Australia’s New Tax Regimes

Despite increasing economic uncertainty across the globe, Australia remains a land of opportunity for offshore investment particularly in the energy and resources sector.  It's important that investors are aware that the sector currently faces the prospect of new taxes at the federal level and a likely increase of royalty imposts at the state level.

The reasons behind these new imposts are complex and their final form is difficult to predict, although the fact that there will be new taxes seems almost assured.  Australia has experienced a protracted boom in resources and energy exports largely attributable to the expansion of the Asian economies, most notably China.  At the same time, local investment in energy production has failed to keep pace and the cost of domestic energy production is rising rapidly due to a heavy reliance on antiquated, carbon emission inefficient coal fired power stations.

A Tax on Carbon

Australia is currently governed by the Labor Party in a minority, centre-left Federal Government governing with the support of the Greens Party and a range of Independents.  The Government has announced its intention to impose an economy-wide tax on carbon.  It is advised by a multi political party committee which includes the Greens and Independents, but not the major opposition Liberal Party which oppose any form of tax on carbon.

The Government has indicated it initially wishes to bring in a low impact tax which will rise over time and has foreshadowed rebates to the tax payers most likely to be adversely affected by rising energy costs.  It is under pressure to protect highly unionised industries (such as steel making) which are traditional supporters of the Labor Party.  The Greens are looking for a greater impact from a carbon tax and less protection for big emitters of CO².  Ultimately, given the effects of the Government's previous back downs on a cap and trade scheme and the popularity of the opposition's stance against any tax, it is likely the Government and the Greens will agree on a relatively low impact tax.

On 7 June 2011, the Australian Treasurer Wayne Swan stated that, based on treasury estimates, a $20* per tonne carbon tax would not have a long term impact on jobs in the economy.  Even under a $20 per tonne carbon price the treasurer said that employment will increase by 1.6 million jobs and income will be $8000 per person higher by 2020.  He argued that tax would only have a slight bearing on Australia's bottom line with the real national impact per person being just .01% annually.

The multi party climate change commission referred to above have not yet settled on a starting price for the carbon tax but a range of options have been modelled.  The Government's key climate advisor, Professor Ross Garnaut, has recommended a starting price of $26 per tonne, compared to the European Union's $23 per tonne.

Professor Garnaut is the Government's primary advisor on climate change and released his final update to the 2008 climate change review on 31 May 2011.  His report states that an initial carbon tax of $26 a tonne would raise about $11.5 billion in the 2012/13 financial year.

He has made recommendations on how revenue from the carbon tax should be spent – 10% for innovation, 55% for households and 35% for industry.  Revenue from carbon permits are foreshadowed to pay for $3 billion a year on new clean technology and $1 billion set aside to help workers and communities affected by the shift away from the coal fired power industry.  Garnaut says that the bulk of the revenue should go to households to compensate for higher priced energy while compensation to business would eventually be cut to 25% of revenue when a floating carbon price kicks in under an emissions trading regime to be implemented at a later date.

Following the release of the report, the Climate Change Minister Greg Combet stated that the proposed breakdowns of proceeds from the carbon tax were Professor Garnaut's opinion and did not reflect the Government's position as to how the carbon tax revenue would be distributed.

It therefore remains unclear how much of the report will be adopted and there will be considerable political negotiating before final details of the carbon tax legislation are revealed as scheduled in July 2011.

MRRT AND PRRT

In addition to a carbon tax, the Federal Government has devised the Minerals Resources Rent Tax ("MRRT") and an extension of the offshore Petroleum Resources Rent Tax ("PRRT") to include onshore oil and gas projects.  Draft MRRT legislation was released for public comment on 10 June 2011 with a closing date for submissions of 14 July.  It is intended the MRRT will commence on 1 July 2011 and be restricted to iron and coal projects.

The MRRT is intended to be levied at a rate of 30% of the operating margin, which is calculated from an organisation's revenue less operating and investments costs and less the MRRT allowance and an extraction allowance.  The purpose of the extraction allowance is to focus the tax on the value of the resource being extracted rather than the value of mining expertise.

Under the MRRT there will be an immediate write off, rather than depreciation over a number of years, of new investments costs.  Unutilised loses can be carried forward at the government long term bond rate plus 7%.  There will be transferability for deductions which will allow minerals companies to deduct expenses that flow from investments in the construction phase of any particular project to offset the MRRT liability from projects in the production phase.

Importantly, the MRRT will also provide a full credit for state royalties paid by the tax payer in respect to a mining project.  As outlined below, this is likely to result in state royalties increasing as the MRRT is implemented.

It is intended that the MRRT will apply a tax point close to the point of extraction of iron or coal as it is intended that only the value of the resource be taxed and not the value added by the expertise of particular miners.

In addition to the MRRT, the Federal Government proposes to extend the Petroleum Resources Rent Tax ("PRRT") which it currently exacts on offshore oil and gas projects to onshore projects at a rate of 40%.  According to the Government, there are a range of uplift allowances for unutilised and capital write offs and immediate expensing is available for all expenditure.  All state and federal resources taxes will be credited against current and future PRRT liabilities.  The Government intends releasing PRRT draft legislation for public consultation and comment in the middle of 2011.

State Royalties

What can be seen from the draft MRRT legislation is that there will be credit given to iron and coal companies for royalties paid at a state level.  The Western Australian State Government has already increased royalties and it is likely that other states will follow suit.  The Federal Government has foreshadowed reducing federal payments to the states in other areas after losing returns under the MRRT to state royalties.  This is a matter that obviously has some way to go, but the implications of new taxes and the interaction between a carbon tax, MRRT, PRRT and state royalties is something that all investors in oil and gas, iron and coal projects in Australia need to be fully aware of and follow closely.

* All figures quoted in the article are in Australian Dollars.

Piper Alderman is recognised in Australia as a leading legal advisor to the energy and resources sector. Our clients operate across the full range of areas within the industry – from oil, gas and minerals to renewables such as wind and wave – throughout Australia and across the globe.

Our experience has been built from many years working on some of the region's most significant and often pioneering projects. This track record enables our national team to provide our clients with legal services which take into account the unique risks and rewards of the sector, offering advice on corporate and commercial transactions, licensing, regulatory, employment, environmental, native title and dispute resolution.

Gordon Grieve is the National Head of Energy & Resources at Piper Alderman.   He has significant international experience having undertaken matters for clients in the United Kingdom, United States of America and Continental Europe and is experienced in managing teams of professionals involved in major transactions.  

Mr Grieve can be contacted on +61 2 9253 9908 or by email at ggrieve@piperalderman.com.au