2012 Americas School ofMines

www.pwc.com

Australian Tax OverviewAustralian Tax OverviewWayne Huf

Agenda

Three Tiers of Mining Taxation in Australia

Tier 1 – State Royalties

Tier 2 – Minerals Resource Rent Tax (MRRT)

Tier 3 – Corporate Tax

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Tier 3 – Corporate Tax

Other Taxes

Stamp Duty

Carbon Tax

Fringe Benefits Tax

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Three Tiers of Mining Taxation in Australia

Mining Royalties

• Turnover based tax.

• Calculated as % of valueor $ per tonnage.

• Payable quarterly

• Profit based tax.

• Effective tax rate of22.5%.

• Focused on the impliedprofit at the “point the

• Profit based tax.

• 30% rate.

• Deduction for Stateroyalties/MRRT paid(rather than tax credit).

Tier 1State Taxes

Tier 2Mining Tax

Tier 3Company Income Tax

PwC 3May 2012Minerals Resource Rent Tax

• Payable quarterly(quarterly returns).

• Non-refundable,therefore still a cash costwhen no MRRT payable.

profit at the “point theresource is extracted.”

• State Royalty deduction“grossed up” at MRRTrate.

• Immediate deductionfor capital expenditure.

• Losses carried forwardincrease in value(LTBR+7%).

(rather than tax credit).

• Generates tax offsets forshareholders (fullimputation system).

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Tier 1

State Royalties

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State RoyaltiesRates for Coal and Iron Ore

State Coal Royalty Iron Ore Royalty

Western Australia 7.5% 7.5%

Queensland 7% up to $100/tonne and10% of the valuethereafter

$1.25/tonne up to$100/tonne and 2.%of the value thereafter

New South Wales 6.2% - Deep 4%

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New South Wales 6.2% - Deepunderground7.2% - Underground8.2% - Open-cut

4%

Victoria $0.0678/gigajoule forbrown coal2.75% other coal

2.75%

South Australia 5% 5%

Northern Territory 20% 20%

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Tier 2

Minerals Resource Rent Tax (MRRT)

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MRRTWhat is it?

• Applies from 1 July 2012 (legislation giving effect has been enacted)

• Applies only to iron ore and coal projects

• Tax is generally based on value at point just prior to processingor beneficiation (Valuation Point) – ROM Pad.

• It is levied on a project basis rather than a miner basis.

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• It is levied on a project basis rather than a miner basis.

• The tax is 22.5% of mining profits at the Valuation Point reducedby available allowances, including state royalties.

• Options for small miners, low profit offset and simplified MRRTmethod. In some cases this may reduce the MRRT liability to nil.

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MRRTHow is a project defined?

• The MRRT is taxed on a Mining Project Interest (MPI) basis, butwhere MPIs are ‘integrated’ it may be possible to combine.

• Generally, Pre-Mining Project Interests (PMPI) cannot combineuntil they become MPIs.

• Upstream (mandatory) vs Downstream (choice) integration.

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• Upstream (mandatory) vs Downstream (choice) integration.

• The question of integration is fact-driven, often complicated andneeds to be assessed on a case-by-case basis.

• Integration will affect several aspects of your MRRT calculation(including mining revenue, mining expenditure and starting base).

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MRRTHow is the liability calculated?

Project item Comments

Mining Revenue • Value of resource at the valuation point.

Less Mining Expenditure • Capital / Operating costs up to the valuation point.

• Certain costs not deductible (e.g. interest/ foreign exchange).

Equals Mining Profit

Less Royalty Allowance • Royalties Paid/0.225 (and prior year royalty losses).

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Less Royalty Allowance • Royalties Paid/0.225 (and prior year royalty losses).

Less Pre-Mining Loss Allowance • Losses from expenditure incurred on a project prior to productioncommencing.

Less Mining Loss Allowance • Losses from expenditure incurred on a project after productioncommencing.

Less Starting Base Allowance • Amortisation of Project value at 2 May 2010 and interimexpenditure incurred between 2 May 2010 and project start date

Less Transferred Loss Allowance

Equals MRRT Profit

@ MRRT Rate: 22.5% • 30% * (1 – 25%*) * the Extraction Factor

Equals MRRT Liability

MRRTDetermination of Revenue

Mining Revenue

Initial SupplyMRRT Valuation Point

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Mining Crushing Processing Rail PortSales andmarketing

Step 1: Revenue from resourceat point of current miningrevenue must be determined(OECD Principles regardingmethod selection recognised)

Step 2: MRRT revenue at valuationpoint determined by deductingdownstream revenue from Step 1amount. Downstream revenuedetermined via application of OECDmethods.

How do we getthere?

MRRTMining profit

RevenueUpstream Downstream Taxing TimeMining Profit

Step 1Step 2 – Allocate RevenueStep 3 - Expenditure

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Exploration

Mine Planning

Blasting

Overburden

Load & Haul

ROM PADCrushing

Washing

Rail

Blending

Port LoadingFOB Coal

Sale

Marketing and otheradministration

Step 1: Determine revenue at taxing time (e.g. upon sale).

Step 2: Determine amount attributable to resource at valuation point (e.g. ROM pad).

Step 3: Deduct qualifying upstream expenditure.

MRRTHow is the Starting Base Allowance Determined?

• Starting base allowances are based on upstream project assets valuedat 2 May 2010, plus “interim” expenditure.

• Miners have the choice of using a book value or market valueapproach.

• Reworking an existing market valuation for MRRT purposes can

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• Reworking an existing market valuation for MRRT purposes canprove problematic:

Starting base assets should be valued at 2 May 2010 without thebenefit of hindsight.

Other valuations are likely to include assets that are not allowed asstarting base assets (i.e. Downstream assets such as crushers).

• Interaction with Valuation Point/s and projectintegration/combination

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MRRTAccounting

• Legislation was substantially enacted on 19 March 2012 for IFRSaccounting purposes.

• Temporary Differences are required to be recognised

Comparison of tax base and accounting base of assets andliabilities under AASB 112

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liabilities under AASB 112

Only for assets and liabilities subject to MRRT (e.g. generallywill exclude trade receivables, cash)

Any MRRT starting base DTA will need to be recognised and willresult in a one off impact on tax expense

• Interaction with tax effect accounting for corporate income tax.

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Tier 3

Corporate Taxes

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Corporate TaxOverview

• Corporate tax is imposed at the Federal level.

• Corporate tax rate currently 30% (commitment to reduce to 29% notmet).

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• Capital Gains Tax (CGT) regime imposes tax on capital gains derivedfrom specific ‘CGT events’ – also taxed at 30%.

• Full dividend imputation system prevents double taxation ondistribution of profits from companies to shareholders – credit forcompany tax already paid.

Corporate TaxOverview (cont.)

• Revenue and capital losses are eligible to be carried forwardindefinitely to offset future revenue and capital profits respectively,subject to certain loss integrity rules being the Continuity ofOwnership Test (CoT) and the Same Business Test (SBT).

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• Loss carry back for up to two years announced May 2012 – limited to$1m per annum – companies only.

• Separate debt / equity classification rules for taxation purposes.

Corporate TaxInbound investors

• Thin capitalisation regime limits ability to claim debt deductionswhere debt / equity gearing of international inbound investorsexceeds ‘safe harbour’ threshold of 3:1 (i.e. 75%) – proposal to reduceto 1.5:1 (60%).

• “Long-arm” CGT rules impose tax on sale of assets ultimately held byinternational investors, where majority of underlying assets

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international investors, where majority of underlying assetsconstitute “taxable Australian property” (largely land and miningrights).

• Transfer pricing regime requires all international related partytransactions to be on “arms-length” terms and sufficientlydocumented.

Corporate TaxInbound investors (cont.)

• Withholding tax imposed (under both domestic law and applicableDouble Taxation Agreements) at varying rates on certain types ofpassive income (dividends, interest & royalties) derived by non-residents.

• Transfer pricing regime requires all international related partytransactions to be on “arms-length” terms and sufficiently

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transactions to be on “arms-length” terms and sufficientlydocumented.

• Withholding tax imposed (under both domestic law and applicableDouble Taxation Agreements) at varying rates on certain types ofpassive income (dividends, interest & royalties) derived by non-residents.

Stamp Duty

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Stamp Duty

5.15%

5.45% 5.25%

5.5%

New South Wales

Queensland

NorthernTerritory

Western Australia

South Australia

Ratesof Duty

2012

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5. 5%

4%

6.75%

5.5%

Tasmania

ACT

Victoria

2012

Notes:1 Vic has announced a move to a landholder model from 1 July 2012.

• State tax imposed on transfer of certainassets –including land and mining rights.

Carbon Tax

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Carbon TaxReduction targets

• The Australian Government’s Clean Energy Future Plan (The Plan)commits Australia to a reduction target of at least 5 per cent from2000 levels by 2020 and 80 per cent below by 2050.

• Meeting this target will require abatement of at least 159 million

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• Meeting this target will require abatement of at least 159 milliontonnes CO2-e by 2020

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Carbon TaxWho is liable?

• Any entities with facilities with covered emissions above 25,000tonnes CO2-e will have a liability to surrender carbon units.

• The government estimates that approximately 500 ‘heavy emitters’will be obligated to surrender units under the scheme.

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will be obligated to surrender units under the scheme.

• Around 100 of these are expected to be miners.

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Carbon TaxPrice starting points and evolution to a flexible price

• The starting carbon price for each tonne of CO2, to be introduced on1 July 2012, is $23.

• This will rise (in real terms) to $24.15 in 2013 and to $25.40 in 2014.

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• This will rise (in real terms) to $24.15 in 2013 and to $25.40 in 2014.

• As of 1 July 2015, a flexible carbon price will be introduced – EST(Emissions Trading Scheme).

• This will include a transitional price cap and floor.

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Carbon TaxKey price details

Carbon price mechanism will start on 1 July 2012

Fixed price phase (1 July 2012 to 30 June 2015) -$23 for each permit to emit a tonne of CO2 above25,000t threshold

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25,000t threshold

Price increased annually by 2.5% until 2015 whenflexible price phase / ETS begins on 1 July 2015

Flexible price phase subject to a transitional $15/tfloor and a ceiling of $20t above international priceincreasing by 4% and 5% annually

Carbon TaxTransitional assistance for emissions-intensive trade-exposed (EITE)sectors

• Organisations conducting emissions-intensive trade-exposed (EITE)activities will receive an estimated $9.2 billion in transitionalassistance over the first three years.

• The initial rates of transitional assistance have been set at two levels,these are intended to reduce by 1.3% each year.

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these are intended to reduce by 1.3% each year.

• The average industry rates are:

94.5% For highly emissions intensive activities (e.g. aluminiumsmelting, integrated iron and steel production and flat glassproduction)

66% For moderately emission intensive activities (e.g. polyethyleneproduction and tissue paper production)

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Fringe Benefits Tax

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Fringe Benefits Tax (FBT)A tax on non-cash benefits provided to employees

• FBT is a tax employers pay on “fringe benefits” provided toemployees.

• A fringe benefit is a benefit provided to employees in place of salaryor wages (i.e. non-cash benefits).

• For example:

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• For example:

company car;

entertainment;

low or no interest loans;

payment or reimbursement of private expenses; and

living away from home benefits.

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Summary

Three Tiers of Mining Taxation in Australia

Tier 1 – State Royalties

Tier 2 – Mineral Resource Rent Tax (MRRT)

Tier 3 – Corporate Tax

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Other Taxes

Stamp Duty

Carbon Tax

Fringe Benefits Tax

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Questions?

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