Second Exposure Draft - Minerals Resource Rent Tax...

2011

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

EXPOSURE DRAFT

MINERALS RESOURCE RENT TAX

EXPLANATORY MATERIAL

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

[Click here and enter the name of the Chapter

Table of contents

Glossary 1

Chapter 1 Charging for Australia’s non-renewable resources 3

Chapter 2 Overview of the Minerals Resource Rent Tax9

Chapter 3 Core rules25

Chapter 4 Mining revenue 41

Chapter 5 Mining expenditure 57

Chapter 6 Allowances 75

Chapter 7 Starting base allowances 97

Chapter 8 Small miners 121

Chapter 9 Combining mining project interests 127

Chapter 10 Transfers and splits of mining project interests159

Chapter 11 Winding down and ending of mining project interests 179

Chapter 12 Pre-mining project interests 199

Chapter 13 Adjustments 205

Chapter 14 Valuations219

3

Chapter 15 Accounting for the MRRT 241

Chapter 16 Entities 265

Chapter 17 Integrity measures 279

Chapter 18 Administration of the MRRT 297

Glossary

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

The following abbreviations and acronyms are used throughout this explanatory material.

Abbreviation Definition

AFTS Review Australia’s Future Tax System Review

AMPLA Australian Mining Petroleum Law Association

APA Advance Pricing Agreement

ATO Australian Taxation Office

CGT capital gains tax

CPI Consumer Price Index

CUP comparable uncontrolled price

DCF discounted cash flow

EBIT earnings before interest and tax

GAAR The general anti-avoidance rule (see Division 210)

GST goods and services tax

GSTAA 1999 A New Tax System (Goods and Services Tax ) Act 1999

ITAA 1997 Income Tax Assessment Act 1997

ITAA 1936 Income Tax Assessment Act 1936

LTBR long term bond rate

LTBR + 7 long term bond rate plus 7 per cent

MRRT Minerals Resources Rent Tax

MRRT Bill Minerals Resource Rent Tax Bill 2011

MRRT (CA&TP) Bill Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011

1

Abbreviation Definition

OECD Organisation for Economic Cooperation and Development

PRRT Petroleum Resource Rent Tax

PTG Policy Transition Group

RET Department of Resources, Energy and Tourism

ROM run-of-mine

RTIG Resource Tax Implementation Group

SAP substituted accounting period

T(IOEP) Act 1983 Taxation (Interest on Overpayments and Early Payments) Act 1983

TAA 1953 Taxation Administration Act 1953

TNMM transactional net margin method

Treasury Department of the Treasury

2

Chapter 1Charging 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.

3

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

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.

4

Charging for Australia’s non-renewable resources

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 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 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 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 has decided that, from 1 July 2012, the Minerals Resource Rent Tax (MRRT) will apply to profits from coal and iron ore operations, while the Petroleum Resource Rent Tax will 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 (PTG). The PTG was chaired by Don Argus AC and the Hon Martin Ferguson AM MP, Minster for Resources, Energy and Tourism. The PTG consulted extensively across Australia on the new resource tax arrangements and reported to the Government in December 2011.

5

Explanatory material: Minerals Resource Rent Tax

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 taxing point. The taxing 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 company income tax, which seeks to tax all sources of company 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 taxing point, the MRRT requires taxpayers to determine the amount of those proceeds that relate to upstream operations for tax purposes using the most appropriate and reliable method. The tax is not intended to tax the value added in downstream activities.

1.29 To calculate the MRRT profit at the taxing point, the sales proceeds are reduced by an amount that recognises value added downstream of the taxing point 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 is was in at the taxing 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

6

Charging for Australia’s non-renewable resources

recovering a sufficient return to the community for the profits attributable to the underlying resource rent at the taxing point, while 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 allowance, the taxing 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 at Chapter 2 of this explanatory material.

7

Chapter 2Overview 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 or use of taxable resources, 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.

9

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. A mining project interest is an entitlement to share in the output of an undertaking 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, issued under a law of a State or Territory, 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 year has to be determined. The mining profit is the mining project interest’s mining revenue for the year less its mining expenditure. If that produces a negative amount, that is a mining loss.

Mining revenue

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

2.12 Under the MRRT, the taxing point is typically when the taxable resource leaves the ‘run-of-mine’ stockpile (also called the ‘ROM stockpile’ or ‘ROM pad’). The ROM stockpile is where the resource is placed after extraction ready for the next unit of production. The next unit of production could be transportation but is often some form of processing. However, not all mining operations use a ROM stockpile.

10

Overview of the Minerals Resource Rent Tax

Where a project has no ROM stockpile, or it is by-passed for any reason, the taxing point is generally just before the first beneficiation process starts.

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

Diagram 2.1: The taxing point

In this diagram, the dashed line represents the taxing point at the ROM stockpile. Upstream and downstream mining operations are illustrated.

2.14 The MRRT is a tax on realised proceeds from selling a taxable resource but only on that part of those proceeds that relate to the condition and location of the resource when it was at the taxing point. In most cases, the mining revenue will be determined as an amount of the consideration received for the sale of the resource reduced by an amount for the value added by the downstream operations.

Mining expenditure

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

2.16 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 taxing point (such as dump trucks and conveyor belts).

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

2.18 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.

11


Allowances

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

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

Royalty allowances

2.21 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.

2.22 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 that the royalty is already a type of resource rent charge on the non-renewable resource, 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.

2.23 Where the full royalty allowance for the year cannot be used, the unused portion is uplifted and carried forward to be used in the next year. The uplift rate is the long term bond rate (LTBR) + 7 per cent.

Mining loss allowances

2.24 If a mining project interest made a loss in an earlier 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

2.25 If the MRRT profit is above zero after deducting the allowances, it is subject to tax under the MRRT. The MRRT liability is calculated by multiplying the MRRT profit by the MRRT rate.

2.26 The basic MRRT tax rate is 30 per cent. However, the MRRT recognises that miners employ specialist skills to extract the resource and bring it to the taxing point. It recognises the value of those specialist skills through a special feature called the extraction factor. The

12


extraction factor reduces the MRRT rate by 25 per cent, to produce an effective MRRT rate of 22.5 per cent.

Diagram 2.1: Calculating MRRT Liability

The miner calculates its mining revenue 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.

Mining revenue $500mMining expenditure ($120m)Mining profit $380mRoyalty allowance [royalty payable/0.225] ($166.7m)Mining loss allowance [earlier loss x (LTBR + 7%)]

($56.5m)

Total allowances (223.2m)

MRRT profit $156.8mMRRT liability [MRRT profit x 0.225] $35.3m

13


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

Offset for low-profit miners

2.27 If a miner’s mining profit is $50 million or less, it is entitled to a low-profit offset that will reduce its 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.

2.28 Even though a miner’s mining profit might be under $50 million, it still deducts its allowances.

The second case — treatment of existing investments

2.29 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.

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

2.31 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.

2.32 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 are uplifted at the CPI rate, while they are uplifted at LTBR + 7 per cent under the book value method.

14



The miner calculates its mining revenue 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 net 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.

15


Mining revenue $600mMining expenditure ($120m)Mining profit $480mRoyalty 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 $136.8mMRRT 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.

2.33 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 consumer price index. 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 one, $3.3 million of Big Mountain’s starting base allowance 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 one is 2.5 per cent.

In year two, 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 two, as all project expenses were deducted.

16


Year 1 Year 2

Mining revenue 100m 250m

Mining expenditure (50m) (50m)Mining profit 50m 200mRoyalty allowance (33.3m) (66.6m)Mining loss allowance 0 0

Starting base allowance (20m) (23.4m)†

MRRT profit 0 110mMRRT liability 0 24.8m

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

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

Pre-mining expenditure

2.35 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.

2.36 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.

2.37 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.

2.38 Pre-mining expenditure incurred in relation to a pre-mining project interest (called pre-mining expenditure) 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 be

17


able to transfer pre-mining losses that come with it to any of its mining project interests producing the same taxable resource.

2.39 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.

2.40 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 ten years. After that, any remaining pre-mining loss is uplifted at LTBR.

Transferring losses

2.41 A miner with two or more mining project interests that produce the same taxable resource can transfer 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.

2.42 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.

2.43 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.

18



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 one 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.

19


Mining project interest two 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.

Mining project interest one has a mining loss of $85 million. Its royalty payment converts into a royalty credit of $11.1 million. It has no profit, so can’t use it as an allowance. Since it also can’t be transferred, it will be uplifted and carried forward to the next year.

Mining project interest two 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 next transfers the pre-mining loss from the pre-mining project interest. It still has $27.7 million of its mining profit remaining, so it then transfers $27.7 million of the loss from mining project interest one. That reduces project interest two’s mining profit to nil and project interest one’s 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 0Mining expenditure (120m) (30m) (7m)

Mining profit/(loss) (85m) 60m 0Pre-mining loss 0 0 (7m)Royalty allowance 0 (25.3m) 0Transferred 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 the part of the mining loss from mining project interest one, are transferred to mining project interest two to reduce its mining profit to nil.

† After transferring $27.7 million to mining project interest two.* After transferring $7 million to mining project interest two.

Combining project interests

2.44 A miner with several mining project interests must combine them into a single mining project interest if they meet the integration

20


criteria (and satisfy some other conditions designed to prevent interests combining if that would effectively transfer allowances that are not otherwise transferable).

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

• they both produce the same taxable resource; and

• the miner conducts their upstream operations together as one operation.

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

• both produce the same taxable resource; and

• 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.

2.47 In deciding whether a miner conducts the upstream or 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.

2.48 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 loss that arose when the two interests were not commonly owned.

21


Diagram 2.1: Integrated mining project interest

In this diagram, the miner has four mining project interests relating to the same resource. If they are all run as a single integrated mining operation, they would be upstream integrated. If they aren’t operated in that way, 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 election.

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

Transferring and splitting mining project interests

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

2.50 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.

2.51 When a mining project interest is transferred, any current year 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.

22


2.52 When a mining project interest splits, any current year 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 divided among the split mining project interests.

2.53 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

2.54 The MRRT recognises that some miners may be below the $50 million 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.

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

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

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

2.56 A miner who chooses to use the simplified MRRT regime loses any starting base, starting base allowances, mining losses, pre-mining losses and royalty credits for all their 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 regime.

23

Chapter 3Core rules

Outline of chapter

3.1 This chapter explains the framework for calculating how much MRRT a miner must pay for a Minerals Resource Rent Tax (MRRT) year together with the core concepts that underlie that calculation.

3.2 The concept of mining project interest is the basic building block of the MRRT. It is the unit in respect of which MRRT liability is determined.

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

3.4 The MRRT only applies to profits made from extracting taxable resources. This chapter explains what taxable resources are.

3.5 This chapter also explains where the taxing point is. Where the taxing point is affects which revenues and expenditures are recognised in working out the MRRT liability for a mining project interest.

Summary

General Liability

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

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

3.8 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. If there is a mining profit for the mining project interest for the year, then the MRRT liability in respect of that profit may be reduced to nil by MRRT allowances relating to the interest.

3.9 MRRT allowances are applied in a particular order.

3.10 A miner’s overall MRRT liability for a year may be reduced to nil by operation of the low profit offset.

25

Mining project interest

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

3.12 A miner’s MRRT liability comprises the sum of its MRRT liabilities for each of its mining project interests.

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

Project areas

3.14 Mining project interests relate to production rights that are issued in respect of an area in Australia. The project area for a mining project interest is the area covered by the production right to which the mining project relates.

Meaning of Australia

3.15 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.

Taxable resources

3.16 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.

Taxing point

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

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

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

3.20 If there is a supply of the resources before they reach their normal taxing point, the point of supply becomes the taxing point.

26

Core rules

Detailed explanation of the new law

A miner’s liability for MRRT

3.21 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. [Sections 7-1 and 7-20]

3.22 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 7-30]

3.23 A miner’s MRRT liability for a mining project interest is worked out by applying the adjusted tax rate to the mining profit from the mining project interest, reduced by any MRRT allowances applicable to the mining project interest. [Section 7-5]

3.24 The adjusted tax 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. [Section 7-15]

3.25 Each of the MRRT allowances is made up of allowance components [section 190-1]. 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.

3.26 The MRRT allowances must be applied in a particular order. Broadly, the principle is that project specific allowances must be applied before allowances can be transferred from another project. This is consistent with the design of the MRRT as a project-based tax. [Section 7-10]

3.27 MRRT allowances cannot reduce a MRRT liability below nil.

Example 1.1: Order of MRRT allowances

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

Francis Mining Co has MRRT allowances totalling $190 million. The allowances are applied in the following order:

• $20 million royalty allowance;

• $10 million pre-mining loss allowance;

27


• $10 million mining loss allowance; and

• $150 million starting base allowance.

The MRRT allowances are subtracted from the mining profit producing an MRRT profit of $310 million.

Francis Mining Co’s MRRT liability is $69.75 million worked out as 22.5% x $310 million.

3.28 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 7-25]. Provisions in the Taxation Administration Act 1953 will require miners to pay MRRT in instalments [Schedule 1, item 4 to the MRRT (CA & TP) Bill 2011, Division 115 of the Taxation Administration Act 1953].

3.29 A miner will not be liable to pay MRRT for a year if the miner has elected to use the simplified MRRT regime and it satisfies one of two tests in Division 125.

Mining project interest

Share of an undertaking to extract taxable resources

3.30 An entity will have a mining project interest, and consequently be liable for MRRT, if it is entitled to taxable resources extracted from an area in Australia covered by a production right in return for sharing the risks of extracting the resources.

Specifically, an entity will have a mining project interest if:

• it is a participant in an undertaking the purpose or a purpose of which includes:

– extracting taxable resources from an area covered by a production right; and

– producing an output being a commodity that comprises either a taxable resource or something produced using a taxable resource; and

• the entity is entitled to share in the commodity produced by the undertaking.

[Subsection 9-5(1)]

3.31 If the undertaking in which the entity is a participant covers more than one production right, then the entity will have a separate

28

Core rules

mining project interest in relation to each of the production rights to which the undertaking relates. [Subsection 9-5(1A)]

3.32 The ‘undertaking’ mentioned in subsection 9-5(1) is an undertaking or endeavour whereby the entity, alone or together with other entities extracts, or plans to extract, taxable resources from a particular area or areas with a view to producing a commodity which the entity and the other participants in the undertaking can each enjoy.

3.33 The kinds of commodities that might be the output of such an undertaking 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.

3.34 The existence and extent of such an undertaking 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, and the commodities that are produced. Most typically, but not necessarily, an undertaking will be a joint venture to extract and produce resource commodities.

3.35 Usually a participant in such an undertaking would risk money, property or skills in the undertaking in exchange for a right to share the commodity produced by the undertaking. A participant may, however, be gifted or otherwise transferred a right to share in the output of the undertaking.

3.36 The same participants may be engaged in separate undertakings.

Example 1.2: A vanilla joint venture

ExplorerCo enters into a joint venture with DiggerCo (the joint venturers) to produce coal. 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.

Each of the joint venturers has a mining project interest and will be liable for MRRT.

Example 1.3: Another 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

29


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. Both DiggerCo and ExplorerCo have mining project interests.

DiggerCo and ExplorerCo will be liable for MRRT.

Example 1.4: The other joint venture

HolderCo grants DiggerCo an exclusive license to access and mine coal from its production right. In consideration for the grant of the exclusive license, DiggerCo is required to pay HolderCo $5.00 per tonne for all coal sold during the month.

DiggerCo acquires title to the coal after it is extracted and loaded on the ROM stockpile. HolderCo is required to pay mineral royalties to the State. However, under the license agreement it is entitled to be reimbursed for those royalties by DiggerCo.

In this example, although HolderCo is the legal and beneficial holder of the production right, DiggerCo has a mining project interest and HolderCo does not.

3.37 An entity that merely provides a service or accommodation to such an undertaking would not itself be a participant in the undertaking.

Example 1.5: 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 undertaking. BigBank does not therefore have a mining project interest.

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

Example 1.6: 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

30

Core rules

return for a commercial fee calculated as a fixed rate per tonne of coal extracted by MinerCo.

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

3.38 An entity would not be entitled to an output of such an undertaking merely because it is entitled to a royalty for the resources or to a private mining royalty comprising a share of the profits of such an undertaking. [Subsection 9-5(5)]

Example 1.7: Profit sharing

DiggerCo has a mining project interest comprising an entitlement to extract and produce 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 its net profits 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 undertaking and does not have a mining project interest.

More than one undertaking to extract taxable resources

3.39 There may be more than one undertaking to extract resources in relation to a single production right.

Example 1.8: More than one undertaking

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

Subsequently, CrusherCo decides it wants to undertake mining in another part of the area covered by the production right. DiggerCo takes the view that mining in that area would be too risky but agrees that CrusherCo may do so on its own behalf and at its own risk.

CrusherCo commences to extract coal from that other area. CrusherCo would be viewed as having a second undertaking and would have a

31


second mining project interest comprising its right to the output of that separate undertaking.

No undertaking to extract taxable resources

3.40 In a case where an undertaking to extract taxable resources from an area covered by a production right does not exist, the entity or entities who have the right to extract the taxable resources from the area would each have a mining project interest to the extent of their respective entitlements. [Subsection 9-5(2)]

3.41 Where there is no such undertaking, the entity that has the mining project interest will typically, albeit not necessarily, be the entity that has the production right.

Example 1.9: No undertaking to extract resources

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

3.42 If an entity has a mining project interest because there is no undertaking in respect of the area covered by the production right, that entity will not have a new mining project interest merely because it subsequently enters into an undertaking to extract resources from the production right area. [Subsection 9-5(4)]

Acquiring a further share in a mining project interest

3.43 If an entity that has a mining project interest because it is entitled to a share in the output of an undertaking acquires an additional right to share in the output of the undertaking it will have a separate mining project interest that corresponds to that further entitlement.

3.44 Similarly, if an entity that has a mining project interest because it has an entitlement to extract taxable resources from a particular area 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 9-5(3)]

Example 1.10: Acquiring a further share

DiggerCo and CrusherCo are participants in a joint venture with each other. They each have a right to receive and dispose of 60 and

32

Core rules

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 joint venture to CrusherCo.

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

Mining project interests to be kept separate

3.45 A mining project interest cannot relate to both iron ore and another taxable resource.

3.46 Mining project interests that would otherwise relate to both iron ore and one or more other taxable resources will be taken to constitute separate mining project interests. [Section 9-10]

Production right

3.47 The term production right refers to any authority, license, permit or right under an Australian Law granted by a State or Territory (or in some instances a private land owner) that enables an entity to extract resources from a particular area in Australia. [Section 9-20]

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

3.49 A production right should be distinguished from an authority, license, permit or other right (granted by a State or Territory or private land owner) 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’ and ‘retention leases’. A production right does not include rights of this kind. [Subsection 9-20(2)]

3.50 For the purposes of the MRRT, interests in these other rights are referred to as pre-mining project interests. [Section 53-40]

Project area

3.51 Production rights authorise the extraction of taxable resources from particular areas in Australia. The project area for a mining project interest is the area covered by the production right to which the mining project relates. [Section 9-25]

33


Definition of Australia

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

3.53 In the MRRT, 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]

External territories

3.54 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

• Australian Antarctic Territory.

3.55 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 prohibit mining within the Australian Antarctic Territory.

Offshore areas

3.56 The Offshore Minerals Act 1994 is a Commonwealth law that provides for production rights to be granted in respect of minerals in offshore areas. To ensure mining in such areas are covered by the MRRT, the MRRT is aligning with the definition of offshore areas that is relevant for the Offshore Minerals Act 1994.

34

Core rules

3.57 The Offshore Minerals Act 1994 relies on the definition of offshore areas in section 8 of 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 up to that distance.

3.58 Such offshore areas do not include the Joint Petroleum Development Area or the offshore areas of the Australian Antarctic Territory.

Taxable resources

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

3.60 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 or a proposed coal mine.

[Subsection 13-5(1)]

3.61 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.

3.62 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.

3.63 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 13-5(2)]

35


3.64 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).

3.65 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 13-5(3)]

The MRRT and gases

3.66 Most petroleum gases are not taxable resources under the MRRT. Instead, most of them are, or will be, 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).

3.67 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 13-5(1)(d)]

3.68 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.

3.69 Sometimes coal seam gas is drained from a potential coal mine as a pre-mining activity. Where that drainage occurs prior to 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.

36

Core rules

3.70 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’. [Paragraph 13-5(1)(c)]

3.71 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.

3.72 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.

Taxing point

3.73 The taxing point is the point in the mining process that sets the quality of the taxable resources, which is used for working out what part of the proceeds of selling the resources is included in mining revenue. The taxing 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, although it may be relevant to working out how much of the sale price of the resources is mining revenue- for instance if a netback methodology is used).

Normal taxing point for coal and iron ore

3.74 The usual taxing point for coal and iron ore is immediately before it leaves the run-of-mine stockpile. [Subsection 23-5(1)]

3.75 This means that expenditure on moving the resources to the stockpile, and expenditure on managing and maintaining the stockpile, is upstream of the taxing 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 — for instance, if a ‘netback’ methodology is used).

3.76 ‘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’.

3.77 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

37


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.

Taxing point for coal and iron ore with no stockpile

3.78 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.

3.79 In those cases, the taxing point is immediately before the coal or iron ore enters the first mine site beneficiation process [paragraph 23-5(2)(a)]. If there is no beneficiation process at the mine site, the taxing point is instead when the resource leaves the point of extraction [paragraph 23-5(2)(b)].

3.80 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.

Taxing point for gases

3.81 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.

3.82 The taxing point for those gases is when they exit the wellhead. [Subsection 23-5(3)]

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

38

Core rules

Taxing point for earlier supplies

3.84 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 taxing point. If that happens, the taxing point is immediately before that supply. [Subsection 23-5(4)]

39

Chapter 4Mining revenue

Outline of chapter

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

Summary

4.2 Mining revenue is a fundamental concept in the tax as it feeds directly into the calculation, in Division 17, of a miner’s mining profit for a mining project interest in respect of an MRRT year.

4.3 Most revenue amounts are dealt with in Division 19, but some amounts may be included in mining revenue by provisions in other Divisions.

Detailed explanation of new law

What is a miner’s mining revenue?

4.4 A miner’s mining revenue in respect of an MRRT year is calculated separately for each mining project interest of the miner. [Section 19-5]

4.5 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 revenue relates to the resources as they were at the taxing point;

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

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

41

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

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

4.6 Other amounts from provisions contained outside Division 19 may also be included in a miner’s mining revenue, such as amounts arising out of balancing adjustment events for starting base assets and from adjustments where circumstances change. [Divisions 106 and 114]

4.7 An amount to be included in a miner’s mining revenue does not include any GST 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 19-100]

4.8 The law contains a provision to prevent double counting of the same amount. 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 19-85]

4.9 The sum of the amounts treated by the Act as revenue in respect of a mining project interest in respect of an MRRT year is the total mining revenue for that interest for that year [section 19-5]. This drafting approach is taken to facilitate the calculation of the mining profit for a mining project interest [section 17-5].

Revenue from the supply, export or use of taxable resources

4.10 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.

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

4.12 There are three ways in which a mining revenue event may happen and result in an amount relating to taxable resources being included in a miner’s revenue for an MRRT year. [Section 19-22]

4.13 The first way is by the miner making a first supply of the taxable resource prior to its exportation or use [paragraph 19-22(1)(a)]. For example,

42

Mining revenue

if a miner sold coal to an export customer on free on board terms, where risk and title passes ‘over ships’ rail’, such a sale would be a supply prior to export.

Example 1.1

Francis Resources supplies 30,000 tonnes of ore to a third party in Australia and 20,000 tonnes to an overseas purchaser by an agreement executed at or before export. Both supplies would be examples of supplies prior to export.

4.14 The second way is by the miner exporting resources when there has been no first supply at or before that time. [Paragraph 19-22(1)(b)]

Example 1.2

Francis Resources exports 20,000 tonnes to China which is later sold to a third party.

4.15 The third way is by the miner making a first supply of, using, or exporting, something produced using the taxable resource if an event has not been triggered by a first supply or export of the taxable resource. [Paragraph 19-22(1)(c)]

Example 1.3

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

4.16 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.

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

Supply

4.18 ‘Supply’ has the meaning given by section 9-10 of the GST Act and subsection 995-1(1) of the ITAA 1997, but is to be interpreted in the context of the MRRT. In the context of the MRRT, a supply will usually

43


happen where the miner relinquishes title to the resource. Generally, this will be a sale of the resource to a third party.

First Supply

4.19 The usual way that the revenue provisions will be triggered is by the miner making the first supply of the taxable resource. [Paragraph 19-22(a)]

4.20 The first supply of a taxable resource extracted under the authority of a production right is generally the first supply that a miner makes after it has extracted the taxable resources. [Subsection 19-23(1)]

4.21 A first supply must be made by a miner. Typically, therefore, it would not include a supply made by the owner of the resource in situ (unless the owner is also a miner).

4.22 A supply is not a first supply if it does not result in a change in the ownership of the taxable resource. [Paragraph 19-23(2)(b)]

4.23 The concept of a first supply is also subject to an exception relating to supplies made between participants in the course of an undertaking [subsection 19-23(2)]. This mainly affects joint-venture agreements and arrangements.

4.24 The exception ensures that, if a supply is made between participants in an undertaking, and the supply is made in the course of that undertaking, the supply is treated as if it is not a first supply.

Example 1.4

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

Example 1.5

Taking the facts in example 4.4, if, after the extraction and blending activities have occurred and the respective shares of X Co and Y Co determined, X Co sells its share in the resource to Y Co, this supply is not excepted because it has not occurred in the course of the joint-venture undertaking.

44

Mining revenue

Example 1.6

In a separate situation where 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 first supply.

4.25 A supply will not be excepted from being a first supply if it is made between participants in separate undertakings.

Example 1.7

Taking the facts in example 4.4, a supply by X Co to a participant in another joint venture in which X Co is also a participant would not be a first supply. That is because it would not be a supply between participants in a single undertaking; it would be a supply between participants in two different undertakings. It would make no difference if the separate undertakings both relate to the same production right.

4.26 The time when a supply is made is the earliest of when consideration for it is received or becomes receivable, when it is delivered, or when ownership passes in the resource. [Section 19-35]

Export

4.27 If the miner exports the taxable resource from Australia where there has not been a first supply, the export will trigger a mining revenue event. [Paragraph 19-22(b)]

4.28 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.

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

4.30 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.

4.31 Similarly, the miner ‘exports’ the resource even if the miner is not actually responsible for the exporting activities. The time of ‘export’ determines both the time of the mining revenue event if it happens under section 19-22(b) and whether it (or a supply that occurs at the same time or earlier) is the relevant mining revenue event to use.

45


4.32 It will only be where the resource finally clears Australia’s territorial limits (which, for the MRRT law, will usually be its coastal waters) that the time of export will have occurred. Merely leaving the final Australian port is not sufficient to constitute export.

4.33 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.

4.34 More complicated cases may arise where a transaction has occurred prior to the resource leaving Australia. In those cases it must be determined whether or not it is a first supply or export that triggers the revenue.

4.35 In this regard, it should be noted that while a supply has usually not occurred until ownership has passed 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. [Section 19-35]

4.36 A sale (ownership passing) at the port or while the ship is in Australian waters will be dealt with under the ‘first supply’ test and not the ‘export’ test. So for instance, sales of coal or iron ore using free-on-board or cost-insurance-freight in commercial terms will be dealt with under the ‘first supply test’.

4.37 If title does not pass in the resource until after it leaves Australian coastal waters, and no consideration is received or receivable, the export test will apply. For instance, where coal or iron ore is sold to an export customer using terms which result in title to the product passing and consideration being received following export of the product from Australia. This will occur where, under a commercial terms contract, risk and title passes at the destination port.

Use

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

4.39 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 will trigger the mining revenue event.

4.40 If, however, the miner uses the thing produced from the resource in carrying on mining operations or transformative operations, for example, where the miner uses coal it has extracted to produce electricity

46

Mining revenue

which it in turn uses in its mining operations, the use of the electricity does not give rise to a mining revenue event [subsection 19-22(2)]. That is because the miner will not be entitled to a deduction for the value of the coal that it consumes. That is, the consumption of coal will not constitute general expenditure.

4.41 Compensation for loss, destruction or damage before a mining revenue event happens in relation to the taxable resource may also be included in revenue. [Section 19-55]

Working out revenue amounts to be included

4.42 The amount of mining revenue to be included for a particular mining revenue event is determined through a two-step process:

• first, the ‘revenue amount’ for the mining revenue event is determined; and

• second, the ‘revenue amount’ is reduced by a ‘downstream amount’ for the taxable resource for which the mining revenue event has happened [section 19-25 and subsection 19-25(5)].

4.43 Where the mining revenue event is a supply, the revenue amount will be the actual consideration received for the supply. By using this amount only realised profits are brought to tax under the MRRT law. That is, the price realised for the supply is used rather than the price prevailing in the market when the resource was at the taxing point.

4.44 In this way, price increases after the resource has passed the taxing point, and which are reflected in the price at which the resources are supplied, will be treated as revenue. Price decreases after the resource has passed the taxing point, and which are reflected in the supply price, will reduce the amount treated as revenue.

4.45 The revenue amount is reduced by a downstream amount to avoid taxing profits made by the miner from its downstream mining operations and, if relevant, its transformative operations. The downstream amounts comprise amounts a miner has either paid another entity to procure its downstream mining and transformative operations, or, would have paid if it hadn’t itself directly carried out those operations.

4.46 The 'deduction' approach for downstream activities is simply a mechanism to achieve a reasonable attribution of the revenue amount between its taxable and non-taxable components. It is a key design principle of the law.

47


4.47 In effect, the revenue amount is attributed between the resource, in the form it existed, and the place it was in, when it was at the taxing point, on the one hand, and the downstream mining operations and, if relevant, the transformative operations, on the other. The amount attributed to the resource at the taxing point is the amount included as mining revenue.

4.48 This process requires consideration be given to all aspects of the miner’s circumstances. Arm’s length principles can apply at three points:

• to test whether a supply has been made on an arm’s length basis [Division 205];

• to impute a consideration amount where the taxable resource (or the thing produced using the taxable resource) has not been sold before it is exported, or where a thing produced from the taxable is used [subsection 19-25(2), table, items 2 and 3]; and

• to determine the downstream amount (for example, under a net back methodology) [subsection 19-25(3)].

4.49 Because the attribution process starts with the revenue amount, this is discussed first, and then there is a discussion of how the downstream amount is worked out.

Step 1 — Determining the revenue amount

4.50 There are three categories of mining revenue events for which revenue amounts must be determined.

Supplies

4.51 The amount that relates to a supply of the resource is the actual consideration received or receivable for the supply (unless the anti-profit shifting rules apply). [Subsection 19-25(2), table, item 1 and Division 205]

4.52 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 19-95]

Imputed supplies

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

48

Mining revenue

4.54 The arm’s length consideration is used for an exportation of the resource or a thing produced from the resource. In these cases 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 19-25(2), table, item 2]

4.55 Where the amount 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 19-25(2), table, item 3]

Meaning of arm’s length consideration

4.56 Arm’s length consideration for a supply is the amount that would be expected to be received or receivable by the miner if, instead of exporting or using the resource or the thing, the miner had supplied the resource, for consideration, under an agreement between the miner and another entity dealing wholly independently with one other in relation to the supply. [Subsection 19-30(1)]

4.57 The reference to ‘the miner’, as opposed to any entity that might have supplied the resource under an arm’s length agreement, is to ensure that the miner’s particular circumstances are taken into account. The process to be undertaken is not one of determining the market value of the resource supplied at that time. [Subsection 19-30(2)]

4.58 The requirement to take into account the miner’s circumstances is made even clearer by the express requirement in the law as to methodology.

Most reliable method

4.59 The taxpayer must use the most reliable method to determine the arm’s length consideration [subsection 19-30(2)]. Regard must be had to all relevant circumstances, including:

• the position and economic circumstances of the miner and the characteristics of the resource at the point of supply or equivalent;

• the terms and conditions of arrangements entered into;

• the risks, functions and assets of the parties to the transaction and their market strategies;

• the availability, coverage, and reliability of data;

49


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

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

4.60 The method must produce an arm's length result that is reasonable and makes sense on a commercial basis in all the circumstances.

4.61 If, however, it is not possible to work out the arm’s length consideration then the revenue amount is the amount that is fair and reasonable in the opinion of the Commissioner. [Subsection 19-30(3)]

Step 2 — Determining the consideration that relates to the taxable resource

4.62 Having ascertained the revenue amount, the task is then to determine how much of that amount is attributable to the resource, in the form it existed, and at the place where it was located, when it was at its taxing point.

4.63 That amount is worked out under Step 2 by reducing the revenue amount by a reasonable allowance for the miner’s downstream mining operations and, if relevant, its transformative operations. [Subsection 19-25(1)]

4.64 The amount for the miner’s downstream mining operations and, where relevant, its transformative operations comprises:

• amounts actually paid or payable by the miner to procure those operations or activities from another entity; and

• amounts that the miner would pay to procure those operations or activities from a distinct and separate entity if the miner had not itself directly carried out those operations and activities.


50

Mining revenue

4.65 In determining the amounts that a miner would pay a distinct and separate entity for the downstream operations and activities and, where relevant, the transformative operations, the following assumptions must be made:

• the other entity carried on the downstream mining operations and transformative operations that the miner actually carried on during the year;

• the other entity were to provide those operations and activities to the miner as services to the miner;

• there were a competitive market for the provision of those services;

• the price for the services would be sufficient to meet the costs of the other entity in providing the services, including its cost of capital commensurate with the risks involved in it providing those services; and

• the miner and the other entity were dealing wholly independently with one another in that market in relation to the provision of those services.


4.66 The amount for the miner’s downstream mining operations and, where relevant, its transformative operations, is then attributed to each mining revenue event on a reasonable basis. [Subsection 19-25(5)]

Example 4.1: 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 X Resources downstream mining activities. During the same year X Resources obtains $35 million from exporting the iron ore. The revenue that relates to the ore as at the taxing point for the year is $20 million.

Arm’s length pricing methods

4.67 Arm’s length methodologies may assist in working out what the miner would have paid to procure the downstream operations and activities from a separate and distinct service with whom it was dealing at arm’s length.

51


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

4.69 Regard may be had to those guidelines, adapted as appropriate in the context of the approach taken by the MRRT law for attributing revenue amounts between the downstream operations and the taxable resources as at the taxing point.

4.70 In determining the amounts that a miner would pay a distinct and separate entity to provide all of the downstream operations and activities, the method must be used that produces the most appropriate and reliable measure of the amount having regard to the circumstances of the miner and the information available. [Subsection 19-25(4)]

4.71 Relevant circumstances would include the following:

• the assumption that the separate entity is performing the functions, employing the assets and assuming the risks that a service provider would perform, employ and assume in carrying on all of the downstream operations;

• the functions undertaken, the assets employed and the risks assumed by the miner in carrying out its upstream mining operations and in producing the taxable resources (or things produced using the taxable resources);

• the assumption that the separate entity is operating in a competitive market for the provision of services and the further assumption that it is a market in which service providers are able to meet their costs (including their costs of capital);

• the market or markets into which the miner sells its taxable resources (or things produced using the taxable resources); and

• the degree of comparability that exists between the services assumed to have been provided by the separate entity to the miner, and the circumstances in which it is assumed those services are provided, and the services that are in fact provided by independent service providers to their arm’s length customers, and the circumstances in which those services are provided.

52

Mining revenue

Example 1.8: 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. Having regard to the prices charged by those service providers, Daley 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.

During the same year Daley Resources obtains $40 million from selling the iron ore. The amount included in Daley Resource’s mining revenue is $22 million.

1.2 The characteristics of a competitive market that are particularly 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 are not sunk (sunk costs increase the risk of new entrants and so would deter entry). In a competitive market, a separate entity would expect to be reimbursed for its efficient operating costs, the depreciation of the assets it employs and its cost of capital sufficient to justify the continued commitment of capital.

1.3 As such, expenditures incurred in relation to activities downstream of the taxing point may be relevant to working out the amounts that a miner would pay a distinct and separate entity to provide downstream operations.

1.4 The relevance of such expenditures will, however, depend on the methodologies used to work out the amount that a miner would pay for the downstream operations. For example, capital expenditure in relation to downstream activities would not be immediately deductible in a cost plus calculation notwithstanding that the equivalent expenditures would be deductible upstream.

Example 1.1: What a miner would pay a distinct and separate entity — cost plus

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

53


the efficient costs that would be borne by another separate entity in crushing the ore for Katherine Mining.

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 have regard to the risks the separate entity would incur and the assumption that there is a competitive market for the provision of the service to Katherine Mining. Katherine Mining determines that a return on the capital invested in the crusher of 10 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 $972,000 ($700,000 operating costs plus $80,000 depreciation and $192,000 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.

Other mining revenue

4.72 Other forms of mining revenue include:

• amounts recouping or offsetting mining expenditure and payments that give rise to royalty credits [sections 19-50 and 19-52]; and

• compensation for loss of taxable resources or loss of mining revenue [sections 19-55 and 19-60)].

Recoupments and offsets

4.73 If a miner (or its associate) obtains an amount, (which does not trigger an adjustment for change of circumstances under Division 160) that recoups or offsets mining expenditure (including future expenditure) that was included (or will be included) in a miner’s mining expenditure for the mining project interest, the amount that is recouped or offset is included in the miner’s mining revenue in relation to that interest. [Subsection 19-50(1)]

4.74 An example is a receipt of a subsidy for expenditure incurred by the miner in employing apprentices to work on the mining project interest.

54

Mining revenue

4.75 Where an amount is received that recoups an expenditure that was only partly deductible (for example, where the expenditure was on an asset that is used 60 per cent in upstream mining operations and 40 per cent in downstream mining operations) the proportion of the recoupment amount that is included in mining revenue should match the proportion of the expenditure that was deductible. [Subsection 19-50(2)]

4.76 Amounts recouping or offsetting a liability that gives rise to a royalty credit are also included in mining revenue, to the extent the amounts, grossed up by the MRRT rate, are not otherwise applied, pursuant to section 43-110, to reduce royalty credits for the interest. [Section 19-52]

Compensation for the loss of taxable resources or mining revenue

4.77 A miner who obtains, or whose associates obtain, an amount of insurance, compensation or indemnity relating to the loss destruction or damage to an extracted taxable resource or something produced from it, must include mining revenue to the extent that, if the payment had been consideration or arm’s length consideration for a supply, it would have been included, as mining revenue, by operation of section 19-25.

4.78 Amounts included as mining revenue are limited to compensation for loss, destruction, or damage of resources that were the subject of a mining revenue event after 1 July 2012 (or which would have been had the resources not been lost or destroyed). Resources that were the subject of a mining revenue event before 1 July 2012 would not have generated mining revenue, so compensation for their loss or destruction would similarly not be mining revenue. [Section 19-55]

Amounts that do not relate to a particular taxable resource

4.79 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 nonetheless treated as mining revenue. [Section 19-60]

4.80 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 4.1: 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 Co takes delivery of that quantity of coal. For the year beginning 1 July 2012, X Energy Co pays the fixed annual amount, but because of reduced demand for energy from its coal-fired power

55


station, X Energy Co takes delivery of only ¾ of the coal contracted for and it obtains a credit that can be applied to future coal deliveries.

New Resources is assessable on the full payment in the year it is received (¾ of the payment is assessable under section 19-25 and the remaining ¼ under section 19-60).

Expenditure causing revenue to be received

4.81 An amount that would otherwise be included in mining revenue in respect of a mining project interest under Subdivisions 19-B or 19-C is reduced to the extent that the miner incurred expenditure in causing the amount to be received or receivable and the expenditure was not mining expenditure for the mining project interest and was not excluded expenditure. [Section 19-90]

4.82 For example, litigation costs incurred in seeking compensation for damages to taxable resources would be mining expenditure.

56

Chapter 5Mining 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.

Summary of chapter

5.2 A miner’s mining expenditure for a mining project interest includes expenditure necessarily incurred in carrying on mining operations upstream of the taxing point. However, some expenditure is specifically excluded.

Mining expenditure

5.3 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 an MRRT year [section 17-5] and therefore its total MRRT liability for a MRRT year [section 7-1].

5.4 A miner’s total mining expenditure for a mining project interest is the sum of all the amounts that are mining expenditure under the MRRT for that MRRT year. [Subsection 21-5(1)]

5.5 In order to determine if an expense is mining expenditure, it is necessary to satisfy a general test — mining expenditure for a mining project interest includes all expenditure necessarily incurred in carrying on upstream mining operations for a mining project interest [subsection 21-20(1)]. It does not matter whether expenditure is of a capital or revenue nature [subsection 21-20(2)]. An amount will also be mining expenditure if it is an adjustment for changes in circumstances [Division 106]. An amount is only included in mining expenditure once, under the most appropriate provision [section 21-30].

General test for mining expenditure

5.6 A miner’s mining expenditure for a mining project interest includes all capital or revenue expenditure the miner is liable to pay, to the

57

extent that it is necessarily incurred by the miner in carrying on upstream mining operations in respect of that mining project interest. [Section 21-20]

Necessarily incurred ... in carrying on ...

5.7 The words ‘necessarily incurred ... in carrying on ...’ are familiar to business taxpayers as they are integral to the income tax test for deductibility. 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 PRRT regime and which has given rise to disputes about whether some expenses are deductible or not.

5.8 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 the upstream mining operations, it is mining expenditure.

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

Example 5.1: Approach to deductibility

After negotiation with a local authority Wildfire Coal 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 the 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 will be mining expenditure to the extent that it is for employees engaged in upstream mining operations. 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 and not an income tax — not all revenue is assessable, and not all expenditure is deductible. Expenditure must be 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.

58

Mining expenditure

Example 5.2: Expenses incurred in carrying on a business

Wildfire Coal, a UK resident, has Australian operations. It 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.

Mining operations

5.10 The MRRT defines mining operations broadly. The general definition includes all activities or operations that are ‘preliminary or integral to’ or ‘consequential upon’ extracting or producing taxable resources, or producing something produced using those taxable resources [paragraph 21-23(1)(a)]. 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 [paragraph 21-23(1)(b)].

5.11 This definition includes doing 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 will also be included.

5.12 Some relevant activities and operations are specifically identified as mining operations for a mining project interest [subsection 21-23(2)]. This does not limit what is included under the general definition.

5.13 The specific activities are:

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

• 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 in relation to them;

• obtaining access to the project area for mining operations;

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

• rehabilitation of the project area or land affected by any of the above activities;

59


• closing down any of the above activities; and

• activities done in furtherance of these activities.

5.14 An activity will be an activity done in furtherance of the other activities specified in the definition of mining operations 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, the costs associated with the ASX listing activities mentioned above would be too remote a connection to be upstream mining operations.

5.15 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.

Example 5.1: 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. This constitutes mining operations.

Upstream mining operations

5.16 Upstream mining operations include all mining operations to the extent that they are involved in the extraction of the taxable resource from the mining project area for the mining project interest as well as those involved in getting them to the taxing point. It does not matter where, or when, the operations are carried out. [Section 21-22]

5.17 Extracting the taxable resource incorporates all those activities necessary to free the taxable resource from its in situ location, and would, where relevant, include the recovery of resources from the surface of the land. Getting taxable resources to their taxing point incorporates all activities necessary to move taxable resources to the taxing point. Any activity or operation directed at doing anything to or with the taxable resource after it reaches the taxing point is not an upstream mining operation.

60

Mining expenditure

5.18 Section 21-22 includes a list of examples of activities that may be upstream mining operations for a mining project interest. These are:

• negotiations with native titleholders 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 taxing point;

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

• planning and constructing facilities to be used in processing taxable resources before they reach their taxing point;

• acquiring and maintaining plant or equipment for use in processing taxable resources before they reach their taxing point;

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

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

5.19 Additional examples are provided below. Neither the examples in the Act or here limit the general definition.

5.20 There is no requirement that the operations or activities be carried on within the mining project area.

Example 5.1: Activities in a remote location

Wildfire Coal has automated some activities for producing and handling taxable resources before the taxing 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 5.2: Staff training on and off the mine site

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

61


capital city. The activities are upstream mining operations to the extent that they are for employees to be engaged in activities that are upstream mining activities.

Example 5.3: Mine planning in a capital city

Wildfire Coal employs staff at its head office in a capital city whose duties include the 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 5.4: 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 will be an upstream mining activity as it is preliminary and integral to producing the taxable resources. Upstream mining operations may be carried out before or after the taxable resource reaches the taxing point so long as they otherwise have the required relationship to the extraction of the resource and getting it to the taxing point.

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

Example 5.1: 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 (ROM) stockpile. This includes earthworks to level and provide access to the ROM stockpile site and drainage work to ensure that any run-off from the ROM stockpile does not contaminate local waterways. These activities are upstream mining operations.

5.22 Activities directed at expanding a mine are upstream mining operations. For example, exploration may be undertaken within a project area in order to define and clarify the exact location and extent of a taxable resource within a mining project area. This informs decisions that are made around the working and operation of the mine in order to extract the taxable resource and is an upstream mining operation.

Example 5.1: 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

62

Mining expenditure

undertakes drilling to clearly establish the boundaries of the existing ore body within the project area. The drilling is an activity that is an upstream mining operation.

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

Example 5.1: 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 producing the taxable resources and will be included to the extent that they relate to land otherwise affected by upstream mining operations.


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. Wildfire Coal undertakes activities to drain and backfill the tailings pond to restore the site. These restoration activities are upstream mining operations.


When restoring its mine site, Wildfire Coal removed conveyor belt systems used to transport coal from the coal face to the taxing point. This is an upstream mining operation.

Incurring mining expenditure

5.24 The MRRT operates on an accruals basis. Mining expenditure is therefore deductible in the year that it is incurred. In some cases this will be before a payment is made; in others it will be after a payment is made. This aligns with the treatment of deductible expenditure under the ITAA 1997 and under the Petroleum Resource Rent Tax (PRRT).

Example 5.1: Contractor performing services

Wildfire Coal engaged Upstream Coal Services in June 2013 to perform activities that would be upstream mining operations. Under the agreement, Wildfire Coal was to pay Coal Mine Services after the work was performed and invoiced. Coal Mine Services performed its contractual obligations in July 2013 and immediately issued a tax invoice. Wildfire Coal incurred this expense in the 2013-2014 MRRT year and can therefore include it in its mining expenditure for that year.

63


Example 5.2: Joint venture funds

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

Therefore, all joint venture participants incur mining expenditure when Pick and Shovel Co actually incurs a pecuniary liability that bears the necessary relationship to upstream mining operations.

Apportioning mining expenditure

5.25 The definition of upstream mining operations — in conjunction with the definition of mining operations and downstream mining operations — means that an asset can be used both in upstream and downstream mining operations and that 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 that is incurred in the upstream operations is mining expenditure and deductible against mining revenue.

5.26 The words ‘to the extent’, which are also familiar to taxpayers through their use in income tax, support the apportionment of costs.

Example 5.1: Activities partly for upstream mining operations

Wildfire Coal uses a loader to maintain the ROM 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.

5.27 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 or key such as revenue, production volumes, direct costs, labour costs or head counts.

64

Mining expenditure

Example 5.1: Apportioning between taxable and non-taxable resources

Wildfire Coal operates a coal mine in Northern 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 Coal purchases a fleet of 10 dump trucks for use in its coal mine, to transport coal to the taxing 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 taxpayer must apportion this expenditure to its coal operation and its copper operation. The taxpayer may only claim $2,500,000 as mining expenditure.

Example 5.2: Apportioning head office costs

Wildfire Coal operates two coal mines and one nickel mine in Queensland (nickel is not a taxable resource). It does not engage in any other commercial activities.

During the year, Wildfire Coal 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 taxing points. The total operating expenditure for the nickel mine is $160 million ($40 million upstream, and $120 million downstream).

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

ASX Listing..........................................1 millionInterest..................................................$4 millionPrivate royalties....................................5 millionBusiness development..........................$5 millionPolitical donations................................$1 millionInvestor Relations.................................1 millionHuman Resources.................................10 millionManagement.........................................$5 millionOffice lease...........................................5 million

The ASX listing fee, investor relations and political donation costs would not qualify as a general 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 the research and consideration of potential acquisition targets of coal mining projects in and outside of Australia. These costs would not be deductible for MRRT purposes on the basis that they were not incurred

65


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 split across upstream and downstream, each on a fair and reasonable basis.

Step 1

One basis for undertaking the first step of allocating the human resources, office lease and management expenditure to each of the three mines may be to use a reasonable estimate of the headcount of employees at each of the mines. A split based on total costs of each of the three mines would 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 Coal’s revenue and profit margin from its coal mines is disproportionately large compared to its profit margin from its nickel mine. Revenues and profits may not therefore be an accurate proxy for working out the purpose for which the expenditure was incurred.

Step 2

Once the cost allocation has been made to each of the mine sites it still then 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 mines’ 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, say if a ‘netback’ methodology is used.

66

Mining expenditure

Excluded expenditure

5.28 Certain expenditure is specifically excluded from mining expenditure because of the general design of the MRRT and because of the way that it deals with the various claims to the resource right [subsection 21-5(2)]. These are:

• costs of acquiring rights and interests in projects;

• royalties;

• financing costs;

• hire purchase agreements;

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

• hedging losses or foreign exchange losses;

• rehabilitation bond and trust payments; and

• payments of income tax or GST.

Cost of acquiring rights and interests in a project

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

• acquiring an interest in a production right covering an area or land, unless the expenditure is in relation to the grant of the production right [paragraph 21-45(1)(a)];

• acquiring a pre-mining project interest, unless the expenditure is in relation to the grant of the exploration right to which the pre-mining project interest relates [paragraph 21-45(1)(b)];

• acquiring a mining project interest [subsection 21-45(2)]; or

• acquiring an interest in profits, receipts or expenditures of, or relating to, a mining project interest [subsection 21-45(3)].

5.30 To grant something means to bestow or confer it upon another. It has historically been used to refer to situations in which governments bestow property rights upon citizens (and other entities). It has not generally been to used describe the transfer of rights. It has been chosen

67


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.

5.31 Clearly, this provision could have been limited by specifically referring to ‘first rights’. However, this is would be too restrictive. 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 a mining right.

5.32 Transfers are excluded for reasons of tax symmetry. If a miner sells its right or interest in a project, it does not include the sale proceeds in its mining revenue; therefore, the acquirer of such a right is not entitled to a deduction. If the situation were otherwise, it would effectively capitalise future profits and bring forward tax on any change in the value of the project or mining tenement.

5.33 Examples of expenditure not excluded by the provision are amounts for government fees and legal expenses associated with the grant of a right. Conversely, legal fees incurred in relation to acquiring rights are excluded expenditure.

Mining royalty, private mining royalty and payments to other miners that give rise to royalty credits

5.34 Mining royalties, private mining royalties, and payments that give rise to royalty credits are excluded expenditure. [Subsection 21-50(1)]

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

5.36 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), 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 21-53(2)]. Examples of private mining royalties include:

• royalties to a landowner where the mineral rights have not been alienated by the Commonwealth, State or Territory and there is no obligation to pay the royalty under a Commonwealth, State or Territory law;

68

Mining expenditure

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

• resource profit sharing arrangements (private override royalties); and

• any of the above payable in kind.

5.37 Private override 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 the sale of the resource by the owner.

5.38 Private mining royalties are excluded because all mining profits are taxed in the hands of those entities that have the right to enjoy the resource — that is, entities that hold mining project interests. Recipients of private mining royalties generally do not have a right to enjoy the resource.

5.39 This approach is consistent with that under the PRRT, which excludes private override royalties as a deduction.

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

• it is paid or given to a contractor for services provided the services form part of upstream mining operations for a mining project interest and it does not represent a share of the miner’s profits [subsection 21-50(2)];

• 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/Territory body (STB) other than an excluded STB [subsection 21-50(3)];

• 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 holder 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 21-50(4)].

69


Example 5.1: STB royalties

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 and 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’s electricity plant, and the balance sold into export markets. Voltage Power consents to Ready, Willing and Able applying for a mining lease over the relevant part of Voltage Power’s licence area, in consideration of Ready, Willing and Able entering a contract to supply coal at fixed prices to Voltage Power, and also pay it a private mining royalty on the export coal sales. The payments are general expenditure 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, because the agreement with Voltage Power has been entered into before 2 May 2010, they are not excluded expenditure due to subsection 21-50(3).

Example 5.2: Private mining royalties and native titleholders

Wildfire Coal negotiates an Indigenous Land Use Agreement (ILUA) with a native title group under the Native Title Act 1993. The ILUA is registered. In accordance with the ILUA, 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 disturb 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 ILUA are necessarily incurred in carrying on mining operations. Although the payments of a share of mining revenues are private mining royalties, they are not excluded expenditure under subsection 21-50(4).

Financing costs

5.41 Financing costs and associated payments are not deductible under the MRRT [section 21-55]. Broadly, the type of costs excluded by these provisions include: both the principal and interest on a loan, borrowing costs, dividends, capital returns, trust and partnership distributions, and the cost of issuing membership interests in entities [section 21-55]. This is consistent with the PRRT.

5.42 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 taxpayer chooses to finance its operations.

70

Mining expenditure

5.43 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 taxing point. The ‘uplift’ also includes a premium for the risk that losses may never be used. Downstream operations are effectively recognised through the process of attributing the revenue to the resource at the taxing point where the taxpayer’s first arm’s length sale is beyond the taxing point.

5.44 Allowing a specific deduction for financing costs would amount to a double deduction for the cost of capital unless financiers were also subject to the MRRT. This would also distort investment and production decisions, creating a bias towards debt financing instead of equity financing.

Hire purchase agreements

5.45 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 21-60(1)]

5.46 Where a miner is party to a hire purchase arrangement and the parties have dealt at arm’s length, the miner will be taken to have acquired the property for the amount shown in the agreement as the cost or value of the property [paragraph 21-60(2)(a)]. If these conditions are not met, 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 21-60(2)(b)].

5.47 The cost of the property is taken to have been incurred when the property is supplied to the miner. [Subsection 21-60(3)]

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

5.48 Capital expenditure in relation to land and buildings used in connection with administrative or accounting activities which are not located at or adjacent to the mining project area is excluded expenditure. It does not matter whether the land and buildings are partly used in connection with administrative or accounting activities and partly used for upstream mining operations. [Section 21-65]

5.49 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,

71


the value of non-adjacent land and buildings do not reflect this risk and are likely to appreciate over time. Therefore, capital payments in relation to these assets are excluded expenditure.

5.50 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 5.1: 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 from the mine site. All administration for the coal mine is carried on at the administration building located in this regional township. The company incurs capital expenditure in respect of that administration building. The expenditure is not excluded expenditure as the building is considered to be 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 5.2: Non-adjacent land and buildings

South & Co Mines operates an iron ore mine in the Pilbara region of Western Australia. 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 not mining expenditure.

Hedging losses or foreign exchange losses

5.51 Expenditure is excluded to the extent that it relates to hedging losses or foreign exchange losses. [Section 21-70]

5.52 Hedging and foreign exchange arrangements should not affect the MRRT liability as those arrangements do not affect the value of the resource. It is noted that where a hedge or foreign exchange arrangement is integral to the sale arrangement for the resource, capital item or service, compliance costs in removing the effect of any hedging integrated within the sale, may be significant. If a hedging or foreign exchange arrangement that forms part of a sales contract results in a loss, it can be included in mining expenditure because the primary obligation to provide the commodity is non-cash settlable.

72

Mining expenditure

Example 5.1

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 Exports enters into a hedging contract with the 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, to the extent that it relates to the foreign currency hedge is excluded expenditure for MRRT.

Rehabilitation bonds and trust payments

5.53 Amounts provided as security for rehabilitation of the project area for a mining project interest are excluded expenditure for the MRRT. [Subsection 21-75(1)]

5.54 The reason for this is because, in order to ensure that money put aside for rehabilitation is secure, rehabilitation bonds and trust payments are generally placed in low-risk investments. That being the case, 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.

5.55 However, if an amount held as security is paid out by a trustee, for the purpose of rehabilitating the project area for a mining project interest, then that amount will be included in the miner’s mining expenditure. Such amounts are considered paid or payable by the miner at the time the trustee or bondholder incurs the amount. [Subsection 21-75(2)]

5.56 The trustee must provide the miner with a notice containing the information that is necessary for the miner to determine the extent to which the amount is mining expenditure for the miner [Schedule 1 to the MRRT (CA&TP) Bill 2011, item 4, section 121-12 of Schedule 1 to the TAA 1953].

Payments of income tax or GST

5.57 Payments under the ITAA 1997, the Income Tax Assessment Act 1936 or the Goods and Service Tax Act 1999 are not mining expenditure and cannot be deducted against mining revenue. [Section 21-80]

5.58 As with mining revenue, all mining expenditure should be deducted on a GST-exclusive basis.

73

Chapter 6Allowances

Outline of chapter

6.1 This chapter explains how to calculate the individual allowances (apart from the starting base allowance, which is dealt with in Chapter 7) used in working out a miner’s Minerals Resource Rent Tax (MRRT) liability for an MRRT year. It explains the allowances’ common features and why there are some differences between allowances.

Summary

6.2 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.

6.3 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 a miner’s MRRT liability 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.

6.4 The starting base allowance is explained in Chapter 7.

6.5 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.

75

6.6 Allowances reduce the mining profit of a miner’s 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.

6.7 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 any transfers is carried forward to future MRRT years and uplifted.

Detailed explanation

Allowances generally

6.8 Under the MRRT, the mining profit of a mining project interest for an MRRT year must be reduced by any available MRRT allowance. [Sections 43-15, 48-15, 53-20, 63-20, 73-17, 83-10 and 93-10]

6.9 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 7-10]

Allowances only up to the amount of the mining profit

6.10 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 43-15, 43-25, 48-15, 48-25, 53-20, 53-25, 63-20, 63-25, 73-15, 73-17, 83-10, 83-15, 93-10 and 93-25].

76

Allowances

Example 6.1: Ordering of allowances

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

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

6.11 Any remaining royalty credits, mining losses or 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

6.12 The order in which a royalty credit, mining loss or pre-mining loss arises is the order in which it is applied in calculating the amount of each of the relevant allowances for the MRRT year. [Subsections 43-25(2), 48-25(2), 53-25(2), 63-25(2) 83-15(2) and 93-25(2)]

6.13 However, in relation to working out each transferred royalty allowance, transferred pre-mining loss allowance and transferred mining loss allowance, the miner may choose which order to apply any two or more royalty credits, pre-mining losses or mining losses that arise at the same time. [Subsections 48-25(2), 83-15(2) and 93-25(2)]

Uplifting

6.14 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 LTBR + 7 per cent each year [subsections 43-105(2) and 63-100(3)]. The amount of a pre-mining loss is uplifted at LTBR + 7 per cent for the first 10 years after the loss arises, but only at LTBR thereafter [section 53-85].

77


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

6.15 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 either both relate to iron ore or both do not relate to iron ore. This limits transfers to between two groupings of taxable resources, those that are related to iron ore and those that are related to coal.

6.16 An interest will relate to iron ore if what the interest relates to is:

• iron ore [paragraph 13-5(1)(a)]; or

• anything produced from a process that results in iron ore being consumed or destroyed without extraction [paragraph 13-5(1)(c)].

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

• coal [paragraph 13-5(1)(b)];

• coal seam gas extracted as a necessary incident of mining coal [paragraph 13-5(1)(d)]; or

• anything produced from a process that results in coal being consumed or destroyed without extraction [paragraph 13-5(1)(c)].

Example 6.1: 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 Gas Co 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 Gas Co’s pre-mining project interest relates to iron ore, they both do not relate to iron ore.

78

Allowances

Example 6.2: 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 both project interests do not relate to iron ore and only one of the project interests does not relate to iron ore, the mining loss cannot be transferred to the mining project interest with the mining profit.

Royalty allowances

6.18 A miner has a royalty allowance for a mining project interest it has if the interest has a mining profit and there are royalty credits that relate to that interest [section 43-15]. The amount of the royalty allowance is the sum of the available royalty credits up to the amount of the mining profit [subsection 43-25(1)]. Excess royalty credits are applied in calculating any transferred royalty allowance for another mining project interest of the miner (or of a close associate) for the year. Any remaining royalty credits are available for use in future years.

Royalty credits

6.19 For a liability a miner incurs 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. [Subsection 43-100(2); and Schedule 5, item 6 in the MRRT(CA&TP) Bill 2011]

Royalties

6.20 A royalty credit arises for a mining project interest when the miner incurs a liability to pay a mining royalty in relation to taxable resources extracted under a production right that relates to the interest. [Paragraph 43-100(1)(a)]

6.21 A mining royalty is a liability to make a payment in relation to a taxable resource extracted under authority of a production right that:

• is a royalty payable under a Commonwealth, State or Territory law; 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.


79


6.22 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 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.

6.23 Mining royalties include royalties payable to the Commonwealth, as well as the more common State and Territory royalties. This deals with the fact that 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

6.24 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 43-100(1)(b)]

6.25 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 6.1: 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

80

Allowances

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.

6.26 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 43-100(1)(b)]

6.27 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 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 ITAA 1997 and includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described.

Example 6.1: 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 ROM 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.

6.28 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 interest. Royalty credits are reduced in the order in which they arose. Only any remaining royalty

81


credits are available to produce royalty allowances and transferred royalty allowances for that year. [Subsection 43-110(1)]

6.29 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 43-110(1)(a)]

6.30 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 43-110(2) and section 19-52]

6.31 The effect of generating royalty credits for royalty payments for 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 under an Australian law 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 6.1: 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 $5m to the State but, under the terms of the agreement, is entitled to a $2.5m reimbursement from Malyshka. Smelaya generates a royalty credit of $22.22m ($5m/0.225) and Malyshka a generates a credit of $11.11m ($2.5m/0.225) for its liability to reimburse Smelaya. Smelaya will reduce its credit by $11.11m for that recoupment.

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

Initial amount of a royalty credit

6.32 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

82

Allowances

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 43-105(1)]

Example 6.1: 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 ($5.625m/0.225). South and Co Mines’ mining profit is reduced to $30 million by the royalty allowance and the royalty credit is exhausted.

Example 6.2: 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 Co on a monthly basis. Zenat Ltd 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 Co would normally be a private mining royalty but are instead mining royalties because they are paid under State legislation.

Uplifting unused royalty credits

6.33 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 43-105(2)]

Using up a royalty credit

6.34 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 project mining interests. [Subsection 43-100(3)]

83


Transferred royalty allowances

6.35 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. [Section 48-15]

6.36 A royalty credit of a 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.

[Section 48-100]

6.37 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.

6.38 Whether two mining project interests are integrated is explained in Chapter 10.

6.39 The amount of a royalty credit that can be transferred to a mining project interest cannot exceed the amount of the interest’s mining profit. [Subsection 48-25(1)]

6.40 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 48-25(2)]

Pre-mining loss allowances

6.41 The general mining expenditure rule will not apply to expenses necessarily incurred on exploration if there is no mining project interest. If an entity merely holds an interest in an exploration right that is not a production right, such expenditure will be taken into account for MRRT purposes as a pre-mining loss allowance.

6.42 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

84

Allowances

relates to that interest and it has a remaining mining profit after deducting all higher ranked allowances. [Section 53-20]

6.43 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. [Section 53-25]

6.44 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 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 LTBR + 7 per cent for the first ten years, and LTBR thereafter. [Section 53-85]

6.45 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 has 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 53-35]

Pre-mining project interest

6.46 A pre-mining project interest is any interest in an authority or right for a purpose (other than an incidental purpose) of exploration for taxable resources, other than a production right. 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).

6.47 Since ‘exploration’ 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. [Section 53-40]

Pre-mining losses

6.48 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 year. [Subsection 53-55(1)]

6.49 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.

85


Pre-mining expenditure

6.50 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, except to the extent it is excluded expenditure. [Subsections 53-60(1) to (4)]

Pre-mining project operations

6.51 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. [Paragraph 53-60(5)(a)]

6.52 Operations or activities are also pre-mining project operations to the extent that they are preliminary or integral to, or consequential upon, either holding the interest or developing the project area for the interest or obtaining a production right in relation to at least part of the project area, regardless of whether the operations or activities were carried on in the project area or not. [Paragraph 53-60(5)(b)]

Pre-mining revenue

6.53 An amount is pre-mining revenue if it would have been mining revenue if the interest to which it relates had been a mining project interest rather than a pre-mining project interest. [Section 53-65]

Mining loss allowances

6.54 The mining loss allowance enables a mining loss that the miner has for a mining project interest for an earlier MRRT year to be carried forward, uplifted and applied against mining profits that the miner has for the mining project interest in future MRRT years.

6.55 A miner’s 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 63-20]

6.56 The amount of a mining loss allowance is the lesser of the 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 63-25]

86

Allowances

6.57 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 63-100(1) and (2)]

6.58 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 LTBR + 7 per cent. [Subsection 63-100(3)]

87


Example 6.1: 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%, 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 - - - 200 226 255.38 154.352016 - - - - 100 113 127.692017 - - - - - 20 22.602018 - - - - - - -Prior year

Mining loss2013 - 113 127.69 144.29 163.05 184.24 -2014 - - 56.50 63.85 72.14 81.52 -2015 - - - 226 255.38 288.58 174.412016 - - - - 113 127.69 144.292017 - - - - - 22.60 25.542018 - - - - - - -

Mining profit

0 0 0 0 0 0 455.76

A mining loss for a later MRRT year is the mining loss for the preceding MRRT year less what was applied against a mining profit for the preceding MRRT year (in working out a mining loss allowance or a transferred mining loss allowance).

The 2018 mining profit of $400m 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 calculated up to the 2018 MRRT year ($184.24m), is applied first.

This is followed by the mining loss for the 2014 year, as calculated up to the 2018 year ($81.52m). Then the mining loss for the 2015 year, as

88

Allowances

calculated up to the 2018 year ($288.58m), is applied but only to the extent that it reduces the mining profit in the 2018 year to nil. Therefore, $154.34m ($400m — $184.24m — $81.52m — $288.58m = -$154.34m) of the mining loss for the 2015 year will not be applied in calculating the mining loss allowance for the 2018 MRRT year.

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

6.59 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 63-100(4)]

Transferred pre-mining loss allowances

6.60 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 a requirement that transfers occur between interests related to the same type of taxable resource. The transfer of pre-mining losses is also limited where they are traded for less than their tax value.

6.61 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 83-10]

6.62 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 83-15(1)]

6.63 In calculating the amount of the allowance, pre-mining losses are applied in the order in which they arose. It is necessary to attach pre-mining losses to particular years, rather than use a rolling balance, because the uplift factor for pre-mining losses reduces after 10 years. 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. [Subsection 83-15(2)]

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

89


A pre-mining project interest is in force

6.65 The first is where the miner (or a close associate) 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. [Subsection 83-25(2)]

Pre-mining project interest replaced by a mining project interest

6.66 The second is where the miner (or a close associate) holds another mining project interest that relates to the same type of resource and has a pre-mining loss it inherited from a pre-mining project interest it replaced or was carved out of. The pre-mining loss can be applied to work out a transferred pre-mining loss allowance for the first mining project interest. [Subsection 83-25(3)]

Meaning of closely associated

6.67 An entity is closely associated with another entity at a particular time if they are both members of the same consolidated or consolidatable group or the same MEC group. Those expressions are income tax concepts relevant to deciding whether a group of entities is, or could be, treated as a single entity. [Subsection 83-25(5)]

Capping the transfer of pre-mining losses

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

6.69 The purchaser can then apply the pre-mining losses to reduce mining profits of mining project interests it holds or that are held by entities closely associated with it.

6.70 However, to prevent trading in pre-mining losses that have a greater economic value than the underlying tenement, the extent to which those pre-mining losses can be transferred to another mining project interest is capped by reference to the grossed-up amount paid for the pre-mining project interest or the mining project interest. [Sections 83-30 and 83-35]

90

Allowances

6.71 The cap itself is worked out by grossing up the payment that relates to the mining project interest or pre-mining project interest that 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. In other words:

• Where the entity or a close associate did not have the ‘receiving interest’ after the start of the pre-mining loss year, its purchase price will be taken into account in the cap.

• Where the entity or a close associate did not have the ‘loss project interest’ after the start of the pre-mining loss year, its purchase price will be taken into account in the cap.

6.72 If there was no payment to start holding the interest (such as where the receiving interest first starts to exist after the pre-mining loss year), then no cap will apply in relation to that interest.

6.73 The cap amount can apply across a number of years. For this reason, in any particular year the cap needs to take account of any transferred loss allowance that has previously been applied from within the cap. In other words, where only part of the cap is applied against a transferred pre mining loss allowance, the rest of the cap can be applied against other transferred pre mining loss allowances.

Example 6.1: Cap on transferable pre-mining losses

Log Jam Co. buys the following interests:

• mining project interest 1 for $1 million; and

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

Assume that mining project interest 1 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 mining project interest 1 — the cap is $4.44 million; and

• for pre-mining project interest 2 — the cap is $8.88 million.

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

91


Transferred mining loss allowances

6.74 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 93-10]

6.75 The amount of a transferred mining loss allowance cannot exceed the amount of mining profit the mining project interest has. [Subsection 93-25(1)]

6.76 Mining losses that can be transferred must be transferred 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 transferred. [Subsection 93-25(2)]

6.77 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 93-100(1)(a)];

• the mining loss is not attributable to a year in respect of which an election was made to use the alternative valuation method for its mining project interest [paragraph 93-100(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) [paragraph 93-100(1)(c)].

Common ownership test

6.78 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 93-115]

6.79 The common ownership test is not focused on whether there has been a change in the direct ownership of the project interests, nor is it asking if the project 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

92

Allowances

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).

6.80 These examples illustrate the circumstances where two mining project interests satisfy the common ownership test.

Example 6.1: Same miner has both interests

Echo Coal Co is the head of a consolidated group (which consolidated for MRRT purposes in 2012). P1 has a mining loss in relation to its mining project interest for the 2013 year and P2 has a mining profit in relation to its mining project interest for that year. Because it is a consolidated MRRT group, both mining project 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 is able to transfer its mining loss to reduce P2’s mining profit for the year. Similarly, P1’s mining loss is available to be applied in calculating a transferred mining loss that will reduce mining profits of P3, P4 or P5.

Example 6.2: 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 Coal Co’s consolidatable group. P1 and P2 have moved from Echo Coal Co’s consolidated group to Foxtrot Coal Co’s consolidatable group. While P1 and P2 have existed in two different groups, the two project 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

93


cannot be transferred from P1 to P6 or P7 as P1 was not in common ownership with P6 and P7 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.

Example 6.3: 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 Coal Co 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 its 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.

94

Allowances

Example 6.4: 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 Foxtrot 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 its remaining mining profit.

95

Chapter 7Starting base allowances

Outline of chapter

7.1 This chapter explains Part 3-5 (Divisions 73, 75 and 77) of the legislation, which deals with starting base allowances.

Summary of new law

7.2 Starting base allowances reduce a miner’s MRRT liability for a mining project interest for an MRRT year. The allowances recognise investments in assets that relate to the upstream activities of a mining project interest (starting base assets) 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 before 1 July 2012.

7.3 A miner 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.

7.4 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.

7.5 A miner can generally 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 2 May 2010; or

• the most recent accounting book value of starting base assets (not including rights to the resources) available at that time.

7.6 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 loss is preserved by uplifting it by the consumer price index.

97

7.7 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 LTBR + 7 per cent. Any unused losses are also uplifted by the LTBR + 7 per cent.


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

7.8 A miner 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 73-15 and 73-17]. Royalty, transferred royalty, pre-mining loss, and mining loss allowances are all higher ranked allowances [Section 7-10].

7.9 A miner has a starting base loss for a year when it 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 73-20]

Starting base assets produce starting base losses

What is a starting base asset?

7.10 Starting base assets include most tangible and intangible assets that are relevant to the upstream operations of a mining project interest.

7.11 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 start time [subsections 73-25(1) and (2)]. The concept of ‘upstream mining project operations’ is explained in Chapter 5. The ‘start time’ is explained below.

7.12 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.

7.13 The ‘asset’ concept is a broad one, encompassing all types of legal property and rights. However, it does not include things such as mineral reserves, which some might consider to be a type of economic asset. Where a miner holds an interest in an asset, the interest in the underlying asset is itself capable of being the starting base asset.

98

Starting base allowances

7.14 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 73-25(5)]

7.15 For the market value approach, the definition specifically includes mining information (as defined in subsection 40-730(8) of the ITAA 1997), which may not otherwise be considered a legal asset as it is not capable of assignment (eg, see Hepples v FCT (1990) 90 ATC 4497 and Taxation Determination TD 2000/33). [Subsection 73-25(4) and section 300-1, definition of ‘mining, quarrying and prospecting information’]

7.16 If a miner chooses 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 exclusion 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 73-25(3)(a)]

7.17 If a miner chooses the market value approach, the rights, interests, mining information and goodwill (if any) are taken to be a single starting base asset. In other words, any relevant mining information held by a miner should be taken to be part of the same asset as all the rights and interests that comprise the mining project interest [subsection 73-27(1)]. This composite starting base asset is taken to be a depreciating asset, which has an effective life equal to the longest effective life of any of those rights and interests [subsection 77-11(3)].

7.18 Notwithstanding that improvements to land are treated as separate to the land, the single starting base asset is taken to include any improvement to land (but not a fixture) in the project area of a mining project interest. This inclusion reflects the administrative 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. However, haulage roads are not included in the single starting base asset. This is, in part, because of the relatively short life of these improvements. Another reason to separately identify haulage roads is because, in contrast to other improvements to land in the project area, the expenditure which contributes to the value of haulage roads is more easily distinguished from

99


expenditure that has been incurred as part of the previous extraction of taxable resources (such as the costs involved in overburden removal). Submissions are invited on other types of improvements to land that should also be recognised as a separate starting base asset. [Paragraph 73-27(1)(d)]

7.19 Under either the book value or market value approach, other intangible assets relevant to the upstream operations of the mining project interest can be starting base assets.

7.20 All tangible assets relevant to the upstream operations of the mining project interest are starting base assets as well. The most common type will be the equipment that is involved in the extraction activities of the mine.

7.21 Some trading stock and consumable assets are included in the definition of starting base assets, but it is expected that few of these assets would produce starting base losses. If they were held on 1 May 2010 and continue to be held on 1 July 2012, they are capable of producing starting base losses. However, trading stock and consumables that are acquired between 2 May 2010 and 1 July 2012 would not have a ‘cost’ that is included in the value of a starting base asset (see interim expenditure below).

7.22 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. [Paragraph 73-25(3)(b)]

7.23 An asset stops being a starting base asset once it is incapable of producing any further starting base losses because it has been completely written off. [Paragraph 73-25(3)(c)]

When an asset is 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

100


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, the courts have held that things ‘held in reserve’ must be held for future use in an existing operation and that 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 The phrase ‘being constructed for use’ does not appear in the income tax law. In the context of the MRRT starting base, these words are 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. An asset that is being constructed by an entity other than the miner may be a starting base asset, but the miner would only have a base value for the asset if it held the asset on 2 May 2010, or if it incurred interim expenditure at a time that it held the asset after 1 May 2010 and before 1 July 2012.

Example 7.1: Assets under construction

On 2 May 2010, Panda Co. was in the process of building trucks under a sale contract it had with a miner. Ownership passed from Panda to the miner on 1 December 2012 and the miner started to use the trucks in the upstream mining operations in relation to its mining project interest. However, as the miner did not hold the trucks on 2 May 2010, and did not incur interim expenditure on the trucks, the trucks are starting base assets that are not capable of producing starting base losses (ie, they have no base value).

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;

• the time production (other than incidental production) commences for the mining project interest; and

101


• 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 time production (other than incidental production) commences for the constituent interest. [Subsection 73-25(2)]

7.30 This time is referred to as the ‘start time’ of a 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 occur from that date.

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 is 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, or during, the initial development of a mine will constitute ‘incidental production’ when the main purpose of that extraction is allow the mine to be established. 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 7.1: Incidental production

Blue Tongue Co. has a mining project interest, which relates to a mine it is developing on land covered by its production right.

On 1 July 2012, Blue Tongue is extracting some quantities of taxable resources as part of its work to clear the site to install equipment at the

102


site. It is able to sell these resources, but is not producing taxable resources in sufficient quantities to meet regular orders from its customers. It is liable to pay MRRT in relation to the sale of these resources. However, as this extraction is incidental to the development of the mine it is not production that meets the test for determining the start time of its starting base assets.

On 1 July 2014, Blue Tongue has established its mine to the point that it can extract taxable resources for the purpose of serving the market. It has not yet fully established its downstream infrastructure and so its production is constrained by its ability to process and deliver the resources. Nevertheless, Blue Tongue will be able to recognise and write off its starting base assets from 1 July 2014 even though it has not yet started to produce taxable resources in the volumes it intends when the mine is fully operational.

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’. The start time of an asset that relates to one of these constituent interests is deferred until the time that production commences in relation to that constituent interest. [Subsection 73-27(2)]

When does a miner hold a starting base asset?

7.36 The meaning of ‘hold’ 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. [Sections 250-5 and 250-10]

Amount of a starting base loss

7.37 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

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

• Step 1: Work out the decline in value for each starting base asset the miner held in the year.

103


• Step 2: Reduce the result of step 1 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 of step 2 to the extent the asset relates to a use that would not be deductible under the MRRT.

• Step 4: Add up the amounts remaining after step 3 for each of the starting base assets.

Step 1 — Decline in value of each starting base asset

7.39 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 73-55(1)]

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

7.40 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 73-55(2) and (3)]

7.41 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, etc. 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 7.1: 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 decline reduced by $800,000 to reflect the use of the asset other than in upstream mining operations).

The base value of the asset for the next MRRT year is $9 million.

7.42 The narrow base of the MRRT means there is a need to apportion the decline in value. This will be relevant when starting base

104


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 taxing point). As under the general expenditure provision (section 21-20), 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

7.43 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 73-55(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 7.1: 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 (see section 21-65). As a consequence, to that extent the decline in value for the year for the starting base asset (the building) is not taken into account in working out the starting base loss.

7.44 However, where the market value approach is used, the starting base loss may include the decline in value, regardless of whether that decline would, if it were an amount incurred on or after 1 July 2012, be excluded expenditure under section 21-45. [Subsection 73-55(5)]

7.45 Under section 21-45, expenditure incurred to acquire an interest in a production right is one type of excluded expenditure. 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.

Example 7.1: Decline that relates to a starting base asset that is a production right

Fox Co. chose 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 under section 21-45. However, the decline in value for the

105


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

7.46 The starting base loss is the total of the amounts worked out under steps 1 to 3 for each starting base asset [subsections 73-55(1) and (2)]. In other words, a miner adds together the decline in value for each of its starting base assets in relation to a particular mining project interest to work out the 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 miner has sufficient mining profits against which to offset these losses.

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

7.47 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 73-60]

7.48 An unused starting base loss is any part of a starting base loss that is not used to make 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.

7.49 To 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 73-60(1)];

• under the market value option — the consumer price index for the previous year ending 31 March. The consumer price index is expressed in the same way as subsection 960-275(1) of the ITAA 1997 [paragraph (b) of the definition of ‘uplift factor’ in subsection 73-60(1)].

Example 7.1: 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. The LTBR for the 2015-16 MRRT year is 6 per cent.

106


Therefore, in the 2016-17 MRRT year, the amount of the 2015-16 starting base loss is $1.13 million.

Choosing between the market value and book value approaches

7.50 A miner may be able to 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. [Subsections 75-5(1) and (2) and section 75-15]

Choice applies to all assets used in a project

7.51 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. [Section 75-15]

7.52 However, 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

7.53 There are various other choices available to miners under the MRRT. The common rules that apply to these choices are explained in Chapter 18. Under these rules, an entity is able to make its starting base choice 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. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 4, section 119-5 of Schedule 1 to the TAA 1953]

7.54 The choice is irrevocable. It applies to the mining project interest for all times after the start time for the starting base assets. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 4, section 119-10 of Schedule 1 to the TAA 1953]

7.55 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

107


potential difficulties, an entity can choose to use a valuation approach in relation to the mining project interest(s) that relate to a particular area, rather than nominating the mining project interests directly. [Subsection 75-5(3)]

Example 7.1: 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 7.2: 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.

108


Restrictions on when a miner can choose the book value approach

7.56 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 75-10(1)(a)]

7.57 This financial report must also relate to a financial period that ended in the 18 months prior to 2 May 2010. This would preclude the use of a financial report that relates to a financial period that ended before 2 May 2009, even if the report was prepared in the 18 months prior to 2 May 2010. [Paragraph 75-10(1)(b)]

7.58 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 75-10(1)(a) and (c) and subsection 75-10(2)]

7.59 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 77-15(3)(a)]

7.60 ‘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?

7.61 Where an entity fails to make a valid choice about whether to use the market value or the book value approach, it will not have any starting base assets [paragraph 73-25(3)(b)]. However, the Commissioner may allow further time for an entity to make a valid choice. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 4, subsection 119-5(1) of Schedule 1 to the TAA 1953]

109


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

7.62 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 77-5]

7.63 The ‘base value’ of an asset represents the value of the asset that can be further declined. It is a year-end 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.

7.64 ‘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 73-55(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.

7.65 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

7.66 The following table lists the annual write off rates under the book value approach. [Section 77-8]

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%

110


For this MRRT year: The write off rate is:

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%

7.67 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.

7.68 The 2 May 2010 announcement stated that depreciation was to occur over 5 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.

7.69 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

7.70 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:


7.71 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 77-11(1)]

7.72 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 assessments for income tax

111


purposes. This may be significant when the original assessments have not taken into account changes in the way the assets are used.

7.73 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.

7.74 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.

7.75 The remaining effective life of the combined starting base asset (explained above) is taken to be the longest 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 77-11(3)]

Example 7.1: 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 ten 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 nine years.

7.76 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

112


• the period until 1 July 2037 (which is 25 years after the MRRT commences).

[Subparagraphs (a)(ii) and (iii) of the definition of ‘remaining effective life’ in subsections 77-11(1) and (2)]

7.77 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.

7.78 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. [Paragraph (b) of the definition of ‘remaining effective life’ in subsections 77-11(1) and (2)]

7.79 The remaining effective life of an asset cannot be less than one year. This ensures that the write off rate does not exceed 100 per cent so that the decline in value cannot exceed the asset’s base value for the year. [Subsection 77-5(2)]

Base value under the book value approach

Base value for the year in which the start time occurs

7.80 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 at all times in the interim period is:

• the initial book value of the asset [subparagraph 77-15(1)(a)(i)]; plus

• any additional valuation amounts (uplifted interim expenditure) [subparagraph 77-15(1)(a)(ii)].

7.81 If the starting base asset was not held at all times in the interim period (because it was acquired during this period), then its initial base value is simply the sum of additional valuation amounts (uplifted interim expenditure) [paragraph 77-15(1)(b)]. ‘Interim period’ is explained below.

Initial book value

7.82 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

113


• 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 77-15(3) and (5)]

Valuation amounts for interim expenditure

7.83 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 77-15(6) and (7)]

Base value for later years

7.84 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 77-30]

Base value under the market value approach

7.85 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 77-50(1)]

Base value for the year in which the start time occurs

7.86 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 at all times from 2 May 2010 to 30 June 2012 is:

• the market value of the asset on 1 May 2010 [subparagraph 77-50(1)(a)(i)]; plus

• any interim expenditure [subparagraph 77-50(1)(a)(ii)].

7.87 If the starting base asset was not held at all times in the interim period (because it was acquired during this period), then its initial base value is simply the sum of interim expenditure. [Paragraph 77-50(1)(b)]

Market value of the asset

7.88 ‘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 (see Subdivision 960-S of the ITAA 1997). [Section 300-1, definition of ‘market value’]

114


7.89 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.

7.90 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.

7.91 Where a mining project interest originates from a pre-mining project interest that existed on 1 May 2010, then 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 77-52]

7.92 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 77-50(3)]. Mining royalties are explained in Chapter 6.

7.93 For private mining royalties agreed prior to 2 May 2010, it may not be possible for the miner to renegotiate the terms of the royalty agreement, in which case they would bear an MRRT liability in respect of profits they do not earn. This is addressed by valuing any starting base asset that is (or includes) a mining project interest as if it were not encumbered by the private royalty liability. This will lead to additional starting base losses that provide an equivalent shield to that otherwise available to the royalty recipient.

7.94 Where such an arrangement is renegotiated on or after 2 May 2010, this may be recognised as a partial disposal of the starting base asset, which will mean its base value is reduced to the same extent. The rules about part disposals of starting base assets are explained below.

115


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

7.95 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.

7.96 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)]

7.97 This choice (like the choice to use the market value approach) is irrevocable and needs be made at the time the MRRT return is due (or would be due) to be lodged for the first MRRT year [section 180-5]. However, the Commissioner may allow further time for an entity to make a choice. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 4, sections 119-5 and 119-10 of Schedule 1 to the TAA 1953]

7.98 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 180-10(1)]

7.99 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 [subsection 180-10(4)]. Chapters 6 and 12 explain the types of expenses that are included in pre-mining expenditure.

Interim expenditure

7.100 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, under the market value approach, interim expenditure 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 77-50]

116


Base value for later years

7.101 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, under the market value approach this amount is not uplifted for the year. [Section 77-60]

Interim expenditure

7.102 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 1 July 2012 and starting on:

• under the book value approach — the earlier of 2 May 2010 and:

– the date of the accounts that are reflected in the audited financial report; or

– the date of the auditor’s report, if it contains a value that is inconsistent with those accounts; and


• under the market value approach — 2 May 2010 [subsection 77-75(6)].

7.103 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. [Paragraphs 77-15(1)(b) and 77-50(1)(b)]

7.104 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 77-75(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 77-75(1)(a)(ii) and subsection 77-75(2)].

117


7.105 Interim expenditure also includes mine development expenditure that relates to the mining project interest. [Subsection 77-75(3)]

Mine development expenditure

7.106 Mine development expenditures are the amounts a miner incurs in the interim period in developing the project area of its mining project interest as part of carrying on its upstream operations [subsections 73-35(1), (2) and (4)]. 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.

7.107 To the extent it is not interim expenditure on another starting base asset, the mine development expenditure itself is taken to be a starting base asset [paragraph 73-35(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 73-35(3) 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 77-11(1)].

7.108 Mine development expenditure cannot itself be interim expenditure relating to another amount of mine development expenditure [subsection 77-75(4)]. 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 7.1: 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 holds and uses in the upstream mining operations of the mining project interest.

Mystic 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 (ie, the earlier mine development expenditure). Instead, the expenditure is taken to be another new starting base asset that Mystic

118


holds and uses in the upstream mining operations of the mining project interest.

Other reductions to base value

Recoupment of base value

7.109 The base value of a starting base asset is reduced to the extent there is any economic recoupment of the asset’s base value [section 77-85]. This is equivalent to the recoupment of mining expenditure in Division 19 (which is explained in Chapter 5).

Example 7.1: Recoupment of the base value of a starting base asset

Continuing the previous example, on 30 June 2011 Mystic receives a government grant that subsidises the activities on which Mystic 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 each 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

7.110 The base value of a starting base asset is also reduced to the extent that the miner disposes of any interest in the asset. This ensures that the impaired value of an asset is reflected in a lower base value for the asset. [Section 77-80]

7.111 For example, if a miner enters a contract that has the effect of transferring some of its benefits under the production right it holds (and continues to hold), the base value of that right is reduced to that extent. This is a part disposal of the asset.

7.112 Where a miner simply stops holding a starting base asset (or the asset is no longer used, installed ready for use, or being constructed) there is a starting base adjustment, which is discussed in detail in Chapter 13.

Starting base and schemes to avoid MRRT

7.113 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 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 subject to the general anti-avoidance rule, which is discussed in Chapter 17.

119

Chapter 8Small miners

Outline of chapter

8.1 This chapter outlines:

• how the low profit offset applies to fully or partially relieve small miners of their MRRT liability for an MRRT year; and

• the operation of the simplified MRRT.

Summary of chapter

8.2 There is no MRRT liability for miners with group mining profits of $50 million or less. Nil liability is achieved by the provision of a low profit offset.

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

8.4 A miner can use the simplified MRRT method for an MRRT year if its group profit is below certain limits.

8.5 If a miner chooses to use the simplified MRRT method, it will have no MRRT liability for the MRRT year, and its allowances are extinguished.


Low profit offset — mining profits equal to or less than $50 million

8.6 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 31-5(1)]

8.7 Group mining profits include the mining profits of entities that are connected or affiliated with the miner in the way described in Subdivision 328-C of the ITAA 1997.

121

8.8 The offset is the sum of the miner’s MRRT liabilities for each of the miner’s mining project interests for the year [subsection 31-5(2)]. This reduces a miner’s MRRT liability to nil [section 7-20].

Low profit offset — mining profits between $50 million and $100 million

8.9 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, a formula applies so that the offset phases out for profits between $50 million and $100 million. [Section 31-20]

Formula 8.1

8.10 A miner’s group MRRT allowances is the sum of the MRRT allowances for each mining project interest for the year that an entity mentioned in subsection 31-5(1). [Subsection 31-10(1)]

8.11 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 31-10(1)]

8.12 The taper amount is the difference between the miner’s group mining profit for the year and $50 million. [Subsection 31-10(1)]

8.13 Where the result produced by this calculation is less than zero, there is no entitlement to a 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.

8.14 The low profit offset entitlement of the miner is then calculated as:

amount calculated in formula 8.1 × the MRRT rate


8.15 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.

8.16 Once the low profit offset entitlement is determined, it is applied to reduce the miner’s MRRT liability for the year. [Section 7-20]

122

Small miners

Example 8.1: 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 and Project B.

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

Project carry forward losses

$0.10 $0.00 $0.10

Starting base allowance $0.10 $0.20 $0.30

Total MRRT allowances $4.60 $8.20 $12.80

Calculate whether Strayan Ltd is entitled to a low profit offset by using the following steps:

Step (i): Calculate group mining profits by adding the mining profits of Project A and Project B. Calculate the group MRRT allowances 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, a low profit offset entitlement may exist.

Step (ii): Calculate the formula parameters as follows:

Taper amount: $80 million — $50 million= $30 million

Miner’s group MRRT allowances: $4.60 million + $8.20 million= $12.80 million

Miner’s share of group mining profits: $60 million / $80 million= 75 per cent

Step (iii): Work out if there is an entitlement to a low profit offset.

= ($50 million — $30 million) — $12.80 million × 75 per cent

= $5.40 million

8.17 The existence of the low profit offset is not a mechanism for reducing compliance costs. However, a miner with group mining profits below $50 million may be eligible to use the simplified MRRT method.

123


Simplified MRRT method

Choosing to use the simplified MRRT method

8.18 In order to make the simplified MRRT choice, a miner must satisfy one of two alternative tests.

8.19 Under the first test, the aggregate of the miner’s group profit for simplified MRRT purposes for MRRT commodity operations must be less than $50 million for the year. [Subsection 200-10(1)]

8.20 A miner that satisfies this requirement is unlikely to have an MRRT liability in the year the election is made because their MRRT profits should be sufficiently low so as to fall below the $50 million threshold for the low profit offset.

8.21 Uner the second test, a miner is eligible for simplified MRRT if:

• the sum of the miner’s group profits is less than $250 million; and

• the sum of royalty credits mentioned in paragraph 43-105(1)(a) for that interest for that year and the sum of any royalty credits reduced by recoupments mentioned in paragraph 43-110(1)(a),

is less than 25 per cent of the entity’s profit (worked out under section 200-15) for that year that relates to that interest. [Subsection 200-10(3)]

8.22 The choice must be made in the approved form and the entity must give it to the Commissioner on the last day of the period within which the entity would have been required to give the Commissioner a return had the entity been required to give the Commissioner a return. [Subsection 200-10(4), and Schedule 1 of the MRRT (CA & TP) Bill 2011, item 4, Division 119 of Schedule 1 to the Taxation Administration Act 1953]

Working out an entity’s profit for simplified MRRT purposes

8.23 An entity’s profit for simplified MRRT purposes is its profit from MRRT commodities, determined in accordance with general accounting principles, and adjusted for interest, taxation, royalties and extraordinary items. [Section 200-15]

8.24 The adjustments for interest, taxation and extraordinary items are made in order to produce an amount that is a reasonable estimate of the entity’s earnings before interest and taxation (EBIT). The further adjustment for royalties is to align the EBIT amount with the non-deductibility of royalties under the MRRT.

124

Small miners

8.25 The profit for simplified MRRT method purposes is intended as a reasonable proxy for an entity’s MRRT profits.

Consequences of using the simplified MRRT method

8.26 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 2011, item 4, paragraph 117-5(4)(a) of Schedule 1 to the Taxation Administration Act 1953].

8.27 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.

8.28 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.

125

Chapter 9Combining 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 MRRT.

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

Summary

Combining mining project interests

9.3 A mining project interest is the basis upon which a miner’s MRRT liability is determined. The mining project interest is the anchor for the operation of the MRRT. A miner’s mining revenue, mining expenditure, allowance components and starting base assets are linked to a mining project interest.

9.4 A miner will have a mining project interest in respect of their entitlement to share in the output of taxable resources extracted from the area covered by a production right. If a miner has such an entitlement in respect of the taxable resources extracted from the area covered by two production rights, it would have two mining project interests. A miner will also have two mining project interests if it later acquires a further entitlement to a share of the output of the undertaking with respect to the same production right that the original mining project interest relates to.

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

127

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

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

9.8 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

• any of the integrated mining project interests have a starting base loss or starting base asset, the integrated mining project interests (or the pre-mining project interest from which they originate) have existed on 2 May 2010 and have been held by the same miner as each other from that time.

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

9.10 Once combined, the combined mining project interest will be the basis upon which MRRT liability is determined. The combined interest will inherit the tax history of all the constituent interests. The combined mining project interest will aggregate each type of like allowance components that it inherits from the constituent interests.

9.11 A miner that has a combined mining project interest will no longer have to separately track mining revenue, mining expenditure, allowance components and base values of starting base assets for each of the integrated mining project interests. Instead, the miner will only need to track these amounts for the combined mining project interest.

9.12 To put integrated mining project interests that are unable to combine in a similar position, prospectively in regards to royalty credits, as they would have been had they been able to combine, royalty credits that arise while the interests are integrated can be applied as transferred royalty allowances (see Chapter 6, Allowances).

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

128


Detailed explanation

Integration of mining project interests

9.14 Integration between two mining project interests is one of the conditions that must be met before the interests can combine. Only integrated mining project interests can combine.

9.15 Integration is a measure of the relationship between two mining project interests. [Sections 255-5 and 225-10]

9.16 Whether mining project interests are integrated is a question of fact. If interests cease to be integrated there will be a mining project split [subsection 125-10(3)]. (Chapter 10, Mining project transfers and splits 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(1)(a)]; and

• 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(1)(b)]; and

• the interests:

– 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 have made the choice to be downstream integrated [paragraphs 255-10(1)(c) and 255-10(1)(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.

9.19 If a group has elected to be consolidated for the MRRT, then all the mining project interests that are within the group are taken to be mining project interests of the head entity of the group.

129


The same miner must have the mining project interests

9.20 The same miner must have each of the mining project interests for the interests to be integrated [paragraphs 255-5(a) and 255-10(1)(a)]. The miner will have two or more mining project interests if it is the entity that has each of the interests [section 9-5)].

9.21 If a group has elected to be consolidated 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. [Division 215]

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

9.22 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 not relate to iron ore, that is, it will relate, in some way, to coal. [Section 255-5]

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

• iron ore [paragraph 13-5(1)(a)]; or

• anything produced from consuming or destroying iron ore in situ [paragraph 13-5(1)(c)].

9.24 A mining project interest will not relate to iron ore, that is, it will relate to coal, if what is extracted from the production right area is:

• coal [paragraph 13-5(1)(b)];r

• coal seam gas (extracted as a necessary incident of coal mining) [paragraph 13-5(1)(d)]; or

• anything produced from consuming or destroying coal in situ [paragraph 13-5(1)(c)].

Example 9.1: Mining project interest 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.

130


Example 9.2: Mining project interest 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.

Neither mining project interest that Col Co has relates to iron ore. Therefore, they both do not relate to iron ore, meaning that this integration condition is satisfied.

Example 9.3: Mining project interests that do not relate to the same type of 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 iron ore mining project interests.

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

9.25 Two mining project interests are upstream integrated if they relate to the same mine or proposed mine. [Section 255-5]

9.26 Whether a mine or proposed mine exists is a question of fact determined by reference to all of the circumstances of a particular case.

What constitutes a mine

9.27 The following points are relevant in determining if a mine exists.

• The existence of an ore body does not necessarily equate to the existence of a mine.

• More than one ore body can constitute a single mine.

• Extraction of ore by way of its own extraction facilities that are separate and distinct from any other extraction facilities indicates the existence of a separate mine.

131


• The existence of a mine plan, prepared in accordance with the Australian 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 body.

9.28 The inclusion of these points should not be taken to limit the consideration. Other factors may also be relevant in determining whether a mine exists.

When is there more than one mine

9.29 The following points are relevant in determining whether there is one mine, or several mines.

• The separateness and distinctiveness of the workings, equipment and machinery capable of producing ore.

• The early management thinking about developing the ore bodies concurrently.

• The concurrent development of the ore bodies.

• The structural connection between the ore bodies.

• The similarity of the ore bodies geological characteristics.

• Whether there are any time differences between mining.

• The extent of common facilities for the treatment of the ore from the mine/s.

• The extent of any economic integration.

What is a proposed mine

9.30 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.

132


Example 9.1: Two separate mines

Coal Co has two production rights, both 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 taxing 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 cannot be seen as resulting in there being one mine.

As each mining project interest has its own distinct mine, the mining project interests are not upstream integrated.

Example 9.2: Integration of production rights not yet producing

Rock Doctor Co has seven production rights, all of which entitle it to extract coal. Rock Doctor Co has a mining project interest in relation to each of the 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.

Production rights 1 and 7 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 production rights 2-6. 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 ROM stockpile. The same staff will service production rights 1 and 7 when they commence production.

All of the ore bodies are structurally connected and geologically similar.

133


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; 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.

Example 9.3: Upstream integration

MineCo Mining Pty Ltd has two production rights (A and B) on which 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 baragaining 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 five pits is hauled by trucks to a single ROM 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 then stored on a single product stockpile. The saleable product is then loaded on a train and transported to port to be loaded for export.

Taking all these factors into account, MineCo Mining is operating one miner 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.

134


Whether downstream mining operations are integrated (downstream integrated)

9.31 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. [Section 255-10]

Downstream mining operations

9.32 Downstream mining operations are those mining operations which are not upstream mining operations. [Section 255-15]

9.33 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 on a reasonable basis.

Diagram 9.1: Mining operations, upstream mining operations, downstream mining operations

9.34 Downstream mining operations are those activities or operations which are necessary to get the taxable resource extracted from the project area (or something produced using a taxable resource) from the taxing point and into the form and location in which it is when a mining revenue event happens. [Subsection 255-15(1)]

9.35 Operations or activities undertaken after the taxable resources, or something produced using the taxable resources, are in the form and location in which they are in at the mining revenue event, are not downstream mining operations. [Subsection 255-15(1)]

Example 9.1: Downstream mining operations

Deanna Coal Co has a mine from which it extracts coal. The coal extracted from the mine is exported to a foreign steel maker. The coal

135


is sold as it is loaded onto the ship at the port. The coal extracted from each production right is taken to a ROM stockpile.

The coal is removed from the ROM stockpile by a reclaimer and taken by conveyer belts 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 saleable product is then taken from the processing plant, loaded onto a train and transported to port. At port, the coal is offloaded on 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 other coal).

Deanna Coal’s downstream mining operations begin when the coal is removed from the ROM stockpile (that is, the taxing 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 9.2: Downstream mining operations — blending

Fox Fines Pty Ltd has two production rights which entitle it to extract iron ore. Fox Fines Pty Ltd 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 ROM stockpiles, a different stockpile for each production right. Iron ore is removed from a ROM 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 then taken and loaded onto ships, such that the shipment satisfies the contractual blended requirement.

Fox Fines Pty Ltd’s downstream operations begin when the iron ore is removed from the respective ROM stockpiles and ends as it goes over the ship’s rail.

Integrated

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

9.37 Whether the downstream mining operations or the mining operations of two mining project interests are integrated is a question of fact, having regard to the manner in which those operations are carried on,

136


including use and operation of infrastructure and equipment. [Paragraph 255-10(1)(c)]

9.38 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.

9.39 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 that infrastructure is used. For example, integration may be demonstrated through the scheduling of the use of the infrastructure, or where that is not the case, through the combining of the resource from different mining project interests into a blended product.

Example 9.1: Downstream integration — blended product

Riley Co has five mines, each of which is a single mining project interest. Each mine has its own ROM 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 ROM stockpiles. The iron ore is taken from the various ROM 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 specific 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.

The downstream mining operations of each of the mining project interests that Riley Co has are integrated with each of the other interests that Riley Co has.

Example 9.2: 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

137


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 ROM 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 on to 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 transport and blending at port are necessary to get the coal into the form and location in which it is sold and the downstream mining operations are those of Lachlan Co in relation to its mining project interest. Therefore, the downstream mining operations of each of the mining project interests that Lachlan Co has are integrated.

Example 9.3: Downstream integration

Mining Co has 10 coal mines, each of which is a separate mining project interest. Each mine is operated under separate life of mine plans and has separate ROM stockpiles. The coal is removed from the ROM 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 port stockyards 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 ports 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 ports. 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 ROM 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,

138


taking into account the overall mining operations, are highly coordinated.

Example 9.4: Downstream integration

Francis Coking Coal has six production rights (A, B, C, D, E and F). 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. No operations are carried out on production rights E and F, which are very small in area.

Premium coking coal is extracted from the three underground mines located in production right A and medium quality coking coal, pulverised coal injection (PCI) coal and thermal coal is extracted from the three open cut pits. Each of the underground and open cut pits has its own ROM stockpiles. The coal from each ROM 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 on 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

9.40 Even if the downstream mining operations of the mining project interests are 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(1)(d)]

Example 9.1: 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 downstream mining operations of the two interests are factually integrated.

139


Geologue Jacqueline Pty Ltd has not made the downstream integration election. Therefore, despite the downstream mining operations being factually integrated, the two interests are not recognised as integrated for the MRRT.

9.41 The downstream integration choice is irrevocable and does not lapse. Once made, the choice will operate to integrate all mining project interests that the miner has, provided that they satisfy the other conditions for downstream integration, including subsequent mining project interests that the miner acquires (provided the subsequent interests also satisfy the other conditions for downstream integration). [Section 255-20]

9.42 While the purchase of additional mining project interests may meet the integration test, they may not necessarily be able to combine.

9.43 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 the latter. Put simply, two mining project interests will be integrated when it meets all the downstream integration conditions, including the making of a valid choice. [Subsection 255-10(1)]

Example 9.1: Integrated on day of choice

Following on from Example 10.10, Geologue Jacqueline Pty Ltd chooses the downstream integration on 27 February 2013. Geologue Jacqueline’s two mining project interests will be integrated with each other from 27 February 2013.

Example 9.2: Choice made in advance of integrated operations

On 1 July 2012, Bowen Integrated Materials Co (BIM Co) holds several mineral development licences (MDLs) in various locations throughout the Bowen Basin. BIM Co is in the process of obtaining production rights in respect of the MDLs. 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 MDLs. 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.

140


Retrospective downstream integration

9.44 There is a transitional rule that 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 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. [Subsection 255-10(2)]

9.45 This transitional rule takes account of the fact that a miner will not have made 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 9.1: 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 (1 July 2012 — 30 June 2013).

Despite having not made the downstream integration choice on 2 May 2010, Miner Co’s interests will be treated as integrated with each other from 2 May 2010 until the miner makes the choice. Once the choice is made, the miner will actually be integrated.


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

9.47 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

141


extent possible. A miner cannot choose to only combine two mining project interests, if there are actually four interests, for example, that can combine.

9.48 Mining project interests (‘constituent interests’) that combine are taken to be a single mining project interest (‘combined interest’) for the purpose of the MRRT Act (except Division 115). [Subsection 115-10(1)]

9.49 The constituent interests are not recognised as a combined interest for the purpose of Division 115. This is to allow the integration provisions to look-through the combined interest and apply in relation to the constituent interests. If the integration rules were to be applied in relation to the combined interest, a combined interest would never cease to be integrated as the mining operations would always relate to the mining project interests, it would not be a question of whether they are integrated.

9.50 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)]

9.51 Combination is not an annual test. It is determined at and from a point-in-time. 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 115-50]

9.52 There are a number of conditions that 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)]

9.53 Integrated mining project interests can only combine if:

• any royalty credits that any of the interests have 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]; and

• any pre-mining loss that any of the interests have (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]; and

• any mining loss that any of the interests have (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

142


allowance for each of the other interests [paragraph 115-10(1)(d) and section 115-30]; and

• if any of the interest has a starting base loss or a starting base asset, then:

– the interest that has the starting base loss or starting base asset existed on 2 May 2010 (or originated from a pre-mining project interest that existed on 2 May 2010) [paragraph 115-10(1)(e) and paragraph 115-35(a)]; and

– all the interests (or pre-mining project interests from which they originated) have been held by the same miner as each other since 2 May 2010 [paragraph 115-10(1)(e) and paragraph 115-35(b)].

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

9.55 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 will have the effect of cancelling those allowance components that otherwise prevent it from combining. [Section 115-15]

9.56 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

9.57 If any of the integrated mining project interests have a royalty credit, they can only combine if all the royalty credits are fully transferable to each of the other interests. [Section 115-20]

9.58 Chapter 6, Allowances, explains what a royalty credit is and when one arises.

9.59 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, 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 is not attributable to the alternative valuation method). [Subsection 48-100(1)]

143


9.60 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)]

9.61 A royalty credit is attributable to the alternative valuation method if it arose for a mining project interest for an MRRT year in which there was an election to use the alternative valuation method for the mining project interest. [Paragraph 48-100(1)(b)]

9.62 If any of the royalty credits arose while the mining project interests were not integrated or they are attributable to the use of 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. [Section 115-15]

9.63 The choice to cancel allowance components to enable combination is discussed below.

Example 9.1: Royalty credits not fully transferable

Miner Co has two mining project interests, one which existed at 1 July 2012 and another 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 previous MRRT years. 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 will be able to transfer royalty credits that arise while the two mining project interests are integrated with each other (see Chapter 6, Allowances).

Pre-mining losses must be transferable to combine

9.64 If any of the integrated mining project interests have 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 all the other integrated mining project interests. [Section 115-25]

9.65 Chapter 6, Allowances, explains what a pre-mining loss is and when one arises.

9.66 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.

144


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

9.68 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 relate to the same type of taxable resource (that is, iron ore or coal), the entities that have the mining project interests are close associates, the pre-mining losses do not exceed the cap and the common ownership test is satisfied. [Sections 83-25, 83-30 and 83-35]

9.69 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 between each of the constituent interests. [Paragraph 115-25(b) and section 115-65]

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

9.71 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. [Section 115-15]


Mining losses must be transferable to combine

9.73 If any of the integrated mining project interests have a mining loss (or would have a mining loss if the MRRT year ended at the combining time) they can only combine if all the mining losses are fully transferable to all the other integrated mining project interests. [Section 115-30]

9.74 Chapter 6, Allowances, explains what a mining loss is and when one arises.

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

145


9.76 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, 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 is not attributable to a period for which there was an election to use the alternative valuation method. [Subsection 93-100(1)]

9.77 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 between each of the constituent interests. [Paragraph 115-30(b) and section 115-70]

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

9.79 A mining loss will be attributable to the alternative valuation method if the mining loss arose for a mining project interest for an MRRT year in respect of which there was a choice to use the alternative valuation method for the mining project interest. [Paragraph 93-100(1)(b)]

9.80 If the common ownership test is not satisfied or any of the mining losses are attributable to the use of 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. [Section 115-15]


Example 9.1: Mining losses not fully transferrable

Miner Co has two mining project interests. Miner Co has always had one of the interests but it only acquired the other interest recently. The second interest that Miner Co acquired has a mining loss for a prior 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.

146


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

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

9.83 If the miner acquires a new mining project interest (which did not originate from a pre-mining project interest that the miner had at that date), despite being integrated and having no starting base losses or starting base assets, the new interest will be unable to combine with an interest the miner did have at 2 May 2010 so long as the old interest has starting base losses or starting base assets. If these mining project interests were able to combine, this would effectively transfer starting base losses from the old interest to the new interest.

9.84 Chapter 7, Starting Base Allowances, explains when a miner has a starting base loss and a starting base asset. [Section 73-20 and Subdivision 73-C]

9.85 Chapter 6, Allowances, explains what a pre-mining project interest is and when a mining project interest originates from a pre-mining project interest.

9.86 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 the interests (or the pre-mining project interests that lead to the interests) existed on 2 May 2010. [Paragraph 115-35(a)]

9.87 This enables all mining project interests 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 9.1: Pre-mining project interest existing on 2 May 2010

Expo Co has an exploration right at 2 May 2010, that 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.

147


Example 9.2: 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 that Digger Co now has derived 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.

9.88 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)]

9.89 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, it is 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 elected to be consolidated for MRRT purposes, the head company will be the miner that has all mining project interests that exist within the group.

9.90 A change of ownership does not necessarily exclude two interest from being combined. Rather, the test focuses on the relationship between the two mining project interests and looks at whether they have always been held by the same miner, regardless of whether the identity of the 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 9.1: Same miner has mining project interests

Miner Co has two mining project interests as 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. CHPP Ltd now has the two interests.

From 2 May 2010 to 20 September 2012, Miner Co had the interests. Then from 1 October 2012 onwards CHPP Ltd had the two interests.

148


Despite different miners having the interests, at all times both interests have been held by the same miner.

Example 9.2: Same miner has not had mining project interests

Head Co is the head entity of a consolidated group for the purpose of income tax. A Co and B Co are subsidiaries of Head Co.

Head Co has not elected to be a consolidated group for the purpose 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.

Example 9.3: Combination in the case of acquisition of a group

Assume the facts from Example 10.20. 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 has a mining project interest, respectively, MPI 4, MPI 5 and MPI 6. Because Mega Co has elected to be consolidated 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 miners.

149


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.

Assume all of the mining project interests have starting base assets with base values.

Mega Co can combine (provided all the other combination conditions are met) 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 — 14 July

2012

15 July 2012 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


150



Upon combination, Mega Co will be left with 3 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.

9.91 If the mining project interests have starting base losses or starting base assets that do not comply with these requirements, the mining project interests will be unable to combine, unless the miner makes a choice to cancel the starting base losses and starting base assets to enable the combination. [Section 115-15]


Choice to combine — cancellation of allowance components

9.93 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.

9.94 The effect of making the choice is that any allowance components not satisfying the conditions outlined above (that is, the allowance components that are otherwise preventing the interests from

151


combining) are cancelled. This includes reducing the base value of starting base assets to zero. [Section 115-15]

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

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

Example 9.1: 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 1 has some mining losses whereas MPI 2 has no allowance components.

MPI 1 has unapplied mining losses for the 2012, 2013 and 2014 MRRT years. The 2013 and 2014 losses are transferable to MPI 2, however, the 2012 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 2012 MRRT year are cancelled. MPI 1 retains the mining losses for the 2013 and 2014 MRRT years.

MPI 1 and MPI 2 combine. The combined interest will therefore inherit MPI 1’s mining losses for the 2013 and 2014 MRRT year.

Effects of combining mining project interests

Inherited history

9.97 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 115-10]

MRRT liability

9.98 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 liable to pay MRRT in relation to the constituent interests. [Section 115-50]

152


9.99 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 7-5]

9.100 The allowance components of the constituent interests are taken to be the allowance components of the combined mining project interest. [Section 115-55]

9.101 Royalty credits that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year. [Subsection 115-55(1)]

9.102 Pre-mining losses that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year. [Subsection 115-55(2)]

9.103 Mining losses that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year. [Subsection 115-55(3)]

9.104 Starting base losses that the combined interest inherits from the constituent interests are aggregated if they relate to the same MRRT year and have had the same starting base valuation method applied (that is, book value or market value). [Section 115-55]

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

9.105 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 a different starting base valuation method 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 way that pre-mining losses and mining losses can be. [Subsection 115-55(5) and section 115-60]

9.106 The aggregated book value starting base losses will be subject to the book value uplift (LTBR + 7 per cent) and the aggregated market value starting base losses will be subject to the market value uplift (CPI). [Section 115-60]

9.107 The starting base losses for the constituent interests that the combined interest is taken to have are not aggregated. Rather, the starting base losses are only aggregated to the extent they relate to the same valuation approach for an MRRT year. [Subsection 115-60(2)]

153


9.108 Where 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 115-60]

9.109 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. [Subsection 115-60(3)]

9.110 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. [Section 115-60]

Example 9.1: Aggregating starting base losses with same valuation method

Miner Co has two mining project interests, MPI A and MPI B. Miner Co elected to use the book value starting base methodology for starting base assets that relate to MPI A and MPI B.

From 1 July 2014, MPI A and MPI B are taken to be a combined interest, MPI AB. At the time of combination MPI A had a $200 starting base loss for the 2012 year and a $500 starting base loss for 2013 year. At the time of combination, MPI B had a $100 starting base loss for the 2012 year and a $200 starting base loss for the 2013 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 2012 year of $300 ($200 plus $100) and a book value starting base loss for the 2013 year of $700 ($500 plus $200).

Example 9.2: Aggregating starting base losses with different valuation methods

Assume all the same facts as for Example 10.22 except this time Miner Co had elected 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

154


the starting base losses. Therefore, MPI AB will have a book value starting base loss for 2012 and 2013 and a market value starting base loss for 2012 and 2013.

In the 2014 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 2014 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, 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 2012 year (attributable to MPI A), $500 book value starting base loss for the 2013 year (attributable to MPI A), $100 book value starting base loss for the 2014 (attributable to MPI A), $100 market value starting base loss for the 2012 year (attributable to MPI B) and $100 of the $200 market value starting base loss for the 2013 year (attributable to MPI B).

Choices

9.111 The downstream integration choice and simplified MRRT choice are both made by a miner and apply to all mining project interests that 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.

9.112 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.

9.113 An alternative valuation method choice made in respect of a constituent interest will have no effect on the combined interest. [Section 115-75]

9.114 The miner can, if it meets the requirements, choose to use the alternative valuation method in respect of the combined interest, however, such an election in relation to a combined interest may result in a mining project split. [Subsection 125-10(3)]

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

9.115 There are special rules for transferring pre-mining losses and mining losses to or from a combined interest. [Sections 115-65 and 115-70]

155


9.116 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.

9.117 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.

9.118 This rule applies regardless of whether a pre-mining loss or a mining loss is otherwise transferable under the general transfer rules. [Subsections 115-65(3) and 115-70(3)]

Example 9.1: Unable to transfer mining losses to combined interest

At the beginning of the 2014 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 2013 MRRT year.

Assuming MPIs 1-4 are factually integrated and do not have any allowance components, they combine from the beginning of the 2015 MRRT 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 2015 MRRT year while MPI 5 makes another mining loss.

The combined interest still has 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 2012 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, MPI 1 — 4.

The common ownership test will be satisfied if the same miner had MPI 5 and each constituent interests from the start of the 2012 MRRT year until the end of 2015 (that is, 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 2013 MRRT year.

Therefore, the 2012 mining loss of MPI 5 cannot be applied in working out the transferred mining loss allowance of the combined interest for the 2015 MRRT year.

156


Application and transitional provisions

9.119 While an application provision is yet to be drafted, Division 115 and Division 255 will both apply to allow for combination and integration of mining project interests in the period 2 May 2010 and 30 June 2012. [To be drafted in the MRRT (CA & TP) Bill 2011]

157

Chapter 10Transfers and splits of mining project interests

Outline of chapter

10.1 This chapter explains when a mining project interest is transferred and when an interest is split. The miner that has a mining project interest after a transfer or split is liable to pay MRRT for that interest.

10.2 The chapter also explains when a pre-mining project interest is transferred and when an interest is split.

Summary

10.3 A mining project interest is the basis upon which a miner’s MRRT liability is determined. The mining project interest is the anchor for 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 the miner to one 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 the miner to one or more other entities.

10.6 A mining project split also happens if:

• the constituent interests of a combined interest cease being integrated with each of the other constituent interests; or

• an election to use the alternative valuation method only applies in relation to part of the mining project interest.

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

159

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

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

10.10 The extent to which the tax history and tax liability of the original mining project interest will be inherited by the new interests is determined by applying the split percentage.

10.11 The split percentage is the percentage that best reflects a reasonable approximation of the market value of the new interests relative to the sum of the market values of all the new interests arising from the split.

10.12 There are similar rules that deal with pre-mining project transfers and pre-mining project splits.

Detailed Explanation

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 one other entity, the new miner. [Subsection 120-10(3)]

10.14 The arrangement will have the effect of transferring the original miner’s entitlement comprising the mining project interest to the new miner. [Subsection 120-10(3)]

10.15 The miner’s entitlement may be a share in the output of an undertaking or a share of the taxable resources. [Section 9-5]

10.16 ‘Arrangement’ has the same meaning as in the ITAA 1997. [Subsection 995-1(1) of the ITAA 1997]

10.17 The mining project transfer may be affected by a sale, sub-lease, gift, or any other means.

160

Transfers and splits of mining project interests

10.18 For the avoidance of doubt, a mining project transfer can occur in the period 2 May 2010 to 30 June 2012.

Effects of a mining project transfer

10.19 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 old miner had; and

• the MRRT liability for the transfer year is payable by the new miner.

Continuation principle

10.20 The effect of the mining project transfer is that the old miner will cease to have the mining project interest and the new miner will start to have the interest.

10.21 The mining project interest that the new miner has after the transfer will be taken to be a continuation of the interest that the old miner had just before the transfer. Because the new interest is taken to be a continuation of the old interest, everything that happened in relation to the original interest is taken to have happened in relation to the new interest. For example, MRRT allowances for the original interest are taken to be MRRT allowances of the new interest. This ensures that the tax history of the original interest is inherited by the new interest. [Subsection 120-10(2)]

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

10.23 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 a transferred mining loss allowance in relation to the interest.

Example 10.1: Inherit ownership history

On 1 July 2012, AlexandraGeo had a mining project interest (MPI 1). On 1 July 2013, 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

161


Resources’ ownership history. When acquired, the new interest has a mining loss for the 2012 MRRT year.

At the end of the 2013 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 2012 or 2013 mining losses for the new interest can be applied as a transferred mining loss allowance for MPI 1.

In relation to the 2012 mining loss, the mining loss can only be applied if the same miner had the new interest and MPI 1 from the beginning of the 2012 MRRT year until the end of the 2013 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 2012 MRRT year (before AlexandraGeo had the new interest). Therefore the common ownership test will not be satisfied in relation to the 2012 MRRT year. It would, however, be satisfied in relation to the 2013 MRRT year.

10.24 Any allowance components for the original interest will be taken to be allowance components for the new interest. All dates that are specific to the allowance components are preserved when they are inherited.

10.25 Allowance components of the original interest are any:

• royalty credits;

• pre-mining losses;

• mining losses; and

• starting base losses.

[Section 300-1]

10.26 That is, a mining loss for the original interest for the 2012 MRRT year will remain a 2012 mining loss for the new interest.

10.27 Once the original interest has been transferred, the original miner will not be able to use any allowance components that have accrued before the date of the transfer as a transferred allowance for another interest.

10.28 If any starting base asset that was held by the original miner in relation to the original interest is, after the mining project transfer, held by the new miner in relation to the new interest, the asset will continue to be a starting base asset in relation to the new interest. The base value of the asset will continue and will be unaffected by the transfer.

162


10.29 A starting base asset valuation method election that the original miner made in relation to the original interest, will continue to apply in relation to the starting base assets of the new interest.

MRRT liability for the transfer year

10.30 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 old miner had the interest. [Subsection 120-10(1)]

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

10.32 If the old 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 a period which is longer or shorter than its normal MRRT year. [Subsection 120-10(4)]

Diagram 10.1: Different accounting periods

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

Mining revenue and mining expenditure

10.34 To enable the new miner to determine the MRRT liability for the new interest for the transfer year, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest will instead be taken to be mining revenue and mining expenditure of the new miner in relation to the new interest. Excluded expenditure for the original interest will remain excluded expenditure for the new interest. [Subsection 120-10(4)]

10.35 The information transfer rules require the original miner to notify the new miner of amounts that are relevant to the mining project interest. [Division 121 in Schedule 1 to the TAA 1953]

163


Choices

10.36 Choices that the original miner made in relation to the original interest will generally continue to apply in relation to the new interest. Once such example is the starting base valuation method choice.

10.37 However, if the original miner made one of the following three choices in respect of the mining project interest for the transfer year, the new miner will not be bound by the choice:

• alternative valuation method choice;

• simplified MRRT method choice; or

• suspension day choice.

[Subsection 120-10(5) and 120-10(6)]

10.38 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. [Subsections 120-10(5) and (6)]

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

10.40 Although a new miner will not be bound if the original miner had chosen to use the simplified MRRT method, the new miner will be affected because the original miner’s choice will have extinguished the allowance components that would otherwise have related to the interest. The new miner will not be able to reconstruct the allowance components, they will remain extinguished.

Example 10.1: Original miner made simplified MRRT choice

Part way through the year, S&S Resources purchases a mining project interest from HC Minerals. Before the transfer, HC Minerals had chosen to use the simplified MRRT method for that year. HC Minerals had made royalty payments in relation to the interest during the pre-transfer part year, but, because HC Minerals chose to use the simplified MRRT method there are no royalty credits in relation to the interest.

When S&S Resources acquires the mining project interest, it does not make the choice to use the simplified MRRT method. There will be no royalty credits in relation to the new interest for the pre-transfer part

164


year, but there will be royalty credits for royalties paid in the period of the year that follows the transfer.

Events happening to the original miner after the transfer

10.41 If an amount of mining revenue or mining expenditure comes home to the old miner after the mining project transfer has occurred and the amount is instead taken to be mining revenue or mining expenditure of the new miner in relation to the new interest. The same applied for allowance components that may be affected by an event that occurs after the mining project transfer. [Section 120-20]

10.42 This rule applies to all the entities who were previously miners in respect of the mining project interest.

Example 10.1: 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 the iron ore before the transfer time.

On 20 February 2013, OldMinerCo supplies the 50,000 tonnes of iron ore to ForeignCo.

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.

NewMinerCo does not receive any amount in respect of this supply.

The mining revenue in relation to the supply of the 50,000 tonnes of iron ore by OldMinerCo to ForeignCo, will be 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 mining revenue.

10.43 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. They are not things that happen to the mining project interest and therefore will not be covered by the continuation rule.

165



Property transferred with the mining project interest

10.45 When property is transferred from the original miner to the new miner as part of the arrangement that affects the mining project transfer, that part of the consideration for the arrangement that represents payment for that property is likely to be mining expenditure of the new miner in relation to the transferred mining project interest [Division 21]. 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 19-50].

10.46 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 for the property and it would also fall to the miner to include the amount recouped by the original miner in the mining revenue of the interest for the year [section 120-20]. This is somewhat circular.

10.47 To prevent such circularity, a special rule exists to deal with these cases [section 120-20]. The intended effect is to cancel out the mining expenditure and the recoupment [subsection 120-20(2)].

Transferred property

10.48 The special rule applies when:

• any property or any kind of 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 respect of the interest.


166


Effect of transferring property

10.49 The effect of transferring such property, is that:

• The original miner is not taken to have received a recoupment [paragraph 120-15(2)(a)]; and

• The new miner is taken to have an amount of excluded expenditure [paragraph 120-15(2)(b)].

10.50 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 the purchase the particular property.

Example 10.1: Transferred property

Ironman Resources has a mining project interest (MPI 1). In 2015, it sells the interest, along with all the property that is 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 were 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.

10.51 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. The new miner inherits the original miner’s use of the 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 may result in a starting base adjustment. [Division 165]

10.52 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]

When a mining project split occurs

10.53 A mining project split is an arrangement that results in the whole or part of a mining project interest being transferred from the miner to one

167


or more other entities [subparagraph 125-10(3)(a)(i)]. Unlike transfers, there will be more than one new interest as a result of a split.

10.54 The arrangement will have the effect of transferring all or part of the original miner’s entitlement comprising the mining project interest to one or more other entities. The entities which have a mining project interest after the split will be the new miners in relation to the respective interests.

10.55 As the original miner may retain part of the interest, it will be a new miner in respect of the part that it retains. [Paragraph 125-10(3)(b)]

10.56 Arrangement has the same meaning as in the ITAA 1997. [Subsection 995-1(1) of the ITAA 1997]

10.57 The arrangement may be effected by a sale, sub-lease, gift, or any other means.

10.58 A mining project split also happens if:

• a the production right to which the mining project interest relates splits [subparagraph 125-10(3)(a)(ii)];

• the constituent interests of a combined interest cease being integrated with each of the other constituent interests [subparagraph 125-10(3)(a)(iii)];

• a choice to use the alternative valuation method only applies in relation to part of the mining project interest [subparagraph 125-10(3)(a)(iv)].

10.59 A mining project interest will split if the production right to which it relates splits. [Subparagraph 125-10(3)(a)(ii)]

10.60 A combined interest will split if the constituent interests cease to be integrated with each of the other constituent interests [subparagraph 125-10(3)(a)(ii))]. 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 Combining Mining Project Interests.

10.61 The circumstances in which a mining project split will occur due to a choice to use the alternative valuation method are discussed in Chapter 8 Small Miners.

10.62 These types of splits do not need an arrangement for the split to take place. As there is no arrangement that transfers the entity to another

168


entity, in most cases, the original miner will retain all the split interests and therefore will be the new miner in respect of the split interest. [Paragraph 125-10(3)(b)]

10.63 For the avoidance of doubt, a mining project split can occur in the period 2 May 2010 to 30 June 2012.

Effects of a mining project split

10.64 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 old miner had; and

• the MRRT liability for the transfer year is payable by the new miner.

Continuation principle

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

10.66 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 that the tax history that is relevant to the original interest is inherited by the new interests to the extent of their respective split percentages.

10.67 If any starting base asset that was held by the original miner in relation to the original interest is, after the mining project split, held, to an extent, by a new miner in relation to a new interest, the asset will continue to be a starting base asset in relation to the new interest. The base value of the asset will continue unaffected by the split.

10.68 A starting base asset valuation method election that the original miner made in relation to the original interest, will continue to apply in relation to the starting base assets of the new interest.

Split percentage

10.69 The split percentage is the percentage that best reflects a reasonable approximation of the market value of the new interest, expressed as a percentage of the sum of the market values of all the new

169


interests arising from the split. The market values of the new interests are calculated immediately after the split. Each new interest will have a split percentage. [Subsections 125-10(7) and (8)]

Example 10.1: Simple split percentage

ACo sells half its entitlement to share in the output of an undertaking in respect of a production right to BCo. After the mining project split, there are taken to be two new interests each of equal size. Therefore, the split percentage for each of the new interests is 50 per cent.

Example 10.2: Complex split percentage

ACo, a miner, holds 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. In this case, the entitlement that ACo sells to BCo cannot be expressed as a fixed percentage, rather 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 (P2) that BCo has is valued at $600 million. The split percentage for ACo’s P1 is approximately 95 per cent and the split percentage for BCo’s P2 will be approximately 5 per cent.

10.5/11.1 = 95 per cent0.6/11.1 = 5 per cent

MRRT liability for the split year

10.70 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 when the original miner had the interest. [Subsection 125-10(1)]

10.71 The old 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, that is, the original miner has retained part of the mining project interest).

10.72 When a mining project split occurs, the tax attributes, including mining revenue, mining expenditure and allowance components, of the mining project interest should disaggregate and be inherited by each of the new interests to the extent of their respective split percentages.

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

170


Mining revenue, mining expenditure and allowance components

10.74 To enable the new miners to determine the respective MRRT liability for the new interests for the split year, amounts of mining revenue and mining expenditure that the original miner had in relation to the original interest will instead be taken to be mining revenue and mining expenditure of the new miner (to the extent of the split percentage) in relation to the new interest. Excluded expenditure for the old interest will remain excluded expenditure for the new interest. [Paragraph 125-10(4)(a) and paragraph 125-10(4)(b)]

10.75 Any allowance components for the original interest will be taken to be allowance components 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. [Paragraph 125-10(4)(c) and paragraph 125-10(4)(d)].

10.76 All the dates that are specific to the allowance components are preserved when they are inherited. That is, a mining loss for the original interest for the 2012 MRRT year, will remain a 2012 mining loss for the new interest.

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

Example 10.1: Applying split percentage to tax attributes

Following on from Example 10.6 above, the split percentage for ACos 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 After the split

Tax attributes P P1 P2

Mining revenue 500 475 25

Mining expenditure 200 190 10Royalty credit (2013) 60 57 3

Royalty credit (2014) 10 9.5 0.5Starting base loss 5 4.75 0.25

Pre-mining loss (2012) 5 4.75 0.25

171


10.78 The information transfer rules requires the original miner to notify the new miners of amounts that are relevant to the mining project interest. [Division 121 in Schedule 1 to the TAA 1953]

Choices

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

10.80 However, if the original miner made one of the following three choices in respect of the mining project interest for the split year, the new miner will not be bound by the choice:

• an alternative valuation method choice

• a simplified MRRT method choice

• a suspension choice.

[Subsections 125-10(5) and (6)]

10.81 After the split, the new miner can determine whether or not it wants to make such choices in respect of the split interests for the split year. [Subsections 125-10(5) and (6)]

10.82 For example, where an original miner has made an alternative valuation method choice and the new miner does not make such a choice, it included in its mining revenue for the split year the raw mining revenue (that is, the amounts unaffected by the alternative valuation method).

10.83 Although a new miner will not be bound if the original miner had chosen to use the simplified MRRT method, the new miner will be affected because the original miner’s choice will have cancelled the allowance components that would otherwise have related to the interest. The new miner will not be able to reconstruct the allowance components, they will remain cancelled.

Events happening to the original miner after the split

10.84 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 interest. The same applies for allowance components that may be affected by an event that occurs after the mining project transfer. [Section 125-20].

172


10.85 This rule applies to all the entities that were previously miners in respect of the mining project interest.

10.86 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. They are not things that happen to the mining project interest and therefore will not be covered by the continuation principle.


Property transferred with the mining project interest

10.88 When property is transferred from the original miner to the new miner as part of the arrangement that affects the mining project transfer, that part of the consideration for the arrangement that represents payment for that property is likely to be mining expenditure of the new miner in relation to the transferred mining project interest [Division 21]. 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 19-50].

10.89 Under inherited history, the new miner is liable for the MRRT for the mining project interest for the whole split year [subsection 125-10(1)]. Therefore, the new miner would have mining expenditure for the property and it would also fall to the miner to include the amount recouped by the original miner in the mining revenue of the interest for the year [section 125-15]. This is somewhat circular.

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

Transferred property

10.91 The special rule applies when:

• any property or any kind of 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

173


• the transferred property gave rise to an amount of mining expenditure for the original miner, or a previous miner, in respect of the interest.


Effect of transferring property

10.92 The effect of transferring such property, is that:

• the original miner is not taken to have received a recoupment [paragraph 120-15(2)(a)]; and

• the new miner is taken to have an amount of excluded expenditure [paragraph 120-15(2)(b)].

10.93 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 the purchase of the particular property.

10.94 Starting base assets that are transferred as part of a mining project split continue to be starting base assets in relation to the mining project interests. The new miner inherits the original miner’s use of the 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 may result in a starting base adjustment. [Division 165]

10.95 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

10.96 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 Winding down and ending of mining project interests.

10.97 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 125-17]

10.98 This special rule recognises that the split percentage is based on market values, which takes into account prospective things, such as future

174


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.

10.99 This is particularly relevant for the interests that are split towards the end of the interest 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)]

10.100 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 the split percentage may be determined to be the most reasonable basis upon which to allocate past liabilities.

Example 10.1: Reasonably allocating previous year’s MRRT liability

Big Miner has a mining project interest (MPI). Throughout its life MPI had 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% for MPI 1 and 1% 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% of the profits of MPI.

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 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

175


rehabilitation tax offset amount for MPI 2 will not be unduly limited by the split percentage.

Pre-mining transfers and splits

10.101 There are similar rules that provide for the transfer and splitting of pre-mining project interests. [Divisions 145 and 150]

10.102 For the avoidance of doubt, pre-mining project transfers and splits can occur in the period 2 May 2010 to 30 June 2012.

Pre-mining transfer

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

10.104 The new pre-mining project interest is taken to be a continuation of the original pre-mining project interest. [Subsection 145-10(1)]

10.105 The new explorer is liable to pay MRRT for the transferred interest for the whole transfer year, although it is less likely that a pre-mining project interest will have an MRRT liability. [Section 145-15]

10.106 If the original explorer chose to apply the alternative valuation method or the simplified MRRT method for the transfer year, the new explorer will not be bound by that choice. The new explorer will be able to choose whether those methods apply to the new interest for the transfer year. [Subsection 145-15(3)]

10.107 A difference between the mining project transfer rules and those for pre-mining project transfer 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.

10.108 The effects of transferring property along with the pre-mining project interest are the same as for mining project interests. [Section 145-17]

10.109 Events happening to the original explorer after the transfer come home to the new explorer. [Section 145-20]

Pre-mining project splits

10.110 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 of more other entities. [Subparagraph 150-10(2)(a)(i)]

176


10.111 A pre-mining project split may also happen if the exploration right that relates to the pre-mining project interest is itself split. [Subparagraph 150-10(2)(a)(ii)]

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

10.113 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. [Subsection 150-5(1)]

10.114 The new explorer is liable to pay MRRT for the transferred interest for the whole transfer year, to the extent of the split percentage, although it is less likely that a pre-mining project interest will have an MRRT liability. [Section 150-15]

10.115 An alternative valuation method choice or a simplified MRRT choice of the original explorer will not bind the new explorer for the transfer year. The new explorer will be able to make its own choice as to whether they should apply. [Subsection 150-15(3)]

10.116 A difference between the mining project transfer rules and those for pre-mining project transfer 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.

10.117 The effects of transferring property along with the pre-mining project interest are the same as for mining project interests. [Section 150-16]

10.118 Events happening to the original explorer after the transfer, 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 150-20]

10.119 The split percentage for pre-mining project interest is worked out on the same basis as it is for mining project interest. [Subsection 150-15(4)]

10.120 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). [Section 150-17]

177



10.121 While an application provision is yet to be drafted, Division 120, 125, 145 and 150 will all apply to transfers and splits that happen in the period 2 May 2010 and 20 June 2010. [To be drafted in the MRRT (CA & TP) Bill 2011]

178

Chapter 11Winding down and ending of 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 interests life. Divisions 130, 135, 155 and 225 are all concerned with things that happen towards the end of an interest.

Summary of new law

11.2 The MRRT recognises that towards the end of an interest’s life the activities of the interest will have changed. From that time on, special rules treat the interest differently.

Suspension day

11.3 The suspension day for a mining project interest is the earliest of the following days:

• the day chosen by the miner (provided commercial production has ceased);

• the day 10 years after commercial production most recently took place; or

• the termination day.

Effects of suspension

Cancellation of allowance components

11.4 From the end of the MRRT year in which the suspension day occurs onwards, a mining project interest will no longer be able to carry forward and uplift allowance components.

179

11.5 The interest will still be able to have allowance components within a year but the components will be cancelled to the extent they are unable to be used for that year.

Rehabilitation tax offset

11.6 An entity will have an entitlement to the refundable rehabilitation tax offset if it has a rehabilitation tax offset amount for one of its mining project interests or pre-mining project interest.

11.7 A miner will have a rehabilitation tax offset amount for a mining project interest if:

• the suspension day for the interest has occurred;

• the miner has incurred upstream rehabilitation expenditure in relation to the interest for the year;

• the expenditure is unable to be applied against mining profit of the interest or another interest; and

• there has been a 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 will be the day no entity has the mining project interest.

Effect of termination

11.9 For a mining project interest and a pre-mining project interest, from the termination day onwards, the last entity to have the interest before it ended is taken to continue 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

11.10 Pre-mining project interests do not have suspension days. They do, however, have termination days.

11.11 The termination day for a pre-mining project interest will be the day no entity holds the pre-mining project interest.

180

Winding down and ending of mining project interests

11.12 The termination day for a pre-mining project interest has the same effects the suspension day does for a mining project interest. That is, from the termination day onwards the pre-mining project interest will be unable to carry forward and uplift allowance components and may have a rehabilitation tax offset amount.


Suspension day

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

11.14 The suspension day for a mining project interest is the earliest of the following days:

• the day chosen by the miner (provided commercial production has ceased);

• the day 10 years after commercial production most recently took place; or

• the termination day.


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

Day chosen by the miner

11.16 A miner may chose the suspension day for the mining project interests, 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)]

11.17 All the general rules for making a choice under the MRRT apply to this choice. In addition, the miner will be required to give its choice to the Commissioner. [Subsection 130-10(4)]

10 years after commercial production

11.18 The suspension day for a mining project interest may be the day occurring 10 years after the most recent day on which commercial

181


production of taxable resources took place from the project area. [Paragraph130-10(1)(b)]

11.19 Commercial production is also a relevant concept in relation to the choice of a suspension day.

11.20 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.

11.21 The factors that must be taken into account are:

• past and current production of coal and iron ore;

• past and current expenditure relating to the upstream mining operations; and

• the extent to which upstream mine equipment has been decommissioned.

[Subsection130-10(3)]

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

• 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.

11.23 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 11.1: Commercial production has ceased

Durpy Limited announced 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

182


mine site rehabilitation plan. The rehabilitation plan covered activities like:

• 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 began on 16 December 2013. The rehabilitation plan also identified the date when commercial production would cease from the Gaullcos coal mine, being 1 September 2014.

From 1 September 2014, the 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, on the termination day of the mining project interest, whichever occurs first.

11.24 Commercial production can cease at a mine well before a mine formally closes and before the site has reached a state where the mining lease has been relinquished.

11.25 In some circumstance ceasing commercial production may only be temporary, or the mine may enter a period of care and maintenance.

Example 11.1: Care and maintenance

Colecoal Resources Limited operates the Pertep coal mine (a mining project interest). The Pertep coal mine produces 1 million tonnes per annum. Due to an economic downturn Colecoal Resources Limited has placed the Pertep coal mine in 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 coal mine remains in a care and maintenance program. This will be the suspension day for the mining project interest.

11.26 If a suspension day has occurred for a mining project interest because the commercial production of taxable resources had ceased for 10 years and the interest recommences commercial production after the suspension day, the suspension day will be taken to no longer apply to the interest. [Section 130-20]

183


11.27 However, recommencing commercial production does not undo the effects of there having been a suspension day. [Paragraph 130-20(1)(b)]

Example 11.1: 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 comprised the following:

• employed 1,000 people;

• operated 500 trucks;

• had operating expenditure of $50 million;

• had $1 billion of capital; and

• produced 10 million tonnes of iron ore per annum.

Iron ore production from the Nanihall iron ore mine steadily declined to 1 million tonnes per annum in 2013. On 24 December 2013, Rexneilad decided to close the mine and began rehabilitation of the mine site.

On 12 May 2024 the world iron ore price tripled and Rexneilad decided to recommence mining. By the end of that year, Rexneilad:

• employed 500 people;

• operated 250 trucks;

• had operating expenditure of $40 million;

• had produced 5 million tonnes of iron ore.

By the end of 2025, production had increased to 15 million tonnes.

On 8 December 2026, iron ore prices returned to long term averages and Rexneilad stopped producing iron ore and restarted the mine site rehabilitation works.

Rexneilad Resources, after taking into account all the relevant factors including past production, expenditure and use of mining equipment, determines that commercial production did cease (sometime on or before 24 January 2013). Commercial production then recommenced sometime during the period 12 May 2024 and 8 December 2026. Commercial production ceased for a second time on 8 December 2026.

As 10 years elapsed between commercial production first ceasing and commercial production recommencing, a suspension day for the

184


interest will have occurred. When commercial production recommences the suspension of the interest will be lifted but that will not alter the fact that the interest had a suspension day for a period of time.

Termination day

11.28 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]

11.29 The concept of a termination day is discussed in further detail below, under the heading ‘Termination day’. Generally it will be the day on which the undertaking or the production right giving rise to the interest no longer exists.

Effect of suspension

11.30 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.

11.31 First, allowance components can no longer be carried forward and uplifted and, second, rehabilitation tax offsets may be available.

Cancelling allowance components

11.32 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 the allowance component.

11.33 The suspension day signals a new phase of a mining project interest, that is, the beginning of the end (although the suspension day may also be the day the interest ends, that is, the termination day).

11.34 From the suspension day onwards, the mining project interest will be less likely to have mining profits against which the allowance components can be applied.

11.35 From the suspension day, allowance components of the mining project interest will no longer be carried forward and uplifted. They will be cancelled at the end of each MRRT year. [Section 130-15]

11.36 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 its own or that of a related mining project interest.

185


11.37 In the year in which the suspension day occurs, the mining project interest will get the chance to use all its allowance components, being those carried forward from a previous year and those that have arisen in the current MRRT year. The interest may use the allowance components in an allowance to be applied 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 then cancelled, that is they will not be carried forward for use in a future year. [Paragraph 130-15(a)]

11.38 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 for that year will be cancelled and cannot be carried forward. [Paragraph 130-15(b)]

11.39 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.

11.40 The interest would continue to exist and the miner would still be a miner that is liable to pay the MRRT. A mining project interest will still be able to accrue allowances 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 revenue or transferred for use against another’s mining revenue) 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 11.1: Cancellation of allowance components

Miner A has two mining project interests, MPI 1 and MPI 2. 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 the mining losses. Therefore, MPI 1 transfers $40 million of the losses to MPI 2 for use as a transferred mining loss allowance.

MPI 1 has $30 million of mining losses that cannot be applied for the year. These mining losses are cancelled.

186


Rehabilitation tax offset

11.41 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.

11.42 Throughout the life of a mining project interest, rehabilitation expenditure, to the extent it relates to upstream mining operations, is mining expenditure that will be deductible [section 21-20]. If mining expenditure exceeds mining revenue, a mining project interest makes a mining loss for an MRRT year [section 63-100]. Therefore a mining loss represents mining expenditure, some of which may be attributable to rehabilitation expenditure.

11.43 While the rehabilitation expenditure is just as necessary to the interest as other upstream mining operations, given the time at which rehabilitation expenditure is frequently incurred, there is less likelihood that the interest will have mining revenue to apply the expenditure against. To recognise this, a miner may be entitled to a rehabilitation tax offset.

Entitlement to a rehabilitation tax offset

11.44 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 is determined with reference to the rehabilitation tax offset amounts for each relevant mining project interest. [Section 225-10]

11.45 A miner will only have an entitlement to the rehabilitation tax offset for an MRRT year if:

• it is, or has been, liable to pay MRRT for any MRRT year; and

• it has a rehabilitation tax offset amount for a mining project interest.

[Subsections 225-10(1) and (2)]

Amount of a rehabilitation tax offset

11.46 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)]

187


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

11.48 The offsets that are taken into account are any:

• rehabilitation tax offsets for a previous year [subparagraph 225-10(3)(b)(i)]; and

• low-profit offset the miner is entitled to for the current year [subparagraph 225-10(3)(b)(ii)].

11.49 This limits the miner’s ability to claim a refundable tax offset if the miner has no liabilities (in the current or previous years) which have not been previously offset.

11.50 The rehabilitation tax offset will reduce 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 liabilities) [subsection 225-25(2) and subsection 225-25(3)]. Therefore, the rehabilitation tax offset is a refundable tax offset.

Rehabilitation tax offset amount for a mining project interest

11.51 A miner has a rehabilitation tax offset amount for a mining project interest for the 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)];

• the miner incurred rehabilitation expenditure [paragraph 225-15(1)(b)]; and

• the miner has had a mining loss relating to the current year cancelled as a result of the suspension day having occurred [paragraph225-15(1)(c)].

11.52 The rehabilitation tax offset amount 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). [Subsection 225-15(3) and subsection 225-15(4)]

188


11.53 This limits the miner’s ability to have a rehabilitation tax offset amount for the mining project interest greater than the MRRT liabilities that relate to the interest.

Upstream rehabilitation expenditure

11.54 The rehabilitation expenditure that can give rise to a rehabilitation tax offset amount comprises any expenditure on rehabilitating the project area or any other area of land affected by an upstream activity.

11.55 To be upstream rehabilitation expenditure the expenditure must be:

• incurred by the miner and 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 21-23(2)(f) and 21-23(2)(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 11.1

ReakesFox Resources Limited intends to close down the Surajeeve iron ore mine (a mining project interest). A community consultation program for the rehabilitation project commenced when the closure was first announced in February 2015. The announcement was accompanied by briefings for the Demus-King River Shire Council, the Constable Consultative Group, employees, local media, Government departments and other stakeholders.

The costs associated with conducting the briefings would be relevant rehabilitation expenditure, to the extent they 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, Mining Expenditure.

189


Allowable rehabilitation expenditure

11.58 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)].

11.59 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 11.1: Allowable rehabilitation expenditure

Lyon Resources has a mining project interest that has had a suspension day. For the 2018 MRRT year, the miner incurred $27 million on upstream rehabilitation expenditure. The interest has a $50 million mining loss for the year. It is able to transfer $10 million to a related interest but it has a $40 million mining loss for the year that it is unable to use. The $40 million mining loss is cancelled. However, 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).

190


Diagram 11.2: Calculating the rehabilitation tax offset

Termination

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

11.61 The most obvious time that no entity will have an interest is when there is no production right. However, not having an undertaking may also give rise to no entity having a particular mining project interest.

Example 11.1: 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.

191


11.62 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.

11.63 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)]

No termination day

11.64 A termination day does not occur if:

• there is a change to, or renewal of, the production right; and

• there is a mining project transfer or mining project split.

[Section 135-10 and section 135-15]

Change to, or renewal of, the production right

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

11.66 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.

11.67 When there is a change to, or renewal of, the production right that relates to the mining project interest, the change or renewal will not result in a termination day, provided it does not result in the mining project interest covering an additional area. [Section 135-10]

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.

11.69 The additional area will not form part of the mining project interest and it will form part of a different mining project interest. [Subsection 135-10(2)]

192


Example 11.1: Additional area

RTIG Co has a mining project interest in respect of a production right. In 2014, the production right was altered to include a small area adjacent to the production right.

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

Mining project transfer and mining project splits

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

Effect of termination

11.71 Even though a mining project interest has had a termination day, the MRRT will still operate 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 135-20(1)]

11.72 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 135-20(2)]

11.73 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.

11.74 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 should still be mining revenue despite the interest having ended. All royalties incurred in respect of those resources should also be recognised. Similarly, mining expenditure that is incurred in carrying on mining operations for the interest after the termination day should be

193


recognised even if the termination day has occurred for the interest at the time the expenditure is incurred.

11.75 The miner may still have a rehabilitation tax offset amount in respect of the mining project interest after the termination day for the interest.

11.76 One aspect of the MRRT that does not operate in the same way is starting base. If there has been a termination day for a mining project interest, a starting base asset is no longer able to be a starting base asset in relation to that interest [subsection 135-20(3)]. This is the case regardless of the fact that the asset is still being used in respect of the interest.

11.77 While the asset is taken not to be a starting base asset in relation to the interest which has the termination, the asset can still be a starting base asset in relation to other mining project interests.

Example 11.1: Starting base assets used after termination day

South Miner Co has two mining project interests (MPI 1 and MPI 2). The production right in respect of MPI 1 ends, therefore there is a termination day for MPI 1. MPI 2 continues.

There is a truck which has been used 50:50 in MPI 1 and MPI 2. The truck is a starting base asset in respect of both interests. After the termination day for MPI 1, the truck continues to be 50 percent used in respect of upstream rehabilitation for the project area for MPI 1. Despite the truck being a starting base asset and being used in respect of MPI 1, the truck is taken not to be a starting base asset in respect of MPI 1. Therefore, South Miner Co will be unable to have a starting base loss allowance for MPI 1.

South Miner Co will still have a starting base loss allowance in respect of the truck for MPI 2.


11.78 Like mining project interests, there are special rules to deal with the operation of the MRRT in respect of pre-mining project interests towards the end of the interest.

11.79 In principle, the rules for pre-mining project interests largely mirror those for mining project interests, however, there are some differences.

194


Suspension day

11.80 There will be 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 interests, as such interests would be unable to satisfy the commercial production threshold.

11.81 Therefore, cancellation of allowance components and access to the rehabilitation tax offset, which are the effects of a suspension day for a mining project interest, will take effect for pre-mining project interests from the termination day.

Termination day

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

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

11.84 Similar to the rules for termination of mining project interests, a termination day will not occur for a pre-mining project interests if:

• there is a change to, or renewal of, the exploration right; or

• there is a pre-mining project transfer or split.

[Section 155-10 and section 155-15]

Change to, or renewal of pre-mining project interest

11.85 A termination day does not occur if there is a change or renewal of the exploration right to which the pre-mining project interest relates. [Section 155-10(1)]

11.86 If the varied or renewed production right results in the pre-mining project interest covering an additional area, it will need to be determined whether that additional area is insignificant.

Insignificant additional area

11.87 ‘Insignificant’ takes its ordinary meaning. In determining whether an additional area is insignificant, the additional area should be taken to include all previous additional areas that have resulted from changes to, or renewals of, the exploration right. This will require adding together all the additional areas and assessing whether, taken together,

195


they constitute an insignificant change to the area covered by the original exploration right. [Subsection 155-10(3)]

Example 11.1: Determining insignificance of an additional area

RTIG Co has a mining project interest in respect of a production right. In 2014, the production right was altered to include a small area adjacent to the production right (the area in blue).

There have been a number of changes to the exploration right over the past 12 months (the bits in red). When considering whether the latest addition is insignificant, all the other previous additions come into consideration.

While the most recent addition to the area may be insignificant, that is not the test. The test requires all the previous additional areas to be added together and assessed as to whether, taken collectively, they constitute an insignificant change.

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

11.89 However, if the additional area is determined to be a not insignificant area, that additional area that is the subject of the most recent change or renewal will form part of a different pre-mining project interest. [Paragraph 155-10(2)(b)]

11.90 The insignificant area is only relevant to changes to pre-mining project interests (not mining project interests). The insignificant area test

196


seeks to recognise two things. First, that alterations of an insignificant nature are frequently made to exploration rights (as distinct from mining project interests). Such changes should not result in new pre-mining project interests. Second, that pre-mining project interests do not give rise to starting base loss allowances and therefore the risk of insignificant changes to the exploration right resulting in the opening up of otherwise quarantined allowance components is relatively low.

Pre-mining project transfer and pre-mining project splits

11.91 A pre-mining project transfer or pre-mining project split does not result in a termination day for the pre-mining project interest [section 155-15]. There will be a continuation of a pre-mining project interest if it is subject to a transfer or split. [Section 145-10 and section 150-10]

Effects of termination

11.92 Like mining project interests, a pre-mining project interest will be taken to continue after the termination day. [Section 155-20]

11.93 For the most part, the MRRT will continue to operate in respect of the pre-mining project interest in the usual way. There are some exceptions.

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

• will have all its allowance components cancelled [section 155-25]; and

• may have a rehabilitation tax offset amount [section 225-10].

11.95 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 or uplifted but the miner may be entitled to rehabilitation tax offset amounts for the interest.

197

Chapter 12Pre-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 interests in Division 140.

Summary of new law

12.2 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 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. The treatment of those pre-mining profits is explained in more detail below.

12.3 Other aspects of the MRRT law which will apply to pre-mining project interests in the same way they apply to mining project interests include the following:

• royalty credits and allowances (see Chapter 6);

• low profit offsets (see Chapter 8);

• rehabilitation tax offsets (see Chapter 11);

• non-cash benefits, currency translation and substituted accounting periods (see Chapter 13);

• valuation principles (see Chapter 14); and

• anti-profit shifting and the anti-avoidance rules (see Chapter 17).

12.4 Other rules in the MRRT have been specially adapted to treat pre-mining project interests in a similar way to mining project interests.

• Pre-mining expenditure and revenue arises for a pre-mining project interest in a similar way to the mining expenditure

199

and revenue that arises for a mining project interest. (See Chapter 6 and below).

• Pre-mining losses can arise for a pre-mining project interest in a similar way to the losses that arise for a mining project interest. 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 extent of the losses that can be transferred is capped). (See Chapter 6).

• A starting base can arise in relation to a pre-mining project interest that existed on 2 May 2010 in the same way it arises in relation to a mining project interest. However, the starting base does not begin to produce starting base losses before a mining project interest is originated from the pre-mining project interest. A further difference is that when applying the market value approach to a mining project interest, 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 a pre-mining project interest, an entity can instead choose to work out the base value of its starting base assets by using a ‘look-back approach. (See Chapter 7).

• A pre-mining project interest is taken to end, transfer and split in a similar way to a mining project interest. (See Chapters 10 and 11).

12.5 Finally, there are some aspects of the MRRT law for which there is no equivalent treatment for pre-mining project interests. For instance, a pre-mining project interest cannot combine with another pre-mining project interest (nor with a mining project interest).


Treatment of pre-mining profits

12.6 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.

12.7 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 7-5 and 140-10]

200


12.8 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 7-5 and 140-10]

12.9 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 53-40]

12.10 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]

12.11 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 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)].

12.12 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.

12.13 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

201


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)];

• it is integrated with mining project interests it could not integrate with as a pre-mining project interest [paragraph 140-10(2)(e)]; and

• its royalty credits can become transferred royalty credits for another interest (because transferred royalty credits can only arise for interests that are integrated) [subsection 140-10(3)].

12.14 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

12.15 In the MRRT year that a mining project interest originates from a pre-mining project interest, the year’s pre-mining profit 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]

12.16 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 12.1: 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 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 the 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. It then works out its mining profit

202


for the second half of the year and adds it to the pre-mining profit to reach the interest’s total mining profit for the year. 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.

203

Chapter 13Adjustments

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 MRRT is no longer appropriate (Division 160); and

• starting base losses (and in some cases, mining revenue) when a starting base asset ceases to be part of a miner’s starting base (for example, because the miner disposes of it) (Division 165).

Summary of new law

Mining adjustments for changes in circumstances

13.2 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.

13.3 In other words, an adjustment applies to the extent that the arising or 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.

13.4 The main case in which the rules will apply is to ensure 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 the change in the extent to which the asset is used in the upstream mining operations of the mining project interest.

205


Starting base adjustments

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

• stops holding a starting base asset;

• stops using a starting base asset in the upstream mining operations; or

• has not used a starting base asset in the upstream mining operations and expects never to so use it.

13.6 In these cases, the termination value of the asset is compared with its adjustable value (which is its base value less the 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.


Mining adjustments for changes in circumstances

When does a mining adjustment arise?

13.7 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 these expectations are revised, or the expected circumstances do not eventuate or 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)]

13.8 The most common example of this will be 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. [Subsection 160-10(3)]

13.9 Under the general mining expenditure rule (section 21-20), 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. Accordingly, under the MRRT, the

206

Adjustments

extent to which an expense is included in a miner’s mining expenditure may depend on that miner’s expectation about future circumstances in relation to that expense.

Example 13.1: Change in extent to which asset 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 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 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 both 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 included in its mining expenditure. The second mining project interest has a mining adjustment in relation to the non-inclusion of any amount of the purchase price in its mining expenditure.

Example 13.2: Change in extent to which asset relates to excluded expenditure

Dheera 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 (under section 21-65).

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 non-inclusion of any amount of the purchase price in its mining expenditure.

207


Example 13.3: 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 disappears 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.

What is the amount of the mining adjustment?

13.10 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)]

13.11 For example, where 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 13.1: 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% in the upstream mining operations of a mining project interest for each of 5 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 5 years. As a result, the extent to which the expenditure relates to the interest increases to 48 per cent. 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?

13.12 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

208

Adjustments

taken into account in working out the original amount of mining revenue, mining expenditure, pre-mining revenue, or pre-mining expenditure. 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 13.1: Effect of mining adjustments

If the original amount was an amount included (or not

included) in:

... and if the circumstance or event was taken into

account in working out the original amount, that

amount would:

The mining adjustment is included in:

mining revenue for a mining project interest

increase mining revenue for that interest

mining revenue for a mining project interest

decrease mining expenditure for that interest

mining expenditure for a mining project interest

increase mining expenditure for that interest

mining expenditure for a mining project interest

decrease mining revenue for that interest

pre-mining revenue for a pre-mining project interest

increase pre-mining revenue for that interest

pre-mining revenue for a pre-mining project interest

decrease pre-mining expenditure for that interest

pre-mining expenditure for a pre-mining project interest

increase pre-mining expenditure for that interest

pre-mining expenditure for a pre-mining project interest

decrease pre-mining revenue for that interest

Example 13.2: Mining adjustment which increases mining expenditure

Continuing example 13.4 above, 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 is included in mining expenditure.

209


13.13 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 chapter 6. Broadly speaking, the mining project interest is taken to be a continuation of the pre-mining project interest so it is appropriate that any adjustment that would have arisen for the pre-mining project interest is instead attributed to the mining project interest. For this reason, where a mining project interest has originated from the 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

13.14 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)]

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

Example 13.1: Accounting for previous mining adjustments

Continuing Example 13.5 above, 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 5 years. As a result, the extent to which the expenditure relates to the interest increases to 78 per cent. These circumstances would have given rise to a $38 million deduction if they formed part of the circumstances in MRRT year 2 rather than the $8 million deduction discussed in Example 13.5. The mining adjustment now made is the $30 million not yet recognised, and since this would have increased the year 2 amount of mining expenditure, it is included in mining expenditure for MRRT year 3.

13.16 The amount of the mining adjustment can exceed the original amount [subsection 160-10(4)]. Indeed, the effect of an adjustment can be to reduce the original amount below zero. This will occur when, for example, an original amount was included in mining revenue and the change in circumstances are such that an amount would have instead been included in mining expenditure had they been known at the time of the original amount [subsection 160-15(4)].

210

Adjustments

Example 13.1: Mining adjustment that reduces the original amount below zero

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 on a mining project interest for each of 5 years, after which the machinery will be sold. On this basis, $40 million (the original amount) 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 on the interest increases to 100 per cent, and the miner expects that extent of use to continue for the rest of the 5 years. As a result, the extent to which the expenditure relates to the interest increases to 88 per cent. These circumstances would have given rise to an $88 million deduction if they formed part of the circumstances in MRRT year 1. The mining adjustment is the $48 million difference, and since this would have increased the year 1 amount of mining expenditure, it is included in mining expenditure for MRRT year 2.

In MRRT year 3, the miner stops using the machinery on the interest, choosing instead to employ it elsewhere, and the miner expects that situation to continue for the rest of the 5 years. As a result, the extent to which the expenditure relates to the interest decreases to 28 per cent. These circumstances would have given rise to $12 million of mining revenue if they formed part of the circumstances in MRRT year 2. The adjustment is the difference between the $48 million deduction actually claimed in MRRT year 2 and the $12 million of mining revenue that would have been recognised if the new circumstances were known at that time. The mining adjustment is the $60 million ‘difference’, and since this would have ‘reduced’ the year 2 amount of mining expenditure (turning it into an amount of revenue), it is included in mining revenue for MRRT year 3.

Starting base adjustments

13.17 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

13.18 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 an asset. [Paragraph 165-5(1)(a)]

13.19 A starting base adjustment event also occurs when a miner stops using a starting base asset in carrying on upstream mining operations

211


relating to the mining project interest and expects never to use it again in this way. [Paragraph 165-5(1)(b)]

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

13.21 A starting base adjustment also applies 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 expects never to so use it. [Paragraph 165-5(1)(c)]

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

• is a right or an interest that constitutes a mining project interest; or

• is transferred with such a right or interest. [Subsection 165-5(2)]

13.23 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.

Starting base adjustment amounts

13.24 If a starting base adjustment event occurs for a starting base asset:

• where the asset’s adjustable value exceeds its termination value — that excess is included in a starting base loss [subsections 165-10(2), 165-25(1) and (2)];

212

Adjustments

• where the 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) [subsections 165-10(1), 165-25(3) and (4) and section 165-30].

Adjustable value

13.25 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

13.26 The termination value of a starting base asset (essentially, what was received under a starting base adjustment event) is:

• where the miner has received or is taken to have received an amount — that amount; or

• where 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

13.27 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.

13.28 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.

13.29 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.

13.30 When a miner’s liability to pay an amount to another entity is reduced (or terminated) because of a starting base adjustment event, this

213


economic benefit is included in the asset’s termination value for the miner. [Subsection 165-10(5)]

13.31 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 13.1: Apportioning the amount received for several starting base assets

Bell Resources receives $1 million for the sale of two starting base assets. The $1 million will be apportioned between the termination value 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

13.32 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 13.1: 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 Toni Co. formed the expectation that it would never use the asset again.

13.33 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.

13.34 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 a result of real bargaining.

214

Adjustments

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

13.35 Alternatively, the termination value will instead be:

• 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 received or taken to have been received. [Subsection 165-10(4)]

13.36 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 13.1: 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.

13.37 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 13.1: Reduced mining expenditure arising because of a starting base adjustment

Continuing example 13.10 above, 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

13.38 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 [section 165-15]. The reduction is:

215


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

13.39 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.

13.40 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 73-55(3)]; or

• that would be excluded expenditure if it were an amount that was incurred on or after 1 July 2012 [subsection 73-55(4)].

Starting base adjustment events for part of the single starting base asset

13.41 There is a special rule to deal with a starting base adjustment event that would apply to one of the assets that is taken to be part of the single starting base asset (under section 73-27). This rule is not limited to disposals, but would apply whenever there is a starting base adjustment event in relation to a constituent asset of the single starting base asset. The rule applies the following steps:

• Step 1: Reduce the base value of the single starting base asset by the termination value [subsection 165-35(2)].

• Step 2: Any excess remaining after step 1 should be applied to reduce any starting base losses of the mining project interest for the MRRT year or any earlier year (in the order in which the losses arose) [subsections 165-35(3) and (4)].

• Step 3: Any excess remaining after step 2 should be included in the mining revenue of the mining project interest [subsection 165-35(5)].

Partial disposals of starting base assets

13.42 Further rules are also being developed to deal with partial disposals of starting base assets after the start time. In summary, the rules are expected to apply as follows:

216

Adjustments

• If a miner stops holding part of a starting base asset, it is taken to have stopped holding the whole asset and started to hold the part it retains.

– There is a starting base adjustment event in relation to the disposed part of the asset.

– There is no starting base adjustment event in relation to the retained part, which continues to be a starting base asset of the miner in relation to the mining project interest.

• The termination value of the disposed part is equal to the amount worked out under existing rules as if the references in those rules to a ‘starting base asset’ instead referred to that part.

• The adjustable value of the part of the asset that the miner disposes of is a reasonable proportion of the original asset’s adjustable value at the time of the event.

• The base value of the part of the asset that the miner retains is equal to:

– the adjustable value of original asset’s adjustable value at the time of the event; less

– the adjustable value attributed to the part of the asset that the miner disposes of.

Example 13.1: Partial disposal of a starting base asset

Maher and Paher Co. (MPC) uses a starting base asset to the extent of 10% in the upstream mining operations of its mining project interest. The base value of the asset at the beginning of the MRRT year was $10 million and its remaining effective life was 10 years. Halfway through the year, MPC sold 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 ($9.5 million x 75%). The termination value of the 75 per cent interest is $6 million (being the sale price). So, there is a positive starting base adjustment of $1.125 million.

The base value for the remaining 25 per cent interest is $2.375 million ($9.5 million x 25%).

217


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 ½ x $1 million = $50,000

• For the use of the 25% interest in the second half of the year: 10% x ½ x $250,000 = $12,500.

218

Chapter 14Valuations

Outline of chapter

14.1 This chapter describes:

• the valuation principles in Division 170 that are to be applied in working out the value of assets, rights and other things for the purposes of the 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.

Summary

Valuation principles

14.2 An MRRT taxpayer may need to value certain assets and rights in order to determine their MRRT liability.

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

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

14.5 To this end, valuations are required to comply with a set of principles, which recognise that their reasonableness depends on:

• the consistent application of appropriate assumptions;

• each thing that is to be valued being counted exactly once; and

219

• avoiding the use of hindsight when estimating the value of something as at a particular point in time.

Alternative valuation method

14.6 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.

14.7 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 tonnes (not counting the resources used in the vertically integrated operation), they can also use it for the rest of their mining project interests.

14.8 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-taxing point (downstream) operating costs, depreciation on its downstream assets and a return on its downstream capital. The rate of return is the same as the rate used to uplift carried forward mining losses and royalty credits (that is, LTBR + 7 per cent).


Valuation principles

When the valuation principles apply

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

14.10 An obvious example is the way the value of certain starting base assets is used to determine the starting base loss of project interests which existed on 1 May 2010.

14.11 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.

220

Valuations

14.12 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)]

14.13 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, whichever of the market value or book value approaches is chosen by the taxpayer. [Paragraph 170-5(3)(a)]

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

14.15 For example, the Alternative Valuation Method in Division 175 and 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 in section 175-55 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 in section 19-25 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

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

14.17 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)]

Sub-principles

14.18 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.

14.19 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)]

221


14.20 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 at a particular 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.

14.21 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.

14.22 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.

14.23 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.


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

Example 14.1: 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

222

Valuations

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.

14.25 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 with reference to information available at the time to which the valuation relates.

Example 14.1: 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 to service major deposits nearby is built. 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 Resource’s 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 the information in this example, 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 would have on the value of the project interest.

It would not be valid, though, 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.

223


14.26 The second sub-principle states that the sum of the values of all things in a set must equal the value of the set. [Subsection 170-10(3)]

14.27 This is intended to ensure each thing that is being valued is counted exactly once.

14.28 A common application of this principle 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.

14.29 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 that does exist from being recognised, but they do insist that it only be counted once.

Example 14.1: 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 determined to be $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.

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

14.31 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.

14.32 However, the corollary of the principle is that a difference in value between two assets must be explainable by differences in their nature or circumstances.

14.33 Essentially this is another expression of the requirement for valuations to be reasonable when considered alongside other related valuations. Something that is not relevant to the value of a particular

224

Valuations

asset, such as whether it operated upstream or downstream of the taxing point in a particular period, should not influence any estimate of the asset’s value.

Example 14.1: 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 then unloading it. While five of the trucks operate mostly upstream of the taxing 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 explanation 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 taxing point was greater than the others, because the location of the taxing point is not relevant in determining the value of an asset.

14.34 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.

14.35 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.


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

14.37 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.

225


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

14.39 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)]

14.40 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 be compelled to employ.

14.41 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 14.1: 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 Co makes an assumption regarding 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 Co. 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.

14.42 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)]

226

Valuations

14.43 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 14.1: The relationship between assumptions must be taken into account

In determining the market value as at 1 May 2010 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 ¥.

14.44 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)]

14.45 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.

227


14.46 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 14.1: 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 at the same time other assets relating to this project interest.

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).

14.47 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.

14.48 The sub-principle states that each valuation done for the MRRT after 1 May 2010 should be reconcilable with each other valuation 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)]

14.49 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 if it were to be considered in isolation.

14.50 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.

14.51 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.

228

Valuations

Example 14.1: Two valuations can be reconcilable without being the same

In 2012-13, Buzz Coal 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.

14.52 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.

14.53 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 14.1: 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 taxing point (so its value is used directly in calculating the starting base) and the crusher forms part of its downstream mining operations.

Buzz Coal Co 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

229


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.

14.54 The sub-principle is limited to those valuations made after 1 May 2010. This ensures that valuations made since the Government’s resource tax reforms are covered by this principle, but without extending back to cover all previous valuations which may have been done in relation to a project interest before the announcement of the MRRT.

Alternative valuation method

14.55 It can sometimes be difficult to apply the normal methodologies for working out what part of the consideration for selling resources relates to the condition and location of the resources at their taxing 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 generating.

14.56 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 method is a choice

14.57 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)]

14.58 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.

230

Valuations

14.59 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 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 2 to the MRRT(CA&TP) Bill 2011, item 4, subsection 119-5(3)]

14.60 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 2 to the MRRT(CA&TP) Bill 2011, item 4, section 119-10]

Effect of making the choice

14.61 If a miner makes the choice 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

14.62 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.


14.63 If a miner’s group production is 10 million 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.

14.64 If a single mining project interest uses some resources in such a vertically integrated transformative operation and supplies some resources directly, a miner whose group production is 10 million tonnes or more would have to split the interest into two mining project interests if it wanted to make the choice for the vertically integrated part. This issue is discussed later.

231


Group production

14.65 A miner’s group production includes its production of taxable resources across all its mining project interests and those of all the entities connected to, or affiliated with, it. [Subsection 175-15(1)]

14.66 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.

14.67 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)]

14.68 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)]

14.69 Resources used by the miner in a vertically integrated transformative operation that existed before 2 May 2010 do not count towards the 10 million tonnes. The effect is that, instead of just counting its overall production for the year, a miner with such a vertically integrated operation has to first deduct the tonnes put through the vertically integrated part of the operation to work out if it comes within the 10 million tonne threshold. Miners with vertically integrated operations could therefore come within the threshold even though their overall production for the year exceeds 10 million tonnes. [Paragraph 175-15(2)(b)]

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)]

232

Valuations

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. 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 taxing point in such operations, because of the extent of capital investment after the taxing 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 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

233


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. It would not be a sufficient test that an element was or was not used in the operation at that date. For instance, it would be reasonable to conclude that a mine owned at 2 May 2010 was part of the operation at that time, even if it was not being used in the operation at that time, so long as it was contemplated at that date that it could be used in the operation in substitution for the mine that was being used. This might be important if the usual mine became temporarily unavailable as a result of a natural disaster or an industrial dispute or if the usual mine had a shorter expected life than the other elements of the vertically integrated operation.

14.80 Changing components of each of the two elements could also raise difficult problems. Replacement of buildings, plant and staff would probably not change the operation, even if upgrades were involved, but significant expansion of capacity would probably change the operation.

Example 14.1: Power generating operation

Replacing a power station’s generator in an operation that mines the coal and generates the electricity would be unlikely to change the operation but adding a new power station, or extra generating capacity to the existing power station, would mean it was no longer the same operation.

Example 14.2: Steel making operation

Freiheit Resources owns two iron ore mines at 2 May 2010, Old mine 1 and Old mine 2. It uses the ore from Old mine 1 to supply its steelworks; the ore from Old mine 2 is exported. In 2011, Freiheit acquires another mine, New mine, the ore from which is also exported.

In 2015, the mining lease for Old mine 1 is renewed. The renewal does not change Freiheit’s vertically integrated operation. The 2 May 2010 elements of the operation are still intact.

In 2018, the ore from Old mine 1 runs out and it is closed down. Freiheit could use ore from Old mine 2 or from New mine in its steelworks. If it uses ore from New mine, the vertically integrated operation would no longer be the same operation as the one at 2 May 2010 because New mine was not part of that operation at 2 May 2010. If it uses ore from Old mine 2, it would still be the same operation if Freiheit could show that its plans as at 2 May 2010 were to use ore from Old mine 2 when ore was no longer available from Old mine 1.

234

Valuations

Vertically integrated transformative operations for miners with 10 million tonnes or more

14.81 If a miner produces less than 10 million tonnes of taxable resources, it can choose the alternative valuation method for each of its operations.

14.82 However, if it produces 10 million tonnes or more in a year, it can only choose the alternative valuation method for its vertically integrated transformative operations.

14.83 If such a miner only transforms some of the taxable resources into something else (for example, if some of the operation’s taxable resources are sold without being transformed), the miner will have to split that mining project interest into two interests: one for the vertically integrated part and one for the rest. How to split a mining project interest is discussed in Chapter 10. [Subsections 175-50(1) and (2)]

14.84 Special quarantining rules prevent the mining losses and royalty credits from vertically integrated projects being transferred to other projects. [Paragraphs 48-100(1)(b) and 93-100(1)(b)]

14.85 Lower than normal resource values could be generated by the alternative valuation method (because the prescribed rate of return on downstream capital could be too high for a particular operation). Splitting the mining project interest into two and quarantining the mining losses and royalty credits from the vertically integrated part of the interest ensures that mining losses and royalty credits available because of those low values cannot be used to shield the mining profits of another project, limiting the effects of any inappropriately low resource values.

14.86 A mining project interest that is split in this way could re-combine into a single mining project interest in a later year if the two parts are no longer subject to any rules that would require their continued separation (such as having unused royalty credits or mining losses from previous years) — see Chapter 9. [Subsection 175-50(3)]

What is the alternative valuation method?

14.87 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.

235


14.88 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; or

• what would be the arm’s length consideration for a supply at the time 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 the thing is used by the miner.

[Section 175-25, steps 1 and 2 and section 175-30]

14.89 How those amounts are worked out is discussed in Chapter 4.

14.90 The miner then reduces that amount by its post-taxing 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]

14.91 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 will never be less than zero.

Downstream operating costs

14.92 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 taxing point [paragraph 175-35(1)(a)]. They do not include any expenditure of capital or of a capital nature [paragraph 175-35(1)(b)].

236

Valuations

14.93 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

14.94 The alternative valuation method allows a deduction 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 taxing 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)].

14.95 Depreciation is worked out using the broad approach described in the uniform capital allowance provisions in Division 40 of the 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)]

14.96 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)]

14.97 If a miner chooses to use the alternative valuation method in the first MRRT year (2012-13), 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)]

14.98 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)]

14.99 The legislation does not define ‘depreciated optimised replacement cost’ but relies on its meaning within the valuation industry.

237


Broadly, an asset’s depreciated optimised replacement cost is the amount it would cost to buy a modern equivalent asset, 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.

14.100 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)]

14.101 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

14.102 The final amount deducted to produce the value of the resource under the alternative valuation method is the return on capital costs.

14.103 The return is equal to the adjustable value of the assets for which depreciation was allowed under the previous step, multiplied by LTBR + 7 per cent:

Total adjustable values x LTBR + 0.07


14.104 This is the same rate of return used to uplift 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 that is longer or shorter than 12 months, it will adjust the return by multiplying it by:

Days in the transitional period365

so that the miner gets a return that properly reflects the actual number of days in its MRRT year. [Subsection 120-45(1)]

238

Valuations

14.105 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 14.1: Applying the alternative valuation method — under 10 million tonnes

Wind Sun Energy Pty Ltd operates a coal mine that supplies coal to Wind Sun’s power station. In the MRRT year starting on 1 July 2012, it produces 9 million tonnes of coal, 1 million tonnes of which it sells to another power station and the rest it uses in its own power station.

Its downstream operating costs for the year are $100m. 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 $1.5b and their remaining effective lives are each 20 years.

Wind Sun sells the 1 million tonnes for $120m. It sells the electricity it generates using the rest of the coal for $600m.

Because its production in the year is less than 10 million tonnes, it can choose to use the alternative valuation method for that year. To work out the MRRT revenue for the coal it extracts, it would start by adding together the amounts it derived from selling the coal and the electricity ($720m). From that, it would deduct its $100m downstream operating costs, its $75m downstream depreciation ($1.5b/20 years — it chooses to use the prime cost depreciation method), and its $180m return on downstream capital ($1.5b x 0.12, assuming a long term bond rate of 5%). That gives Wind Sun mining revenue of $365m attributable to the taxable resources it produced in that year.

Example 14.2: 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 28 million tonnes (that is, its own 9 million tonnes + its affiliate’s 20 million tonnes less the 1 million tonnes used in the power station). However, it could use the method to work out the value of its integrated electricity generation operation. If it did that, it would have to split its operation into two because the part of its operation that sells coal cannot use the method.

Wind Sun chooses to use the alternative valuation method for its vertically integrated transformative operation. It would have to

239


separate its downstream assets into those used for each operation (some might have to be apportioned between the two). Let’s assume that, of the $1.425b opening adjustable value of its downstream assets ($1.5b — $75m for last year’s depreciation), $1.2b relates to the integrated electricity generation operation. Of its downstream operating costs, $75m relate to that operation.

For that operation, Wind Sun would start with $600m for its electricity sales and deduct its $75m downstream operating costs, its $63.16m depreciation ($1.2b/19) and its $144m return on capital ($1.2b x 0.12). That gives it mining revenue for the resources used in its electricity generation operation of $317.84m. It would also work out the MRRT revenue for the coal it supplied but would have to use the normal methods to do that.

240

Chapter 15Accounting for the MRRT

Outline of chapter

15.1 This chapter explains the 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 the financial year.

Summary of new law

Non-cash benefits

Barter transactions

15.2 A barter transaction, where an entity provides a non-cash benefit in return for another non-cash benefit, 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

15.3 An entity that gifts a non-cash benefit is treated as:

• selling the benefit it provides for money equal to its market value; and

• gifting that money.

15.4 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.

241

Functional currency

15.5 A miner’s MRRT liability is calculated by measuring amounts in Australian dollars, even where these 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.

15.6 The translation rules for the MRRT are adopted from the translation rules in Subdivision 960-C of the ITAA 1997, apart from several special translation rules contained in the MRRT.

15.7 Where an entity has a valid choice in effect to use an applicable functional currency for income tax purposes it will be required to work out its mining profit, pre-mining profit and MRRT allowances by reference to that currency rather than Australian currency.

15.8 Where a valid choice to use an applicable functional currency is in effect, an entity will use a two-step translation process to calculate their mining profit, pre-mining profit and MRRT allowances. This is the same process used by a taxpayer with an applicable functional currency to calculate their taxable income for income tax purposes.

Accounting periods

15.9 An entity that uses an accounting period for income tax other than the standard 1 July to 30 June year, treats that substituted accounting period as its MRRT year.

15.10 When 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.

15.11 Such ‘transitional’ MRRT years can be longer or shorter than 12 months. MRRT rules that are based on a 12 month period (such as the low-profit offset rules) are proportionately adjusted to reflect the different length of transitional years.

15.12 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.

242

Accounting for the MRRT


Non-cash benefits

15.13 The MRRT includes provisions about how to treat transactions that do not involve money. They are necessary because the law is generally written on the assumption that a quantifiable monetary consideration is involved in a transaction.

15.14 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]

15.15 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

15.16 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

15.17 A non-cash benefit is property or services in any form except money (see subsection 995-1(1) of the ITAA 1997). 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.

243


Promises to pay money

15.18 The barter transaction rules extend to also 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).1 [Subparagraph 195-10(1)(a)(ii)]

15.19 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 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

15.20 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 then spends that money to buy the benefits it receives. [Subsections 195-10(2) and (3)]

Example 15.1: Barter transaction

Great Southern Mining agrees with Chamarette Excavations to provide Chamarette with 5m 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 5m tonnes of iron ore for a right to obtain 5m tonnes at its convenience.

Great Southern is taken to receive an amount for providing its tonnage equal to the market value of Chamarette’s promise to provide ore on demand. 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 but some part of the sale price Great Southern is taken to have received for its ore will be included in Great Southern’s mining revenue.

1 The ‘time value of money’ is the principle that a given amount of money has more value today than the same amount promised to be paid in the future (for example, you would rather have $100 now than a right to get $100 next year).

244


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.

15.21 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.

15.22 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 15.1: Multiple non-cash benefits

Great Southern Mining enters into a barter transaction with Lonergan Mining Equipment under which it gives Lonergan 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 mining expenditure.

15.23 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.

245


Example 15.1: 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.

15.24 Where 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.

15.25 The actual delivery of the thing promised does not have a further MRRT effect, such as a further amount of mining revenue or expenditure. 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

15.26 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.

15.27 The gift provisions work in a similar way to the barter provisions after, of course, taking account of the one-sided nature of a gift.

Receiving a non-cash gift

15.28 If an entity receives a non-cash benefit as a gift, it is taken to have received money at the time it receives the benefit equal to the benefit’s market value. It is also taken to have spent that money to acquire that benefit. [Subsection 195-15(1)]

15.29 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 as a way of refunding mining royalties, the receipt could produce a reduction of

246


royalty credits or an increase in mining revenue in the same way as a cash refund would.

15.30 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

15.31 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)]

15.32 There could be an MRRT effect arising from the notional sale of the benefit.

Example 15.1: Miner gifts a mining truck

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% 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, the notional gift of money will produce the same effect.

15.33 The notional gift of the money would seldom produce an MRRT effect. That is not to say that miners do not make what we would think of as gifts; they clearly do. For instance, many mining companies would provide free facilities to local communities. But, in most of those cases, the ‘gift’ would be more accurately characterised as a barter transaction under which the community provided the miner with consideration, such as its agreement for a mine to be developed. That said, it is possible there could be cases where a miner genuinely makes a non-cash gift in circumstances where it would have an MRRT effect if the gift had been provided in cash. In those cases, the non-cash gift provisions ensure that the gift receives the same treatment.

247


Functional currency

Translation of foreign currency amounts to Australian dollars

15.34 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.

15.35 The core translation rule provides that for MRRT purposes an amount of foreign currency is translated, or expressed in Australian dollars. This is similar to the core translation rule for income tax purposes. [Subsection 185-10(1)]

15.36 Foreign currency is defined as a currency other than Australian currency. This is the same definition used for income tax purposes. [Section 190-1]

15.37 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 a consideration; or

• a value.


15.38 Foreign currency amounts need to be translated to 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)]

15.39 In some cases, an amount which is taken into account for MRRT purposes is the sum or the result of two or more other amounts. Any amounts in foreign currency which are elements in the calculation of another amount are translated prior to calculating the other amount. This is similar to the approach taken for income tax purposes. [Subsection 185-10(4)]

248


15.40 The only exception is calculating an entity’s profit for the purposes of the simplified MRRT method (subsection 185-10(5)). 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).

Functional currency rules

15.41 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 will 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, unless the entity operates project interests through two or more Australian permanent establishments that use different functional currencies (discussed in more detail below). [Subsection 185-15(1)]

15.42 The functional currency rules for MRRT allow those miners that have made a valid choice under item 1 or paragraph (b) of item 2 of 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 (‘mining profit’, ‘pre-mining profit’ and ‘mining allowances’) will be translated to Australian dollars.

How are amounts translated using an applicable functional currency?

15.43 Broadly, when an entity is required to use an applicable functional currency:

• all amounts that are not in the applicable functional currency will be translated to that currency rather than to Australian dollars; and

• the mining profit and MRRT allowances of the entity will be translated from the applicable functional currency to Australian dollars at the end of the MRRT year.

15.44 This follows the approach used for income tax purposes and potentially involves two translations. This is explained below.

249


First translation rule

15.45 There will be situations where an entity will undertake transactions in a currency other than its applicable functional currency. For the purposes of working out:

• 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 holds 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; and

• whether the entity may elect to use the simplified MRRT method for the MRRT year,

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 185-15(3)]

15.46 The amounts that are subject to the first translation rule 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 a consideration;

• a value; or

• a monetary limit or other amount set out in this Act or any other law of the Commonwealth.


15.47 The exchange rate for translating these amounts is the same exchange rate that would be used if the translation was done for income

250


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 (Subdivision 960-C of the ITAA 1997).

Second translation rule

15.48 For income tax purposes, a taxpayer’s taxable income is calculated in the applicable functional currency and then translated to Australian dollars. The same methodology has been adopted for the MRRT to calculate:

• the mining profit; and

• the amount of an allowance component that is applied to work out an MRRT allowance.


15.49 These amounts will be calculated in the applicable functional currency and then translated to 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)]

15.50 An allowance component is defined as any of the following:

• a royalty credit;

• a pre-mining loss;

• a mining loss; or

• a starting base loss.

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 portion 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 will be uplifted in that currency.

251


Example 15.1: 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 to the Euro in order to calculate Langstraat’s mining profit. After translating these amounts they are:

• mining revenue of €600m; and

• mining expenditure of €120m.

Langstraat also has the following allowance components that are applied to work out its MRRT allowance for the year.

• royalty credit of €150m

• unused mining loss of €60m (after uplift)

• starting base loss of €120m

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 €480m (mining revenue minus mining expenditure) is translated to Australian dollars and is A$640m.

The following allowance components that are applied to calculate the MRRT allowance are also translated to Australian dollars in accordance with the second translation rule:

• Royalties allowance A$200m (150m/0.75)

• Mining loss allowance A$80m (60m/0.75)

• Starting Base allowance A$160m (120m/0.75)

• Total allowances A$440m

MRRT Profit: A$200m (mining profit minus allowances)

MRRT Liability: A$45m (MRRT profit x 0.225)

252


Foreign resident operating through a permanent establishment

15.52 In some circumstances, a miner may be required to use both the Australian dollar and an applicable functional currency to calculate its taxable income for income tax purposes.

15.53 This situation can arise with a foreign resident. This is because, a foreign resident can only use an applicable functional currency to calculate their taxable income from carrying on an activity or business at or through a permanent establishment (see subsection 960-60(1) of the ITAA 1997). Therefore, any taxable income a foreign resident makes outside these operations will be calculated in Australian dollars.

15.54 To ensure a foreign resident miner in these circumstances is only required to use one currency to calculate their mining profit or allowances, the functional currency rules for MRRT will only apply if all the activities that give rise to the mining profit or allowances for the MRRT year are carried on at or by permanent establishments that use the same functional currency. In other words, where more than one Australian permanent establishment is using an applicable functional currency, the MRRT functional currency rules will only apply if they are using the same currency. [Subsection 185-15(9)]

Example 15.1: Foreign resident that accounts for income tax in more than one currency

Lyonnaise Mining Co (Lyonnaise) is a foreign resident company that holds a mining project interest being a mining lease in Western Australia on which mining is yet to commence. It also has an Australian permanent establishment in Queensland, through which it has another mining project interest, which relates to coal.

Lyonnaise has made a choice under item 2(b) of the table in subsection 960-60(1) of the ITAA 1997 to use an applicable functional currency to work out its taxable income or tax loss from its coal operations carried on through the permanent establishment.

The MRRT functional currency rules will not apply to Lyonnaise as it has activities or businesses outside the permanent establishment that give rise to mining profit and/or allowance components that are accounted for in Australian currency.

Special translation rules

Translating the allowance component used for a MRRT allowance

15.55 As stated above, any allowance component applied in working out an MRRT allowance in an MRRT year, will be subject to the second

253


translation rule and will be translated from the entity’s applicable functional currency to Australian dollars.

15.56 Where this happens, these amount(s) are translated to Australian dollars at the exchange rate applicable on the last day of the MRRT year to which the allowance component relates. [Item 1 of the table in subsection 185-20(1)]

Translating amounts already recognised for MRRT purposes in a different currency

15.57 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. 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 will be translated at the applicable exchange rate on the first day of the current MRRT year. [Item 2 of the table in subsection 185-20(1)]

15.58 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 15.1: Starting to use a functional currency

At the end of the 2014-15 MRRT year, Black Coal Mining Co (Black) has unused mining losses of $100m. This amount had been recorded and accounted for in Australian dollars as Black 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 has a new parent company, Salem Mining (Salem). Salem is a foreign resident company based in the United States. Black makes a valid choice to use the US dollar as its applicable functional currency under section 960-60 of the ITAA 1997 for the 2015-16 income tax year.

As Black has made a functional currency choice for income tax purposes, Black is required to use that applicable functional currency for its corresponding MRRT year.

Black will need to translate the amount of unused mining losses previously denominated in Australian dollars to 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 current MRRT year (in this case, the 2015-16 MRRT year).

254


Transfer or split of a mining project interest or pre-mining project interest

15.59 Special translation rules apply if:

• there is a transfer (under Division 120) or split (under Division 125) 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.

15.60 Where this happens the amount(s) will be translated by the new miner at the exchange rate applicable on the day the transfer or split happens. [Item 3 of the table in subsection 185-20(1)]

15.61 A similar rule applies to the transfer or split of a pre-mining project interest. [Item 4 of the table in subsection 185-20(1)]

Events that happened before the current choice took effect

15.62 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 which precedes the choice but is taken into account at a time after that choice takes effect. For income tax purposes, there is a special translation rule to deal with these cases which is contained in 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.


15.63 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 to Australian dollars at the rate prevailing at the event time.

255


• Second, the Australian dollar amount is then translated into the functional currency (if necessary) at the exchange rate prevailing at the start of the current MRRT year.

[Item 1 of the table in subsection 185-20(3)]

15.64 Where a previous functional currency choice has been made, the same process applies, except the previous applicable functional currency is substituted for Australian currency. [Item 2 of the table in subsection 185-20(3)]

Example 15.1: 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 will be translated to US dollars at the applicable exchange rate at the start of the 2014-15 MRRT year.

Accounting periods

15.65 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.

15.66 However, the income tax law allows taxpayers to use accounting periods that vary from the standard year. This possibility is provided for by section 18 of the Income Tax Assessment Act 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. These days, 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.

15.67 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 broadly 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

256


are relevant to both taxes if the accounting for both uses the same period. [Sections 190-5 and 190-10]

15.68 Entities use a substituted accounting period once they have applied, and been granted leave by the Commissioner, to use that period. The Commissioner publishes information outlining the circumstances in which leave is likely to be given.

15.69 A number of exotic entities, such as venture capital limited partnerships, have different accounting periods for income tax purposes provided for by section 18A of the Income Tax Assessment Act 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 annual accounting period is not divided into those sub-periods for MRRT purposes, avoiding the compliance costs that would go with that.

15.70 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 but that is not 1 December. It still pays quarterly MRRT instalments by the 21st day after the end of each quarter but its quarters do not start on 1 July, 1 October, 1 January and 1 April and its payment dates are not 21 October, 21 January, 21 April and 21 July.

Changing accounting periods

15.71 Substituted accounting periods work just like standard MRRT years as long as the period does not change. The accounting is still done for 12 months; but a different 12 months. 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.

15.72 The complications arise because an accounting period has to be 12 months long (see section 18 of the Income Tax Assessment Act 1936). A moment’s thought is enough to conclude that, when there is a change from one 12 month period to another, there must be a period that either falls into both the old and the new accounting periods or into neither of them.

15.73 There are no income tax provisions that provide an explicit treatment for these situations. The Commissioner administers them by

257


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).

15.74 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 an annual accounting to account for 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

15.75 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 will comprise 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 will be 12 months long (unless the entity further changes its accounting period). This approach ensures that every financial year is matched by one, and only one, MRRT year. [Subsection 190-15(2)]

Example 15.1: 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

15.76 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

258


overlap between the periods or a gap between them. Again, the approach ensures there is one MRRT year to match every financial year.

An overlap between the old and new periods

15.77 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 15.1: 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 will end on 31 August 2014, as usual, but the new accounting period is shortened to the 7 months from 1 September 2014 to 31 March 2015. Later accounting periods will run for 12 months, from 1 April to 31 March.

A gap between the old and new periods

15.78 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 15.1: Gap between old and new accounting periods

A miner 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, the old and new accounting period will run for 12 months as normal and the 2 months between them will be 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 2 months between is the accounting period that matches the 2014-15 financial year.

259


Adjusting amounts for long and short accounting periods

15.79 Many amounts under the MRRT law are designed to work on an annual basis. For example, a miner with a mining profit of $50m 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 $50m 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 $50m profit threshold.

15.80 To deal with such cases, amounts that count towards thresholds like the $50m profit are adjusted proportionately to reflect the length of the accounting period. This is done by multiplying them by:

365Days in the transitional accounting period


15.81 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.

15.82 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 10m 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.


Example 15.1: 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 $75m and has MRRT allowances of

260


$10m. The MRRT year of its affiliate, Old Ridge Mining, is the standard 2013-14 financial year. Old Ridge makes a mining profit of $23m and has MRRT allowances of $3m 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 $60m ($75m × 365/457) and its adjusted MRRT allowances would be $8m ($10m × 365/456). The group’s mining profit would be $83m ($60m + $23m) and the group’s MRRT allowances would be $11m ($8m + $3m).

Applying the low-profit offset formula, would produce an offset for New Valley of $976,500 ($4.34m × .225) and an offset for Old Ridge of $373,500 ($1.66m × .225).

Further adjustment for the low-profit offset

15.83 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 will have been increased for a short accounting period, or decreased for a long accounting period, and will therefore result in an annualised offset amount that is not proportionate to the mining profit of the miner for the actual transitional period.

15.84 The further adjustment multiplies the unadjusted offset by:

Days in the transitional accounting period365

to proportionately adjust the offset to the right amount for the length of the actual accounting period being used. [Subsection 190-20(2)]

Example 15.1: Further adjustment for the low-profit offset

Continuing the pervious example, New Valley would multiply its $976,500 offset figure by 457/365 to get a final offset of $1.22m.

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 the same period.

261


Special adjustment for the simplified MRRT method

15.85 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 less than $250m 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 the size of its liability for mining royalties for the year (after adjusting for any recoupment of royalties).

15.86 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:

365Days in the transitional accounting period


Uplifts for transitional accounting periods

15.87 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 + 7% for use in the next year.

15.88 In all such cases, the uplift factor for the year following a transitional accounting period is indexed by:

Days in the transitional accounting period365

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]

262


Example 15.1: Uplifting a loss from a transitional accounting period

Exoform Tunnelling makes a mining loss of $4m for its 2016-17 MRRT year, which was a 9 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 long term bond rate + 7%. Instead, it has to index that uplift figure by 274/365. Assuming the long term bond rate in 2016-17 was 5.5%, it would get an adjusted uplift factor of:

(0.055+1.07) 274/365

which comes to 1.09. Multiplying 2016-17’s $4m loss by 1.09, would produce an uplifted loss of $4.37m for Exoform to use in 2017-18.


Accounting periods

15.89 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 will have a short first MRRT year covering the period from 1 July 2012 until the end of their accounting period. [Schedule 4 to the MMRT(CA&TP) Bill 2011, item 1]

15.90 The adjustments applicable for transitional accounting periods apply to entities where their first MRRT year does not have a 12 month long accounting period.

263

Chapter 16Entities

Outline of chapter

16.1 This chapter explains how Division 215 of the MRRT Act provides for groups of entities that have formed a consolidated group for income tax purposes to also choose to consolidate for MRRT purposes. An MRRT consolidated group has lower compliance costs because it is treated as a single entity for MRRT purposes. It also explains how the MRRT treats partnerships, trusts and unincorporated associations.

Summary of new law

Consolidated groups

16.2 A group of entities that is a consolidated group or a MEC group for income tax purposes can choose to consolidate for MRRT purposes. It must notify the Commissioner of its decision to do so.

16.3 A 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.

16.4 An entity that joins an MRRT group (whether because 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 the interests) the entity takes with it.

16.5 Changes in a group’s head company, and certain conversions of a group 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.

265

Partnerships, trusts and unincorporated associations

16.6 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.


Consolidated groups

16.7 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.

16.8 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

16.9 Subsidiary members of a consolidated group, or MEC group,2 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

2 MEC groups (‘multiple entry consolidated groups’) are, in very broad terms, groups of Australian entities whose real head company would be a foreign resident. Instead of that company being the group’s head company, the group must choose one of the first tier Australian entities to be its head company.

266

Entities

• working out the entities’ instalment income for an MRRT instalment quarter.

[Section 215-15]

16.10 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 a single entity reorganised the management of its interests.

16.11 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 deducted in relation to that transaction.

16.12 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.

16.13 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.

16.14 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.

16.15 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.

16.16 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

267


integration test or the downstream integration test. Those things could otherwise only happen to interests held by the same entity.

Example 16.1: The ‘single entity’ rule

King Resources Co and Wills Steelworks Co are subsidiaries of RO Burke Enterprise 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. 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 16.2: 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 have a mine (the ‘Lewis’ mine and the ‘Clark’ mine). The coal from those mining project interests 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 taxing 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.

Choosing to consolidate for MRRT purposes

16.17 A group can choose to consolidate for MRRT purposes if it is an income tax consolidated group or MEC group. [Subsection 215-10(1)]

16.18 The group makes the choice when its head company (or provisional head company in the case of a MEC group) gives the Commissioner notice of the choice. It has 21 days after making the choice to give the Commissioner notice in the approved form. 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

268

Entities

instalments system and the MRRT consolidation rules. [Subsections 215-10(1) and (2)]

16.19 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(3)]

16.20 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 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]

16.21 A choice to consolidate for MRRT purposes, once made, cannot be unmade and cannot be altered. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 4, section 119-10 of Schedule 1 to the TAA 1953]

16.22 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. [Section 215-20]

Joining and leaving a consolidated group

Joining a group

16.23 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 assets the entity brings with it need to be valued in the hands of the group. Those calculations do not apply for MRRT purposes when an entity joins a group.

16.24 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]

16.25 When an entity joins a group (whether because the group is formed or because the group acquires the entity), it is treated as

269


transferring its mining project interests and pre-mining project interests to the group’s head company. [Subsection 215-20(1)]

16.26 This attracts the operation of the mining project transfer provisions, which treat 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 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]

16.27 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. If the notional transfer from a joining entity to the head company 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. [Subsection 215-20(2)]

16.28 This is the end of the story if the notional transfer arises when a group is formed. However, the cap should still apply in some form 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 83-30 and 83-35]

Leaving a group

16.29 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). [Subsections 215-25(1) and (2) and 215-30(1) and (2)]

16.30 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 to the leaving entity, so that it acquires the MRRT liability for the transferred interests for the transfer year. The head company

270

Entities

remains liable for MRRT liabilities that arose in relation to the transferred interests before the transfer year. [Sections 120-10 and 125-10]

16.31 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 will not give rise to mining revenue or expenditure for either the head company or the leaving entity so that, in effect, the leaving entity will inherit the head company’s MRRT treatment of the assets. [Sections 120-15, 125-15 and 215-15]

16.32 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. [Subsections 215-25(3) and 215-30(3)]

16.33 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 83-30 and 83-35]

16.34 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

16.35 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

16.36 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

271


of treatment for the group. A number of rules achieve the same result for purposes of the MRRT.

Changing the head company of a consolidated group

16.37 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).

16.38 Where a group makes the choice under subsection 124-380(5) of the ITAA 1997, identical results apply to the group for 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

16.39 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).

16.40 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. The new head company (or provisional head company) inherits the relevant 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

16.41 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

272

Entities

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).

16.42 The same result applies for MRRT purposes when a MEC group converts to a consolidated group, and vice versa. The head company of the new group inherits the relevant history from the head company of the old group just as if it had been the head company at all relevant times. [Section 215-55]

Partnerships, trusts and unincorporated associations

16.43 The MRRT law applies to partnerships, trusts and unincorporated associations in the same way as it applies to any other entity.

16.44 ‘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’]

16.45 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.

16.46 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.

16.47 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. 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.

273


Entity status

Partnerships

16.48 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 16.1: The acts of the partners are the acts of the partnership

Shelby 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 $15m 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

16.49 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

16.50 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.

16.51 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 that gives rise to a separate MRRT liability. [Subsection 220-10(2)]

274

Entities

Trusts

16.52 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 to be removed that trusts are entities for the purposes of the MRRT law.

Responsibility for partnerships, trusts and unincorporated associations

16.53 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.

16.54 To overcome this problem, 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.

16.55 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.

16.56 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 Taxation Administration Act 1953 (see Division 444 of Schedule 1 to that Act).

16.57 Those provisions are extended so that they also apply for the purposes of the MRRT law. [Schedule 1 to the MRRT(CA&TP) Bill 2011, items 23 to 32, subsections 444-5(1), (1A), (1B) and (2), 444-10(1), (3) and (5), 444-15(1), 444-30(1), (2) and (3), and 444-70(1) and (2), and section 444-1 of Schedule 1 to the TAA 1953]

16.58 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

275


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 2011, item 25, subsections 444-5(1A) and (1B) of Schedule 1 to the TAA 1953]

Trustees are responsible for MRRT obligations of trusts

16.59 Consistently with this approach, the law is 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 2011, item 33, sections 444-120 of Schedule 1 to the TAA 1953]

16.60 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 2011, item 33, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.61 The obligation attaches to any trustees from the time the obligation arose until the time it was 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 that 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 2011, item 33, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.62 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 interest charges that arise in relation to the MRRT. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 33, subsection 444-120(2) of Schedule 1 to the TAA 1953]

16.63 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 2011, item 33, subsection 444-120(3) of Schedule 1 to the TAA 1953]

16.64 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 2011, item 33, subsection 444-120(4) of Schedule 1 to the TAA 1953]

276

Entities

16.65 Trustees who use their personal 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 2011, item 33, subsection 444-120(5) of Schedule 1 to the TAA 1953]

16.66 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 2011, item 33, subsection 444-120(6) of Schedule 1 to the TAA 1953]

16.67 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. They could, of course, still be responsible for satisfying the obligation. [Schedule 1 to the MRRT(CA&TP) Bill 2011, item 33, subsection 444-120(7) of Schedule 1 to the TAA 1953]

Consequential amendments

Consolidation

Notes about the link between income tax and MRRT consolidation

16.68 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 2011, items 1 to 4, subsections 703-50(1) and 719-50(1) of the ITAA 1997]

Joint and several liability

16.69 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).

16.70 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.

277


16.71 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 2011, item 5, subsection 721-10(2) of the ITAA 1997]

16.72 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 2011, item 6, subsection 721-10(4) of the ITAA 1997]

16.73 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 the table.

278

Chapter 17Integrity measures

Outline of chapter

17.1 The MRRT contains two integrity measures:

• general anti-profit shifting rule; and

• general anti-avoidance rule.

17.2 Division 205 contains integrity rules which ensure 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 one or more 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 for a mining project interest, or increasing offsets, can be appropriately dealt with.

Summary of chapter

Anti-profit shifting

17.4 The mining profit, allowance components and offset amounts for a mining project interest and a pre-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.

17.5 The MRRT law has this effect whenever there is a detriment to the revenue. Its operation does not depend on the miner or any other entity having a purpose of avoiding MRRT nor does it depend on the Commissioner, or any other person, determining that it should apply.

17.6 There is no presumption that parties which are independent of each other have dealt wholly independently with one another.

279

General anti-avoidance

17.7 Division 210 applies to schemes which seek to reduce the MRRT liability of an entity for a mining project interest for an MRRT year or to increase the Division 31 low profit offset or Division 225 rehabilitation tax offset.

17.8 This Division allows the Commissioner to make any such scheme ineffective where it is concluded that the scheme was entered into, or carried out, with a purpose of getting an MRRT benefit from the scheme or an anti-avoidance provision of another taxation law applies to the scheme.

17.9 Where this Division applies the Commissioner can negate the entity’s MRRT benefit.


General profit-shifting rule

When the Division 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 then the MRRT liability of one or more of the parties may be distorted.

17.12 The question of 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 operate between independent entities dealing wholly independently with one another in comparable circumstances. [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

280

Integrity measures

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 (OEC) 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.

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 entity or 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 17.1: Commercial or financial relations

The 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 Consumer Co 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 one or more other entities include, but would not be limited to, the price of any dealings between them, the

281

Explanatory material: Minerals resource rent tax

margins or profits earned by one or all of them, and the division of profits between them.

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 price, whether loans should be advanced and at what interest rates, and about 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 The ‘independent conditions’ are those conditions that could reasonably be expected to operate in comparable circumstances between independent entities dealing wholly independently with one another [paragraph 205-10(1)(b)].

17.22 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

17.23 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)].

17.24 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.

17.25 The relationship between the parties is relevant but not determinative. Thus, parties that are related to each other may deal independently with one another but parties that are not related to each other may 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].

282

Integrity measures

17.26 Circumstances in which parties that are unrelated with each other may not deal 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;

• if 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 17.1: Parties not dealing independently with one another

Taking the facts as outlined in Example 1.1, 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 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 as to the allocation of that amount between the services and the resources.

Comparable circumstances

17.27 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.

17.28 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)].

17.29 This will require, 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 will also require 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. [Paragraph 205-10(1)]

283


17.30 Where differences exist, a situation may be considered comparable if reasonably accurate adjustments can be made in order to eliminate the effects of such differences on the comparison.

17.31 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 be realistically 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 17.1: 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.

17.32 Although ordinarily, the comparison will be between the commercial or financial relations as they actually exist between the miner and another entity or 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 17.1: 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 Miner Co 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 Uraba Co. Subsequently Miner Co exercises the call option and Uraba Co sells the loading unit to Miner Co.

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

284

Integrity measures

when the options were issued (that is, rather than when the options were exercised).

Methodologies

17.33 Once a comparability analysis has been undertaken then that analysis will inform the choice of methods for working out what the miner’s mining profit, allowance components and / or offsets for the mining project interest or pre-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)]

17.34 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)];

• the appropriateness of a particular method in view of the circumstances of independent entities to which the miner’s commercial and financial relations are being compared and whether adjustments can and should be made [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 transfer pricing guidelines (as published on 18 August 2010 or such other document published by the OECD as the Commissioner determines to be a transfer pricing guideline) [paragraph 205-15(1)(d) and subsection 205-15(2)].

17.35 The method must be capable of practicable application and must 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.

17.36 The OECD transfer pricing guidelines provide a framework for the application of the arm’s length principle. The OECD guidelines are titled OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the Guidelines).

17.37 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.

285


17.38 The various methods outlined in the Guidelines are set out below. Note, however, these are not necessarily the only methods that may be used. Other methods may be applied provided they accord with the arm’s length principle (as explained in the Guidelines).

Comparable uncontrolled price (CUP) method

17.39 The CUP 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 17.1: Resource CUP

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

17.40 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 17.1: 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

17.41 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

286

Integrity measures

parties or by independent entities dealing wholly independently with each other in materially comparable circumstances.

Example 17.1: 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

17.42 The transactional net margin method (TNNM) 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.

17.43 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.

17.44 The TNNM examines the net profit relative to an appropriate base (for example, costs, sales, assets) that a taxpayer realises from an activity or transaction. The TNMM 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

17.45 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.

287


17.46 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

17.47 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 profit, its allowance components or its offsets. [Subsection 205-10(3)]

17.48 The effect of subsection 205-10(3) is that 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 pursuant to section 21-20;

• the consideration received ore receivable by the miner for a supply of taxable resources or a thing produced using taxable resources (see item 1 of the method statement in subsection 19-25(2));

• an amount that is taken into account for the miner under step 2 of the method statement in section 19-25 (including an amount that might be taken into account in working out what the miner would pay a distinct and separate entity to procure its downstream operations);

• an amount that is taken into account in calculating the miner’s group profit for simplified MRRT purposes (see Division 200).

General anti-avoidance rule

17.49 Division 210 can be divided into two parts, the application of Division 210 (Subdivision 210-A) and the provisions dealing with the consequences of Division 210 applying (Subdivision 210-B).

288

Integrity measures

Overview

Subdivision 210-A — Application

17.50 Division 210 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.

17.51 A purpose of obtaining the MRRT benefit is either the dominant purpose of the scheme or, if not the dominant purpose, another purpose that is more than an incidental purpose. Division 210 is therefore designed to take in what is commonly considered to be tax avoidance and not bona fide arrangements.

17.52 There are three requirements that must be satisfied for Division 210 to apply:

• there must be a scheme;

• an entity must obtain an MRRT benefit from the scheme, that is:

– a reduction in MRRT liability for a mining project interest for an MRRT year; or

– an increase in the low profit offset or rehabilitation tax offset; and

that benefit is not attributable to the making of a choice expressly provided for by a taxation law.

• it is reasonable to conclude, taking into account a list of relevant factors, that the purpose of the scheme is either the dominant purpose of the scheme or if not the dominant purpose, another purpose that is more than an incidental purpose.

17.53 Division 210 will apply to schemes entered into on or after 2 May 2010, the resource rent tax announcement date. This ensures that Division 210 is able to cover 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 (Division 77); and whether an operation is a vertically integrated transformative operation in respect of which the choice can be made to apply the alternative valuation method (Division 175).

289


17.54 Division 210 will also apply to an avoidance 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 purpose of obtaining an MRRT benefit.

Subdivision 210-B — the consequences of Division 210 applying

17.55 If Division 210 applies, the Commissioner can make the scheme ineffective for MRRT purposes. The Commissioner can do this by making a determination that has the effect of negating the MRRT benefit obtained by the entity under the scheme — see generally Subdivision 210-B.

17.56 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:

• a determination has been made against the entity that got the MRRT benefit in relation to a scheme or part of a scheme; and

• the Commissioner considers it fair and reasonable that the disadvantage be negated or reduced.

Explanation of the specific rules of Subdivision 210-A: Application of Division 210

17.57 There are three requirements that must be satisfied before Division 210 will apply.

Requirement 1: There must be a scheme

17.58 Scheme is defined in section 190-1 as taking its meaning from subsection 995-1(1) of the Income Tax Assessment Act 1997 which defines it as:

• any arrangement; or

• any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Requirement 2: An entity must get an MRRT benefit from a scheme

17.59 The concept of an entity getting an MRRT benefit from a scheme is defined in section 210-15.

290

Integrity measures

17.60 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 (Division 31) or a rehabilitation tax offset (Division 225) 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.

17.62 However Division 210 does not apply to MRRT benefits to which the exception applies. The exception is where the MRRT benefit that is obtained is attributable to the making of a choice that is expressly provided for by a taxation law, other than a choice relating to functional currency under Subdivision 960D of the Income Tax Assessment Act 1997. [Paragraphs 210-10(1)(b) and 210-10(3)]

17.63 The exception for choices does not apply 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.

The connection between the MRRT benefit and the scheme

17.64 Subsection 210-15(1) provides that an entity will get 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.

17.65 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

17.66 The test of purpose under section 210-5 is a test of objective purpose. The question posed by the rule is whether, objectively, it would be concluded that a person who entered into or carried out the scheme did so for a purpose of having the entity obtain an MRRT benefit [paragraph 210-10(1)(c)].

291


17.67 If a taxpayer enters into such a scheme with two or more purposes, neither of which is merely incidental, the fact that one purpose is not that of obtaining an MRRT benefit will not prevent Division 210 from applying.

Incidental purpose

17.68 A purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with another purpose, or merely follows another purpose as its natural incident. For example an entity incurs costs for upstream mining expenditure in the ordinary course of mining coal. An MRRT benefit of a reduced MRRT liability for the entity’s mining project interest will arise when the entity claims mining expenditure for these costs. The purpose of incurring the costs is generally no more than a natural incident of the entity mining the coal, and generally the purpose of obtaining the MRRT benefit simply follows incidentally from the mining of the coal: it is therefore merely an incidental purpose.

17.69 On the other hand an entity may enter into a scheme which results in it obtaining an immediate tax benefit in the form of a reduced MRRT liability for a mining project interest it holds (the first MRRT benefit) and another substantial purpose of obtaining an increased low profit offset in a future MRRT year (second MRRT benefit). The fact that the entity may regard the first MRRT benefit of the reduced liability for the mining project interest as more important that the second MRRT benefit of the increased low profit offset does not mean the second purpose is merely incidental to the first.

17.70 Having an incidental purpose test, rather than a sole or dominant purpose test, ensures that Division 210 can fulfil its intended policy outcome. Take the example of a miner who undertakes a scheme that has two purposes, a primary purpose of avoiding income tax and another purpose that is not an incidental purpose of avoiding MRRT. Part IVA of the ITAA 1936 may apply if this is the dominant purpose of the scheme. However as the MRRT purpose is another purpose that is not the primary purpose it will not be a dominant purpose. Having an incidental purpose test overcomes this situation and ensures that the policy intent of the MRRT can be met.

Relevant circumstances

17.71 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 [section 210-20]:

• the manner in which the scheme or part of the scheme was entered into or carried out. The terms manner, entered into,

292

Integrity measures

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 220-15(c)];

• the effect that this exposure draft has 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)];

• the nature of the connection (whether business, family or other nature) between the entity and such an entity [paragraph 210-20(h)].

Does it matter where the scheme is entered into or carried out?

17.72 The fact that any part of a scheme is entered into or carried out outside of Australia does not affect the application of Division 210 [subsection 210-10(2)].

Negating the effect of a scheme

17.73 Subdivision 210-B makes the outcome of a scheme to which Division 210 applies ineffective.

293


Determinations negating an MRRT benefit

17.74 If Division 210 applies to a scheme, the Commissioner can make a determination negating the entity’s MRRT benefit [section 210-25].

17.75 There are two ways a Commissioners determination can negate an MRRT benefit:

• The determination can state that the entity’s MRRT liability for a mining project interest (see clause 7-5) for an MRRT year is, and at all times has been, a particular amount [paragraph 210-25(1)(a)];

• The determination can state that the entity’s low profit offset (see Division 31) and/or rehabilitation tax offset (see Division 225) is, and at all times has been, a particular amount [paragraph 210-25(1)(b)].

Determinations compensating an entity or another entity

17.76 The Commissioner can also make a determination compensating the entity or an entity other than the entity for a MRRT disadvantage that entity gets from the scheme [section 210-30].

17.77 Three conditions must be satisfied before the Commissioner can make such a determination for a particular entity:

• the Commissioner must have made a determination in relation to the entity’s MRRT benefit [paragraph 210-30(1)(a)];

• the Commissioner considers the entity or other entity gets an MRRT disadvantage from the scheme (an MRRT disadvantage from a scheme is defined in subsection 210-45(2)) [paragraph 210-30(1)(b)]; and

• the Commissioner considers it fair and reasonable to make a determination for an MRRT year so as to compensate the entity or the other entity for the MRRT disadvantage [paragraph 210-30(1)(c)].

17.78 There are two ways a Commissioner’s determination can compensate for the MRRT disadvantage:

• the determination can state that the entity’s or other 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

294

Integrity measures

• the determination can state that the entity’s or other entity’s low profit offset (see Division 31) and/or rehabilitation tax offset (see Division 225) is, and at all times has been, a particular amount [paragraph 210-30(3)(b)].

17.79 An entity can request in writing that the Commissioner make a compensating determination for that entity. The Commissioner must decide whether to grant the request, and give the entity written notice of the decision. [Paragraph 210-30(4)].

One determination can cover several MRRT years

17.80 Statements relating to different MRRT years can be included in a single determination [section 210-35]. The Commissioner does not have to make a separate determination for every adjustment that he makes to either negate an entity’s MRRT benefits, or to compensate the entity or another entity for an MRRT disadvantage to which Division 210 applies.

A copy of a determination must be given to the entity affected

17.81 The Commissioner must provide a copy of a determination to the entity whose MRRT liability or low profit offset or rehabilitation tax credit offset is stated in the determination [subsection 210-40(1)].

17.82 Failure to satisfy this requirement does not affect the validity of the determination [subsection 210-40(2)].


17.83 Division 210 will also apply to a scheme if:

• it was entered into before 2 May 2010;

• the scheme was an avoidance scheme;

• an entity obtains an MRRT benefit from the scheme; and

• it would be reasonable to conclude that the entity did so with the purpose of obtaining an MRRT benefit, if the MRRT law had been in force at the time the scheme was entered into. [Schedule 4 to the MRRT (CA & TP) Bill 2011, item 4]

17.84 This ensures that Division 210 can apply to avoidance schemes entered into prior to 2 May 2010 that also results in an entity obtaining on MRRT benefit.

295


(i) it was entered into before 2 May 2010

17.85 This requirement is satisfied if the scheme has been entered into before 2 May 2010.

(ii) the scheme is an avoidance scheme

17.86 The scheme is an avoidance scheme, if it is a scheme to which one of the following anti-avoidance provisions of another taxation law applies:

• Part IVA of the Income Tax Assessment Act 1936;

• Division 165 of the GST Act;

• Section 67 of the Fringe Benefits Tax Assessment Act 1936;

• Subdivision A of Division 6 of the Petroleum Resource Rent Tax Assessment Act 1987.

(iii) an entity obtains an MRRT benefit from the scheme, and

17.87 This requirement is satisfied if the entity obtains an MRRT benefit from the avoidance scheme.

(iv) the purpose test is met

17.88 This requirement is satisfied, if, had the MRRT law been in force at the time the avoidance scheme was entered into, it would be reasonable to conclude that the entity would have entered into the scheme for the purposes of obtaining an MRRT benefit.

17.89 In working out whether it would be reasonable to conclude that an entity would have entered into the scheme for the purpose of obtaining an MRRT benefit, regard should be had to the nature of the other tax avoidance benefit or benefits obtained under the scheme.

296

Chapter 18Administration of the MRRT

Outline of chapter

18.1 This chapter deals with the 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 Mineral Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 unless otherwise stated.

Summary of chapter

MRRT returns

18.3 A miner is required to lodge an annual MRRT return dealing with its mining project interests and pre-mining project interests, and specifying its MRRT liability for the year. However, there may be circumstances in which the Commissioner will not require a miner or miners to lodge a return. MRRT returns will generally be lodged electronically.

Assessments

18.4 The MRRT is a fully self assessing system. The Commissioner will generally accept an MRRT return at face value, and the return will effectively serve as a notice of assessment. The assessment will be deemed made when the Commissioner receives the return.

Collection and recovery

18.5 The MRRT will be supported by generic collection and recovery rules that apply to the whole tax system. This means that penalties can apply to outstanding obligations, and interest is payable on outstanding liabilities. The rules allow the Commissioner to enforce collection through the courts if necessary. Collection and recovery is further supported by mechanisms requiring payers to withhold tax from certain types of payments.

297


Instalments

18.6 Instalments form part of the collection and recovery regime. New instalment provisions have been necessary for the MRRT.

18.7 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 should ensure that an entity does not have a significant MRRT tax payment due on assessment. This system is designed to ensure the efficient collection of the MRRT in a similar manner to the pay as you go (PAYG) instalment system’s collection of income tax.

18.8 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 the final MRRT liability, 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.

18.9 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.

18.10 As with PAYG instalments, the entity will be able to 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.

18.11 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 relate to the transferred interest. The entity to which the interest is transferred will increase its instalment income for the quarter in which the transfer occurs to reflect the fact that it will be liable to pay MRRT for the whole year, including the part before the transfer.

Record keeping

18.12 The effective administration of the MRRT requires the Commissioner to have access to the information needed to determine a miner’s MRRT liability.

18.13 Fundamental to this is a requirement that miners keep records of their MRRT affairs.

298

Administration of the MRRT

18.14 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.

18.15 The MRRT record-keeping rules are similar to those of other record-keeping regimes that operate elsewhere in the tax law.

Information transfers

18.16 An entity that transfers a mining project interest or a pre-mining project interest (or part of either of them) to another entity has 21 days in which to also provide it with the information it will need to work out its MRRT liabilities and to satisfy its MRRT obligations.

18.17 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 make any reasonable request of the original entity to provide those further particulars. That request must be answered within 60 days.

Access powers

18.18 In order to administer the MRRT, and in particular ensure compliance, the Commissioner has the power to access buildings and documents, and gather information that is held domestically and in foreign jurisdictions.

Service

18.19 The Commissioner can serve documents on miners at addresses provided by them, including electronic addresses. A document is considered served when the Commissioner leaves or posts it.

Making choices

18.20 The MRRT provides for taxpayers to make choices about a range of matters in the course of determining their MRRT liability.

299


18.21 A set of default rules applies to these choices, so as to shorten and standardise the legislative drafting.

18.22 The default rules are based on the following principles:

• miners 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 that an MRRT return evidences a choice that was made, that return should be sufficient evidence of the choice.

• choices should not have to be lodged with the Commissioner unless either the Commissioner specifically asks for it or the miner does not have to lodge a return.

• miners should not be able to 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. Miners can also apply for private rulings about how the MRRT laws apply to their particular circumstances.

Accountability of the Commissioner

18.24 The Commissioner must provide an annual report to the Minister on the operation of the MRRT law.


MRRT returns

18.25 Returns are integral to self assessment. They enable taxpayers — miners in this context — to inform the Commissioner as to their tax position for a period.

18.26 Some conventions exist around the form and contents of returns. They must be in the form approved by the Commissioner, and lodged in a

300


prescribed manner, within a certain time limit. Failure to lodge a required return can result in penalties.

18.27 Consistent with the above, Schedule 1 inserts Division 117 into Schedule 1 of the TAA 1953 to establish a system for MRRT returns.

Who must give MRRT returns

18.28 Miners who hold such interests during an MRRT year must give the Commissioner an MRRT return for that year. The return must deal with all such interests the miner holds during the year. [Schedule 1, item 4, section 117-5 of Schedule 1 to the TAA 1953]

18.29 This means that an MRRT return is required even if a miner is not liable to pay MRRT for the MRRT year [Schedule 1, item 4, subsection 117-5(2) of Schedule 1 to the TAA 1953]. It also means that if a miner transfers an interest to another entity during an MRRT year, the miner will need to lodge an MRRT return; this will enable the miner to obtain a credit for MRRT instalments paid in respect of its instalment income relating to the interest.

18.30 However, there are some exceptions to the general rule. Some miners are not required to furnish MRRT returns for an MRRT year. This includes miners that have elected to use the simplified MRRT method under section 200-10 of the MRRT Bill (provided the election is in effect at the end of the MRRT year). It also includes miners that belong to a class that the Commissioner has exempted from furnishing an MRRT return for an MRRT year. [Schedule 1, item 4, subsections 117-5(4) and (5) of Schedule 1 to the TAA 1953]

18.31 If a miner is required to lodge an MRRT return, the due date is the first day of the sixth month after the end of the year; for miners operating on a standard June-July MRRT year, the return is due on 1 December [Schedule 1, item 4, subsection 117-5(3) of Schedule 1 to the TAA 1953]. This is the same date that MRRT is due and payable.

18.32 The Commissioner has discretion to defer lodgement for both individual miners, and classes of miners [Schedule 1, item 4, subsection 117-5(5) of Schedule 1 to the TAA 1953].

The form and contents of the MRRT return

18.33 MRRT returns for an MRRT year must be in the approved form [Schedule 1, item 4, subsection 117-10(1) of Schedule 1 to the TAA 1953].

301


18.34 The approved form for an MRRT return must include as a minimum, the miner’s [Schedule 1, item 4, subsection 117-10(2) of Schedule 1 to the TAA 1953]:

• mining profit less the sum of its MRRT allowances for each mining project interest it has during the MRRT year;

• MRRT liability for each of those mining project interests for the year;

• MRRT payable for the year.

18.35 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

18.36 The Commissioner can direct a miner to give a further or fuller MRRT return or any other MRRT return for an MRRT year or specified period, whether or not it has already furnished an MRRT return for the same period. The Commissioner can also request such returns from entities acting in the capacity of agent or trustee for a miner. [Schedule 1, item 4, subsection 117-15(1) of Schedule 1 to the TAA 1953]

18.37 This provision 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; this may be required where, for example, miners are engaged in aggressive tax planning schemes, or are abandoning their Australian mining operations. The Commissioner can also require returns from liquidators, receivers, executors, and of agents acting on behalf of non-residents.

Electronic lodgement of MRRT returns

18.38 Miners must lodge MRRT returns electronically, unless the Commissioner determines otherwise [Schedule 1, item 4, section 117-20 of Schedule 1 to the TAA 1953].

Assessments

18.39 Following the lodgement of a return, the Commissioner assesses a taxpayer’s liability, if any. In a self assessment system, the Commissioner generally accepts tax returns at face value, subject to a period of review during which the Commissioner can amend a return.

302


18.40 Importantly, the Commissioner does not actually issue a notice of assessment in a fully self assessing system. The return effectively becomes the notice of assessment. The taxpayer can assume that its return has been accepted at face value unless the Commissioner informs it otherwise.

18.41 Schedule 2 amends the TAA 1953 to enable the Commissioner to assess miners on MRRT, consistent with the principles of self assessment. The provisions of the TAA 1953 that are being amended are expected to be contained in Tax Laws Amendment (2011 Measures No. 8) Bill 2011: Assessment of amounts under indirect tax laws. The exposure draft of this Bill was released on 22 August 2011. It will insert a set of generic assessment provisions into the TAA 1953 that are in turn being used for MRRT purposes. Please see: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2132

Self assessment

18.42 The Commissioner will make an MRRT assessment when a miner lodges its MRRT return for the MRRT year [Schedule 2, items 1 and 2, section 155-5 and subsection 155-17(1) of Schedule 1 to the TAA 1953].

18.43 As the MRRT is a full self assessment regime under which assessments are made when returns are given, a miner cannot request an assessment 6 months after lodgement if the Commissioner has not made an assessment [Schedule 2, item 3, subsection 155-19(1) of Schedule 1 to the TAA 1953]. It is not possible for such situations to arise because the assessment occurs upon lodgement of the return.

Amendments to give effect to certain anti-avoidance declarations and MRRT profit shifting rules

18.44 The Commissioner can amend an assessment at any time to provide a compensating adjustment in certain circumstances of MRRT avoidance; that is, where an entity has been disadvantaged by a determination that another entity has obtained an MRRT benefit from a scheme, and that other entity’s benefit has been cancelled by the Commissioner [Schedule 2, item 4, paragraph 155-33(c) of Schedule 1 to the TAA 1953].

18.45 The Commissioner can amend an assessment at any time to give effect to the MRRT profit-shifting rules [Schedule 2, item 4, section 155-34 of Schedule 1 to the TAA 1953].

303


Collection and recovery

18.46 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.

18.47 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.

18.48 Schedules 1 and 3 amend the TAA 1953 for the purposes of collecting and recovering MRRT.

Generic collection and recovery rules

18.49 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;

• quarterly MRRT instalments.

[Schedule 1, items 5 and 6, subsection 250-10(2) of Schedule 1 to the TAA 1953]

Withholding tax

18.50 Miners 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 3, paragraphs 12-330(1)(b) and 12-335(2)(a) of Schedule 1 to the TAA 1953].

Shortfall interest charge

18.51 Existing provisions have been modified to make the shortfall interest charge applicable to shortfalls in MRRT [Schedule 1, items 7, 8, 10, 11, and 12, sections 280-1, 280-50 and 280-170, paragraph 280-105(1)(a), and subsection 280-110(1) of Schedule 1 to the TAA 1953].

304


18.52 A miner 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 9, subsection 280-101(1) of Schedule 1 to the TAA 1953]. Shortfall interest charge accrues for each day beginning on the day the miner’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 miner notice of the amended assessment [Schedule 1, item 9, subsection 280-101(2) of Schedule 1 to the TAA 1953].

18.53 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 9, subsection 280-101(3) of Schedule 1 to the TAA 1953].

General interest charge

18.54 The general interest charge is payable on:

• unpaid 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, item 1, section 8AAB of the TAA 1953]

Interest on overpayments and early payments

18.55 The MRRT has been included as a relevant tax so that interest can be paid on overpayments and early payments [Schedule 3, items 34, 35, 36, and 37, section 3C of the T(IOEP) Act 1983].

Liability to penalty

18.56 Aside from being liable to penalty when it fails to lodge documents with the Commissioner, a miner may be liable to an administrative penalty if it fails to give information to an entity (other than the Commissioner) in accordance with Division 121 [Schedule 1, items 13 and 14, subsection 286-75(2AA) and paragraph 286-80(2)(a) of Schedule 1 to the TAA 1953].

305


Instalments

18.57 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 pay MRRT instalments annually or half-yearly.

18.58 Like the PAYG instalments system, MRRT instalments are intended to ensure the efficient collection of MRRT by providing those 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 4, section 115-5 of Schedule 1 to the TAA 1953]

Liability for instalments

18.59 Entities are liable to pay an MRRT instalment for an instalment quarter if they have mining revenue, pre-mining revenue, or an instalment rate above nil, for the quarter. [Schedule 1, item 4, subsection 115-10(1) of Schedule 1 to the TAA 1953]

18.60 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 4, subsection 115-10(2) of Schedule 1 to the TAA 1953]

18.61 An entity using a substituted accounting period would also usually have four 3-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 4, section 115-110 of Schedule 1 to the TAA 1953]

306


18.62 Each quarterly instalment is due on the 21st day of the month after the end of the quarter. [Schedule 1, item 4, section 115-25 of Schedule 1 to the TAA 1953]

Example 18.1: 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.

18.63 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 4, section 115-30 of Schedule 1 to the TAA 1953]

Credit for instalments

18.64 An entity’s instalments payable for an MRRT year are credited against its final MRRT liability, which is assessed after 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 4, subsection 115-20(1) of Schedule 1 to the TAA 1953]

18.65 The amount of the credit is the total of the entity’s instalments payable for the year, less any credits claimed already 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 4, subsection 115-20(2) of Schedule 1 to the TAA 1953]

18.66 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 4, paragraph 115-20(2)(a) and subsections 115-20(1) and (3) of Schedule 1 to the TAA 1953]

The amount of an instalment

18.67 The MRRT instalment an entity is liable to pay for a quarter is:

The entity’s MRRT instalment income for the quarter ×the entity’s applicable instalment rate

[Schedule 1, item 4, section 115-35 of Schedule 1 to the TAA 1953]

307


Example 18.1: Amount of an instalment

Under Mines Pty Ltd has instalment income for a quarter of $75m and an applicable instalment rate of 7%. Its instalment for the quarter will be $75m × 0.07 = $5.25m.

Instalment income

18.68 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;

• 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.


18.69 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 taxing 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 entity’s instalment rate.

Applicable instalment rates

18.70 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.


308


18.71 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).

• A rate the Commissioner has given the entity that is not a nil rate.

• The default rate.


The Commissioner’s instalment rate

18.72 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.

18.73 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.

18.74 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 4, item 3 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

18.75 The Commissioner usually works out the rate by using a formula that determines the rate that would have produced the right instalments for the previous MRRT year. That is:

The entity’s MRRT liability for the previous MRRT yearThe entity’s instalment income for the previous MRRT year


309


18.76 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 4, 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 4, subsection 115-75(4) of Schedule 1 to the TAA 1953].

18.77 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 4, subsection 115-75(3) of Schedule 1 to the TAA 1953]

Example 18.1: Commissioner’s instalment rate

In the 2014-15 MRRT year, Like Mines Pty Ltd, an iron ore miner, had an MRRT liability of $14.5m. Its consideration for the ore it supplied in that year was $207m. The Commissioner would usually provide Like Mines with a rate for the 2015-16 MRRT year of 14.5m/207m = 7%.

18.78 The Commissioner can modify the MRRT liability 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 varied law had applied for that year. This ensures that the MRRT instalments system functions effectively, and neither over nor under collects instalments. [Schedule 1, item 4, subsection 115-75(5)and section 115-80 of Schedule 1 to the TAA 1953]

18.79 The Commissioner can also modify the MRRT liability 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 4, section 115-80 of Schedule 1 to the TAA 1953]

18.80 The Commissioner may be aware of other circumstances that would mean the rate calculated in the normal way would not be appropriate. For example, there may have been a marked change in the world price for a particular taxable resource or 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

310


liability for the year. [Schedule 1, item 4, subsections 115-75(5) and (6) of Schedule 1 to the TAA 1953]

18.81 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 4, subsection 115-45(2) of Schedule 1 to the TAA 1953]

18.82 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 4, 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 the MRRT year [Schedule 1, item 4, subsection 115-45(4) of Schedule 1 to the TAA 1953].

18.83 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 4, subsection 115-45(3) of Schedule 1 to the TAA 1953]

18.84 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 4, subsections 115-45(1) and (5) of Schedule 1 to the TAA 1953]

18.85 If the Commissioner gives an entity a rate, he or she must notify the entity in writing [Schedule 1, item 4, 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 4, subsection 115-45(3) of Schedule 1 to the TAA 1953].

The entity’s chosen instalment rate

18.86 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 4, section 115-50 of Schedule 1 to the TAA 1953]

18.87 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

311


applicable rate in that later year. [Schedule 1, item 4, item 2 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

The default instalment rate

18.88 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 4, item 4 in the table in subsection 115-45(1) of Schedule 1 to the TAA 1953]

18.89 The default instalment rate for an entity that only has instalment income relating to iron ore is 8 per cent [Schedule 1, item 4, 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 coal or gas is 3 per cent [Schedule 1, item 4, paragraph 115-85(2)(a) of Schedule 1 to the TAA 1953]. Those default rates can be changed by regulation for quarters after the 2012-13 MRRT year [Schedule 1, item 4, paragraphs 115-85(1)(b) and (2)(b) and subsection 115-85(4) of Schedule 1 to the TAA 1953].

18.90 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 4, subsection 115-85(3) of Schedule 1 to the TAA 1953].

Example 18.1 Default rate for diverse interests

Merry Quest Co has several iron ore mines and one coal mine. 80% of its instalment income for a quarter relates to iron ore and the other 20% relates to coal. The default rate for iron ore for the quarter is still 8% but the regulations have changed the coal default rate to 2.5%. Merry would work out its default rate for the quarter as (8% x 80%) + (2.5% × 20%) = 6.9%

Consequences of choosing an instalment rate

18.91 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 knows will affect its rate.

18.92 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

312


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

18.93 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 4, subsections 115-60(1) and (3) of Schedule 1 to the TAA 1953]

18.94 The entity does not have to claim this variation credit through the instalments process. If it does not, it would get a full credit for its instalments when it is assessed at the end of the MRRT year [Schedule 1, item #, 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 #, paragraph 115-20(2)(b) of Schedule 1 to the TAA 1953].

18.95 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 4, subsection 115-60(2) of Schedule 1 to the TAA 1953]

Amount of the credit

18.96 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 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 4, paragraph 115-60(1)(d) of Schedule 1 to the TAA 1953]

Example 18.1: Claiming variation credits

In the first instalment quarter of its MRRT year, Grayte Mines Pty Ltd has instalment income of $80m 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 $12m for the quarter.

313


In the second instalment quarter, Grayte Mines has instalment income of $75m and chooses an instalment rate of 12 per cent. It is liable to pay an instalment for the quarter of $9m. 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 $9.6m, so Grayte Mines can claim a credit of the $2.4m difference. It would still remain liable to pay $12m for the first quarter instalment but it would be offset by the $2.4m credit if it remained unpaid.

In its third quarter, it again has instalment income of $75m and decides to use a rate of 10 per cent, for an instalment of $7.5m. 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) × 10% = $15.5m). Therefore, Grayte Mines can claim a variation credit of $3.1m.

General interest charge for choosing too low a rate

18.97 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 4, subsection 115-65(1) of Schedule 1 to the TAA 1953]

18.98 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 4, sections 115-70 and 115-105 of Schedule 1 to the TAA 1953]

Example 18.1 Benchmark instalment rate

Bee Mines Pty Ltd has instalment income of $60m for each quarter of the 2014-15 MRRT year. Its MRRT liability for the year is $28.8m, so its benchmark instalment rate for 2014-15 is:

$28.8m = 12%$240m

314


18.99 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 ameliorate the consequences for an entity that chose a rate that was fair and reasonable given the information it had if it had also made a reasonable effort to remedy a rate it realised was too low when new information came to light.

18.100 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 chosen a rate that was too low. If the difference would have been lower if the year’s benchmark instalment rate had been used, then the charge is only imposed on that lower difference. [Schedule 1, item 4, subsection 115-65(2) of Schedule 1 to the TAA 1953]

Example 18.1: 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 $6m (10 per cent of $60m). The instalment liability it would otherwise have had (using the most recent Commissioner rate) would have been $7.8m (13 per cent of $60m). However, using the benchmark instalment rate, the instalment liability would have been only $7.2m (12 per cent of $60m). 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 $1.2m ($7.2m — $6m).

18.101 The amount on which the general interest charge is imposed is increased to take into account any credits the entity has claimed for the

315


year (which effectively reduce the instalment rate for earlier quarters). [Schedule 1, item 4, subsection 115-65(2) of Schedule 1 to the TAA 1953]

18.102 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 4, section 115-105 of Schedule 1 to the TAA 1953]

18.103 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 4, 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 4, 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 4, subsection 115-65(5) of Schedule 1 to the TAA 1953].

Special rules for transferring or splitting a mining project interest

18.104 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

18.105 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

316


be able to claim a credit after the transfer or split for some part of the earlier instalments).

• 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).


Implications of acquiring an interest

18.106 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 4, subsection 115-90(2) of Schedule 1 to the TAA 1953]

18.107 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 year. [Schedule 1, item 4, subsection 115-95(1) of Schedule 1 to the TAA 1953]

18.108 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 4, subsection 115-95(2) of Schedule 1 to the TAA 1953]

18.109 In other words, the amounts that were, or would have become, instalment income for the transferring entity for the MRRT year become instalment income of the acquiring entity in the instalment quarter in which the transfer occurs. [Schedule 1, item 4, subsection 115-90(2) and section 115-95 of Schedule 1 to the TAA 1953]

Example 18.1: 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 $60m and $75m respectively. In the third quarter, Francis had made supplies for consideration of $10m and Sedgley made further supplies, for $55m, during the remainder of the quarter.

To the $55m instalment income for its own supplies in the third quarter, Sedgley would add amounts of $60m, $75m and $10m to reflect the amounts that arose in the year during the Francis era.

317


Sedgley’s total instalment income for the third quarter would be $200m.

Implications of transferring an interest

18.110 An entity that transfers or splits a mining project interest or a pre-mining project interest in a quarter will not count the quarter’s instalment income that relates to the interest when working out its instalment for the quarter. [Schedule 1, item 4, subsection 115-90(2) of Schedule 1 to the TAA 1953]

18.111 The entity will also be entitled to a credit at the end of the year for instalments payable by it in relation to that interest for earlier quarters in the year. [Schedule 1, item 4, section 115-20 of Schedule 1 to the TAA 1953]

18.112 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 4, subsection 115-100(1) of Schedule 1 to the TAA 1953]

18.113 The credit can only be claimed in the approved form on or before the day the instalment for the transfer quarter is due. [Schedule 1, item 4, subsection 115-100(2) of Schedule 1 to the TAA 1953]

Amount of the early credit

18.114 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).


Notification requirements

Quarterly instalment notices

18.115 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. The notification is due on or before the day the instalment is due. The information helps the Commissioner decide whether to reconsider the taxpayer’s instalment rate and allows any general interest charge that may

318


be imposed if the entity reduces its instalment rate too far to be worked out. [Schedule 1, item 4, subsections 115-15(1) and (2) of Schedule 1 to the TAA 1953]

18.116 The Commissioner can exempt a taxpayer from having to provide this notification if the Commissioner has given the taxpayer a nil instalment rate. [Schedule 1, item 4, subsections 115-15(3) and (4) of Schedule 1 to the TAA 1953]

Choosing a new instalment rate

18.117 An entity that chooses a new instalment rate for a quarter must notify the Commissioner of that choice. The choice must be notified on or before the day the instalment for that quarter is due. [Schedule 1, item 4, section 115-55 of Schedule 1 to the TAA 1953]


18.118 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 8, 10, and 11 to 13, subsection 995-1(1) of the ITAA 1997, meanings of ‘applicable instalment rate’, ‘base year’, ‘benchmark instalment rate’, ‘instalment income’ and ‘instalment quarter’]

18.119 Amendments are also made to the Taxation Administration Act 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 6, subsection 8AAB(4) of the TAA 1953 and subsection 250-10(2) of Schedule 1 to the TAA 1953]

Record keeping

18.120 Taxpayers 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 4, subsection 123-5(1) of Schedule 1 to the TAA 1953]

18.121 As with other taxes, the effective administration of the MRRT requires the Commissioner to be able to ask taxpayers to provide evidence in support of their self-assessed liabilities or entitlements.

18.122 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.

18.123 For example, the seller of a 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 their MRRT liability.

319


18.124 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

18.125 A taxpayer must keep records of every act, transaction, event or circumstance relating to their mining or pre-mining operations that can be reasonably be expected to be relevant to working out their MRRT position, or that of another entity. [Schedule 1, item 4, subsection 123-5(1) of Schedule 1 to the TAA 1953]

18.126 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 (if any) to which the taxpayer or another entity is entitled under the low profit offset or rehabilitation tax offset provisions. [Schedule 1, item 4, paragraphs 123-5(1)(a) and 123-5(1)(b) of Schedule 1 to the TAA 1953]

18.127 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.

18.128 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 from you. A miner will have to keep records which might no longer relate to its own mining operations or MRRT liability

18.129 If such records do not already exist, the taxpayer is obliged to have them reconstructed. [Schedule 1, item 4, subsection 123-5(2) of Schedule 1 to the TAA 1953]

18.130 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 (e.g. records relating to pre-MRRT periods).

18.131 However, this rule is not intended to allow taxpayers to fail to keep records with a view to reconstructing them at some later time.

320


18.132 A taxpayer must also keep a record of each choice, election, estimate, determination and calculation they made under an MRRT law, along with (in the case of estimates, determinations and calculations) the basis and method used to arrive at each such amount. [Schedule 1, item 4, subsection 123-5(3) of Schedule 1 to the TAA 1953]

18.133 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 Taxation Administration Act 1953.

The form in which records are to be kept

18.134 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 4, paragraph 123-5(4)(b) of Schedule 1 to the TAA 1953]

18.135 These records must also be in English, or readily accessible and easily convertible into English. [Schedule 1, item 4, paragraph 123-5(4)(a) of Schedule 1 to the TAA 1953]

18.136 The records can be kept electronically or in hard copy form.

The length of time for which records are to be retained

18.137 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;

• The end of the period of review for an assessment of MRRT for an MRRT year (if the record is relevant to that assessment).


18.138 This is in line with other requirements in the tax law to retain records, normally for either five or seven years.

18.139 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.

321


Example 18.1: 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 acknowledgement of this payment a week later, on 8 May 2013.

The documentary evidence of this payment are relevant records because they are records of a transaction which is used in calculating Buzz Coal’s royalty allowance, which in turn is a factor in determining its MRRT liability.

For how long is Buzz Coal required to keep these records?

The matter which is the subject of the records is the payment of royalties in relation to the extraction of coal during the last three months of 2012. This matter was concluded when Buzz Coal received acknowledgment of its payment, on 8 May 2013. This is also the time when Buzz Coal obtained the final record in relation to this matter.

This royalty payment is relevant to Buzz Coal’s assessment of MRRT for the 2012-13 MRRT year. Buzz Coal lodges its return for this year on 1 November 2013. The end of the period of review for this assessment is four years after this date, 31 October 2017.

Buzz Coal must keep the records relating to this royalty payment until the latest of this date, and 7 May 2018, being five years after the conclusion of the matters which are the subject of the records. Accordingly, Buzz Coal must keep the records until 7 May 2018.

The penalties for not keeping or retaining relevant records

18.140 It is an offence to fail to keep or retain a record in accordance with the provisions discussed in this chapter. [Schedule 1, item 4, subsection 123-15(1) of Schedule 1 to the TAA 1953]

18.141 This offence is one of strict liability within the meaning of section 6.1 of the Criminal Code [Schedule 1, item 4, subsection 123-15(2) of Schedule 1 to the TAA 1953]. Broadly, this means that the intent of the taxpayer is not considered when assessing whether an offence has occurred (however, a defence of mistake of fact may be available).

18.142 This is consistent with other similar offences elsewhere in the tax law.

18.143 The penalty for failing to keep or retain a record is 30 penalty units, which is currently equal to $3,300. [Schedule 1, item 4, subsection 123-15(1) of Schedule 1 to the TAA 1953]

322


18.144 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).

18.145 However, a taxpayer cannot be subject to both of these penalties in respect of the same offence (see section 8ZE of the TAA 1953).

18.146 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.


Information transfers

18.147 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.

18.148 This will mean that an entity that acquires an interest during a year will usually need information only possessed by the entity that transferred the interest. The MRRT’s information transfer provisions require the original entity to supply the information so that the acquiring entity is able to work out its MRRT liability and to satisfy its MRRT obligations. [Schedule 1, item 4, section 121-5 of Schedule 1 to the TAA 1953]

18.149 An entity with a mining project interest or a pre-mining project interest must provide an information notice to any entity that acquires the interest, or part of the interest, as a result of the interest being transferred or split. [Schedule 1, item 4, subsection 121-10(1) of Schedule 1 to the TAA 1953]

18.150 The entity must also provide the acquiring entity with a further information notice when anything happens after the transfer or split that affects the transferred interest. [Schedule 1, item 4, subsection 121-10(3) of Schedule 1 to the TAA 1953]

323


Example 18.1: Further notice about post-transfer occurrences

Smarter Mining Ideas Pty Ltd transfers its Farragut 5 mining project interest to On-The-Edge Investments. Later, Smarter Mining sells some taxable resources it had extracted from the Farragut 5 mine before the transfer. That supply of taxable resources from the interest will generate mining revenue for whoever has the interest at the end of the MRRT year. Therefore, Smarter Mining would have to notify On-The-Edge that a supply had occurred and provide the information On-The-Edge would need to work out the related mining revenue.

Before it received the notification from Smarter Mining, On-The-Edge had already transferred Farragut 5 to Schofield Mining Properties. On-The-Edge would in turn have to provide Schofield with notice of the information about Smarter Mining’s supply of resources from Farragut 5.

18.151 A notice can always be provided in writing but, if both parties are willing, it can be provided in any other form they wish. This will often be electronically, and could even be orally. [Schedule 1, item 4, paragraph 121-10(4)(a) of Schedule 1 to the TAA 1953]

18.152 A notice must be given with 21 days of the transfer or split. A notice of later occurring events must be provided within 21 days of those events. [Schedule 1, item 4, paragraphs 121-10(4)(b) and (c) of Schedule 1 to the TAA 1953]

18.153 The existing taxation offence provisions would apply to an entity that did not provide a notice it was required to provide on time (see section 8C of the TAA 1953). If it is convicted of the offence, the court could order the entity to comply with the notice obligation (see section 8G of the TAA 1953). A failure to provide a notice on time could instead be subject to an administrative penalty (see section 286-75 of Schedule 1 to the TAA 1953). There may also be penalties for providing information that is false or misleading.

What should an information notice contain?

18.154 In broad terms, the information notice must provide the transferee with all the information it needs to work out its MRRT liability for the interest it has acquired and to comply with its related MRRT obligations.

18.155 This would cover these things:

• the amount of the allowance components that come with the interest [Schedule 1, item 4, paragraph 121-10(2)(a) of Schedule 1 to the TAA 1953].

324


• the information necessary to work out future starting base losses for the interest [Schedule 1, item 4, paragraph 121-10(2)(b) of Schedule 1 to the TAA 1953].

Example 18.1: Information about future starting base losses

Little Big Horn Pty Ltd transfers a mining project interest to Crazy Horse Mining Co. It would have 21 days to provide Crazy Horse with the values of the mining right and other starting base assets transferred with the interest. That would include the valuation method chosen for those assets, their base values at the start of the transfer year, the basis on which their decline in value was being worked out, and their upstream usage histories within the interest. It would also have to inform Crazy Horse of the amount of the interest’s starting base losses carried over from the previous MRRT year. It would also have to inform Crazy Horse of the base values, termination values and usage histories of any assets that experienced a starting base adjustment event in the transfer year, so that Crazy Horse could work out how much mining revenue or mining expenditure to include in the year from those adjustment events.

• The amount of the interest’s mining revenue, pre-mining revenue, mining expenditure and pre-mining expenditure for the year; [Schedule 1, item 4, paragraphs 121-10(2)(c) and (d) of Schedule 1 to the TAA 1953]

Example 18.2: Information about revenue and expenditure

Continuing the previous example, Little Big Horn would have to provide Crazy Horse with details of the year’s mining revenue and expenditure for the transferred interest because Crazy Horse would be liable for paying MRRT for the year in relation to the interest and would need that information to work out its liability. Crazy Horse may be able to work out its mining revenue using the alternative valuation method, so Little Big Horn would need to advise it of the tonnes of resources extracted in relation to the interest for the year, so that Crazy Horse could determine whether it came within the 10 million tonnes threshold for eligibility for that method.

• Information about assets transferred with the interest that could give rise to future revenue or expenditure (such as their original cost and assumptions that were made about the extent of their upstream use in the interest); [Schedule 1, item 4, paragraphs 121-10(2)(c) and (d) of Schedule 1 to the TAA 1953]

Example 18.3: Information about other assets

Continuing the previous example, Little Big Horn would also have to provide Crazy Horse with information about the non-starting base assets transferred with the interest. If Crazy Horse later sold those

325


assets, the adjustment rules would require it to work out how much to include in the interest’s mining revenue. If it changed the upstream usage of the assets, it could include a further amount in revenue or expenditure. To work those things out, Crazy Horse would need to know the original cost of the assets, the assumptions made when they were acquired about the extent of their upstream usage in the interest, and any later adjustments made to revenue and expenditure because of a change in their upstream usage. Therefore, Little Big Horn would have to provide Crazy Horse with that information about the transferred assets.

• The information needed to work out the amount of any rehabilitation offset for the interest (including any amounts that have been deposited on trust or as a bond to secure future rehabilitation of the site, any rehabilitation expenditure incurred in the year, and the total amount of MRRT that has ever been paid in relation to that interest) [Schedule 1, item 4, paragraph 121-10(2)(e) of Schedule 1 to the TAA 1953].

• In the case of a transfer of part of an interest, the transferee’s split percentage [Schedule 1, item 4, paragraph 121-10(2)(f) of Schedule 1 to the TAA 1953].

• The information needed to work out the instalment income of the transferee in the transfer quarter (including instalment income related to the transferred interest that it will inherit) [Schedule 1, item 4, paragraph 121-10(2)(g) of Schedule 1 to the TAA 1953].

Substantiation

18.156 The entity to which an information notice is provided may later need further particulars of the information provided. For example, while it might be enough for the original information notice to provide just a gross figure for the amount of the year’s mining revenue up to the date of the transfer of the interest, the transferee could need to know how that figure was arrived at if the Commissioner challenges it.

18.157 In such cases, the transferee can make a reasonable request of the transferor to provide further particulars to justify the information given in the original notice. What is a reasonable request would depend on the circumstances. However, it would never be reasonable to ask for further particulars that the acquirer already possesses or that it knows the transferor does not possess. Nor would it be reasonable to ask for further particulars unless there was a genuine need for it (such as a dispute with the Commissioner or a serious possibility of such a dispute). [Schedule 1, item 4, subsection 121-15(1) of Schedule 1 to the TAA 1953]

18.158 The transferor has 60 days to comply with a request. [Schedule 1, item 4, subsection 121-15(2) of Schedule 1 to the TAA 1953]

326


18.159 As with the original information notice, failing to comply with any reasonable request for further particulars could be an offence or be subject to an administrative penalty.


18.160 The administrative penalty provisions are amended to ensure that an entity that does not satisfy its obligation to provide an MRRT information notice, or satisfy a reasonable request for further particulars, within time is subject to the administrative penalty provisions. [Schedule 1, items 13 and 14, paragraph 286-80(2)(a) and subsection286-75(2AA) of Schedule 1 to the TAA 1953]

Access powers

18.161 In order to provide for the proper administration of the tax system, including by reviewing self assessing taxpayers, the Commissioner can ask taxpayers to provide additional information. Normally the Commissioner does this informally. However, there are occasions when it proves more difficult to access required information. As such, the Commissioner has the power to access buildings and documents, and gather information that is held domestically and in foreign jurisdictions.

Commissioner’s power

18.162 For the purpose of the administration or operation of the MRRT, the Commissioner can provide a miner with a notice requiring it to provide information [Schedule 1, item 17, section 353-10 of Schedule 1 to the TAA 1953].

Access to premises

18.163 The Commissioner can access premises for the purpose of administering the MRRT [Schedule 1, items 18 and 19, section 353-15 of Schedule 1 to the TAA 1953].

Offshore information notices

18.164 The Commissioner can request the provision of information that is held offshore for the purpose of administering the MRRT [Schedule 1, item 20, section 353-17 of Schedule 1 to the TAA 1953].

Service

18.165 In order to deal with self assessing taxpayers, the Commissioner may need to serve documents from time to time. Although fully self

327


assessing taxpayers do not actually receive notices of assessment, the Commissioner may need to serve documents to amend assessments, deal with outstanding liabilities, and participate in legal proceedings.

18.166 Schedule 1 inserts section 125-10 into Schedule 1 of the TAA 1953 to establish rules for service in relation to the MRRT.

Address for service

18.167 For the purposes of an MRRT law, the Commissioner can serve documents at a physical address, postal address, or electronic address that a miner has provided as its address for service for the purposes of an MRRT law [Schedule 1, item 4, subsection 125-1(1) of Schedule 1 to the TAA 1953]. Where a miner has provided the Commissioner with more than one address, the Commissioner can serve documents at the address considered reasonable in the circumstances [Schedule 1, item 4, subsection 125-1(2) of Schedule 1 to the TAA 1953]. Where a miner has not provided the Commissioner with an address, documents can be served at the address the Commissioner reasonably believes to be the miner’s address for service for the purposes of an MRRT law [Schedule 1, item 4, subsection 125-1(3) of Schedule 1 to the TAA 1953].

18.168 The Commissioner can serve a document in the manner specified by section 28A of the Acts Interpretation Act 1901 (AIA), or, where the miner is being served electronically, by sending it to that email address [Schedule 1, item 4, subsection 125-1(4) of Schedule 1 to the TAA 1953].

18.169 A document served by the Commissioner is taken to be given at the time the Commissioner leaves or posts it [Schedule 1, item 4, subsection 125-1(5) of Schedule 1 to the TAA 1953]. This is designed to override section 29 of the AIA and to ensure that there is no room for confusion about when documents are served.

18.170 This provision also overrides paragraphs 9(1)(d) and 9(2)(d) of the Electronics Transactions Act 1999 to the effect that if the miner has provided the Commissioner with an electronic address for service, the Commissioner does not need to seek the miner’s permission to serve electronically [Schedule 1, item 4, subsection 125-1(6) of Schedule 1 to the TAA 1953].

Making choices

18.171 A choice made by a taxpayer under an MRRT law must be made in accordance with the general rules described below, except to the extent a more specific rule in the MRRT law applies. [Schedule 1, item 4, section 119-15 of Schedule 1 to the TAA 1953]

328


18.172 This approach balances the benefits of simplicity and consistency in these matters with the recognition that variations from the general rules are appropriate in some cases.

18.173 Each of the following is an example of a choice under the MRRT which may be available to a taxpayer, depending on their circumstances:

• Whether the book value or market value approach is used to value starting base assets.

• The order in which transferred mining losses that arose at the same time are applied.

• Whether to use the simplified MRRT method.

18.174 The general rules for MRRT choices cover three matters.

• The time by which a choice must be made.

• The manner in which a choice must be recorded, and in certain cases communicated to the Commissioner.

• The irrevocability of a choice.

When a choice must be made

18.175 In order to be valid, a taxpayer must make a choice about a matter by a certain time.

18.176 If the taxpayer is required to lodge an MRRT return for the first MRRT year for which the choice applies, then the choice must be made by the earlier of the day they lodge that MRRT return and the due date for lodging that return. [Schedule 1, item 4, subparagraph 119-5(1)(a)(i) of Schedule 1 to the TAA 1953]

18.177 If the taxpayer is not required to lodge an MRRT return for that MRRT year, then the choice must be made by the day such a return would have been due (in the event that an MRRT return was required that year). [Schedule 1, item 4, subparagraph 119-5(1)(a)(ii) of Schedule 1 to the TAA 1953]

18.178 In all cases, the Commissioner has the ability to provide the taxpayer with more time to make a valid choice. [Schedule 1, item 4, paragraph 119-5(1)(b) of Schedule 1 to the TAA 1953]

18.179 This provides the Commissioner with broad discretion to take into account circumstances which would otherwise prevent a taxpayer from making a choice by the required time.

329


18.180 For example, the Commissioner may provide additional time to make a choice to a taxpayer who is temporarily incapacitated after an accident, or to a taxpayer who lives in an area badly affected by a natural disaster around the time the choice would normally have been made.

18.181 A similar discretion already exists in other similar rules in the tax law (for example in subsection 148(4) of the Income Tax Assessment Act 1936).

How a choice is made and communicated

18.182 The way a taxpayer prepares their MRRT return for an MRRT year will generally be sufficient evidence of the choice(s) they have made. [Schedule 1, item 4, subsection 119-5(2) of Schedule 1 to the TAA 1953]]

18.183 This is consistent with the standard approach to choices applying elsewhere in the tax law. Under the self-assessment system, the Commissioner has no need to see the records for all the choices taxpayers make.

18.184 However, there are some circumstances in which a taxpayer must provide the Commissioner with the details of certain choices they have made. These circumstances are:

• if the choice has no immediate effect in the first MRRT year for which the choice applies; or

• if the taxpayer is not required to lodge an MRRT return for that MRRT year; or

• if the MRRT law expressly requires further information to be provided to the Commissioner; or

• if the Commissioner requests the information.


18.185 The first two of these cases cover situations where a taxpayer’s choice could not be identified solely by examining their MRRT return. The third is an expression of the principle that any specific rules in the MRRT law take precedence over the general rules for choices to the extent there is any conflict between them. The ability for the Commissioner to request further information about the choices a taxpayer makes is a standard provision used throughout the tax law.

330


MRRT choices are irrevocable

18.186 A choice made under the MRRT law is irrevocable. [Schedule 1, item 4, subsection 119-10 of Schedule 1 to the TAA 1953]

18.187 This requirement is largely dictated by the features of the MRRT, in particular the way that when a mining project interest (or a pre-mining project interest) is transferred, its MRRT history is also transferred to the new taxpayer.

18.188 For example, in working out the amount of a transferred royalty allowance, a miner can choose the order in which to apply royalty credits that arise at the same time. After choosing to apply royalty credits from one of its mining project interests (rather than from others), a taxpayer may then sell one of its other interests (with the unapplied royalty credit attached). If the original taxpayer were to be permitted to revisit their earlier choice and unwind the decision about which royalty credit to apply, the purchaser would be at risk of losing the royalty credit they paid for.

18.189 Making choices made under the MRRT law irrevocable prevents this sort of unfair and unreasonable outcome.

Rulings

18.190 The Commissioner provides a range of advice to taxpayers. This includes things such as manuals and fact sheets, as well as rulings. The rulings system, which includes both public and private rulings, is particularly important because it enables taxpayers to self assess tax positions with enhanced certainty.

18.191 A ruling provides taxpayers with the Commissioner’s views about how particular tax laws apply in certain situations. Public rulings are generally issued when a contentious issue affects a lot of taxpayers. Private rulings enable individual taxpayers to ask the Commissioner about how certain tax laws apply to their circumstances.

18.192 The Commissioner is generally bound by the position taken in a ruling.

18.193 Schedule 1 makes the rulings system applicable to MRRT.

Provisions that are relevant for rulings

18.194 Miners can apply for rulings about MRRT. [Schedule 1, item 21, paragraph 357-55(f) of Schedule 1 to the TAA 1953].

331


18.195 However, miners cannot apply for an oral ruling about MRRT provisions [Schedule 1, item 22, subsection 360-5(1) of Schedule 1 to the TAA 1953]. In the general course of things, such rulings can only be sought by individuals seeking quick answers to simple questions.

Accountability of the Commissioner

18.196 Schedule 1 modifies the TAA 1953 to impose reporting requirements on the Commissioner.

Annual report

18.197 The Commissioner must prepare an annual report on the working of the MRRT law [Schedule 1, items 15 and 16, sections 352-1 and 352-10 of Schedule 1 to the TAA 1953].

18.198 The report is due as soon as practicable after 30 June in each year and must be given to the Minister. It must include a report on any breaches or evasions of the MRRT law that the Commissioner knows about. The Minister must table the report in each House of the Parliament within 15 sitting days of that House after the day on which the Minister receives the report. [Schedule 1, item 16, section 352-10 of Schedule 1 to the TAA 1953]

332

Second Exposure Draft - Minerals Resource Rent Tax...

Documents

Transcript of Second Exposure Draft - Minerals Resource Rent Tax...