [Schedule 1, item 8, section 115-5 of Schedule 1 to the TAA 1953]

Liability for instalments

18.124 Entities are liable to pay an MRRT instalment for an instalment quarter if they have mining revenue, pre-mining revenue, or an instalment rate greater than nil, for the quarter. [Schedule 1, item 8, subsection 115-10(1) of Schedule 1 to the TAA 1953]

18.125 An instalment quarter is a period of three months in the year. For an entity using a standard financial year, the quarters would be:

·
First quarter: July, August and September.
·
Second quarter: October, November and December.
·
Third quarter: January, February and March.
·
Fourth quarter: April, May and June.

[Schedule 1, item 8, subsection 115-10(2) of Schedule 1 to the TAA 1953]

18.126 An entity using a substituted accounting period would also usually have four three-monthly quarters, although the months would differ from the standard. When an entity changes accounting periods, the transitional period could be longer or shorter than 12 months, leading to more or fewer than four quarters in the year and a final quarter that could be shorter than three months. [Schedule 1, item 8, section 115-110 of Schedule 1 to the TAA 1953]

18.127 Each quarterly instalment is due on the 21st day of the month after the end of the quarter. [Schedule 1, item 8, section 115-25 of Schedule 1 to the TAA 1953]

Example 18.192 : Due date for instalment For an entity using a standard MRRT year (1 July to 30 June), the instalment for the first quarter, which ends on 30 September, would be due on 21 October.

18.128 As with most other late payments of tax, the general interest charge applies on a daily basis if an MRRT instalment is not paid on time. The general interest charge ensures that the Commonwealth is compensated for late payments of tax and discourages entities from treating Commonwealth tax debts as a form of interest-free loan. [Schedule 1, item 8, section 115-30 of Schedule 1 to the TAA 1953]

Credit for instalments

18.129 An entity's instalments payable for an MRRT year are credited against its final MRRT liability, once an assessment is made following the end of the MRRT year. The crediting process is handled through the running balance account regime in Division 3 of Part IIB of the TAA 1953, which offsets credits against a taxpayer's tax liabilities and refunds any excess credits. [Schedule 1, item 8, subsection 115-20(1) of Schedule 1 to the TAA 1953]

18.130 The amount of the credit is the total of the entity's instalments payable for the year, less any credits already claimed because it transferred a mining project interest (or pre-mining project interest) or because it varied its instalment rate. In effect, the entity gets a credit for the net amount of its instalments payable for the year. [Schedule 1, item 8, subsection 115-20(2) of Schedule 1 to the TAA 1953]

18.131 An entity gets a credit for its instalments even if it has not yet paid them. That ensures that there is no double collection of a liability (once for the annual MRRT liability and again when the unpaid instalment is collected). Unpaid instalments remain debts due to the Commonwealth. [Schedule 1, item 8, paragraph 115-20(2)(a), subsections 115-20(1) and (3) of Schedule 1 to the TAA 1953]

The amount of an instalment

18.132 The MRRT instalment an entity is liable to pay for a quarter is:

The entity's MRRT instalment income for the quarter x the entity's applicable instalment rate

[Schedule 1, item 8, section 115-35 of Schedule 1 to the TAA 1953]

Example 18.193 : Amount of an instalment Under Mines Pty Ltd has instalment income for a quarter of $75 million and an applicable instalment rate of 7 per cent. Its instalment for the quarter will be $75million x 0.07 = $5.25million.

Instalment income

18.133 The instalment income for a quarter is the sum of the following amounts that arise because of mining revenue events that happen during the quarter:

·
consideration for supplies of taxable resources or things produced using the taxable resources;
·
what would be the consideration for supplies of taxable resources, or things produced from taxable resources, that are exported before they are supplied; or
·
what would be the consideration for supplies of something produced from taxable resources that is used instead of being supplied or exported.

[Schedule 1, item 8, section 115-40 of Schedule 1 to the TAA 1953]

18.134 The instalment income includes the gross consideration arising from mining events in the quarter that will result in an amount being included in mining revenue or pre-mining revenue. It does not include the mining revenue itself (which is the part of the gross consideration that is attributed to the valuation point) and it does not include some other amounts (such as recoupments of expenditure). This is done deliberately to make it easier for entities to calculate their instalments. In most cases, entities will only need to track the consideration for supplies of resources during the quarter. The reduction of the gross consideration to produce an instalment that is close to the eventual MRRT liability is achieved by the application of the entity's instalment rate.

Applicable instalment rates

18.135 Three possible instalment rates could apply to an entity:

·
A rate the Commissioner gives the entity.
·
A rate the entity chooses for the quarter.
·
The default instalment rate.

[Schedule 1, item 8, subsection 115-45(1) of Schedule 1 to the TAA 1953]

18.136 If more than one possible rate applies, the rate that the entity uses (the applicable instalment rate ) is (in this order):

·
A nil rate the Commissioner has given the entity.
·
A rate the entity has chosen for the quarter (or an earlier quarter in the same MRRT year).
·
A rate the Commissioner has given the entity that is not a nil rate.
·
The default rate.

[Schedule 1, item 8, subsection 115-45(1) of Schedule 1 to the TAA 1953]

The Commissioner's instalment rate

18.137 The Commissioner will usually give entities an instalment rate based on their previous year's MRRT liability. This is similar to the system used for PAYG instalments. It assumes that the ratio between an entity's revenue and its expenditure and MRRT allowances will be fairly consistent from year to year.

18.138 That assumption, however, may not always hold true. For example, an entity might incur unusually large capital expenditure in one year or the consideration for supplying taxable resources could vary considerably relative to the entity's costs from one year to the next. Nevertheless, it is a reasonable basis on which to build a collection system that is only intended to collect something close to the entity's final MRRT liability.

18.139 A rate the Commissioner gives an entity will apply for the quarter in which it was given and will continue to apply until the Commissioner gives the entity a new rate. It will apply even if it was given some years ago (although the Commissioner's usual practice is to provide a new rate each year). [Schedule 1, item 8, item 3 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

18.140 The Commissioner usually works out the rate by using a formula that determines the rate that would have produced instalments for the previous MRRT year equal to the entity's total MRRT liability. That is:

The entity's MRRT liability for the previous MRRT year / The entity's instalment income for the previous MRRT year

[Schedule 1, item 8, subsection 115-75(2) of Schedule 1 to the TAA 1953]

18.141 The 'instalment income' used in the formula does not include amounts that related to mining project interests and pre-mining project interests that were transferred or split to another entity during the previous MRRT year [Schedule 1, item 8, section 115-105 of Schedule 1 to the TAA 1953] . If either part of the formula is zero, the rate will be nil [Schedule 1, item 8, subsection 115-75(4) of Schedule 1 to the TAA 1953] .

18.142 If the entity did not have an MRRT assessment for the previous MRRT year, the Commissioner would use the most recently assessed MRRT year instead. [Schedule 1, item 8, subsection 115-75(3) of Schedule 1 to the TAA 1953]

Example 18.194 : Commissioner's instalment rate In the 2014-15 MRRT year, Like Mines Pty Ltd, an iron ore miner, had an MRRT liability of $14.5 million. Its consideration for the ore it supplied in that year was $207 million. The Commissioner would usually provide Like Mines with a rate for the 2015-16 MRRT year of 14.5m/207m = 7%.

18.143 The Commissioner can modify the MRRT liability used to calculate the rate in order to reflect changes in the law after the MRRT year (the 'base year') used for working out a rate. For example, if the law were changed to allow expenditure to be deducted that had previously been excluded expenditure, the entity's MRRT liability for the base year would have been lower. In working out a rate, the Commissioner can use the MRRT liability that would have applied if the change in the law had applied for that year. This ensures that the MRRT instalments system functions effectively relative to the current state of the law with the intention that it neither over nor under collects instalments. [Schedule 1, item 8, subsection 115-75(5)and section 115-80 of Schedule 1 to the TAA 1953]

18.144 The Commissioner can also modify the MRRT liability for the previous year to work out an entity's instalment rate if the law has not changed but, in the Commissioner's opinion, is likely to be changed in time to apply to relevant instalments. In that case, the Commissioner can only vary the rate to reduce it. That protects entities against paying instalments that are too high if the anticipated law change does not eventuate. [Schedule 1, item 8, section 115-80 of Schedule 1 to the TAA 1953]

18.145 The Commissioner may be aware of other circumstances that would mean the rate calculated in the normal way would not be appropriate. For example, the Commissioner might become aware that the entity had made significant one-off capital expenditure in the previous year. In all such cases, the Commissioner can work out an instalment rate on a different basis if, having regard to the entity's circumstances, he or she considers it reasonable to do so and if it would produce instalments that are closer to the entity's likely MRRT liability for the year. [Schedule 1, item 8, subsections 115-75(5) and (6) of Schedule 1 to the TAA 1953]

18.146 If the Commissioner believes an entity is unlikely to be liable to pay MRRT for an MRRT year, the Commissioner can give the entity a nil rate. [Schedule 1, item 8, subsection 115-45(2) of Schedule 1 to the TAA 1953]

18.147 There are two differences between a nil rate and any other rate the Commissioner gives an entity:

·
A nil rate is the applicable instalment rate even if the entity has chosen a different rate [Schedule 1, item 8, item 1 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953] ;
·
A nil rate applies for the quarter in which it is given and for any later quarters in the same MRRT year; it does not apply to quarters after that MRRT year [Schedule 1, item 8, subsection 115-45(4) of Schedule 1 to the TAA 1953] .

18.148 The Commissioner can give a whole class of entities a nil rate if the Commissioner believes no member of the class will be liable to pay MRRT for the year. [Schedule 1, item 8, subsection 115-45(3) of Schedule 1 to the TAA 1953]

18.149 A nil rate stops applying from the quarter the Commissioner gives the entity a different instalment rate. Unlike the nil rate, the entity could substitute its chosen rate for that replacement Commissioner rate. [Schedule 1, item 8, subsections 115-45(1) and (5) of Schedule 1 to the TAA 1953]

18.150 If the Commissioner gives an entity a rate, he or she must notify the entity in writing [Schedule 1, item 8, subsections 115-45(2) and 115-75(1) of Schedule 1 to the TAA 1953] . If the Commissioner gives a class of entities a nil rate, the Commissioner does so by legislative instrument and does not have to separately notify the entities in that class [Schedule 1, item 8, subsection 115-45(3) of Schedule 1 to the TAA 1953] .

The entity's chosen instalment rate

18.151 An entity can choose a different instalment rate for each quarter but can only choose one rate for a quarter and cannot change it. [Schedule 1, item 8, section 115-50 of Schedule 1 to the TAA 1953]

18.152 A rate an entity chooses for a quarter will continue to apply for each later quarter in the MRRT year unless the entity chooses a different rate for a later quarter. However, a rate an entity chose for a quarter will not apply to a quarter in a later MRRT year, even if a new rate is not chosen. The rate given by the Commissioner (or the default rate if the Commissioner has never given the entity a rate) would become the applicable rate in that later year. [Schedule 1, item 8, item 2 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

The default instalment rate

18.153 If the Commissioner has not given the entity a rate, and the entity has not chosen a rate, for a quarter, the applicable instalment rate for the quarter will be the default rate. [Schedule 1, item 8, item 4 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

18.154 The default instalment rate for an entity that only has instalment income relating to iron ore is 8 per cent [Schedule 1, item 8, paragraph 115-85(1)(a) of Schedule 1 to the TAA 1953] . The default instalment rate for an entity that only has instalment income relating to other taxable resources (coal or gas) is 3 per cent [Schedule 1, item 8, paragraph 115-85(2)(a) of Schedule 1 to the TAA 1953] .

18.155 For quarters after the 2012-13 MRRT year, those default rates can be changed by regulation. That allows the default instalment rate to be altered quickly to reflect any global changes to profit levels in the mining industry after the first MRRT year. After that first year, existing miners will be given an annual rate by the Commissioner, so regulations changing the default rate will only affect entities new to the MRRT and only for their first MRRT year. Of course, those entities new to the MRRT will be able to choose their own instalment rate in the usual way if the default rate is not suitable for them. [Schedule 1, item 8, paragraphs 115-85(1)(b) and (2)(b) and subsection 115-85(4) of Schedule 1 to the TAA 1953]

18.156 If an entity has instalment income relating to iron ore and to coal or gas, its default instalment rate is an amalgam of the two prescribed rates. It would multiply the iron ore default rate by the proportion of its instalment income for the quarter that relates to iron ore and multiply the coal and gas default rate by the proportion of the quarter's instalment income that relates to coal or gas. Adding the two results and rounding it to two decimal places would give the entity its default instalment rate for that quarter. [Schedule 1, item 8, subsection 115-85(3) of Schedule 1 to the TAA 1953]

Example 18.195 : Default rate for diverse interests Merry Quest Co has several iron ore mines and one coal mine. Eighty per cent of its instalment income for a quarter relates to iron ore and the other 20 per cent relates to coal. The default rate for iron ore for the quarter is still 8 per cent but the regulations have changed the coal default rate to 2.5 per cent. Merry would work out its default rate for the quarter as (8% x 80%) + (2.5% x 20%) = 6.9%

Consequences of choosing an instalment rate

18.157 As with the PAYG instalments system, an entity can choose to use a rate that is different from the rate the Commissioner has given the entity (or the default rate if the Commissioner has not yet given the entity a rate). That allows the entity to take into account the circumstances it expects will affect its end of year MRRT liability.

18.158 An entity that uses the default rate, or a rate the Commissioner has given it, has the security of knowing it cannot be liable for the general interest charge if that rate results in instalments that are too low. An entity that chooses its own rate must be careful to ensure its chosen rate accurately reflects its expected MRRT liability for the year because the general interest charge will apply if the entity chooses a rate that is too low. As with PAYG instalments, there is a 15 per cent margin so that entities are not penalised simply because their chosen rate is not 100 per cent accurate.

Credit for earlier quarters when an entity chooses a low instalment rate

18.159 When an entity chooses a lower rate than it was using in the previous quarter, it can claim a credit for instalments for earlier quarters in the year. It can claim a credit even if it has not yet paid those earlier instalments. It would remain liable to pay the original instalment amounts (although, in practice, the credit and the liability would usually be offset). [Schedule 1, item 8, subsections 115-60(1) and (3) of Schedule 1 to the TAA 1953]

18.160 The entity does not have to claim a variation credit through the instalments process. If it does not, it would get a full credit for its instalments when an assessment is made at the end of the MRRT year [Schedule 1, item 8, paragraph 115-20(2)(a) of Schedule 1 to the TAA 1953] . If it does claim the credit through the instalments process, the credit for its instalments at the end of the year will be correspondingly reduced to reflect the earlier credit it claimed [Schedule 1, item 8, paragraph 115-20(2)(b) of Schedule 1 to the TAA 1953] .

18.161 A claim for a credit must be made in the approved form and can only be made on or before the day the instalment is due for the quarter That will usually be on or before the 21st day after the quarter but could be later if the Commissioner has deferred the time for paying the instalment (see section 255-10 of Schedule 1 to the TAA 1953). [Schedule 1, item 8, subsection 115-60(2) of Schedule 1 to the TAA 1953]

Amount of the credit

18.162 The credit is equal to the difference between the instalments for the earlier quarters in the year and what those instalments would have been if they had used the new (lower) rate instead of the previous higher rate. The amount of the credit is adjusted to reflect any credits already claimed for the year. [Schedule 1, item 8, paragraph 115-60(1)(d) of Schedule 1 to the TAA 1953]

Example 18.196 : Claiming variation credits In the first instalment quarter of its MRRT year, Grayte Mines Pty Ltd has instalment income of $80 million and an applicable instalment rate of 15 per cent that was given to it by the Commissioner. It is liable to pay an instalment of $12 million for the quarter.In the second instalment quarter, Grayte Mines has instalment income of $75 million and chooses an instalment rate of 12 per cent. It is liable to pay an instalment for the quarter of $9 million. Because the rate is lower than the rate it used in the previous quarter, it can also claim a variation credit.The variation credit is the difference between its instalment for the first quarter and what that instalment would have been if it had used the 12 per cent rate. At 12 per cent, the first quarter's instalment would have been $9.6 million, so Grayte Mines can claim a credit of the $2.4 million difference. It would still remain liable to pay $12 million for the first quarter instalment but it would be offset by the $2.4 million credit if it remained unpaid.In its third quarter, it again has instalment income of $75 million and decides to use a rate of 10 per cent, for an instalment of $7.5 million. Because Grayte Mines has again reduced its rate, it can again claim a variation credit.In this case, the credit is the difference between the total instalments for the previous two quarters, less the credit it claimed in the second quarter ($21m - $2.4m = $18.6m), and what those instalments would have been using the new rate (($80m + $75m) x 10% = $15.5m). Therefore, Grayte Mines can claim a variation credit of $3.1 million.

General interest charge for choosing too low a rate

18.163 An entity that chooses its own instalment rate for a quarter is liable to pay the general interest charge if the rate it chooses is below 85 per cent of the year's benchmark instalment rate. [Schedule 1, item 8, subsection 115-65(1) of Schedule 1 to the TAA 1953]

18.164 An entity's benchmark instalment rate for an MRRT year is the rate that would mean the year's instalments added up exactly to the entity's MRRT liability for the year. It can only be worked out at the end of the year, when the entity's MRRT liability and total instalment income for the year (excluding amounts that related to mining project interests and pre-mining project interests that were transferred or split to another entity during the year) are determined. [Schedule 1, item 8, sections 115-70 and 115-105 of Schedule 1 to the TAA 1953]

Example 18.197 : Benchmark instalment rate Bee Mines Pty Ltd has instalment income of $60 million for each quarter of the 2014-15 MRRT year. Its MRRT liability for the year is $28.8 million, so its benchmark instalment rate for 2014-15 is:($28.8m / $240m) = 12%

18.165 Imposing the general interest charge when an entity chooses too low an instalment rate is intended to discourage entities inappropriately dropping their instalment rates to defer paying their MRRT liability until their annual assessment is made. The Commissioner has a discretion under section 8AAG of the TAA 1953 to remit general interest charge. The Commissioner could use that discretion to remit the whole or part of the general interest charge for an entity that took reasonable steps based on the information available to it to ensure that the varied rate was accurate relative to the entity's expected MRRT liability for the year. The Commissioner may also use that discretion to remit the general interest charge if the entity had also made a reasonable effort to remedy a rate it realised was too low when new information came to light.

18.166 The general interest charge for choosing an instalment rate that is too low is imposed on the difference between what the instalment was for the quarter and what it would have been if the entity had not varied its rate that was too low. If the difference would have been less if the year's benchmark instalment rate had been used instead, then the charge is only imposed on that lesser difference. [Schedule 1, item 8, subsection 115-65(2) of Schedule 1 to the TAA 1953]

Example 18.198 : General interest charge for choosing a low rate Continuing the previous example, Bee Mines Pty Ltd was given a rate of 10 per cent by the Commissioner in the 2013-14 MRRT year and it continues to use that rate into the first quarter of its 2014-15 year. In the second quarter, the Commissioner provides a new rate of 13 per cent. Bee Mines decides to use a lower rate and chooses 10 per cent.Bee Mines' benchmark rate for 2014-15 is 12 per cent. If it chooses a rate lower than 85 per cent of that (that is, below 10.2 per cent), it will be liable for the general interest charge. Its rate in the first quarter was below 10.2 per cent but, as it was a rate given by the Commissioner, the charge does not apply for that quarter. However, it does apply in the second quarter because, even though the rate is still 10 per cent, it is now using a rate it chose rather than a rate the Commissioner gave it (because the Commissioner has now provided a rate of 13 per cent).Its actual instalment for the second quarter is $6 million (10 per cent of $60 million). The instalment liability it would otherwise have had (using the most recent Commissioner rate) would have been $7.8 million (13 per cent of $60 million). However, using the benchmark instalment rate, the instalment liability would have been only $7.2 million (12 per cent of $60 million). As that is lower, the liability for the general interest charge is worked out on the difference from the liability using the benchmark instalment rate. Bee Mines will therefore be liable to pay the general interest charge on $1.2 million ($7.2m - $6m).

18.167 The amount on which the general interest charge is imposed is increased to take into account any credits the entity has claimed for the year (which effectively reduce the instalment rate for earlier quarters). [Schedule 1, item 8, subsection 115-65(2) of Schedule 1 to the TAA 1953]

18.168 There is a lower increase in the amount on which the general interest charge is imposed if the credit claimed by the entity related to a transfer of some or all of a mining project interest or pre-mining project interest. [Schedule 1, item 8, section 115-105 of Schedule 1 to the TAA 1953]

18.169 The general interest charge for choosing too low an instalment rate is worked out using the normal general interest charge rules. The charge applies from the due date for the instalment for the quarter for which the rate was reduced to the due date for paying the MRRT for the year [Schedule 1, item 8, subsection 115-65(3) of Schedule 1 to the TAA 1953] . The Commissioner will give the entity notice in writing of the amount of the charge and the entity will have 14 days after being given the notice to pay the charge [Schedule 1, item 8, subsection 115-65(4) of Schedule 1 to the TAA 1953] . If the charge is not paid within that 14 days, the general interest charge will also apply to the unpaid amount and will continue to apply until the full amount is paid [Schedule 1, item 8, subsection 115-65(5) of Schedule 1 to the TAA 1953] .

Special rules for transferring or splitting a mining project interest

18.170 The MRRT uses an 'inherited history' approach, under which annual liability for MRRT on a particular mining project interest or pre-mining project interest falls onto the entity holding it at the end of the year. That approach has three broad categories of implications for the instalment rules:

·
implications for earlier quarters' instalments;
·
implications of acquiring an interest; and
·
implications of transferring an interest.

Implications for earlier quarters' instalments

18.171 An entity's MRRT instalment for a particular quarter is not affected by the fact that a mining project interest or pre-mining project interest is transferred or split in a later quarter of the year. This means that, in working out an entity's MRRT instalments for the quarter:

·
the entity's instalment income remains its instalment income even though the MRRT liability in relation to some or all of it will fall onto another entity because the interest was transferred or split later in the year (although the entity may be able to claim a credit after the transfer or split for some part of the earlier instalments); and
·
the entity's instalment income for the quarter is not increased because it acquires a new interest after the end of that quarter (although there may be an increase in the instalment income for the quarter in which the interest is acquired).

[Schedule 1, item 8, subsection 115-90(1) of Schedule 1 to the TAA 1953]

Implications of acquiring an interest

18.172 An entity that acquires a mining project interest or pre-mining project interest during a quarter will count the instalment income of that quarter that relates to that interest when working out its instalment for the quarter. That instalment income could include amounts relating to mining revenue events that occurred during the quarter but before the transfer or split. [Schedule 1, item 8, subsection 115-90(2) of Schedule 1 to the TAA 1953]

18.173 The entity also increases its instalment income in the instalment quarter in which it acquires the interest to reflect any instalment income relating to its new interest for earlier quarters of the MRRT year. [Schedule 1, item 8, subsection 115-95(1) of Schedule 1 to the TAA 1953]

18.174 The amounts included for the earlier quarters are the usual amounts of instalment income that relate to mining revenue events in those quarters that will lead to an amount being included in the acquiring entity's mining revenue or pre-mining revenue. [Schedule 1, item 8, subsection 115-95(2) of Schedule 1 to the TAA 1953]

18.175 In other words, the amounts that were, or would have been, instalment income for the transferring entity for previous quarters of the MRRT year become instalment income of the acquiring entity in the instalment quarter in which the transfer occurs. [Schedule 1, item 8, subsection 115-90(2) and section 115-95 of Schedule 1 to the TAA 1953]

Example 18.199 : Additional instalment income for an acquiring entity Sedgley Sand Mining Pty Ltd decides to branch out into iron ore mining and buys some hematite mines from Francis Freerange Mining Pty Ltd in the third quarter of its MRRT year. Francis had made supplies from the mine in the first and second quarters for consideration of $60 million and $75 million respectively. In the third quarter, Francis had made supplies for consideration of $10 million and Sedgley made further supplies, for $55 million, during the remainder of the quarter.To the $55 million instalment income for its own supplies in the third quarter, Sedgley would add amounts of $60 million, $75 million and $10 million to reflect the amounts that arose in the year during the Francis era. Sedgley's total instalment income for the third quarter would be $200 million.

Implications of transferring an interest

18.176 An entity that transfers all or part of a mining project interest or a pre-mining project interest in a quarter (the original entity) will not count the instalment income for the quarter relating to that interest (or the part of the interest transferred) when working out its instalment for the quarter. [Schedule 1, item 8, subsection 115-90(2) of Schedule 1 to the TAA 1953]

18.177 The original entity will also be entitled to a credit once an assessment has been made at the end of the MRRT year for instalments payable by it in relation to that interest (or the part of the interest transferred) for quarters in the year before the transfer. [Schedule 1, item 8, section 115-20 of Schedule 1 to the TAA 1953]

18.178 Some entities will not want to wait until the end of the year to get that credit when they know their eventual MRRT liability will be reduced because of the transfer or split. Accordingly, such entities can claim an early credit through the instalments process. [Schedule 1, item 8, subsection 115-100(1) of Schedule 1 to the TAA 1953]

18.179 The credit can only be claimed in the approved form on or before the day the instalment is due for the quarter in which the transfer occurs. [Schedule 1, item 8, subsection 115-100(2) of Schedule 1 to the TAA 1953]

Amount of the early credit

18.180 The credit is equal to the difference between:

·
the instalments the transferring entity was liable to pay for earlier quarters in the MRRT year (reduced by credits claimed because of other transfers or because of a reduction in the entity's instalment rate); and
·
the instalments that would have been due for those earlier quarters if the entity had not had the mining revenue events from the transferred interest (or part interest).

[Schedule 1, item 8, subsection 115-100(1) of Schedule 1 to the TAA 1953]

Notification requirements

Quarterly instalment notices

18.181 An entity liable to pay an instalment for a quarter must notify the Commissioner of the amount of its instalment income in the approved form [Schedule 1, item 8, subsections 115-15(1) and (2) of Schedule 1 to the TAA 1953] . The Commissioner can determine the content of an approved form and the manner in which it is given to the Commissioner, including by electronic means (see section 388-50 of Schedule 1 to the TAA 1953).

18.182 The notification is due on or before the day the instalment is due (that is, on or before the 21st day after the end of the quarter). This information notifies the Commissioner of how an entity's instalment for the quarter was calculated and further allows the calculation of any general interest charge that may be imposed if the entity chose an instalment rate that was too low. [Schedule 1, item 8, subsections 115-15(1) and (2) of Schedule 1 to the TAA 1953]

18.183 The Commissioner can exempt taxpayers (or classes of taxpayers) from having to provide this notification if the Commissioner has given them a nil instalment rate. [Schedule 1, item 8, subsections 115-15(3) and (4) of Schedule 1 to the TAA 1953]

Choosing a new instalment rate

18.184 An entity that chooses an instalment rate for a quarter must notify the Commissioner of that choice in the approved form. Once again, the approved form could be electronic. The choice must be notified on or before the day the instalment for that quarter is due. [Schedule 1, item 8, section 115-55 of Schedule 1 to the TAA 1953]

Consequential amendments

18.185 A number of consequential amendments are made to definitions in the income tax law to cover new terms added for the MRRT instalments regime. [Schedule 3, items 49, 52 to 55, definitions of 'applicable instalment rate', 'base year', 'benchmark instalment rate', 'instalment income' and 'instalment quarter' in subsection 995-1(1) of the ITAA 1997]

18.186 Amendments are also made to the TAA 1953 to update non-operative lists of provisions that either apply the general interest charge or create a tax-related liability, to reflect the addition of such provisions in the MRRT instalments regime. [Schedule 1, items 1, 2 and 10, subsection 8AAB(4) of the TAA 1953 and subsection 250-10(2) of Schedule 1 to the TAA 1953]

Record keeping

18.187 Entities conducting mining or pre-mining operations are required to keep and retain records which are relevant to the operation of the MRRT. [Schedule 1, item 8, subsection 123-5(1) of Schedule 1 to the TAA 1953]

18.188 As with other taxes, the effective administration of the MRRT requires the Commissioner to be able to ask taxpayers to provide evidence supporting their self-assessed liabilities or entitlements.

18.189 In addition, the design of the MRRT necessitates that taxpayers be required to keep records which might no longer relate to their own mining operations or MRRT liability.

18.190 For example, the seller of a mining project interest or pre-mining project interest is required to keep relevant records which support the MRRT history of the interest, because, once this history is inherited by the buyer of the interest, it is used in determining the buyer's MRRT liability.

18.191 Accordingly, these record-keeping rules apply to all taxpayers who have conducted mining or pre-mining operations for the purposes of the MRRT.

The records which are to be kept

18.192 A taxpayer must keep records of every act, transaction, event or circumstance relating to their mining or pre-mining operations that are relevant to working out their MRRT position, or that of another entity. [Schedule 1, item 8, subsection 123-5(1) of Schedule 1 to the TAA 1953]

18.193 In this context a relevant MRRT position includes:

·
the amount (if any) of the taxpayer's MRRT liability (or that of another entity) for an MRRT year; and
·
the amount of any offset to which the taxpayer or another entity is entitled under the low profit offset or rehabilitation tax offset provisions.

[Schedule 1, item 8, paragraphs 123-5(1)(a) and 123-5(1)(b) of Schedule 1 to the TAA 1953]

18.194 Accordingly, relevant records could include such things as audited statements of mining revenue and expenditure, documents detailing State royalty payments and evidence of the date when a mine ceased commercial production.

18.195 An important issue for the MRRT is the fact that the records you have to keep need not be relevant only to your own mining operations or pre-mining operations. If you have a loss (for example) that you transfer to an associate, the record will be relevant to applying the MRRT to that other entity's mining operations. Or, you might transfer a mining project interest to another entity, which will inherit the relevant MRRT history for that interest from you. An entity will therefore need to keep records that might no longer relate to its own mining operations or MRRT liability.

18.196 If such records do not already exist, the taxpayer is obliged to create them. If such records no longer exist, the taxpayer must reconstruct them. [Schedule 1, item 8, subsection 123-5(2) of Schedule 1 to the TAA 1953]

18.197 This circumstance might arise if, for example, an earlier holder of the project interest failed to keep the records they should have. This rule also covers cases where there was no obligation to keep the records at the time (for example, records relating to pre-MRRT periods).

18.198 However, this rule is not intended to allow taxpayers to fail to keep records with a view to reconstructing them at some later time.

18.199 A taxpayer must also keep a record of each choice, estimate, determination and calculation they have made under an MRRT law, along with (in the case of estimates, determinations and calculations) the basis and method used to arrive at each amount. [Schedule 1, item 8, subsection 123-5(3) of Schedule 1 to the TAA 1953]

18.200 This requirement is the same as the existing rules for records relating to indirect tax laws, contained in paragraph 382-5(4)(a) of Schedule 1 to the TAA 1953.

The form in which records are to be kept

18.201 The records which a taxpayer is required to keep must be in such a form as to enable the relevant MRRT position (of either the taxpayer or another entity) to be readily ascertained. [Schedule 1, item 8, paragraph 123-5(4)(b) of Schedule 1 to the TAA 1953]

18.202 These records must be in English, or readily accessible and easily convertible into English. [Schedule 1, item 8, paragraph 123-5(4)(a) of Schedule 1 to the TAA 1953]

18.203 The records can be kept electronically or in hard copy form.

The time for which records are to be kept

18.204 The records which a taxpayer is required to keep in relation to the MRRT must be retained until the latest of the following:

·
five years after the conclusion of the matters which are the subject of the record;
·
five years after the taxpayer made or obtained the record; or
·
the end of the period of review for an assessment of MRRT for an MRRT year (if the record is relevant to that assessment).

[Schedule 1, item 8, section 123-10 of Schedule 1 to the TAA 1953]

18.205 This is in line with other requirements in the tax law to retain records, generally for either five or seven years.

18.206 Requiring records to be kept until the end of any relevant assessment period is designed to ensure that records that could be used to verify the correctness (or otherwise) of an MRRT assessment are available if necessary, in the event of an audit by, or a dispute with, the Commissioner.

Example 18.200 : Keeping records of a royalty payment On 1 May 2013, Buzz Coal Co makes a royalty payment to a State Government in respect of coal extracted during the period 1 October to 31 December 2012. Buzz Coal Co receives a written receipt for this payment a week later, on 8 May 2013. Buzz Coal lodges its return for the 2012-13 MRRT year on 1 November 2013.The documentary receipt is a relevant record because it records a transaction used in calculating Buzz Coal's royalty allowance, which in turn is a factor in determining its MRRT liability.How long is Buzz Coal required to keep these records?Buzz Coal must keep the records relating to this royalty payment until the latest of these dates, which is 8 May 2018.

The penalties for not keeping relevant records

18.207 It is an offence to fail to keep or retain a record in accordance with the provisions discussed in this chapter. [Schedule 1, item 8, subsection 123-15(1) of Schedule 1 to the TAA 1953]

18.208 An entity does not commit an offence if the Commissioner has notified it that it no longer needs to keep the record or if the entity is a company that has been finally dissolved. [Schedule 1, item 8, paragraphs 123-15(1)(c) and (d) of Schedule 1 to the TAA 1953]

18.209 The offence is one of strict liability within the meaning of section 6.1 of the Criminal Code. Broadly, this means that the intent of the taxpayer is not considered when assessing whether an offence has occurred (although a defence of mistake of fact may be available). This is consistent with similar offences elsewhere in the tax law. [Schedule 1, item 8, subsection 123-15(2) of Schedule 1 to the TAA 1953]

18.210 The penalty for failing to keep or retain a record is 30 penalty units, which is currently equal to $3,300. [Schedule 1, item 8, subsection 123-15(1) of Schedule 1 to the TAA 1953]

18.211 Alternatively, an administrative penalty of 20 penalty units (currently $2,200) may apply, as a failure to keep an MRRT record would also breach the general requirement to keep or retain relevant tax records (see section 288-25 of the TAA 1953). However, a taxpayer cannot be subject to both of these penalties in respect of the same offence (see section 8ZE of the TAA 1953).

18.212 However, a taxpayer is not penalised, under either the tax law or the Criminal Code, for not retaining a record beyond the time of either of the following occurrences:

·
the Commissioner notifying them that they do not need to retain the record; or
·
if the taxpayer is a company, that company being finally dissolved.

[Schedule 1, item 8, subsection 123-15(3) of Schedule 1 to the TAA 1953]

Information transfers

18.213 MRRT liabilities are worked out for mining project interests and pre-mining project interests rather than for entities. The MRRT liability for an interest is met by the entity that has the interest at the end of an MRRT year, even if that entity only acquired the interest during the year.

18.214 This will mean that an entity that acquires an interest during a year will usually need information possessed by the entity that transferred the interest. The MRRT information transfer provisions require the original entity to supply the information so that the acquiring entity is able to work out its MRRT liability relating to t