Taxation - Resource super profits tax

Resource super profits tax

Kali Sanyal and Paige Darby

The government announced its intention to introduce the Resource Super Profits Tax (RSPT) in its response to the Australia’s Future Tax System (Henry Tax Review) report on 2 May 2010.[1] A resource rent tax was one of five recommendations the government accepted from the 138 presented by the Henry Tax Review.[2]

Budget measures

As part of the 2010–11 Budget, the government has proposed to introduce the RSPT from 1 July 2012, with revenue from the tax estimated at $3 billion in its first year of operation, increasing to $9 billion in 2013–14.[3]

Of this $12 billion in revenue, $700 million will be used to set up a Resource State Infrastructure Fund in 2012–13, with another $735 million budgeted for the fund in the following financial year.[4] When announcing the fund, the government estimated that it would constitute ‘more than $5.6 billion over the next decade, particularly for mining states’.[5]

In addition, the government has set aside $1.8 billion over four years for a resource exploration tax offset which will be available for expenditure incurred from 1 July 2011.[6]

The RSPT

The RSPT constitutes a 40 per cent tax on the ‘super’ profits made from ‘the exploitation of Australia’s non-renewable resources’. It will replace crude oil excise and involve a refundable credit for royalties mining entities pay to the states and territories. Also, entities currently covered by the Petroleum Resource Rent Tax (PRRT) will be able to opt into the RSPT scheme.[7]

The Henry Tax Review specifically recommended a resource rent tax with the following characteristics:

A uniform resource rent tax should be set at a rate of 40 per cent. It would use an allowance for corporate capital system, with taxable profit associated with a resource project equal to net income less an allowance for undeducted expenses or unused losses. The allowance rate would be set by the long-term government bond rate, as the government would share in the risks of projects by providing a loss refund if the tax value of expenditure is otherwise unable to be used.[8]

The Government has largely followed these recommendations in its design of the RSPT. Under the RSPT scheme an entity can deduct the costs outlaid on a project from the project’s RSPT income or income of another project owned by that entity. Any remaining costs will be carried forward to be deducted as a loss against future income, or potentially refundable at the 40 per cent rate on a reasonable basis (to be determined through consultation with stakeholders). Undeducted costs will be held in an RSPT capital account which will earn an interest allowance (set at the long-term government bond rate—as recommended by the Henry Tax Review). Entities with existing projects subject to the RSPT will have access to an RSPT starting base to recognise past investment. This ‘starting base’ will operate over the first five years of the RSPT, however the starting base will not be refundable or transferable to other projects.[9]

Deductions will be allowed for the cost of extracting resources and getting them to the taxing point, but not for the following types of expenditure:

payments of interest and financing costs, including the cost of issuing shares, the repayment of equity, the payment of dividends, and financial hedging costs;
payments to acquire an interest in an existing exploration permit, retention lease, development licence, production licence, pipeline licence or access authority;
payments to acquire interests in projects subject to the RSPT; and
payments of income tax or GST.[10]

The main implication for existing projects is that if they are very profitable, they will pay more tax under the RSPT, and if they are in a net loss position they will not have to pay any RSPT. In particular, the government maintains that ‘no project that was profitable under the royalty system will become unprofitable because of the RSPT’.[11]

However, specific details—such as the ‘taxing point’ of these super profits—are still unclear. The Government has committed to an extensive consultation period in order to determine the design of the tax in discussion with industry:

There will be a period in excess of two years between announcement and commencement of the scheme, which will allow for extensive consultation on the details of the system and ensure technical design is settled before commencement.[12]

The consultation period will cover, inter alia:

the need for exemptions from the RSPT (for example, in respect of low value minerals or micro businesses)
the basis on which deductible costs will be refundable (for example, when an entity exits the resource sector)
arrangements for projects covered under the PRRT to irrevocably elect into the RSPT
the design of the transitional arrangements into the RSPT and
establishing a methodology for taxing super profits (especially those methodologies for establishing taxing point values where arm’s length prices occur downstream of the taxing point).[13]

Consultation will include the announcement paper (which was released on 2 May 2010), an issues paper to be released in July 2010, the final design paper to be published in late 2010, and exposure draft legislation to be released in mid-2011.[14] Initial consultations based on the announcement paper are scheduled to start in Sydney on 24 May 2010 and end in Adelaide on 11 June 2010.[15]

The current arrangements

The current system of resource taxation involves excise duties administered by the Commonwealth and royalties administered at the State level.[16] Both of these types of taxes are typically levied ad valorem—that is, mining is taxed on a per unit of output basis which, as resources increase in value, is increasingly distant from the profits being made from these resources. In other words, if a tax is levied on the amount per tonne of a resource (say coal), the tax collected by the government does not increase if the value of that resource increases on international markets—direct tax revenue only increases if the mining company chooses to mine more coal.

The RSPT will replace the Commonwealth excise, but in order to avoid the need to force states to remove their royalty-based systems, the government is introducing a refundable credit for royalties paid to the states and territories. This essentially means the Commonwealth Government will pay the states their royalty revenue (through the mining companies).

The Commonwealth Government also administers the PRRT which was introduced in the 1980s. While the RSPT is similar to the PRRT as they are both profit-based taxes levied at a rate of 40 per cent, there are some key differences:

Resource Super Profits Tax	Petroleum Resource 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

Source: The resource super profits tax: a fair return to the nation, op. cit., p. 25

An important lesson to learn from the PRRT will become apparent when determining the taxing point and valuation methodologies for the RSPT—both of which have been a point of concern for the petroleum resource industry under the current regime.[17]

There are arguments in favour of both profit-based taxes like the RSPT and royalty-based taxes. The Henry Tax Review argued that royalty-based taxes lower the return available from resources:

Current charging arrangements fail to collect a sufficient return for the community because they are unresponsive to changes in profits. Further, the current arrangements distort investment and production decisions, thereby lowering the community's return from its resources.[18]

However, many countries retain mining royalties because they create a direct link between use of the resource and the State:

While the trend has been to move toward profit-based taxes, many nations still retain royalty taxes. There are many reasons for this but the most important one is probably the issue of patrimony. In most nations minerals belong to the state. If a company extracts the state’s resources, the state may deem it necessary to demonstrate that it has received something in return for its lost minerals. Mining companies do not always generate taxable profits, and thus there is no guarantee that the state will receive any income-based taxes for its lost resources. There are many examples of mines that operate at a loss. The policy question then is, should a miner be allowed to extract the state’s resources, sell them, and pay the state nothing if the mine is operating at a loss? Some nations have answered this affirmatively but many developing economies impose a royalty thus insuring that anytime a mine extracts the state’s minerals, the state receives at least a nominal payment.[19]

Pros and cons

The government has argued that applying a resource rent tax on all non-renewable resources enables the government to address the ‘risk of a “two speed economy”’. In addition, only applying the tax to profits recognises the large investments required for resource projects. These large investments are further recognised because losses will be able to be credited to future years (which is not possible under the PRRT).[20]

The Government has based its proposal on modelling conducted by KPMG Econtech for Treasury.[21] This modelling suggests that under the RSPT scheme:

mining investment will rise by 4.5 per cent
employment in the mining industry will increase by 7 per cent and
mining production will increase by 5.5 per cent, in the ‘long run’.[22]

For further analysis on this modelling and the implications on the RSPT on the Budget see ‘Budget 2010–11: Key features’ by Scott Kompo-Harms in this Budget Review.

However, the scheme has been criticised over a number of issues including:

it will apply to existing projects, rather than just ‘greenfields’ projects (when the PRRT was introduced it excluded existing projects)
the profit threshold of 6 per cent—the same as the long-term government bond rate—is too low (the PRRT kicks in at the bond rate plus 5 percentage points, i.e., 11 per cent)
it applies the same tax rate to all commodities, rather than applying commodity-specific tax rates, and
it could make Australia look like a less stable and less competitive place for long-term investment, especially given details of the tax will be uncertain while they are discussed over the next two years.[23]

[1]. K Rudd (Prime Minister) and W Swan (Treasurer), Stronger, fairer, simpler: a tax plan for our future, media release, 2 May 2010, viewed 17 May 2010, http://www.futuretax.gov.au/documents/attachments/100502_stronger_fairer_simpler_a_tax_plan_for_our_future.pdf

[2]. K Henry (Chair), J Harmer, J Piggott, H Ridout, and G Smith, ‘Part one: overview’, Australia’s future tax system: report to the Treasurer, Commonwealth of Australia, Canberra, December 2009, viewed 17 May 2010, http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf

[3]. Australian Government, ‘Part 1: revenue measures’, Budget measures: budget paper no.2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 45, viewed 17 May 2010, http://www.aph.gov.au/budget/2010-11/content/bp2/download/bp2.pdf

[4]. Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no.2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 297, viewed 17 May 2010, http://www.aph.gov.au/budget/2010-11/content/bp2/download/bp2.pdf

[5]. Rudd and Swan, op. cit., p. 1. See also: Australian Government, Fact sheet: state infrastructure funding, Commonwealth of Australia, 2010, viewed 19 May 2010, http://www.futuretax.gov.au/documents/attachments/4_Fact_Sheet_State_infrastructure_funding.pdf

[6]. ‘Part 2: expense measures’, Budget paper no. 2: 2010–11, op. cit., pp. 297–298. For further information on the resource exploration refundable tax offset please see the ‘Climate change and energy’ brief in this Budget review 2010–11.

[7]. Australian Government, Fact sheet: resource super profits tax, Commonwealth of Australia, 2010, p. 1, viewed 17 May 2010, http://www.futuretax.gov.au/documents/attachments/10_Fact_sheet_Resource_Profit_Tax_Final.pdf

[8]. Henry et. al., Australia’s future tax system: report to the Treasurer, op. cit., p. 48.

[9]. Fact sheet: resource super profits tax, op. cit. pp. 3–4.

[10]. Australian Government, The resource super profits tax: a fair return to the nation, Commonwealth of Australia, Canberra, 2010, p. 30, viewed 17 May 2010, http://www.futuretax.gov.au/documents/attachments/Announcement_document.pdf

[11]. Ibid., p. 9.

[12]. The resource super profits tax: a fair return to the nation, op. cit., p. 3.

[13]. Fact sheet: resource super profits tax, op. cit.

[14]. The resource super profits tax: a fair return to the nation, op. cit., p. 4.

[15]. Australian Government, ‘Consultation calendar’, Stronger, Fairer, Simpler: a tax plan for our future website, viewed 17 May 2010, http://www.futuretax.gov.au/pages/Consultation.aspx

[16]. Mining companies are also subject to business taxes, such as the company tax.

[17]. See: Fact sheet: resource super profits tax, op. cit., p. 6.

[18]. K Henry (Chair), J Harmer, J Piggott, H Ridout, and G Smith, ‘Part two: detailed analysis’, Australia’s future tax system: report to the Treasurer, vol. 1, Commonwealth of Australia, Canberra, December 2009, p. 217, viewed 17 May 2010, http://taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf

[19]. JM Otto, Mining taxation in developing countries, study prepared for UNCTAD, November 2000, p. 6, viewed 17 May 2010, http://r0.unctad.org/infocomm/Diversification/cape/pdf/otto.pdf

[20]. Rudd and Swan, op. cit., p. 1.

[21]. KPMG Econtech, The Treasury: CGE analysis of part of the Government’s AFTSR response, report prepared for Treasury, KPMG, 2010, viewed 17 May 2010, http://www.kpmg.com.au/Portals/0/KPMGEcontech-Report-CGE-Analysis-of-part-of-Governments-AFTS-Response.pdf

[22]. Fact sheet: resource super profits tax, op. cit., p. 9.

[23]. T Colebatch, ‘Swan’s budget numbers hide ugly reality’, Age, 18 May 2010, p. 11, viewed 18 May 2010, http://parlinfo.aph.gov.au/parlInfo/download/media/pressclp/YIQW6/upload_binary/yiqw62.pdf; A Fraser and A Burrell, ‘State pushes Swan to bend on tax’, Australian, 18 May 2010, p. 1, viewed 18 May 2010, http://parlinfo.aph.gov.au/parlInfo/download/media/pressclp/6HQW6/upload_binary/6hqw60.pdf