Tax Incentives for Clean Coal Tax Incentives for Clean Coal Development in AustraliaDevelopment in Australia

Bill ButcherBill ButcherSchool of Business Law and Taxation, School of Business Law and Taxation,

University of New South Wales, University of New South Wales, Sydney, AustraliaSydney, Australia

The Henry ReviewThe Henry Review

Australia’s Future Tax System Report Australia’s Future Tax System Report 138 recommendations138 recommendations few recommendations adopted by few recommendations adopted by governmentgovernment

Recommendation: Recommendation: “Resource Rent Tax”“Resource Rent Tax”

Additional tax to be imposed on mining Additional tax to be imposed on mining windfall profits windfall profits ““rent” - a payment to a factor of production or rent” - a payment to a factor of production or input in excess of that which is needed to input in excess of that which is needed to keep it employed in its current use. keep it employed in its current use. rent tax not to be imposed on low value rent tax not to be imposed on low value minerals, possibly including brown coal – minerals, possibly including brown coal – raises environmental tax issueraises environmental tax issue

Why Impose Additional Tax on Why Impose Additional Tax on Mining?Mining?

All minerals in the ground belong to the All minerals in the ground belong to the countrycountry

Miners are allowed to extract and sell Miners are allowed to extract and sell minerals on payment of additional chargeminerals on payment of additional charge

Most countries charge royaltiesMost countries charge royalties Current Australian regime imposes royalties Current Australian regime imposes royalties

payable to the states, deductible for income payable to the states, deductible for income tax purposes (effective transfer from Federal tax purposes (effective transfer from Federal to states)to states)

Comparison of coal royaltie

State Royalty Rate Basis of calculation

Last review/change

QLD 7% where the value of the coal produced does not exceed $100/tonne

10% on the value of the coal exceeding $100/tonne

Ad valorem 2008 – Mines and Energy Legislation Amendment Regulation (No 2) 2008

NSW Open cut mining 8.2%

Underground mining 7.2%

Deep underground mining 6.2%

Ad valorem 2008 – State Revenue and Other Legislation Amendment (Budget Measures) Act 2008

VIC Brown Coal$0.0588 per GJ, adjusted in accordance with the consumer price indexOther 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 Grounds for Imposing Windfall Profits Tax on MiningProfits Tax on Mining

Economic distortionEconomic distortion Equity Equity

Economic Distortion and the Economic Distortion and the Problem with RoyaltiesProblem with Royalties

Royalties are based on either the quantity or Royalties are based on either the quantity or value of coal producedvalue of coal produced

No consideration of profitNo consideration of profit Acts as a disincentive – but acts in some Acts as a disincentive – but acts in some

circumstances as an environmental tax, eg circumstances as an environmental tax, eg low-grade coal low-grade coal

Equity: Who Should Benefit from an Equity: Who Should Benefit from an Upsurge in Mineral Prices?Upsurge in Mineral Prices?

Government, Miners, or both?Government, Miners, or both? The country owns the mineralsThe country owns the minerals The miners provided the capital and took the The miners provided the capital and took the

riskrisk

SolutionSolution

Resource rent tax: “levied at a constant Resource rent tax: “levied at a constant percentage of positive net cash flow”percentage of positive net cash flow”

Government Response #1:Government Response #1:Resource Super Profits Tax (RSPT) Resource Super Profits Tax (RSPT) Applies to all entities engaged in the Applies to all entities engaged in the

exploitation of non-renewable resources and exploitation of non-renewable resources and to all mining and petroleum products (not to all mining and petroleum products (not already covered by the Petroleum already covered by the Petroleum Resources Rent Tax (PRRT))Resources Rent Tax (PRRT))

Brown coal probably includedBrown coal probably included

RSPT FeaturesRSPT Features

40% tax rate on assessable resource profits40% tax rate on assessable resource profits Revenue less deductions with an allowance for Revenue less deductions with an allowance for

capital expenditurecapital expenditure Tax imposed on profits above the ‘normal’ rate of Tax imposed on profits above the ‘normal’ rate of

return – 6% (government bonds)return – 6% (government bonds) Loss on abandoned project refunded at 40%Loss on abandoned project refunded at 40% Government shares risk as well as profitsGovernment shares risk as well as profits Cf PRRT – ‘normal’ rate is 11%, but no refund Cf PRRT – ‘normal’ rate is 11%, but no refund RSPT deductible, with credit for royaltiesRSPT deductible, with credit for royalties

RSPT Calculation[1

]

Assessable revenueLess deductible expenditure (including depreciation)Less RSPT allowanceLess any prior year project losses

RSPT opening balance x RSPT rate

= 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

[1] Ib

Description Item Year 1 Year 2

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

Criticism of RSPTCriticism of RSPT

Taxes profits, not “super profits”Taxes profits, not “super profits” Mining projects will be sent offshoreMining projects will be sent offshore Potential effective tax rate of 54-57%Potential effective tax rate of 54-57%

Greens – don’t “cave in” to mining lobbyGreens – don’t “cave in” to mining lobby Partial cave-in and a new Prime MinisterPartial cave-in and a new Prime Minister

Government Response #2Government Response #2Minerals Resource Rent Tax Minerals Resource Rent Tax

(MRRT)(MRRT)

Exposure draft expected June 2011Exposure draft expected June 2011 Draft legislation – late 2011Draft legislation – late 2011 Passage of legislation - 2012Passage of legislation - 2012

Application of MRRTApplication of MRRT

Applies to mining of iron ore and coalApplies to mining of iron ore and coal Excludes ‘small’ miners – less than $50 Excludes ‘small’ miners – less than $50

million of MRRT assessable profits per million of MRRT assessable profits per annumannum

Key Features of MRRTKey Features of MRRT

30% rate30% rate Immediate write-off for new investmentImmediate write-off for new investment Unutilised losses carried forward at long Unutilised losses carried forward at long

term government bond rate plus 7%term government bond rate plus 7% Full credit for state royaltiesFull credit for state royalties Unused credits for royalties at LTGBR + 7%Unused credits for royalties at LTGBR + 7% 25% “extraction allowance”25% “extraction allowance” Effective tax rate 42-45%Effective tax rate 42-45%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Resource Charge $m $m $m $m $m $m

Revenue 0 520 830 910 1090 1100

Operating expenses 0 130 210 230 270 280

Depreciation 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

MRRT profit/loss -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

Company Tax

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

Constitutional IssuesConstitutional Issues

Crediting royalties against MRRT Crediting royalties against MRRT discriminates between the states (MRRT is discriminates between the states (MRRT is then higher in low-royalty states – different then higher in low-royalty states – different conditions prevailing?)conditions prevailing?)

Under the Constitution, mineral resources Under the Constitution, mineral resources belong to the state – Federal government belong to the state – Federal government has no right to tax them. Change of name has no right to tax them. Change of name enough? Or move to company tax enough? Or move to company tax surcharge?surcharge?

Practical IssuePractical Issue

States could raise royalties, which are a credit States could raise royalties, which are a credit against the MRRTagainst the MRRT

Would result in a transfer from Federal to statesWould result in a transfer from Federal to states

Responses:Responses: States give up royalties in exchange for a share of States give up royalties in exchange for a share of

MRRT MRRT Limit tax credits to state royalties that were in Limit tax credits to state royalties that were in

place or "scheduled" when the original RSPT was place or "scheduled" when the original RSPT was announced announced

Why Persevere With Coal?Why Persevere With Coal?

Uses Uses

ConclusionsConclusions

‘‘Clean coal’Clean coal’ The role of taxationThe role of taxation