How the Minerals Resource Rent Tax works
This chapter will set out, in brief, how a miner would calculate its Minerals
Resource Rent Tax (MRRT) liability under the Minerals Resource Rent Tax Bill 2011 (MRRT
It should be noted that this is a short overview of an extremely complex
matter. Further information on how the MRRT works and the calculation of MRRT
liability can be found in the Revised Explanatory Memorandum. The committee
will confine itself in this report to a brief summary of the operation of the
MRRT, sufficient to allow an understanding of the matters addressed in it.
Overview of the MRRT
The MRRT Bill imposes an effective 22.5 per cent tax
on the above-normal profits earned by the mining of a taxable resource.
Clause 20-5 of the MRRT Bill defines a taxable resource as:
(c) anything produced from a process tha results in iron ore or coal being
consumed or destroyed without extraction;
coal seam gas extracted as a necessary incident of mining coal.
Simply stated, under the MRRT the government will take a share of both
the profits and the risks earned by the iron ore and coal industries from their
exploitation of natural resources owned by the Australian people, and use that
share to benefit the community as a whole.
The Revised Explanatory Memorandum provides the following summary of the
design and intended operation of the MRRT:
The MRRT is a project-based tax, so a liability is worked out
separately for each project the miner has at the end of each MRRT year. The
miner’s liability for that year is the sum of those project liabilities.
The tax is imposed on a miner’s mining profit, less its MRRT
allowances, at a rate of 22.5 per cent (that is, at a nominal rate of 30 per
cent, less a one‑quarter extraction allowance to recognise the miner’s
employment of specialist skills).
A project’s mining profit is its mining revenue less its
mining expenditure. If the expenditure exceeds the revenue, the project has a
mining loss. Mining revenue is, in general, the part of what the miner sells
its taxable resources for that is attributable to the resources in the
condition and location they were in just after extraction (the ‘valuation
point’). Mining revenue also includes recoupment of some amounts that have
previously been allowed as mining expenditure.
Mining expenditure is the cost a miner incurs in bringing the
taxable resources to the valuation point.
Mining allowances reduce each project’s mining profit. The
most significant of the allowances is for mining royalties the miner pays to
the States and Territories. It ensures that the royalties and the MRRT do not
double tax the mining profit.
In the early years of the MRRT, the project’s starting base
provides another important allowance. The starting base is an amount to recognise
the value of investments the miner has made before the MRRT.
Other allowances include losses the project made in earlier
years and losses transferred from the miner’s other projects (or from the
projects of some associated entities).
If a miner’s total mining profit from all its projects comes
to less than $75 million in a year, there is a low-profit offset that
reduces the miner’s liability for MRRT to nil. The offset phases out for mining
profits totalling more than $75 million.
The MRRT is designed to deal with three project cases:
The project did not exist on 1 May 2010, that is, at the time the MRRT
was first announced (this is referred to in the Revised Explanatory Memorandum
as the 'vanilla case').
The project was invested in on 1 May 2010 and is transitioning into the
The project is one of multiple projects in which a miner has an
interest, which usually involves considerable pre-mining expenditure.
Calculating a miner's liability
under the MRRT
The method of calculating a miner's liability under the MRRT is,
basically, the same regardless of the case into which the mining project fits.
The steps to working out the amount a miner (i.e., the holder of a mining
project interest) would pay under the MRRT are:
calculate the miner's mining revenue and mining expenditure;
subtract the mining expenditure from the mining revenue, giving the mining
calculate the mining allowances the miner is entitled to claim. In order
of application they are:
starting base losses;.
subtract the total of the mining allowances from the mining profit;
multiple that figure by the MRRT rate (22.5 per cent) to get the
MRRT liability; and
if the miner is entitled to them, it can subtract the low profit
offset and the rehabilitation tax offset from the MRRT liability.
The revenue from a mining project is calculated in a two-step
(a) calculation of the ‘revenue amount’ for the mining revenue event
is determined; and
calculation of 'so much of the revenue amount as is reasonably
attributable to the taxable resource in the form and place the resource was in
when it was at its valuation point'.
The valuation point, therefore, is 'the point in the mining
production chain that separates upstream and downstream operations'.
There is no method for calculating the revenue amounts expressly outlined
in the MRRT Bill, except that it:
... must produce the most
appropriate and reliable measure of the amount, having regard to, amongst
other things, the functions performed, assets employed and risks assumed by the
miner across its value chain and the information that is available'.
Mining expenditure includes expenditure 'necessarily incurred ... in
that year, in the carrying on (by the miner or another entity) of upstream
mining operations for that mining project interest' and is restricted to
expenditure 'of either a capital or revenue nature'.
It does not, therefore, include the expenditure of assets, which are dealt with
as upfront deductions under depreciation.
Upstream and downstream mining
The MRRT applies to the realised profits, or positive cash flows,
generated by a mining project upstream of the valuation point. For that reason
mining revenue and expenditure are calculated with regard to whether they are
part of the upstream mining operations of the mining project or part of
the downstream mining operations.
The upstream mining operations of a mining project:
... relate directly to finding
and extracting a taxable resource from the mining project area for the mining
project interest. Any activity or operation directed at doing anything to, or
with, the taxable resource after it reaches the valuation point is not an
upstream mining operation.
activities preliminary to extraction, such as exploration, mine
planning, training staff, research on extraction processes, preparation of the
mine site, mine site rehabilitation and restoration, and
activities undertaken as a consequence of extraction, such as
transport to the valuation point, initial crushing, building the road,
Downstream mining operations are mining operations involving taxable
resources after they reach the valuation point. Generally, it is the sale of
resources downstream of the valuation point that generates profit for a mining
project. As it taxes realised profits only, the MRRT:
... requires taxpayers to
determine the amount of those proceeds that are reasonably attributable to the
resource and upstream operations for tax purposes.
The MRRT provides for an allowance component that can be used to reduce
the profit of a mining project interest. Essentially, a mining allowance is the
method by which the cost of bringing the resource to the valuation point is
taken into account, ensuring that the tax is only imposed on the realised
profits of the mining project.
Allowances differ depending on the particular case into which the mining
project falls. The four allowance types are set out in paragraph 3.8(c) above
and must be applied in that order.
The uplift rate
Losses incurred by a mining project can be uplifted, with interest, and
carried forward for use as a deduction against profit in later years. The
is the long‑term bond rate (LTBR) plus seven per cent.
The uplift rate is an essential feature of the design of the MRRT. It is
the mechanism by which the government contributes to the cost of innovation,
exploration, research and development. In this way the government addresses any
disincentive arising from the MRRT for miners and prospective miners to engage
in those activities, thus encouraging future growth in the sector.
The starting base allowance and
alternative valuation methods
One of the allowances under the MRRT is the starting base allowance.
Starting base allowances:
... recognise investments in
assets (starting base assets) relating to the upstream activities of a mining
project interest 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 between 2 May 2010 and 1 July 2012 ... starting
base losses are never transferable to other mining project interests.
Staring base assets can be valued using either
the market value method, based on 'the market value of the
mining project interest's upstream assets at 1 May 2010'; or
the book value method based on 'the most recent audited
accounting value of those assets at 1 May 2010'.
The Revised Explanatory Memorandum to the MRRT bills points out some
important differences between the two methods:
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 plus seven per cent; and
under the market value method, starting base losses unable to be
applied in the year are uplifted at the consumer price index (CPI) rate, while
they are uplifted at LTBR plus seven per cent under the book value method.
The issue of how starting base
allowances are calculated is one of the most contentious aspects of the MRRT. In
summary, it is argued by small miners that the market valuation approach
provides large miners with a significantly larger 'tax shield', as they have
greater assets that can be deducted from their revenues. This issue is
discussed in chapter 5 of the report.
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