Minerals resource rent tax will boost expansion and M&As, says DeloitteDOWNLOAD
5 July 2010: Professional services firm, Deloitte, has welcomed the Federal Government’s revamp of the resource super profits tax (RSPT), now called the minerals resource rent tax (MRRT), and the expansion of the scope of the petroleum resource rent tax (PRRT).
According to Mining Lead Tax partner, Gordon Thring, potential beneficiaries of the changes to the RSPT would now be revisiting their modelling to assess various alternatives for expansion and M&A activity, likely to become more attractive to investors, following the MRRT announcement.
“Iron ore and coal miners will need to ascertain the market value of their mining rights, and their effective life, essential to work out the value of the deductions now available under the new MRRT,” he said.
“Of course, junior miners and explorers, and also those with marginal projects, will no longer benefit from any royalty refunds or underwriting of losses, and will need to re-evaluate their modelling for the coming year.”
Mr Thring said while there is a lot of detail still to be worked out, the new proposal will likely remove the uncertainty for investment decisions and exploration.
“M&A activity should now be more viable, as this move by the Government should alleviate some of the concerns about the longer term impact on investment by overseas interests,” Mr Thring said.
“There are particular groups that will be looking for more clarification, including the onshore oil and gas sector caught under PRRT, which differs significantly to the proposed MRRT.”
Importantly, mining companies not in the coal, iron ore and oil and gas sectors will now effectively be carved out of the new taxing arrangements.
The Government is expecting that over 85% of mining companies previously caught under the RSPT will now be excluded from the new regime altogether. For these companies, it will be business as usual.
“This will be particularly beneficial for industries such as nickel and alumina where significant processing and refining caused difficulties with the taxing point,” Mr Thring said.
“It appears that the only thing that has remained unchanged under the original RSPT is the start date of 1 July 2012.
“There will still be a lot of complexity in the MRRT. While the removal of industries such as nickel, copper and alumina, which have extensive refining involved, lessens issues with the taxing point, it will still be an area of debate. Similarly, as seen with the recent ATO rulings on PRRT, which costs form part of the extraction cost, will need to be defined,” Mr Thring said.
According to Deloitte, some of the initial changes proposed are:
• The MRRT tax rate will be 30%. However, assuming the MRRT will be tax deductible, the theoretical nominal tax rate of 49% when combined with the company tax rate is unlikely given the allowances and adjustments noted below
• Mining companies can now elect to use the market value of the mine assets, including the mining rights, valued as at 1 May 2010 as a starting base for projects. This would then be depreciated over effective life of the mine, up to a maximum of 25 years
• A 25% reduction in MRRT taxable profits will be provided via an Extraction Allowance. MRRT losses will also be uplifted at the government long term bond rate plus 7%
• Government “underwriting” of RSPT losses and royalty refunds will be scrapped though royalty credits will be given against the MRRT and uplifted at the government bond rate plus 7% , if not immediately used
• Unlike the PRRT, it appears that there will be fewer restriction on the transferability of MRRT losses between projects with the exception of royalty credits noted above
• Capital expenditure on projects made after 1 July 2012 will now be immediately deductible. This means that, unlike the RSPT, the MRRT should not kick in during the early stages of a project.