Australia: Resource Super Profits Tax and the Federal Budget
Energy and Resources Update

The government delivered the federal budget for 2010-11 on Tuesday, 11 May 2010. The budget confirms the announcement made earlier this month that the government will adopt Recommendations 45 of the "Henry Report" for the introduction of a uniform rent-based tax on resources. This new rent-based tax will be known as the Resource Super Profits Tax (RSPT).

The RSPT is intended to commence on 1 July 2012 but the government has undertaken to consult extensively with the industry before finalising the design of the RSPT. Commentators are already speculating as to the extent of the government's willingness, or lack thereof, to negotiate on certain key elements of the RSPT.

The new regime will replace the existing crude oil excise and operate along side the existing state and territory royalties. A credit will be allowed for royalties paid to a state or territory government to prevent double taxation but the credit may be limited to royalty rates as at 2 May 2010. RSPT payment will be deductible for income tax purposes.

Overview of the RSPT

It is proposed that the RSPT will be levied at a rate of 40% on taxable profits from resource projects.

The RSPT will apply to mining and petroleum projects. The Henry Report recommends that the tax should be applied to non-renewable resources other than those expected to generate low taxable profits (Recommendation 45b). The report queries whether brown coal should be excluded.

There is a special exception for projects currently subject to the petroleum resource rent tax (PRRT) but opt-in arrangements will be developed to allow those projects to make an irrevocable election to transfer from the PRRT regime to the new RSPT.

The RSPT will be levied on the sale of resources by reference to the taxable profits of the project. The taxing point is at the project level, which means the tax will be calculated for project interests rather than for each company participating in the project.

Broadly speaking, all project expenditure up to the point where the resource is sold should be deductible under the RSPT, including exploration expenditure. The project expenditure will be immediately deductible. However, certain costs will not be deductible. These non-deductible costs are expected to include interest and borrowing costs, payments to shareholders, administrative costs, taxes and payments to acquire interests in a project.

RSPT project losses

A key feature of the design of the RSPT is the entitlement to a full loss offset, which means the government effectively shares the risk of the project in proportion to the RSPT tax rate. The Henry Report explained that not providing a full loss offset would discriminate against riskier projects and would distort business decision-making. Some industry members have voiced concern that this down-side protection favours low-margin and high capital-cost projects over most mining ventures.

The full loss offset will be achieved by allowing the transfer of losses to other commonly owned resource projects or, alternatively, by allowing losses to be carried forward so they can be used against future taxable profits. Carried forward losses will be uplifted at the allowance rate. Where losses cannot be utilised against future profits, the tax value of the residual losses will be refunded when the project is closed. RSPT refunds will be assessable for income tax purposes.

The allowance rate (or uplift) compensates investors for the deferral of the tax credit. The Henry Report contends that the appropriate rate should reflect the interest rate the government would have to pay if the deferral was a loan from the investor to the government. On this basis, the report recommends that the allowance rate should be set at the Australian long-term bond rate (Recommendation 45c).

The allowance rate (uplift) controversy

The government's acceptance of the long-term bond rate as the allowance rate is highly controversial and comparisons have been drawn to the more generous uplift allowed under the Petroleum Resource Rent Tax (PRRT), which is an equivalent rent-based tax. Under the PRRT, undeducted exploration expenditure can be compounded forward at the Australian long-term bond rate plus 15 percentage points and general expenditures are compounded at the long-term bond rate plus 5 percentage points.

The Henry Report addressed the PRRT and stated that the PRRT "fails to collect an appropriate and constant share of resource rents from successful projects due to uplift rates that over-compensate successful investors for the deferral of PRRT deductions". The report observed that rents collected under the PRRT have declined in recent years and industry profitability has increased, substantially due to "excessive PRRT uplift rates". These findings in the Henry Report may hinder arguments in support of a more generous allowance rate.

Industry consultation

The government has committed to conducting staggered consultation over the next 12 months and it will release an Issues Paper and a Final Design Paper together with draft legislation prior to the commencement date on 1 July 2012.

Initial feedback suggests that the government is refusing to negotiate the 40% tax rate and it currently seems unwilling to negotiate on an allowance rate (uplift) above the long-term bond rate.

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