Australian Tax Brief

Resource Super Profits Tax & other tax reforms for Australian Resource Projects
May 2010

Most capital expenditure written-off over timeThe Australian Government has announced that it will introduce a new Resource Super Profits Tax (RSPT) on ALL profitable resource projects in Australia. The tax will apply at the rate of 40%.

The RSPT will commence from 1 July 2012 and will be shortly followed by a reduction in the rate of company tax from 30% to 29% in 2013/2014 and a further reduction to 28% after 2014.

An exploration tax offset is also to apply for Australian exploration expenditure incurred on or after 1 July 2011.

The Henry Review made 138 recommendations for Australian tax reform. The Australian Government has not provided a comprehensive response in relation to all these structural recommendations – except as noted above. A comprehensive review is likely to take some time to both consider and implement (as appropriate). Some of the key additional reforms yet to be considered are noted in section 3 below.

Resource Super Profits Tax

Questions  Answers
 What is the rate of RSPT?  The RSPT applies at the rate of 40% from 1 July 2012. This tax is deductible in calculating company tax payable.
What projects are subject to RSPT?

 All Australian projects for the following non-renewable resources: 

  • Petroleum (including crude oil, condensate, and natural gas, including coal seam gas
  • Uranium 
  • 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 is to be considered further.
PRRT projects will be eligible to elect into the RSPT regime in lieu of the PRRT regime.

Will some resources be exempt from RSPT? Resources that may merit exemption from the resource rent tax include:
  Mineral
  Barite
Borates
Calcite
Chert
Chlorite
Clays (bentonite, kaolin, structural and cement clay/shale clay)
Dimension stone (granite, marble, sandstone, slate)
Diatomite
Dolomite
Feldspar
Fluorite
Gypsum Halite
Lime
Limestone
Magnesite
Magnesium salts
Marble
Mica
Olivine
Peat
Perlite
Phosphates 
Potassium minerals and sands
Pyrophyllite
Quartzite Salt
Sand, gravel and rock
Serpentine
Silica
Sillimanate group metals
Talc
Vermiculite
Wollastonite
Zeolites
How will super profits be calculated? Resource Super Profit (by Project)  $
  Assessable receipts or income (being the market value of the resource at the point of productioni)  +
  Less Deductible Project Expenditure incurred up to the point of production (including depreciation).  -
  Less RSPT allowanceii  -
  Less any prior year project lossesiii  -
  = RSPT Project Profit or Loss  =
  +/- losses transferred from/to other projectsiv  +/-
    = Resource Super Profits $
  RSPT Tax @ 40%
What project expenditure is not deductible?
  • 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.v
Does the RSPT apply to existing projects?

Yes – but it is clear that transitional issues will be difficult including recognising the fair 'value' of project costs for existing projects. This is important as a significant part of the expected growth in the mining industry output is likely to come from the expansion of existing mines.

The RSPT 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.

Transitional assistance is likely to be provided by recognising a starting 'capital expenditure' base, to recognise investment made at the project level at the commencement of the RSPT. How this is to be calculated is yet to be determined. The starting base for PRRT projects could be set equal to the value of carried-forward expenditure.

How will the starting project base be available as a deduction in calculating RSPT?

Existing projects will depreciate their RSPT starting base over 5 years at the following accelerated rates:

Year 1     36%

Year 2     24%

Year 3     15%

Year 4     15%

Year 5     10%

Is RSPT the same as PRRT? Resource super profits tax Petroleum resources rent tax
  Most capital expenditure written-off over time Capital expenditure is immediately expensed
  Transferable expenditure Limited transferability of exploration expenditure
  Refundability of unutilised expenditure No refundability of unutilised expenditure
  One allowance (uplift) rate for all capital expenditure  Eight uplift rates for capital expenditure
Does a 'super' profit need to be earned for RSPT to be payable? The Government's proposed formula does not rely on the project generating any super profit by any commercial standard.
This is likely to be strongly contested and debated by state governments and the resources industry generally.
How will this affect shareholder returns?
  • RSPT is an additional project cost that is tax deductible
  • RSPT does not increase Australian company franking credits
  • Shareholder returns are likely to be less unless the tax is recouped through higher commodity prices/sales
How will RSPT affect long term commodity supply prices? There is a risk that commodity prices may increase as a way in part to recover this additional cost.
Is this a double tax? State and territory royalties will be credited against any RSPT that is payable.

However future increases in state and territory royalties will not be creditable and therefore may result in potential double tax.
Will there be further consultation and changes to RSPT? The Australian Mining industry does not support the introduction of RSPT. If the RSPT is to be introduced there will need to be extensive state government, community and industry consultation. This is proposed as follows:
  PHASE 1
  May 2010 Announcement and Announcement paper Announcement paper released.

Formation of the Resource Tax Consultation Panel
  May-June 2010 Preliminary consultation Consultations on the fundamental architecture of the RSPT and transitional arrangements for existing projects
  PHASE 2
  July 2010 Extensive consultation and Issues Paper Expands on the Announcement Paper setting out further technical design issues.

Seek submissions from stakeholders.
Opportunity to provide comment on policy design
  PHASE 3
  Late 2010 Final Design Paper Outlines the detailed design of the RSPT.

Provides certainty to key stakeholders regarding the technical design of the RSPT
  Mid 2011 Exposure Draft Legislation Seek comments from stakeholders on implementation details and whether legislation is consistent with the

Final Design Paper
  Late 2011 Legislation introduced into Parliament  
  1 July 2012 Commencement of the RSPT  

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 returnvi. 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%.

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 (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.

Minter Ellison will be following the progress of these tax reforms and will advise you of further developments and progress on these important issues.