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Australian Update Lance Cunningham looks at four topical issues: ■ Carbon Emissions Pricing Scheme ■ New Mining and Petroleum Taxes ■ Tax Exemption for Non-residents Managed Funds ■ New Tax Incentives for Research and Development 1.Carbon Emissions Pricing Scheme In response to the threat of climate change caused by the human-generated greenhouse gas emissions, the Australian Government has introduced a carbon emissions pricing scheme to commence on 1 July 2012. Australia will be joining a number of other countries that have introduced emissions trading schemes (ETS), including the European Union, New Zealand, Switzerland and a number of States in the United States. Japan and South Korea are also piloting an ETS. A straight carbon tax has also been introduced in a number of other countries. The scheme will have two components. Firstly, a price will be set for the emissions of carbon from large emitting installations such as electricity producers, steel makers and aluminium smelters. This aspect of the scheme will target Australia's top 500 polluters, generally being any business responsible for direct greenhouse gas emissions of more than 25,000 tonnes of carbon (or carbon equivalent) annually. The second component relates to the use of fuels for heavy road transport, domestic aviation, marine and rail transport and fuels used for off road use. For these fuels, the fuel tax credits and excise schemes will be amended to give the same economic effect to these fuels as the imposition of the carbon tax/ETS. Carbon Tax/ETS for large emitters For the first two years the scheme will operate like a tax with the Government dictating the price for greenhouse gas emission permits. From 1 July 2015, it is proposed the scheme will become a cap-and-trade emissions trading scheme with the Government setting the cap on the amount of greenhouse gas that can be emitted by Australian emitters and the price of permits being set by the market (with a price floor and ceiling set by the Government). The initial price of permits will be $23 per tonne of carbon (or equivalent of other green house gases) increasing to $24.15 on 1 July 2013 and $25.40 on 1 July 2014. Some trade exposed industries will be given free permits to ensure they are not adversely affected by international competition. After 1 July 2015 some permits will continue to be provided free by the Government to trade exposed industries until a more extensive international ETS is introduced. Transport fuel taxes The carbon tax / ETS scheme does not apply to the use of transport fuels but a broadly equivalent cost will be imposed in the form of selective reductions of fuel tax credits and excise changes to fuels for domestic aviation, marine and rail transport and the use of transport type fuels used for off-road use (e.g. diesel generators on a mine site). From 1 July 2014, the Government also intends to extend the fuel tax credit reductions to heavy on-road vehicles. There will be no additional tax on fuel used by households or private and light commercial vehicles. Small business, agriculture, forestry and fishing industries will also not have any carbon price added to the cost of off-road use of fuel. Renewable fuels and non-combustible fuels used for lubrication will not bear a carbon price. The concessions Although end consumers will not be directly affected by this scheme it is likely to result in higher prices for certain products and services. To offset these higher prices, and to make it more politically palatable, the scheme also contains tax reductions and welfare increases for individuals. There will also be various grants and assistance packages for manufacturers, coal and steel producers and the agricultural industry. 2.New Mining and Petroleum Taxes The Australian Government proposes to introduce a Mineral Resource Rent Tax (MRRT) on profits made on mining of coal and iron ore in Australia. It will also extend the operation of 5 // PKF International Tax Alert All Regions Issue 8 November 2011
Australia Update continued the existing Petroleum Resource Rent Tax (PRRT) to include all petroleum projects on Australian territory, either at sea or on land. This will be associated with a general reduction in the income tax rate for companies. These changes are proposed to start from 1 July 2012. Australia is experiencing a two-speed economy with industries associated with resource extraction enjoying boom times while other industries are feeling some of the contraction that most of the rest of the world is experiencing following the global financial crisis. The proposed reduction in the general company tax rate and the imposition of the resources rent taxes may help to spread some of the advantages of the resources boom to the rest of the Australian Economy. The report to Government that recommended this approach suggested a wide ranging resources rent tax with a reduction in the company income tax rate from 30% to 25%. However, due to various political problems and lobbying by vested interests, the resource rent tax has been limited to a few high value commodities such as coal, iron ore, petroleum and natural gas. The reduction in company tax rate has also been limited to a 1% decrease from 30% to 29% (with a promise to consider further reductions in the future). Mining Resources Rent Tax This tax will apply from 1 July 2012 to iron ore and coal producers with MRRT profits of at least $50 million per annum. Smaller producers are exempt from MRRT but they will have compliance and record keeping requirements. The MRRT is a tax on the value of the extracted iron ore or coal at the taxing point, which is generally when the taxable resource leaves the 'run-of-mine' stockpile, less the costs incurred in getting the commodity to the taxing point (known as upstream costs). This calculation is designed to identify the value of the resource as it leaves the ground and before further processing occurs. The MRRT profit is further reduced by an allowance for any State or Territory Government royalties paid on the extracted resource and also an allowance for past year losses on the project. The result is the MRRT profit. The rate of tax applied to the MRRT profit is 30%. However, this is decreased by a 25% extraction factor, which reduces the effective tax rate to 22.5%. The extraction factor is an approximation of the value of the miner's specialist skills used to extract the resources and bring it to the taxing point. The liability to tax will commence at profits of $50 million but with a phase in for profits up to $100 million so the full tax is only payable once profits exceed $100million. Pre-May 2010 Projects The MRRT only applies to new projects that start after 1 May 2010 (the date of the Government's announcement for a resource rent tax) and to the increase in value of existing projects as at 1 May 2010. Taxpayers with projects that are in existence at 1 May 2010 have to identify the value of their project's starting base. The starting base is the value of the project as at 1 May 2010 plus certain capital expenditure incurred between 2 July 2010 and 30 June 2012 (the start date for the MRRT). The starting base can be written off against the MRRT profits over time. Petroleum Resource Rent Tax The PRRT currently applies only to certain offshore petroleum projects but from 1 July 2012 it will also apply to all offshore and onshore oil, gas and coal seam methane projects, including the North West Shelf project but excluding projects in the Timor Sea joint development area. There is no threshold before PRRT applies, unlike the MRRT with its $50M threshold. The PRRT will continue to apply at the rate of 40% of PRRT assessable profits. These will generally be calculated in accordance with the prevailing PRRT rules with some adjustments including: ■ Projects transitioning into the PRRT may apply the starting base for their project to be written off against PRRT profits; and ■ All royalties paid to State and Territory Governments will be credited against PRRT. 3.Tax Exemption for Non-residents Managed Funds The Australian Government has announced concessions that will exempt some non-residents with managed funds from Australian tax. These concessions are to apply to foreign investment funds 6 // PKF International Tax Alert All Regions Issue 8 November 2011
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