Summary of Key Tax Proposals
The Henry Review – Implications for Australian Resource Projects
Part B – Other Recommendations
Summary of Key Tax Proposals
The following is a summary of the key tax reforms announced by the Australian Government on 2 May 2010.
- A reduction in the rate of company tax from 30% to 29% in 2013/2014 and a further reduction to 28% from 2013/2014 onwards
- A new 'resource rent' tax to be introduced for mining project profits (rate = 40%) from 1 July 2012
- The resource rent tax is a deduction against assessable income for company tax purposes (results in an effective tax rate of 56.8%)
- State royalties to apply in parallel but to reduce or offset RSPT
- The State royalty regimes would need to be fixed at a particular point in time to ensure that the Australian Government does not automatically fund future increases in State royalties
- A tax offset for exploration companies where the Australian exploration expenditure results in a tax loss
- Geothermal exploration is eligible but there is no statement to confirm that carbon capture and storage exploration are too.
Further reforms may follow as the Government responds in full to the 138 recommendations made by Dr Ken Henry in his report – Australia’s Future Tax System.
- How is the 'super profit' to be calculated?
- Is this really a profit on super profits only, or is it a tax on resource profits generally (that is, a risk free return calculation of project profits)?
- Can the mining and petroleum industries negotiate a fair measure of super profits through the consultation process?
- Can this tax cost be passed on to customers (through commodity supply contracts and subject to the commodity cycle)?
- What is the likely impact on company profits and franking credits available for distribution?
- How will the new tax regime address transitional issues for existing projects and recognise the value of project expenditure to date?
- Will the tax discriminate against existing projects in favour of new projects (noting that the exploration tax offset also appears to favour junior miners)?
- What impact (if any) do existing double tax treaties and other investment treaties have on the introduction of the tax?
The Henry Review – Implications for Australian Resource Projects
The Australian Government released the much anticipated report by Dr Ken Henry and his team of advisors on 2 May 2010 - Australia’s Future Tax System.
The Government has not provided a comprehensive response in relation to all these structural recommendations – which in any case are likely to take some time to consider and implement as appropriate. However the Australian Government has indicated its broad support for five of the reforms including the following:
- the introduction of a Resource Super Profits Tax at the rate of 40% on Australian mining projects from 1 July 2012
- a reduction in the rate of company tax from 30% to 29% in 2013/2014 and a further reduction to 28% from 2013/2014 onwards
- a tax offset for exploration companies in loss as a result of exploration expenditure incurred in relation to Australian permits.
Part A of this report provides an overview of these recommendations.
The Henry Review report makes 138 recommendations for tax reform across a broad spectrum of State and Federal taxes and includes recommendations to abolish the following taxes:
- Insurance tax
- Payroll tax
- Property transfer tax
- Stamp duties on the purchase of motor vehicles
- Resource royalties (replaced by the rent tax)
- Luxury car tax
- Tax on superannuation contributions in the fund (taxed as income of the individual at a capped rate of 15%)
- Income taxes on all government pensions, allowances and benefits, and
- Fuel and vehicle registration taxes (if replaced by more efficient road user charges).
Part B of this report examines the other key tax reforms proposed by Dr Henry that are likely to be material for Australian resource projects.
Resources Super Profits Tax
There is still significant uncertainty about how this proposal is intended to work and how different it is from the recommendations made by Dr Ken Henry. In particular, it is not clear whether the Government intends to impose the RSPT on all resource projects and apply it to profits generally, or only to profits that are indeed 'super profits'. This is expected to be the subject of further consultation and negotiation.
Australian Government announcements
The Government has announced that it will introduce a 40% resource super profits tax. The Australian Government proposal results in an effective tax rate of 56.8%1.
A panel has been formed to consult with industry and consultation is expected to commence shortly. The objectives of the Panel's discussions will be twofold:
- communicating the design features of RSPT, especially the special features of the tax such as the rebating of existing state royalty charges, and
- liaising with industry to find the best way to achieve Government policy outcomes and deliver a system that is both simple and which minimises compliance costs. This will include further defining
- the details of the scheme and ensuring technical design issues are finalised prior to commencement.
The Henry Recommendations
Dr Henry recommends replacing the current arrangements with a resource rent tax so that the rate of tax imposed on the project (including company tax) does not exceed 55%2. The Henry Review also recommends that the Australian Government set out a time-frame to implement the resource rent tax and provide guidance at the time of announcement on how existing investments and investment in the interim will be treated. Presumably this will be addressed as part of the Government's Consultation Process (see above) since there is still significant uncertainty about how the proposals will be implemented.
The Henry Review recommends that the company tax rate and RSPT rate should work in tandem, so that an increase in company tax results in a reduction in resource rent tax and vice versa. Where the company tax rate is set at 25% (as recommended by Dr Henry), a 40% tax deductible resource rent tax results in an overall tax cost of 55%.3
How to calculate Resource Super Profits Tax
The resource rent tax is intended to be calculated on the profit for each project where profit is calculated following these broad principles:
|Resource Super Profit (by Project)
|Market Value of the resource at the point of production 4
Less Deductible Project Expenditure incurred up to the point of production (including depreciation) but excluding5:
- Payments of interest and borrowing costs
- Payments of dividends and the costs of issuing shares
- Repayment of equity
- Payments to acquire an interest in an existing exploration permit, retention lease, production licence, pipeline licence or access authority
- Payments to acquire interests in projects subject to the resource rent tax
- Payments of income tax or GST
- Payments of administrative or accounting costs incurred indirectly with the carrying on of the project, and
- Payments in respect of land and buildings not adjacent to the project for use in connection with administrative and accounting activities.
|Less: RSPT allowance6
|Less any prior year project losses7
|= RSPT Project Profit or Loss
|+/- losses transferred from/to other projects8
|Resource Super Profit
|Tax @ 40%
||Tax @ 40%|
|Tax Benefit from tax deduction for RSPT = company tax rate x 40%
Projects would be taxed separately
The resource rent tax should be calculated for projects, rather than for each company – see Recommendation 45(d).
Setting the taxing point at the project level would also identify the State where the resource is being exploited. This would enable the revenue from the resource rent tax to be allocated on a State-by-State basis, if this is considered appropriate.
In principle, the taxing point should be a sale of resources as close to the well head or mine gate as possible to ensure that only rents from resource extraction are subject to the resource rent tax. Liability would be calculated by reference to the taxable profit of the project (as described above). Where the resource is sold at the point at which it is produced, the receipts would be the amounts actually received. Where it is not sold at that point, the market value of the resource at that point would need to be attributed.
The need to attribute a transfer price can arise if a vertically integrated company both extracts the resource and refines it, or subjects it to some further manufacturing process. The bauxite to alumina to aluminium and natural gas to liquid natural gas industries are examples of vertical integration. For integrated companies, transfer pricing requirements would necessarily involve greater compliance costs.
What resources will be subject to resource rent tax?
The resources that are expected to generate resource rent profits are:
- Petroleum (including crude oil, condensate and natural gas, including coal seam gas)
- Bulk commodities (black coal and iron ore)
- Base metals (gold, silver, copper, lead, nickel, tin, zinc, bauxite)
- Diamonds and other precious stones
- Mineral sands
Brown coal requires further consideration and may be outside the resource rent regime.
The State royalty systems provide a useful guide to identifying other resources that may not merit inclusion, by reference to those mineral resources currently subject to specific (volume-based) royalties. Table 1 lists the minerals, for which the resource rent tax may not be suitable. These resources if excluded could continue to be subject to royalties or other arrangements if appropriate.
Table 1: Resources outside the RSPT
Resources that may merit exemption from the resource rent tax include:
||Potassium minerals and sands|
||Sand, gravel and rock|
|Clays (bentonite, kaolin, structural and cement clay/shale clay)
|Dimension stone (granite, marble, sandstone, slate)
||Sillimanate group metals|
The transition to the resource rent tax
Existing resource projects should be subject to the new resource rent tax - see Recommendation 47.
This is important as a significant part of the expected growth in mining industry output is likely to come from the expansion of existing mines.
The resource rent tax would also apply to projects currently subject to negotiated special royalty arrangements, including those in place for iron ore mines, the Argyle diamond mine in Western Australia and Olympic Dam in South Australia.
Transferring existing projects into the resource rent tax system
The Henry Review suggests that the case for providing transitional assistance is far from clear because:
- non-renewable resources remain the property of the Crown until they are exploited
- governments have not in the past compensated resource firms for changes to resource charges, and
- investors can be expected to have taken into account potential changes to resource charges when they made investment decisions.
Governments should also not compensate investors for the change in the value of projects or companies associated with resource rights or expected benefits from future expenditure and investment.
To the extent the Australian Government decides transitional assistance is warranted, assistance should be directed to recognising previous expenditure and investment. That is, by providing a starting ACC base, as deemed appropriate, to recognise investment made at the project level. The starting ACC base would effectively operate as a lump-sum transfer to existing projects and consequently would not distort subsequent production decisions (see Recommendation 47). For example, the starting ACC base for PRRT projects could be set equal to the value of carried-forward expenditure.
While it is generally desirable to provide a full loss offset, it may not be appropriate for losses to be refunded or transferred where they are associated with past expenditure recognised in the starting ACC base. This is because fully refunding losses on past expenditure may create an incentive for firms to report expenditure incurred for projects that have already failed. As such, losses arising from past expenditure should be quarantined from other losses and would not be refundable.
Transitional relief should not be provided through adjustments to the tax rate or other design features, or, in general, by providing a period of grace for existing projects. Such approaches would distort investment and production decisions or compromise the long-run improvement in the community's return from non-renewable resources.
The resource rent tax and the States
Henry recommends that State royalties are replaced by the resource rent tax and the revenues allocated between the States – on a basis to be negotiated between the Australian Government and the States (see Recommendation 48).
State royalty collections were $8,286 million in 2008–2009, made up as follows:
|State or Territory
||Proportion of State Revenue %|
|New South Wales
Options for dealing with existing State royalties on resources that would be subject to the resource rent tax include:
- replace State royalties and assign the resource rents to the States, or
- continue to apply State royalties in parallel, with royalties credited against the resource rent tax.
The States oppose the abolition of State mining royalties and accordingly Option 2 seems more likely.
Option 2: Apply State royalties in parallel, with royalties credited against the resource rent tax
A project that is subject to both the resource rent tax and a State royalty would be entitled to a credit for the royalty against the total liability for the RSPT (with any excess refunded).
The State royalty regimes would need to be fixed at a particular point in time to ensure that the Australian Government does not automatically fund future increases in State royalties.
While this arrangement would realise the efficiency gains of the resource rent tax, the net gains would be tempered by the compliance and administration costs of running dual regimes.
Reduction in Company Tax Rate
The Henry Review recommends that the company income tax rate should be reduced to 25 per cent over the short to medium term with the timing subject to:
- economic and fiscal circumstances, and
- improved arrangements for charging for the use of non-renewable resources should be introduced at the same time.
Tax Offsets for Exploration Losses
An exploration tax offset will apply for exploration expenditure incurred on or after 1 July 2011. The tax offset is expected to be available through the company tax return9. That is, exploration costs which result in a taxable loss for the exploration company will result in a tax refund for the exploration company.
Expenditure incurred in exploring or prospecting for minerals, petroleum or quarry minerals can be immediately deducted, subject to the taxpayer passing certain tests. Expenditure on depreciating assets that are first used for exploration can also be written off immediately. For companies with little or no taxable income, the existing deductions simply add to tax losses that are carried forward to be offset against possible future income. The offset will provide additional funding for exploration companies during the exploration phase.
The Government considers that a tax offset for exploration expenditure is a simpler and more effective means of supporting the development of Australia’s resource sector than a traditional flow-through share scheme.
Dr Henry indicates in his report that he favours a refundable tax offset for companies in loss as a result of exploration expenditure in preference to the proposal to introduce a traditional flow through exploration share regime. This is primarily because of the perceived strong incentive for superannuation funds to invest in exploration where there was a flow through share model and where the rate of tax applying to superannuation funds was reduced to 7.5%.
Part B – Other Recommendations
The following recommendations in the Henry Review are still to be considered by the Australian Government:
- Recommendation 50: The Australian and State governments should abolish fees and stamp duties on the transfer of interests in a resource project except those related to administrative costs.
- Recommendation 28: The capital allowance arrangements should be enhanced and streamlined to ensure effective rates more closely match rates of economic depreciation, and to reduce administration and compliance costs overall. This should include:
- allowing low-value assets (assets costing less than $1,000) to be immediately written-off, and
- reviewing the impact of special provisions applying to different investments in agriculture and statutory effective life caps and other concessional write-off provisions.
- Recommendation 31: Companies should be allowed to carry back a revenue loss to offset it against the prior year's taxable income, with the amount of any refund limited to a company's franking account balance.
- Recommendation 51: Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system. Recognising the revenue needs of the States, the removal of stamp duty should be achieved through a switch to more efficient taxes, such as those levied on broad consumption or land bases. Increasing land tax at the same time as reducing stamp duty has the additional benefit of some offsetting impacts on asset prices.
- Recommendation 52: Given the efficiency benefits of a broad land tax, it should be levied on as broad a base as possible. In order to tax more valuable land at higher rates, consideration should be given to levying land tax using an increasing marginal rate schedule, with the lowest rate being zero, with thresholds determined by the per-square-metre value.
- Recommendation 53: In the long run, the land tax base should be broadened to eventually include all land. If this occurs, low-value land, such as most agricultural land, would not face a land tax liability where its value per square metre is below the lowest rate threshold.
- Recommendation 54: There are a number of incremental reforms that could potentially improve the operation of land tax, including:
- ensuring that land tax applies per land holding, not on an entity's total holding, in order to promote investment in land development
- eliminating stamp duties on commercial and industrial properties in return for a broad land tax on those properties, and
- investigating various transitional arrangements necessary to achieve a broader land tax.
1 being 28% company tax rate + RSPT 40%*(1-0.28) = 56.8%
2 The Henry report recommends that the rate of RSPT is calculated as follows:
where tr represents the resource rent tax and tc represents the company tax rate.
3 [being 25% + 30% and where 30% = 40% x (1-0.25)]4
Based on actual sale or arms-length sale price at this point in production
Vertically integrated projects will need to calculate a resource value for each stage of production
5 These exclusions are similar to the exclusions under the PRRT regime
6 An ACC allowance is required to compensate investors for the deferral of the tax credit, which is akin to a loan from investors to the government. The appropriate rate should compensate for the market interest that the government would have to pay for its borrowings, rather than being related to the riskiness of the project. Therefore, where a full loss offset is provided, the ACC rate should be set to the long-term Australian government bond rate (see Recommendation 45c). If a full loss offset is not provided but losses can be transferred, the ACC rate should be set to the average corporate bond rate. The ACCC Allowance = ACCC opening balance x RSPT rate set annually at the 10-year Government Bond Rate (currently 6%).
7 the tax value of residual losses would be refunded when a project is closed. We assume that loss carry back rules will not apply
8 Will project losses be transferrable across different States?
9 we expect this will be similar to the model adopted for film tax offsets