Tax Incentives for Clean Coal
Development in Australia
Bill Butcher
School of Business Law and Taxation,
University of New South Wales,
Sydney, Australia
The Henry Review
Australia’s Future Tax System Report
 138 recommendations
 few recommendations adopted by
government
Recommendation:
“Resource Rent Tax”
Additional tax to be imposed on mining
windfall profits
“rent” - a payment to a factor of production or
input in excess of that which is needed to
keep it employed in its current use.
 rent tax not to be imposed on low value
minerals, possibly including brown coal –
raises environmental tax issue
Why Impose Additional Tax on
Mining?
 All minerals in the ground belong to the
country
 Miners are allowed to extract and sell
minerals on payment of additional charge
 Most countries charge royalties
 Current Australian regime imposes royalties
payable to the states, deductible for income
tax purposes (effective transfer from Federal
to states)
State
Royalty Rate
Basis of
calculation
Last
review/change
7% where the value of the coal
produced does not exceed
$100/tonne
Ad valorem
2008 – Mines and Energy
Legislation Amendment
Regulation (No 2) 2008
Ad valorem
2008 – State Revenue and Other
Legislation Amendment (Budget
Measures) Act 2008
e
QLD
10% on the value of the coal
exceeding $100/tonne
NSW
Open cut mining 8.2%
Underground mining 7.2%
Deep underground mining 6.2%
VIC
Brown Coal
$0.0588 per GJ, adjusted in accordance
with the consumer price index
Other than Brown Coal 2.75%
Ad valorem with
quantum rate for
brown coal
2006 – Mineral Resources
Development (Amendment)
Regulations 2006
WA
If exported 7.5%
If not exported
$1/tonne (adjusted each year at 30 June
in accordance with comparative price
increases)
Ad valorem and
quantum rate
2000 – Mining Amendment
Regulations (No. 4) 2000
SA
3.5%
Ad valorem
2005 – Mining (Royalty No 2)
Amendment Act 2005
Grounds for Imposing Windfall
Profits Tax on Mining
 Economic distortion
 Equity
Economic Distortion and the
Problem with Royalties
 Royalties are based on either the quantity or
value of coal produced
 No consideration of profit
 Acts as a disincentive – but acts in some
circumstances as an environmental tax, eg
low-grade coal
Equity: Who Should Benefit from an
Upsurge in Mineral Prices?
 Government, Miners, or both?
 The country owns the minerals
 The miners provided the capital and took the
risk
Solution
 Resource rent tax: “levied at a constant
percentage of positive net cash flow”
Government Response #1:
Resource Super Profits Tax (RSPT)
 Applies to all entities engaged in the
exploitation of non-renewable resources and
to all mining and petroleum products (not
already covered by the Petroleum
Resources Rent Tax (PRRT))
 Brown coal probably included
RSPT Features
 40% tax rate on assessable resource profits
 Revenue less deductions with an allowance for
capital expenditure
 Tax imposed on profits above the ‘normal’ rate of
return – 6% (government bonds)
 Loss on abandoned project refunded at 40%
 Government shares risk as well as profits
 Cf PRRT – ‘normal’ rate is 11%, but no refund
 RSPT deductible, with credit for royalties
[1]
Ib
RSPT
Calculation[
1]
RSPT opening balance x RSPT rate
Assessable revenue
Less deductible expenditure (including
depreciation)
Less RSPT allowance
Less any prior year project losses
= RSPT project profit or loss
+ / - losses transferred in
= RSPT net profit or loss
Project losses can be transferred
RSPT liability = 40 % of RSPT net profit
If net loss, loss is carried forward
Closing RSPT capital account =
undepreciated value of tangible capital,
plus any unutilised losses
Description
Item
Revenue
(1)
0
150
Less Expenses
(2)
60
40
Less RSPT Allowance (6 per cent applied to
RSPT capital base)
(3)
0
6
Less Unutilised losses carried forward from
previous year
(4)
0
60
Net RSPT profit (item 1 less items 2, 3, 4)
(5)
-60
44
Taxable RSPT profit (nil if item 5 is negative)
(6)
0
44
Tax @ 40 per cent
(7)
0
18
Initial investment (1 July in year 1)
(8)
100
n/a
Carry forward losses (item 5 if negative)
(9)
60
0
Undepreciated assets
(10)
40
0
RSPT capital base (items 9 + 10)
(11)
100
0
Year 1
Year 2
Criticism of RSPT
 Taxes profits, not “super profits”
 Mining projects will be sent offshore
 Potential effective tax rate of 54-57%
 Greens – don’t “cave in” to mining lobby
 Partial cave-in and a new Prime Minister
Government Response #2
Minerals Resource Rent Tax
(MRRT)
 Exposure draft expected June 2011
 Draft legislation – late 2011
 Passage of legislation - 2012
Application of MRRT
 Applies to mining of iron ore and coal
 Excludes ‘small’ miners – less than $50
million of MRRT assessable profits per
annum
Key Features of MRRT
 30% rate
 Immediate write-off for new investment
 Unutilised losses carried forward at long
term government bond rate plus 7%
 Full credit for state royalties
 Unused credits for royalties at LTGBR + 7%
 25% “extraction allowance”
 Effective tax rate 42-45%
Year 1
Resource Charge
Year 2
Year 3
Year 4
Year 5
Year 6
$m
$m
$m
$m
$m
$m
Revenue
0
520
830
910
1090
1100
Operating expenses
0
130
210
230
270
280
1000
0
0
0
0
0
MRRT allowance @ 13 per cent
0
130
96
28
0
0
MRRT unutilised losses
0
1000
740
216
0
0
-1000
-740
-216
436
820
820
MRRT @ 30 per cent
0
0
0
131
246
246
Extraction allowance @ 25%
0
0
0
33
62
62
MRRT after extraction allowance
0
0
0
98
185
185
Royalty @ 7.5 per cent
0
39
62
68
82
83
Uplifted Royalty offset
0
0
44
120
102
0
Net MRRT
0
0
0
0
1
102
Total resource charge
0
39
62
68
82
185
Revenue
0
520
830
910
1090
110
Operating expenses
0
130
210
230
270
280
Depreciation
0
200
200
200
200
200
Total resource charge
0
39
62
68
82
185
Company taxable income
0
151
358
412
538
436
Company tax @ 29 per cent
0
44
104
119
156
126
Profit before tax
0
190
420
480
620
620
Total tax
0
83
166
188
238
311
Depreciation
MRRT profit/loss
Company Tax
Constitutional Issues
 Crediting royalties against MRRT
discriminates between the states (MRRT is
then higher in low-royalty states – different
conditions prevailing?)
 Under the Constitution, mineral resources
belong to the state – Federal government
has no right to tax them. Change of name
enough? Or move to company tax
surcharge?
Practical Issue
 States could raise royalties, which are a credit
against the MRRT
 Would result in a transfer from Federal to states
Responses:
 States give up royalties in exchange for a share of
MRRT
 Limit tax credits to state royalties that were in
place or "scheduled" when the original RSPT was
announced
Why Persevere With Coal?
 Uses
Conclusions
 ‘Clean coal’
 The role of taxation