The package of Bills to implement the Minerals Resource Rent Tax was passed by the Senate on 19 March 2012. Subject to the possibility of a successful High Court challenge, and perhaps the outside chance of a Federal Election being called, Australia will have a new tax on iron ore and coal mining with effect from 1 July 2012.
On 20 March 2012, under the headline “Companies in for a shock”, the Australian Financial Review reported that many miners have delayed grappling with the MRRT until the laws were passed. Those in that situation may now have their work cut out for them.
A miner’s MRRT liability is due and payable on the first day of the sixth month after the end of the MRRT year. The first MRRT year for most miners will end on 30 June 2013 making the MRRT due and payable on 1 December 2013. That sounds like plenty of time to get organised. But MRRT is in fact payable in quarterly instalments. The first instalment is due to be paid on 21 October 2012. That’s less than seven months away which isn’t much time at all.
The MRRT instalment payable by a miner is equal to its instalment income multiplied by its instalment rate. Instalment income is essentially gross income from iron ore and coal for the quarter. This is different from the “mining revenue” that factors into the “mining profit” to which the 30% MRRT rate (really 22.5% after applying the extraction factor) is applied. Mining revenue is a more difficult concept involving adjustments to gross income arrived at using transfer pricing methods to get back to the value of the resource at the point of extraction.
The instalment rate is a rate the Australian Taxation Office gives to a miner, a rate the miner chooses, or a default rate. The ATO will not give an instalment rate to a miner until after the end of the first MRRT year. So for the first four or more instalments a miner needs to either choose a rate or apply the default rate.
If a miner chooses its own instalment rate then the general interest charge will apply if the MRRT instalments paid fall more than 15% short of the miner’s actual MRRT liability. A miner that chooses to go down this path will therefore need to be well advanced in its MRRT implementation.
In terms of preparation, the most important thing is to get the starting base allowance right. The starting base is based on the market value or book value of a miner’s assets as at 1 May 2010 (when the Resource Super Profits Tax proposal was first announced) plus expenditure between 2 May 2010 and 30 June 2012. Market valuations should be obtained for this purpose. The allowance for the decline in value of starting base assets will provide significant shelter from MRRT for some miners. It is because of the starting base allowance that Treasury estimates of how much revenue the MRRT will raise have been called into question.
Perhaps the next most important aspect of preparation is the determination of mining revenue. As has been noted, this involves taking actual revenue and making transfer pricing adjustments to get back to the upstream value of the resource, before the miner adds value. This is important because MRRT is intended to be a tax on profits attributable to the resource itself. Profits attributable to value the miner adds downstream through processing, transportation and the like is meant to be subject to ordinary corporate tax.
The law tells the miner to use the most appropriate and reliable transfer pricing method having regard to OECD guidelines. This will generally be a net-back or residual profit split method, unless there are comparable uncontrolled prices available for the resource at the point of extraction.
It will also be critical for miners to have systems in place to capture all the necessary information.
Given the work and the risk involved, miners may initially opt to apply the default rate to calculate their MRRT instalments. The default rate is 8% for instalment income from iron ore and 3% for instalment income from coal. If the miner has instalment income from both iron ore and coal then the default rate is a blend of these two percentages. Note that the default rate is lower than the 22.5% MRRT rate to take account of the starting base and other allowances, and the transfer pricing adjustment of actual revenue to arrive at mining revenue.
So for the estimated 320 miners that will pay MRRT the hard work must start now if it hasn’t already. There will also be other miners outside the first 320 that will need to do the work just to establish that they are not liable to pay MRRT. This will be the case where it is not immediately clear that mining profit is going to be less than the $75 million threshold at which MRRT becomes payable.
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