Chapter 1
1.1
On 5 February 2013, the Senate passed a motion ordering the Commissioner
of Taxation to provide this committee, by no later than 15 February 2013, with
details of the revenue collected from the MRRT by the ATO since
1 July 2012.
1.2
This motion came about as a result of the Treasurer's persistent refusal
to reveal how much or how little the MRRT had raised in revenue.
1.3
The Treasurer was putting forward the extraordinary proposition that the
government could come up with a complex new tax, make predictions in budget
after budget and budget update after budget update on how much it would raise,
spend all the money he thought it would raise, but not be publicly accountable
about whether or not it had raised the revenue predicted.
1.4
In seeking to avoid public scrutiny of the failure of the MRRT to raise
the government's projected revenue, the Treasurer and other senior Ministers
went as far as to suggest that the release of information about how much the
MRRT had raised could be a criminal offence given it would breach
confidentiality provisions in relevant tax laws.
1.5
Clearly that position was completely untenable. As the Commissioner of
Taxation, Mr Chris Jordan AO, was getting himself ready to comply with the
Senate's order and inform the committee that the MRRT had raised $126 million
in gross revenue in the first two quarters of 2012-13, the Treasurer finally
relented and pre-empted him by finally releasing that information publicly
himself..
1.6
Based on revenue raised to date, it is likely that the MRRT will come in
more than 90 per cent below the Treasurer's $4 billion net revenue forecast for
2012-13 in his July 2010 pre-election Economic Update. The MRRT revenue so far
has even come in more than 90 per cent below the already halved $2.0 billion
MRRT revenue estimate in the Mid-Year Economic Fiscal Outlook (MYEFO) 2012-13,
which was released on 22 October 2012.[1]
1.7
The purpose of this inquiry was to consider how the Commonwealth ended
up in such a fiscal mess courtesy of the government's manifestly failed MRRT.
In particular, the committee sought to assess how the development and the
design of the MRRT has contributed to the massive shortfall in revenue relative
to government projections, when the government had already spent all the money
they thought the MRRT would raise and more.
Inquiry terms of reference
1.8
On 26 February 2013, the Senate referred to the Senate
Economics References Committee for inquiry and report the question of the
development and operation of the Minerals Resource Rent Tax (MRRT), with regard
to revenue figures 'showing a massive shortfall in the revenue compared to
government projections.'
1.9
Specifically, the Senate asked this committee to inquire into and report
on:
(a) the design of the MRRT and the extent to which the design of the tax, as
opposed to other factors such as commodity prices, are responsible for the
mismatch between revenue projections and actual revenue raised;
(b) the process by which the MRRT was designed, including the extent of the
involvement of the Department of the Treasury and mining corporations that
would be liable to pay the tax;
(c) the extent to which the government took into account the views of
communities affected or potentially affected by iron ore and coal mining when
designing the tax;
(d) the implications for the budget; and
(e) any other related matter.
Conduct of this inquiry
1.10
The committee advertised the inquiry on its website and in the Australian
and wrote directly to a range of individuals and organisations inviting written
submissions. The committee received 16 submissions, which are listed at
Appendix 1.
1.11
The committee also held three public hearings, in Canberra on 3 April
2013, Perth on 8 April 2013 and in Melbourne on 29 April 2013. The names of the
witnesses who appeared at the hearing are at Appendix 2.
1.12
The committee thanks all who contributed to this inquiry.
1.13
In December 2009, the final report of the Australia's Future Tax System
Review (AFTS Review; otherwise known as the Henry Review) recommended that
current charging arrangements for Australia's non-renewable resources should:
...be replaced with a uniform resource rent-based tax,
using the allowance for corporate capital method. The tax should be imposed and
administered by the Australian government.[2]
1.14
In response to this recommendation, on 2 May 2010 the government, under
Prime Minister Kevin Rudd, announced that it would implement the Resource Super
Profits Tax (RSPT).[3]
1.15
Contrary to previous commitments to the industry by the Minister for
Resources and Energy the government had failed to consult the industry about
the design of the RSPT.
1.16
Even though the federal government sought to introduce a federal tax into
an area that traditionally had been the preserve of the States and Territories,
there was no consultation with State and Territory governments either.
1.17
Despite these obvious process deficiencies the Rudd government had
included about $12 billion in revenue from the RSPT in its 2010/11 Budget –
with revenue projections of about $99 billion over the first eight years.
1.18
The mining industry reacted very strongly against the government's new
federal tax on mining, specifically expressing concern about the lack of
consultation, the retrospective nature of the change, the unsustainability of
the proposition that the Commonwealth would refund mining losses, the ongoing
exposure to increases in State royalties, the implications of using the
accounting book value to determine the starting base for existing operations;
and the application of the RSPT to low-value commodities.
1.19
Upon becoming Prime Minister on 24 June 2010, Julia Gillard announced
that Treasurer Wayne Swan and the then Minister for Resources and Energy, the
Hon Martin Ferguson AM MP, would lead negotiations with the mining industry to
reach consensus on the RSPT.'[4]
1.20
Following the new Prime Minister's announcement, the government entered
into negotiations with representatives from the three largest mining companies
operating in Australia, BHP Billiton, Rio Tinto and Xstrata Coal.
1.21
On 2 July 2010, the Government announced that it would not introduce the
RSPT as originally proposed, but would instead introduce the Minerals Resource
Rent Tax (MRRT), along with the onshore extension of the Petroleum Resource
Rent Tax (PRRT) regime. A joint media release from the Prime Minister,
Treasurer and the Minister for Resources and Energy, presented the MRRT
proposal, as expressed in the MRRT Heads of Agreement between the government
and the mining companies, as the result of 'intense consultation and
negotiation with the resources industry,' and as 'a breakthrough agreement on
improved resource tax arrangements' that addressed the concerns the resource
industry had expressed regarding the previously proposed RSPT.[5]
1.22
Given the government had negotiated the design of the new MRRT with just
three of the more than 300 relevant mining companies across Australia, the
industry as a whole continued to feel excluded from the process.
1.23
Significantly, State and Territory governments had still not been
consulted and were not part of the agreement reached by the Commonwealth with
the three biggest miners.
1.24
In July 2010, the Senate Fuel and Energy Committee inquiring into the
MRRT (confirmed by subsequent Senate inquiries) expressed serious concern about
the federal government's lack of engagement with the States and Territories as
part of this process. In particular, given the federal government made an open
ended commitment in the MRRT Heads of Agreement to credit all state royalties
(including future increases in royalties) against any MRRT liability, the
strong view was expressed very early that as a matter of process the federal
government should have engaged and reached agreement with the States and
Territories before signing the deal.
1.25
As part of the MRRT Heads of Agreement signed on 1 July 2010, the
government agreed to the formation of an Implementation Committee which was to
be: a mutually acceptable Committee comprising credible, respected industry
leaders will oversee the development of more detailed technical design to
ensure the agreed design principles become effective legislation. This will
have the objective of ensuring the agreed principles are effected in line with
their intent in a commercial, practical manner.
1.26
To make it look more like a genuine effort at consultation post the
signed heads of agreement, the Gillard government renamed the MRRT
Implementation Committee, the Policy Transition Group (PTG). The government asked
recently retired BHP Billiton Chairman, Mr Don Argus AC, to chair the MRRT
Implementation Committee/Policy Transition Group alongside Mr Ferguson, to
'consult with industry and advise the Government on the design and
implementation of the MRRT and the extended PRRT'.[6]
1.27
On 3 August 2010, during the Australian federal election campaign,
Minister Ferguson and the Treasurer announced the membership and terms of
reference for the PTG, and stated that the PTG would commence after the outcome
of the election was determined.[7]
1.28
The PTG's terms of reference stated that, in order to protect the
integrity of the process, the PTG would be supported by officials from
Treasury, the Department of Resources, Energy and Tourism, and the Australian
Taxation Office, and, as required, by representatives of the resources
industry. It also indicated that the PTG would obtain advice as needed from
other independent experts.[8]
1.29
The PTG's terms of reference also indicated that its
recommendations should be:
...consistent with the Government's fiscal strategy as stated
in the 2010/11 Budget. Any policy deviation from the Government's announcement
of 2 July 2010 is to be fully offset within the recommendations in terms
of impacts on revenue or costs.[9]
1.30
What the Gillard government meant by this was that the MRRT must raise
the same amount of revenue as forecast ($10.5 billion for 2012/13 &
2013/14) no matter what adjustments were made to its design.
1.31
This obviously severely limited the opportunity for genuine
consultation.
1.32
On 21 December 2010, the PTG provided its final report to the Treasurer,
which included 94 recommendations relating to the introduction of the MRRT and
the transition arrangements for the PRRT.[10]
1.33
On 24 March 2011, the government announced that it had accepted all of
the PTG's (revenue neutral) recommendations.[11]
1.34
At the same time, the government announced that a Resource Tax
Implementation Group (RTIG), comprising representatives of industry and the tax
profession as well as government officials, would 'ensure close consultation
with the resource sector continues as the legislation is finalised.'[12]
1.35
On 10 June 2011, the government released, for public comment, draft MRRT
legislation, with public consultation closing on 14 July 2011.[13]
Second exposure drafts of the Bills were released on 18 September 2011 for
public comment, with the consultation closing on 5 October 2011.[14]
1.36
Following the exposure draft process, the MRRT legislative package was
introduced into Parliament on 2 November 2011.
1.37
The package was then referred to the House of Representatives Standing
Committee on Economics for inquiry, which presented its report to the House on
21 November 2011.[15]
1.38
On 10 November 2011, the Senate referred the provisions of the package
to the Senate Economics Legislation Committee for inquiry and report. The
committee reported on 14 March 2012.[16]
1.39
Previously the Senate Select Committee on Fuel and Energy and the Senate
Select Committee on the Scrutiny of New Taxes had conducted the most
comprehensive inquiries into the MRRT.
1.40
The Bills passed the Parliament on 19 March 2012 and received Royal
Assent on 29 March 2012.
1.41
The MRRT imposes an effective 22.5 per cent tax[17]
on the above-normal profits earned by the mining of a taxable resource.[18]
A taxable resource is defined in the MRRT Act as any of the following:
(a) iron ore;
(b) coal;
(c) anything produced from a process that results in iron ore being consumed
or destroyed without extraction; and
(d) coal seam gas extracted as a necessary incident of mining coal.[19]
1.42
The Revised Explanatory Memorandum for the MRRT Bills provided 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.[20]
1.43
The MRRT deals with three project cases:
(a) The project did not exist on 1 May 2010 (the time when the MRRT was
first announced).
(b) The project was invested in on 1 May 2010, and is transitioning into the
MRRT.
(c) The project is one of the multiple projects in which a miner has an interest,
which usually involves considerable pre-mining expenditure.[21]
1.44
The method of calculating a miner's liability under the MRRT is
essentially the same, regardless of the case into which the mining project fits.
1.45
The following steps are used to work out the amount a miner (that is,
the holder of a mining project interest) should pay under the MRRT:
(a) calculate the miner's mining revenue and mining expenditure;
(b) subtract the mining expenditure from the mining revenue, giving the mining
profit;
(c) calculate the mining allowances the miner is entitled to claim. In order
of application these allowances are:
(i) royalty credits;
(ii) pre-mining losses;
(iii) mining losses; and
(iv) starting base losses;
(d) subtract the total of the mining allowances from the mining profit;
(e) multiple that figure by the MRRT rate (22.5 per cent) to get the
MRRT liability; and
(f) if the miner is entitled to them, it can subtract the low profit
offset and the rehabilitation tax offset from the MRRT liability.
1.46
The revenue from a mining project is calculated using the
following two steps:
(a) The revenue amount for the mining revenue event is determined,
consistent with s. 30-25(2).
(b) Using the method that satisfies s. 30-25(3), work out how much of that
revenue amount is reasonably attributed to the taxable resource:
(i) in the form in which it existed when it was at its valuation point;
and
(ii) at the place where it was located when it was at its valuation point.[22]
1.47
The valuation point, therefore, is the 'point in the mining production
chain that separates upstream and downstream operations.'[23]
1.48
The MRRT Act does not expressly require a particular method for
calculating revenue amounts at the valuation point, and instead requires that
the method used:
...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.[24]
1.49
Mining expenditure includes expenditure 'necessarily incurred ... in
that year, in the carrying on (by the miner or another entity) of upstream
mining operations for the mining project interest' and is restricted to
expenditure 'of either a capital or revenue nature'.[25]
It does not, therefore, include the expenditure of assets, which are dealt with
as upfront deductions under depreciation.
1.50
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.
1.51
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.[26]
1.52
Upstream mining operations could include, among other things:
- 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 linking
the miner to the run-of-mine stockpile and buying and maintain the trucks used
for this transport.[27]
1.53
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.[28]
1.54
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.
1.55
Allowances differ depending on the particular case into which the mining
project falls. The four allowance types are set out above (royalty credits,
pre-mining losses, mining losses, and starting base losses) and must be applied
in that order.[29]
1.56
When profits are high, miners will pay royalties to State and Territory
Governments as well as MRRT. The MRRT recognises this by providing the miner
with a deduction, called a royalty allowance. The royalty allowance is 'grossed
up', using the MRRT rate, so that it reduces the MRRT liability by the amount
of the royalty.[30]
1.57
Importantly, where the full royalty credits for the year cannot be
applied as a royalty allowance, the unused portion is uplifted and carried
forward to be applied in a later year. The uplift rate is the long term bond
rate plus 7 per cent (LTBR + 7 per cent).[31]
1.58
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
uplift rate[32]
is the long‑term bond rate (LTBR) plus seven per cent.
1.59
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.[33]
1.60
Unlike other losses, starting base losses cannot be transferred to other
mining project interests.[34]
1.61
Staring base assets can be valued using either:
(a)
the 'market value method,' based on 'the market value of the mining
project interest's upstream assets at 1 May 2010'; or
(b) the 'book value method,' based on 'the most recent audited accounting
value of those assets at 1 May 2010'.[35]
1.62
The Revised Explanatory Memorandum to the MRRT bills highlighted 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.[36]
1.63
The issue of how starting base allowances are calculated is one of the
more contentious aspects of the MRRT. Simply put, it is argued by small miners
that the market valuation approach provides large and established miners with a
substantial 'tax shield'. This issue, along with other design features of the
MRRT affecting the level of revenue raised, is discussed in the next chapter.
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