Concerns of small and emerging miners
Small and emerging miners have expressed concern that the Minerals
Resource Rent Tax (MRRT) is designed in such a way as to benefit Australia's
large and established mining companies, leaving junior miners to bear the
burden of the tax. This chapter will examine the concerns of the smaller miners
about features of the MRRT. It will address issues raised in relation to the
starting base allowance, the threshold for the low profit offset and the
effects of the MRRT's simplified tax obligations for smaller miners. The
concerns of the emerging magnetite industry will also be covered, as well as a
number of other proposed amendments to the MRRT's design.
Smaller miners have argued that the MRRT will affect the international
competitiveness of the resources industry and that Australia's emerging miners
will be 'competitively disadvantaged' in both domestic and international
The Association of Mining and Exploration Companies (AMEC), which represents
350 companies (mostly smaller miners), argued strongly in its submission
that the MRRT's current design does not reflect a recognition that small and
have different risk profiles;
do not have significant cash flow levels;
have smaller economies of scale; and
consequently have higher unit-cost of production in comparison to
large mature miners, 'making it difficult for them to compete with large mature
miners in the domestic and global markets'.
Competitive neutrality and unfairness
Smaller miners have described the MRRT as 'unfair and discriminatory',
claiming that the tax does not promote competitive neutrality in that its
design delivers advantages for bigger companies.
The argument being made is, in summary, that the design of the MRRT
favours big, established miners, which have considerable assets and substantial
infrastructure in place before 2 May 2010.
This increases the allowances, particularly the starting base allowances, they
can deduct from their mining profit under the MRRT.
On the basis of modelling conducted by the University of Western
Australia, AMEC claimed that under the MRRT a small miner will be paying an
additional effective tax rate of 6 per cent, compared to an additional 2 per
cent to be paid by a large miner:
... there will be at least 4% difference in the level of
effective total taxation (including income tax, royalties and the MRRT) between
a project that was in existence before 2 May 2010 (mostly the three major iron
ore and coal miners), and that applying to less advanced or new developments
taking place after 1 July 2012.
The modelling shows that before the introduction of the MRRT
the average total tax (income tax and royalties) for mining companies would
have been around 38% and post MRRT the total effective tax rate increases to
over 40% and over 44% for existing and new projects respectively.
Mr Simon Bennison, the Chief Executive Officer of AMEC, expanded on this
view in his evidence to the committee. He argued:
The current design of the MRRT clearly discriminates against
smaller emerging miners ... This is a direct result of large mature
miners having a significant prior asset base that can be used as a tax shield,
if you like, for up to 25 years in the form of a starting base deduction. The
starting base deduction provides a significant financial advantage to mature
miners, which would have already claimed a depreciation allowance on relevant
assets. The different effective tax rate and significant points of difference
will make it extremely difficult for small emerging miners to compete with
large mature miners in the domestic and global markets and does not provide a
level playing field. The differential has been likened to a small corner shop
competing with large supermarket chains.
Professor Henry Ergas made a similar point in his evidence to the
I do not believe this is a particularly good tax from the
point of view of society as a whole, for the reasons that we touched on
earlier. I am concerned about its overall effects on our long-term prospects
for our mining industry as a whole, but what is also true is that within the
mining industry it is designed in such a way as to have a differential effect
on different types of miners. As my colleagues and I show in the paper that I referred
to at the outset of my remarks, the effective tax rate on smaller, riskier
projects and mining operations is many times the tax rate on large, mature
operations. That is one of the reasons why this tax will be so distorting in
the long run, because for mature operations it is not so onerous a tax but for
the newer, riskier ones it has extremely high effective marginal tax rates.
Treasury commented on the University of Western Australia modelling
cited by AMEC:
It is just demonstrating in one case that the pre-existing
miner has the benefit of a starting base, because they have undertaken
investment prior to the announcement of the MRRT.
The Minerals Council of Australia (MCA), whose membership includes the
big miners as well as medium and smaller miners, rejected the view that
competitive neutrality had been compromised in the design of the MRRT. Its
submission argued that the MRRT is consistent with that principle:
[The tax] has been aligned deliberately with familiar
concepts and definitions of Australian tax law. No provision of the tax
discriminates against smaller, emerging Australian miners; indeed, certain
features of the MRRT (the low profit threshold and simplified obligations) are
designed to lower the overall burden of the tax on smaller miners.
The MCA's argument was that the MRRT is designed in such a way as to
ensure that small and emerging miners will not incur a liability if they have
projects that are not yet profitable:
The MRRT effectively operates as a "top-up" tax,
never resulting in lower collection of revenue than exists under the status quo
of company tax and royalties, but setting a higher rate for more profitable
miners. On this basis, the bulk of MRRT liabilities will fall on larger miners
with more profitable projects.
Treasury also dismissed claims that the MRRT's design bestowed a
competitive advantage on large miners over smaller ones:
CHAIR: ... We understand it is in the heads of
agreement, but it is characterised to us as being discriminatory vis-a-vis
projects from 1 May or 2 May 2010. So, it is in the heads of agreement. It has
been agreed between the government and the major companies. Why is that? What
is the policy behind it? Why is it not discriminatory?
Mr Heferen: To the extent that you are in place at that
point in time, it applies equally. A range of investment would have gone into
enabling whatever discoveries or capital expenditure was in place, and those
commitments were made on the basis of the existing tax regime. The tax regime
changes and so the rules change with it. As I have said, it is a pretty
standard feature of most particularly significant tax changes. There has to be
some recognition of people incurring costs or gaining some benefit prior to a
change being announced and that being kept in place.
Ms Roff: It might be helpful to think of it in terms of
those profits that have been brought to tax in later years actually being
profits that are in part attributable to the investments that were made by
miners before the tax was announced.
Mr O'Toole: In terms of a small emerging miner versus
big businesses—and I have heard it put in earlier hearings, too—I think it is
also important to remember that this is a project based tax. The starting base
is attributable to an individual project. To the extent that a larger
established miner starts a new project post that date as well then they will be
subject to the same treatment.
On the other hand, in his evidence to the committee, Mr David Ferguson
from Atlas Iron stated his belief that, if the MRRT had been in place at the
time Fortescue Metals Group (Fortescue) was being set up, it would not have 'got
up and running'. In turn, if Fortescue had not gotten off the ground there
would not have been an opportunity for the small miners to start their
The starting base allowance
The major form of alleged unfairness in favour of the established miners
raised by critics concerns the way in which the existing assets and investment
of mining companies is treated.
Under the MRRT, a starting base allowance will lessen a miner's tax
liability by reducing its mining profit. The starting base allowance is
designed to recognise investments that existed prior to May 2010 when the
resource tax reforms were announced. The Revised Explanatory Memorandum to the
MRRT Bills states:
A starting base allowance is one that is used, installed
ready to use, or being constructed for use in carrying on the upstream mining
operations in relation to a mining project interest at the 'start time'.
A miner can value its starting base losses for its mining project
interest in one of two ways:
the market value of starting base assets (including rights to the resources)
at 1 May 2010; or
the most recent accounting book value of starting base assets (not
including rights to the resources) available at that time.
Views on the starting base
Smaller miners have argued that they will be disadvantaged by the
arrangements which allow a market valuation for the starting base allowance.
AMEC asserted that large miners will have the benefit of a larger 'tax shield'
as they will be able to claim a significant deduction for the market value of
their starting base assets, whereas smaller miners will not be able to do so. Fortescue
expressed similar sentiments, criticising the starting base allowance on the
... it will grant such a large tax shield to existing
large producers ... that it is likely to shield the bigger miners from
paying any MRRT for the entire period that the quasi rent profits are expected
to endure ... so that in effect the tax falls mainly upon new producers
that were not in a position to obtain huge concessions based upon May 2010
How strong Fortescue's views on the starting base allowance are,
however, is difficult to verify; while Fortescue put forward some arguments
criticising it, it later acknowledged that it was in the company's interest for
a starting base allowance to be included in the MRRT:
Senator THISTLETHWAITE: Are you saying to us that your
organisation is opposed to that initial tax shield in the proposal?
Mr Tapp: It depends whether you are talking about
theoretically or as a company. I am not a turkey voting for Christmas here. If
somebody gives me a big tax shield, I am not going to say, 'No, thank you, I
don't think that is right'.
Senator THISTLETHWAITE: I am not trying to trick you. I am
just asking you the question: is Fortescue Metals opposed to the legislation?
Mr Tapp: No, I cannot say we are opposed to it.
The submission from the Perth office of accountancy firm BDO Corporate
Tax expressed concern that a fall in commodity prices may lead to a 'scenario
where emerging miners with a smaller starting base will pay MRRT where mature
miners with larger starting bases may not'.
In its evidence to the committee it stated:
We have only gone out a short period with our calculations,
but it shows that the large, mature companies, based on the assumptions that we
have taken, will not pay MRRT or, if they do, it will be negligible. We have
public statements by smaller companies saying that they will pay MRRT in the
first year. That strikes me as anomalous. We have tried to recommend some
changes. If Treasury has done the modelling right, our proposed changes will
not adjust the revenue one iota. If Treasury has the modelling wrong and our concerns
are proved to be correct, the emerging companies are not penalised for the
anomaly that has been built into the legislation.
Atlas Iron shared concerns about the tax shield the larger miners it
competes with will have, arguing:
... when the taxation was first brought out, the argument
from the multinationals was that there was a retrospective nature to the tax.
Everything that was in place, they were having to pay tax on, investments that
they had already made. What they got with the starting base valuation is a
massive amount of shelter, which meant, because their assets are, say, 50-year
mine life—type projects, they were actually able to value those projects over
that mine life, and that gave them shelter over that mine life. If you are a
smaller company—we actually have made most of our discoveries and acquisitions
post 10 May—some of those assets get some consideration but we get nothing like
what the majors get.
In response to the claim that the MRRT promotes inequity because past
investments can be recognised at their market value, the MCA stated:
The starting base allowance provides a form of compensation
to miners for the retrospective features of the MRRT, recognising that mining
is highly capital-intensive with considerable, high-risk exploration outlays,
large upfront capital commitments, long-life assets, sophisticated technologies
and long lead times to profitability.
It is based on the key design principle of
"prospectivity"—that new tax arrangements should not unduly penalise
The MCA's submission also quoted a paper prepared by Deloitte Access
Economics, which noted that allowing the market valuation of existing assets
was a 'well-established principle for easing the transition to new tax
The committee considers that the ability for miners to lessen their
liability by claiming a starting base allowance is not inherently biased or
discriminatory against smaller companies.
The committee takes the view that the policy intent of this design
feature of the MRRT is to provide due recognition to the value of investments
made before the resource tax reforms were announced. Further, it accepts as
self-evident the argument that a tax directed to profits made from mining must
include an allowance for the starting base assets of the miner, so as not to
tax past investment in the industry. A failure to do so would penalise those
companies that have a long history in the industry and have made significant
investment in it.
The policy decision, in the view of the committee, is fair and
reasonable, taking all relevant factors into account.
Low profit offset
Division 45 of the MRRT Bill incorporates a 'low profit offset' which
will fully or partially relieve small miners of their MRRT liability for an
MRRT year. For miners with group mining profits (as measured for MRRT purposes)
of $75 million or less, there is nil liability.
The low profit offset phases out for profits between $75 million and $125
million to ensure the offset 'does not distort the production behaviour of an
entity approaching the $75 million threshold'.
Views on the low profit offset
The Chamber of Minerals and Energy of Western Australia (CME) stated
that while it welcomed an exemption threshold for the MRRT and its increase
from $50 million to $75 million, it still held concerns about whether the
exemption threshold would provide:
... the necessary shelter for junior and emerging mines
and those producers mining low value resources. Until the impact of the MRRT on
Australia's resource industries' international competitiveness and project
costing is fully understood, CME recommends particular consideration needs to
be given to a significant increase to the currently proposed phased threshold.
AMEC's view was that the low profit threshold did not provide
'sufficient protection' to small miners and did not address the 'uncertainty,
nor the inequities and identified discrimination' between small and large
AMEC asserted that the original $50 million threshold was an 'arbitrary
amount without any foundation' and that the amended $75 million threshold remained:
...a very low return on the significant levels of capital
invested upstream (exploring, developing and extracting) of the MRRT taxing point
(mine gate), and takes no account of the subsequent investment downstream
(crushing, blending, transporting, loading, infrastructure).
The CME also called for the threshold to be subject to indexation 'to
ensure the policy intent of excluding small miners is met in ensuing years'.
AMEC echoed the call for indexation to avoid 'bracket creep'
and noted that the threshold was also subject to changes in commodity prices
and exchange rates.
Suggested alternatives to the low
One alternative to the MRRT's low profit offset, proposed by AMEC, would
be the establishment of a 'safe harbour' of 10 million tonnes per annum (mtpa)
of iron ore or coal per MRRT year. It is noted that, according to AMEC, the current
$75 million threshold equates to approximately one to five mtpa of iron
AMEC proposed that this would be a suitable threshold at which to
'trigger' the MRRT and would provide 'a more equitable shield for new and small
emerging miners'. Ultimately, it would also lead to an increased royalty and
MRRT revenue stream because small miners would be better able to grow their
business and increase production.
Under the scenario proposed, the $75 million low profit threshold would
be retained and a minor amendment would be made to clause 4 of each of the Imposition
...whereby an 'emerging miner factor' of 75% is provided where
group production of the taxable resources for the miner for an MRRT year is
less than 10 million tonnes. It is anticipated that such an amendment would be
close to revenue neutral.
Treasury, however, has previously rejected the proposed tonnage-based
exemption, arguing that it would be:
...very distortive and would lead to miners altering their
production in order to remain under the tonnage limit. In addition, including a
tonnage based concession within a profit based tax would erode some of the
efficiency gains inherent in a profit based regime.
The committee supports the low profit threshold as a simple way to
support small and emerging miners. The switch to a tonnage-based threshold would
add unnecessary complication to a tax system based on monetary calculations. Therefore,
it does not consider that an alternative tonnage-based exemption should be
incorporated into the present design of the MRRT.
For the same reasons, the committee also considers that the threshold
should not be subject to automatic indexation. It notes, however, that issues
of this nature are commonly considered as part of the Budget process. It further
notes the recommendation of the Policy Transition Group (PTG) that the MRRT be
reviewed within five years of its implementation.
The committee supports the recommendations of the PTG and feels that that is a more
appropriate time for changes to the low profit threshold to be considered.
The simplified MRRT method and the alternative valuation method
Smaller miners described the restrictions on carrying forward allowances
under the simplified MRRT method and the alternative valuation method (AVM) as
'unnecessary and punitive'
and argued for their removal.
Division 200 of the MRRT Bill includes simplified obligations which are
designed to shield small miners from administrative burdens. According to the Revised
Some miners have the prospect of being below the low profit
threshold for an extended period. Requiring such miners to fully comply with
the MRRT would be burdensome. These miners will have the option of electing to
use a simplified MRRT method.
A miner can elect to use the simplified method for an MRRT year if its
group profit falls below certain limits. While a miner which uses this method
will have no liability for that particular year, a consequence of choosing this
method is that 'its starting base and its allowances are extinguished rather
than carried forward'.
Smaller miners have been critical of these provisions, arguing that the
simplified method will not be taken up as the costs of doing so will outweigh
the benefits. That is, it will have to perform all the calculations necessary
to determine whether it qualifies to use the simplified MRRT method, in which
case any benefits from using the method would be lost. For example, the CME's
submission claimed that there is an inbuilt disincentive for smaller miners to
use the simplified MRRT obligations:
[W]here the relevant tests are not satisfied in a subsequent
income year or where a miner opts to withdraw from the simplified MRRT
obligations, the taxpayer will be required to comply with the full MRRT
obligations for that year. Such taxpayers would be treated as new MRRT
taxpayers and only receive a deduction for expenditure incurred in the year
they fail the test or move to the full MRRT.
The CME also argued that the market value of smaller companies would be
damaged as a consequence of using the simplified method:
Denial of access to an MRRT starting base and prior year
expenditure will also impair the market value of these businesses in the event
of a possible acquisition by existing MRRT taxpayers because an acquirer would
want to be able to utilise starting base, historical losses and unutilised
The CME summed up its concerns about the provisions for the simplified
MRRT method, stating that 'the consequences for exceeding the threshold are
likely to be greater than the administrative concessions of the simplified
AMEC also indicated that small miners would be unlikely to adopt the
simplified method, preferring instead to maintain full MRRT records. In
choosing the simplified method, AMEC voiced concern that small companies would
lose any rights to carry forward allowances. Its submission called for the
... if a taxpayer elects for the simplified MRRT method then
entitlements to the allowance components are allowed to be carried forward.
(This proposal would enable small taxpayers the advantage of a reduced
compliance burden, but without the permanent loss of the allowance components).
taxpayer be allowed to bring forward all elements of the allowance components
into the later year, on the basis of what would have been allowed, had the
election not have been made in prior years, and that appropriate records are
maintained to support the relevant components.
The AVM, as set out in Division 175, is designed to assist small miners and
miners with 'vertically integrated transformative operations' to calculate
their mining revenue attributable to their resources at the taxing point.
The Revised Explanatory Memorandum describes the reasons for providing
this simpler valuation method:
It can sometimes be difficult to apply the normal
methodologies for working out what part of the consideration for selling
resources is attributable to the condition and location of the resources at
their valuation 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
To use the AVM, 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.
AMEC was critical of the AVM on the same grounds that it argued against the
simplified MRRT method. It claimed there would be limited incentive for
companies to choose the AVM because of the treatment of allowances in future
... where an emerging miner elects to use the AVM for a
particular year this precludes them from transferring certain allowances and
also combining interests in later years...
The permanent extinguishment of all allowances is considered
to be extremely unfair and discriminatory and should be removed from the
legislation. Industry believes that without the ability to include the use of
allowances, both the Simplified MRRT Method and the Alternative Valuation
Method have limited attraction particularly when giving consideration to a
merger or being acquired at a future date.
In their evidence to the committee representatives of Brockman Resources
and Gindalbie Metals, outlined their concerns about the simplified method and
Mr DA Richardson: I was involved with the resource tax
implementation group and consultation between Treasury and industry on these
issues. From my own observations and comments that others made, we could not
think of a single company in the iron ore space that would benefit. In other
words, the threshold is so low that it is unlikely to apply to anyone in the
iron ore industry. I cannot speak for the coal industry, but not for the iron
Mr Humphry: I support what Mr Richardson and Mr
Bennison said. The penalties for entering into the simplified method just
outweigh the benefits that they provide. The message that I got from that was
that the government was happy to deal with BHP and Rio but did not really want
new entrants or growing companies.
Mr DA Richardson: In terms of the penalties, that is a
good point. Certain companies may say that they can benefit from this low tax
threshold in their first year or two of production when costs tend to be high
and production is good so your profits are lower. The problem with that is
that, if you elect to take that low profit threshold, you will lose a lot of
potential particularly in relation to things like royalties in the future. If
you then get to a point where you exceed that threshold, as Mr Humphry said, it
is too big a risk. Even for companies that think they might be able to benefit
from that low profit threshold for the first couple of years, you would not
take the risk because you are potentially going to lose a lot down the track if
you are looking to increase production.
The committee notes that the simplified MRRT obligations and the AVM have
been incorporated into the tax's design to reduce compliance and record-keeping
burdens for smaller companies. The committee also acknowledges that some
smaller miners may choose not to take up these alternatives, preferring instead
to be able to carry forward allowances to offset against future MRRT profits. It
recognises, though, that the extent to which this happens and the overall
effectiveness of the valuation methods will not be known for some time.
In light of those factors, the committee does not recommend that
amendments be made to the simplified MRRT obligations and the AVM provisions of
the MRRT Bill. However, the committee does consider that the operation of the simplified
MRRT and the AVM be examined as part of the PTG recommended review of the MRRT and,
should it become clear during that review that the number of miners adopting
the methods is small, that amendments to the legislation be considered to
increase their use.
Submissions to the inquiry also canvassed a number of other suggested
amendments to the design of the MRRT. These included a proposal for a benchmark
MRRT rate and changes to provisions relating to pre-mining losses, default
instalment rates and calculation of mining revenue.
A significant amendment to the MRRT Bills recommended by the smaller
miners would be the establishment of a benchmark rate, to make the tax liable
to be paid only when the first of the large mining companies becomes liable to
pay the MRRT. It is argued that this would create a more level playing field
across the industry, helping to restore competitive neutrality.
AMEC argued that the MRRT rate should not exceed a benchmark rate, which
would be calculated:
... by reference to the highest "mature miner"
MRRT liability for the MRRT year by applying an agreed formula in relation to
each class of taxable resource (either coal or iron ore).
BDO's submission also argued for a 'safeguard measure' enabling junior
...begin to pay MRRT at a time no earlier
than when the mature miners pay MRRT and the effective rate
at which the emerging miners pay MRRT is no greater than that of the mature
[emphasis in original]
Treatment of pre-mining losses
AMEC also raised the issue of pre-mining losses from exploration
expenditure and its concern that under the MRRT legislation, these expenditures
would not be recognised as adding value to a project. AMEC claimed that such an
approach would 'severely undermine the future capacity to raise funds for
exploration and the capacity to spread risk'.
Its submission contained the following recommendations for amendments to the
MRRT to address this:
That the pre-mining losses provisions are amended to allow
exploration on expenditure incurred by an entity prior to earning an interest
in the tenement to be included in an entity's pre-mining expenditure.
That exploration expenditure should still qualify as
pre-mining expenditure even if it does not lead to the farmee acquiring an
interest, and would attach to another pre-mining project interest which relates
to the same taxable resource.
Default instalment rate for iron
Another issue raised was the default instalment rate for iron ore in the
first year that the MRRT is payable. The CME argued that the eight per cent
default rate was too high and should be lowered to three per cent:
...in the first year of the MRRT a miner will have the
unenviable choice of either paying quarterly instalments at the rate of 8% of
gross revenue or selecting a lower rate and bearing the risk of paying the
general interest charge if the rate chosen is too low. This outcome is unfair
given that in the first year of MRRT (and the first quarter in particular) a large
number of miners may not be in a position to accurately predict their MRRT
It must be remembered that the law is highly complex and is
still being developed. There is a very large amount of implementation work to
calculate the tax including undertaking starting base valuations (if elected),
gathering information and ring fencing operations in a way that most company's
information systems do not currently contemplate.
CME submits that the 8% default rate for iron ore is too high
and no justification has been given for applying a different rate for iron are
than that which applies to coal. A default rate of 3% should apply to both iron
ore and coal.
In addition, the CME argued that a miner 'should not be subject to the
general interest charge if it underestimates its instalment rate in the first
MRRT year. Rather any interest on underpayment should be limited to the
shortfall interest charge'.
AMEC also proposed that because of the uncertainty around calculating
MRRT instalments, small emerging miners should be exempt from the instalment
Under the proposed MRRT regulations, default MRRT instalment
rates have been prescribed for iron ore and coal of 8% and 3% respectively. A miner
can elect to vary their instalment rate; however penalties will apply where the
varied amount is less than 85% of the actual amount.
Given the complexity of the MRRT legislation and the
difficulty in accurately estimating MRRT instalments, AMEC recommends that
small emerging miners (<10mtpa) are excluded from the instalment system for
a period of 2 years from the introduction of MRRT, or from commencing
Treasury has previously responded to concerns about the instalment
rates, noting that the default rates represented an 'interim regime' in the
During that first year there would be an indication from
firms that wish to vary their instalments, so there would be an early
indication as to whether the longer term projections, if you like, are accurate.
I expect there would be an opportunity to do something about it. I presume that
no firm is going to come forward and say, 'We expect to be massively overpaying
in the next year.' Because the incentive is the wrong way round, they will just
accept a lower instalment. But, if the ATO identified from key areas instalment
variations that were below that calculated figure, we would be alerted to it
Calculation of mining revenue
Smaller miners also raised concerns about the calculation of mining
revenue under the MRRT.
The MRRT specifies a methodology by which to determine the value of the
ore at the taxing point designed to ensure:
... that the profits that are brought to tax under the
MRRT law will be profits that relate to the resources in the form and the place
they were in when they were at their valuation point. The MRRT law does not
seek to tax profits from operations conducted downstream of the valuation point. 
Clause 30-25 requires a two-step process—the miner must calculate its
revenue amount and then determine:
... how much of the revenue amount is reasonably
attributable to the taxable resource in the form in which it existed when it
was at its valuation point (and) at the place where it was located when it was
at its valuation point.
The second calculation should be made using:
... the most appropriate and reasonable measure ... having
the miner's circumstances, including, but
not limited to, the functions performed, assets used, and risks borne by the
miner in carrying on its *mining operations, *transformative operations and *resource marketing operations for the mining project
the available information.
The CME asserted that:
... specifying a number of assumptions that have to be
made in applying this methodology is not consistent with the recommendations of
the PTG. The PTG simply stated that where there was not an arm's length sale at
the taxing point, the value of the resource should be determined "using
the most appropriate and reliable arm's length method."
The legislation in its current draft with specified
legislative assumptions is potentially limiting.
AMEC was also critical of what it saw as a 'more prescriptive' method of
calculating mining revenue and urged that a broader range of mechanisms,
consistent with those outlined by the Organisation for Economic Cooperation and
Development (OECD), be applicable:
The legislation also attempts to clarify that certain
assumptions must be made when determining the downstream value, and provides a
prescribed hypothetical situation which the miner must use in applying the 'arm's
length principle', and appears to direct miners towards some form of 'netback'
transfer pricing method.
The legislation suggests the use of appropriate transfer
pricing methods as described in the Organisation for Economic Cooperation and
Development (OECD) Transfer Pricing Guidelines. AMEC consider[s] this approach
sound and recommends that all mechanisms included in the above guidelines
should be capable of being applied. In particular AMEC would not wish to see
the use of 'profit-split' or similar mechanisms to determine the taxable value
The use of the OECD's Transfer Pricing Guidelines is referred to in clause
205-15 of the MRRT Bill, which applies to the determination of any amount for
the purposes of Division 205 of the MRRT Bill. The use of the OECD Guidelines
applies to calculating mining profits, allowances and offset amounts.
The MRRT Bill provides for a number of methods of calculation of the
mining revenue, however, whatever is used must be 'the most appropriate and
reasonable measure'. The use of the OECD's Transfer Pricing Guidelines appears
to have a wide application under the MRRT Bill. It does not appear to restrict
the parts of the Guidelines that may be used in calculating mining revenue.
Nonetheless, the committee recommends that Treasury or the Australian
Taxation Office consider whether there is some restriction in the MRRT Bill and,
if that is the case, it should examine whether the wider application of the OECD
Guidelines to the MRRT is warranted and advise the government accordingly.
The compliance burden
As the main representative for the smaller miners and exploration
companies, AMEC was concerned by the compliance burden that would be placed
upon them, even in their early years when they were unlikely to engender
sufficient profit to be liable to pay the MRRT:
Mr Bennison: I think what everyone has to appreciate is that
no matter what size you are, you have to start putting the systems in place—and
I would invite Mr Richardson and Mr Humphry to come in—to monitor every
component of your operations in the context of this tax. It does not matter
whether you are still way behind the eight ball; as of 1 July you now have to
have everything in play ready to roll.
Mr DA Richardson: I agree with Mr Bennison. The issue here is
that this is a very complex tax and it is going to be difficult to administer.
Whilst our particular company, Gindalbie Metals, mines magnetite iron ore as
opposed to haematite, magnetite iron ore is a low iron content, low-grade ore
so it requires a significant beneficiation process to produce a product that
you can sell. It has significant, what they call, downstream transformational
costs associated with that. There is a lot of subjectivity as to how you
calculate those in terms of a netback calculation, returns on assets and
everything else. We have to go through the process of putting systems in place
so that we can comply with the law even though at this stage we certainly do
not expect to have a particularly high MRRT liability or possibly even no MRRT liability
in the first couple of years. But that does not mean that we are not going to
incur significant costs in terms of compliance. That is the biggest issue.
Rather than a fundamental argument over MRRT, if you are a small company with
limited resources, like we are, you do not want to spend tens or even hundreds
of thousands of dollars a year on compliance to prove that we do not have a
liability for the tax.
The compliance costs of the MRRT were raised by other witnesses:
Senator BOB BROWN: If there is no money in it then what
is the problem with it? They are having a tax across the board on—
Mr Hooke: You are going to have an excessively high
compliance cost. The efficiency dividend would be negative.
Mr Hooke: We do not think that this new tax is
necessary as a top-up to the existing underlying profits tax, the company tax,
and the output based royalties tax. It is not a reform and so in that sense it
does add substantial complexity and compliance costs for companies.
Senator CORMANN: If I can summarise that, for the newer
projects, the smaller and mid-tier companies, to the extent that there are
distortions of royalty arrangements they will continue. And for those that are
subject to royalties as well as the MRRT they have an additional level of
distortion that comes into play?
Mr Tapp: ... Those that are not subject to the MRRT
because they are below the threshold—or very close to it—are going to end up
with all the complexity of having to do the sums to work out whether they are
above or below this threshold. This is a tax that administratively is
incredibly complex. It is going to cost millions and millions of dollars in
compliance costs in just trying to work out whether or not you have to pay this
Fortescue expanded upon this further in its submission:
... this new tax needs calculations based upon projects
and within such projects a split between upstream and downstream activities and
potentially also a split between different products where there are products
that aren't subjected to MRRT. All of this will require auditing and then
probably arguments with the tax office about the methodology chosen and with
the risk of penalties being applied for the tax not paid because of the
adoption of a subsequently rejected methodology. And finally small companies
that escape liability because they come under the threshold will have to go
through the same pain each year because they couldn't be certain they won't
grow and produce above the threshold and so they will also need to undertake
this accounting exercise.
At present the MRRT Bill requires miners to lodge returns at the end of
each financial year. AMEC has proposed that the lodgement date for MRRT returns
be extended until the end of February of the following year, citing the limited
resources available to small miners to calculate liability.
Criticism regarding the non-deductibility
of financing costs
In its submission to the committee, Fortescue claimed that the MRRT
would present difficulties for emerging mining companies 'to obtain the
necessary finance for their projects thereby raising barriers to entry into an
industry that already has substantial barriers to entry'.
It stated that for a new entrant to the iron ore mining industry, 'the
investment in infrastructure will effectively only be allowed to earn a
regulated rate of return and anything higher will be subject to the MRRT'.
Fortescue argued that this would have a hugely detrimental impact on smaller
miners seeking finance for their projects, as debt providers would be deterred
from providing funds. It described the MRRT as 'a tax that is biased against
debt financing because it doesn't allow financing costs as a deduction'.
This issue was addressed in 2010 by the PTG as part of its
deliberations. The PTG ultimately recommended that the general deduction test
in the MRRT be based on the 'income tax concept of an expense being necessarily
The value of the resource extracted by a mining company
should be independent of an entity's choices about the way it finances its
mining operations. The required return to capital invested in a mining
operation is recognised through the interest allowance for activities upstream
of the taxing point and through arm’s length pricing of downstream activities
where the first arm’s length sale is beyond the taxing point. Allowing a
specific deduction for interest and other financing costs would amount to a
double deduction for the cost of capital. It would also tend to bias financing
decisions towards debt. Therefore, consistent with the PRRT, interest and other
financing costs should not be deductible under the MRRT.
The issue of a specific deduction for finance was raised with Fortescue at
its appearance before the committee:
CHAIR: So, you want to argue that the financing cost, which
was disproportionately high, should be a tax deduction? But, in fact, what you
are seeking to do, when you are raising capital at extraordinarily high
interest rates, is you are seeking to transfer the risk from the fundraiser and
the provider of capital to the taxpayer via the Commonwealth, are you not?
Mr Tapp: No, I am just saying it is a legitimate cost. It is
a legitimate cost of getting a business up. If you raise finance—
CHAIR: But if it is allowed as a deduction you are
transferring some of the risk of the project to the Commonwealth via the
taxpayer. A deduction does not come from nowhere. It comes from consolidated
revenue. Is that not correct?
Mr Tapp: You are not paying it in tax; that is correct. But
you are not taking any money away from the taxpayer. You are not giving money
to the taxpayer, because you have an interest bill to pay.
Treasury also commented on this issue raised by Fortescue:
Mr Heferen: ... you do not actually look at the interest
costs per se; you look at what it has purchased and then it is depreciated and
then, of course, the interest cost is also deductible. That is on an income
tax. On a cash flow tax the cost of the asset is written off. So, they borrow
money, they buy something and the cost of that is written off. I suspect the
design feature is such that if the interest cost was deductible as well you
would end up getting two deductions for the one bit of profit. That is my brief
understanding. I might turn to my colleagues who might be able to throw a bit more
light on that.
Mr O'Toole: I might just add a little bit. Mr Heferen’s
answer pretty well covered it. I would just note that under the cash flow
taxes, both the PRRT and the MRRT, to the extent that the losses in terms of
the capital that you expended on the capital item, for instance, is not fully
written off in the year, it is then subject to an uplift. That is the long-term
bond rate plus seven per cent in relation to the MRRT. That effectively
proxies, if you like, the financing costs for the item as well.
The committee accepts the explanation of Treasury officials and agrees
with the approach taken by the PTG in deciding not to allow debt financing to
be deductible as an allowance under the MRRT for the reasons it has set out.
In the committee's opinion, the decision by any company to finance its
operations through 100 per cent or near 100 per cent debt financing is a risk
that should remain with that company. Granting the deduction sought by Fortescue
would be equivalent to the risk being transferred to the taxpayer, a situation
the committee finds unacceptable.
Concerns of the magnetite industry
Concerns were raised by magnetite producers about the consequences of
the MRRT applying to their projects. The submission from the industry
representative body, the Magnetite Network (MagNet), highlighted a number of issues
from this emerging industry.
Magnetite is a form of iron ore that has a lower iron content than other
forms such as hematite, which is the form of iron ore usually mined in
Unlike hematite it cannot be sold without extensive processing. Magnetite
miners process those large quantities of low grade ore into high iron content
magnetite concentrate and pellets.
As such, it is argued by producers that magnetite has more in common with
minerals not subject to the MRRT than those which are, and so should be
excluded from the MRRT regime.
Additional concerns include the complexity in the valuation methodology
to calculate MRRT liability, arising from the need to extensively process
magnetite ore to create a saleable product, and the lack of detail from
Treasury about forecast liabilities. While noting some 'real improvement' in
references to valuation methodology in the legislation, compared to the second
exposure drafts of the bills, MagNet emphasised its preference for flexibility
for MRRT taxpayers in relation to an appropriate transfer pricing method to
calculate the value of the resource at the taxing point.
Should the MRRT apply to magnetite ore, MagNet predicted negative
consequences including 'investment uncertainty in an emerging, jobs-intensive
industry' and 'significant set-up and ongoing costs'.
In her evidence to the committee, Ms Megan Anwyl of MagNet, stated:
... final investment decisions for the two projects that
are under construction were made prior to this tax ... in general terms
there appears to be less willingness ... by a range of investors, to
invest in those projects. But I am not telling you, just to be clear, that
there will not be any further investment. I am saying that it has made it more
MagNet's submission acknowledged that it was unlikely that magnetite
concentrate would ultimately be excluded from the MRRT regime and therefore
urged the committee to consider recommending a 'simple and effective' means to
amend the MRRT legislation to assuage some of their concerns. Noting that
similar definitions exist in Western Australian legislation, MagNet suggested:
... the adoption of a definition of "iron ore"
that acknowledges and distinguishes between hematite DSO [direct shipping ore]
and magnetite. This would acknowledge the vastly different level of capital
expenditure required to be spent on the purely processing infrastructure—as
opposed to the investment that is common to both magnetite and DSO such as mine
establishment, transport, energy, port and other infrastructure..
Based on expected MRRT liabilities, however, the need for a special
definition for magnetite is not clear. In its submission to the committee,
MagNet stated 'Treasury officials have consistently told MagNet that the government
was not forecasting MRRT revenue from magnetite. This was recently confirmed
publicly by Minister Ferguson'.
However, Ms Anwyl told the committee that she could not say for certain that it
would have zero liability and, in fact, some members did expect to pay MRRT.
The view that magnetite would be unlikely to be liable to high levels of
MRRT was also shared by the MCA:
Projects mining relatively low value minerals which require
significant downstream processing or "beneficiation" (e.g. magnetite
ore) are unlikely to have significant (or indeed any) MRRT liabilities.
Certain features of the industry and expectations for its future also do
not support the argument that magnetite should be excluded from, or treated
differently under, the MRRT. Magnetite is, after all, one of the principal iron
ores. It is apparent that there will be future demand for it. During his evidence
to the committee, Mr Julian Tapp from Fortescue stated that the mining
companies would move to mining of magnetite if the supply of hematite was to
run out, given that the infrastructure was already in place to make that
possible and that in the Pilbara 'there is literally trillions of tonnes—centuries'
worth of supply'.
The committee accepts that magnetite producers are unlikely to incur
significant tax liabilities in the first few years of the MRRT's operation and
that magnetite ore differs considerably from hematite ore. However, what the
industry is seeking is, in effect, a permanent exemption from the MRRT.
While it has features in common with the nickel and alumina industries,
which are excluded from the MRRT, the magnetite industry also has features in
common with the wider iron ore industry. Indeed, the magnetite industry is, in
essence, an iron ore mining industry. Further, it can be expected that the
larger miners will be more than willing to go into magnetite mining if the
supply of hematite ore was to run out or become comparatively less commercially
viable. The committee sees this as an indication that it is likely there are
considerable profits to be found in that sector, if not immediately, then
certainly in the future.
With these factors in mind, it is the committee's view that a
recommendation that the magnetite industry be exempted from or treated
differently to other types of iron ore under the MRRT would create an unwise
and unwarranted precedent, and accordingly is not supported.
Questions over the constitutional validity of the MRRT have been raised
ever since the announcement of the resource tax reforms in 2010. Critics have
suggested that the MRRT, as presently drafted, may breach paragraph 51(ii) and
sections 99 and 114 of the Constitution.
During 2010 and 2011, both the Senate Select Committee on the Scrutiny
of New Taxes and the House of Representatives Standing Committee on Economics
examined claims over the constitutional implications of the MRRT. Media reports
on the MRRT have also alluded to the prospect of mining companies and states
such as Western Australia, Queensland and New South Wales mounting
constitutional challenges to the legislation.
It should be remembered that a challenge cannot be commenced unless the
bills are passed into law.
The Senate Select Committee concluded:
Whether the proposed MRRT and expanded PRRT are
constitutional remains unresolved...
The interaction between the proposed MRRT, expanded PRRT,
state and territory royalties and GST sharing arrangements remain unresolved.
This committee notes that witnesses to the Select Committee's inquiry
identified that their ability to consider the issue in any depth was
constrained by the fact that the draft MRRT legislation had not yet been
During the recent inquiry into the package of MRRT Bills by the House of
Representatives Standing Committee, Treasury advised that it had no concerns
that the legislation, once passed, was at risk of successful legal challenge on
If the suggestion is, for example, that this could possibly
be taxing the property of the state, thus breaching the Constitution, the
design of the tax is such that it is like other transactions of profits taxes,
it is not a tax on the property; it is a tax on the profit, thereby not risking
that constitutional downside. As to whether somebody somewhere wanted to take
an action that is entirely up to them. But our advice is that, the way this is
designed, there is no risk.
The House Committee concluded:
After carefully considering the matter and given the expert
advice from Treasury, the committee has formed the view that there is little
evidence to suggest that the Bills are unconstitutional. Given the legal advice
Treasury has received, the committee accepts that the bills are consistent with
In this inquiry, concerns that the MRRT may be unconstitutional were
raised in the submissions from Fortescue
and the IPA. The IPA observed that:
The absence of powers relating specifically to mining activities
under Section 51 of the Constitution, and the condition under Section 114 that
the commonwealth cannot impose any tax on state government property, appears to
raise doubts over the constitutional validity of the tax. Issues have also been
cited concerning whether the MRRT effectively discriminates against states,
which is prohibited under the Constitution.
Paragraph 51(ii) and section 99—discrimination
The committee heard concerns that the MRRT may infringe both paragraph 51(ii)
and section 99 of the Constitution on the basis of 'indirect discrimination'.
These concerns related to the MRRT providing a full credit for state royalties
paid in relation to a mining project. As stated in the Revised Explanatory
Memorandum to the MRRT Bills:
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.
Paragraph 51(ii) states:
The Parliament shall, subject to this Constitution, have
power to make laws for the peace, order, and good government of the
Commonwealth with respect to...
(ii) taxation; but so as not to discriminate between States
or parts of States.
Section 99 states:
The Commonwealth shall not, by any law or regulation of
trade, commerce, or revenue, give preference to one State or any part thereof
over another State or any part thereof.
Fortescue's submission advanced the argument that the MRRT, in breach of
paragraph 51(ii), will impose a form of indirect discrimination against states:
If the MRRT Bills are implemented in the form proposed then
they will have the effect of exactly offsetting any reduction in royalties that
a State may be inclined to give for its own policy reasons...
Once the MRRT is in operation any State which has sought to
encourage development or seeks to encourage development will be discriminated
against. Although the discrimination is not to be found directly in the form of
legislation its effect will be discriminatory—this is indirect discrimination
between the States and therefore contrary to s.51(ii) of the Constitution.
It also argued that the question of constitutional validity went deeper
than paragraph 51(ii):
[T]he very nature of the tax, which attempt[s] to impose
taxation in an area that is the prerogative of the States (not least because
they are the owners of the resources; but also because they administer the
regulation and control over mining activities within their borders) would
appear to be contrary to the implied restrictions on Commonwealth powers that
flow from the very nature of the federal structure established by the
Constitution. This interference within what is rightfully the jurisdiction of
the States would effectively result in the destruction of the State's
governmental capacity to encourage exploration and development activity by
varying the associated royalty rate and is sufficient to render the MRRT an
While not raised in submissions to this inquiry, the arguments around
discrimination concerning paragraph 51(ii) also apply to section 99.
Section 114—imposing a tax on the
property of a state
The committee also heard concerns that the MRRT would improperly tax the
property of a state. Section 114 of the Constitution reads:
A State shall not, without the consent of the Parliament of
the Commonwealth, raise or maintain any naval or military force, or impose any
tax on property of any kind belonging to the Commonwealth, nor shall the
Commonwealth impose any tax on property of any kind belonging to a State.
The IPA's submission suggested that the rationale for the government's
introduction of the MRRT—to give Australians a fair share of the nation's
mineral wealth—is based on a false premise:
... the implicit proposition underpinning these and
similar statements—that Australians own all mineral and petroleum natural
resources that are therefore subject to commonwealth taxation—is not supported
by constitutional and legal conventions that instead provide states and
territories with primary legal control over the conditions of exploration,
extraction and sale of resources.
In documents recently released by Treasury under a Freedom of
Information (FOI) request, it was disclosed that advice had been sought from
the Solicitor-General on various constitutional elements of the MRRT
legislation in September 2011.
Treasury's view, set out in the FOI documents, is that the MRRT would
not contravene section 114 of the Constitution. The legislation spells out
clearly that the MRRT is a tax on profits, not a tax on the property of a
As the MRRT objects clause at section 1-10 of the Bill
states, the object of the Act is to tax 'above normal profits made by miners (also
known as economic rents) that are reasonably attributable to the resources in
the form and place they were in when extracted.'
The MRRT taxes profits made [by] miners that are reasonably
attributed to the resource. The MRRT does not tax the resource itself. Nor does
the MRRT impose tax on a State where the State, or an instrumentality of the
State, is itself the miner who makes an above normal profit from the resource
(this is made clear by clause 5 of each of the Imposition Bills).
On the question of indirect discrimination between states, Treasury's
view was that the MRRT could not be characterised as contravening paragraph 51(ii)
and section 99:
The MRRT provides miners with a full credit for State
royalties paid in relation to the resources.
The rate at which royalties are charged from one State to
another is different. Similarly, the manner in which royalties are calculated
differ from one State to the next. In other words, the MRRT Bill does not
differentiate between or discriminate between the States. Any unequal outcomes
arises from the varying royalty regimes that exist from State to State. The
MRRT Bill takes the State regimes as it finds them.
The committee notes that the MRRT Bills have been drafted with the
intention of ensuring that it is not a tax on the resource but on the taxable
profit of a mining project. While the committee has not received a substantial
amount of evidence on this issue, what information it has received suggests
that the MRRT would not be subject to a successful challenge, in that case.
Further, the questions that have been raised during the inquiry in
respect of the constitutional validity of the tax are not supported by the
legal advice obtained by the Commonwealth.
Therefore, the committee believes it is likely that the MRRT legislation
would not present any constitutional risks.
Having carefully considered the concerns of small and emerging miners
about competitive neutrality in the MRRT's design, the committee does not
accept that the MRRT embeds discrimination or inequity against smaller miners. While
it is possible that the starting base allowance provisions give established
miners significant deductions, it must be remembered that the MRRT is a tax
directed to profits. As such, a failure to give an allowance for past
expenditure would render it a tax on past investment.
The committee believes that any advantage to those miners is countered
by the low profit offset and simplified obligations provisions, which have been
specifically incorporated to reduce administrative and compliance burdens for
junior and emerging miners.
Any piece of legislation, and tax legislation more so than most, is
subject to review and updating from time to time as circumstances change. The
committee believes that while the recommendations for changes to the MRRT made
in submissions are from bodies with industry experience, they are also
unproven. This is understandable as the legislation is not in place and there
is little similar legislation from which accurate comparisons may be drawn.
Accordingly, in the committee's opinion the most appropriate time to review the
operation of the MRRT is after it has been in place for a number of years.
In this regard, the committee particularly supports recommendation 63 of
To ensure the MRRT achieves its intended purpose efficiently
and equitably, with minimal compliance and administration costs, the Board of
Tax should review the operation of the MRRT within five years of its
The committee fully expects that all aspects of the MRRT will be
examined as part of the review of its operation. However, it would like to
place on record its view that consideration should be given to the following
issues raised in submissions:
changes to the low profit threshold, including whether a dollar
amount or a tonnage amount or both are more appropriate;
the operation of the simplified MRRT and alternative valuation
methods and their take up rate by miners;
the adoption of a benchmark rate for the tax;
the wider application of the OECD Transfer Pricing Guidelines to
calculation of mining revenue; and
the compliance burden on small miners arising from the MRRT,
including the frequency and timing of lodging MRRT returns.
Special issues relating to the magnetite industry have been raised with
the committee. While it seems likely magnetite producers will not pay
significant amounts of MRRT in the first few years of its operation, the
committee does not agree with the proposal for amendments to the bills that
would effectively give it a permanent exemption from the MRRT.
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