Tax compromise good for miners but not wider business community

According to the firm’s mining lead tax partner, Gordon Thring, potential beneficiaries of the changes to the tax 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 Minerals Resource Rent Tax (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.”
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,” 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 more than 85 per cent of mining companies previously caught under the Resource Super Profits Tax (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,” 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,” Thring said.

MRRT an unexpected setback for some businesses
The resources tax compromise is positive news for big miners and will help repair Australia’s reputation as an investment destination, but it comes at a price, according to corporate advisory service BDO.
BDO director of corporate and international tax Russell Garvey said the deal struck between the Gillard Government and the big miners would help ensure Australia would not be priced out of the international market.
However, he said the wider Australian business community would be disappointed at measures that halve the promised cut in the corporate tax, which would affect SMEs as well as big business.
“We congratulate the Gillard Government for resuming negotiations in good faith and reaching a rational, commercially acceptable agreement,” Garvey said.
He said three factors - narrowing the scope of the mineral resource rent tax to iron ore and coal, cutting the tax rate from 40 to 30 per cent, and removing harsher aspects of the so-called “retrospective” application of the tax by allowing miners to use market value as the basis for taxing existing projects - provided much-needed certainty and direction for the resources sector.
Garvey also noted that most big miners will appreciate the immediate write-off for investment made from July 1st, 2012, rather than depreciating the expenditure over a number of years.
“This means that many mining projects will not be subject to the tax until they earn enough profit to recoup their up-front capital expenditure,” said Garvey.
“The previous proposal was far too damaging to the entire sector, and this deal comes closer to satisfying industry principles and the Government’s desire for improvements to resources tax arrangements.”
Garvey said the policy transition group headed by former BHP chairman Don Argus and Resources Minister Martin Ferguson would have a challenging road ahead in guiding the changes.
“BDO believes Argus is an ideal chair of the policy transition group. He has an intimate knowledge of the resources sector, and his financial background as CEO of National Australia Bank adds to his credibility for the entire business community.”