QUESTION
MAA310 Accounting and Society
Trimester 1 2012
Written Assignment
Due Date: Monday 7 May 2012 BEFORE 11.59pm
Marks: 40 Marks
This assignment is based mainly on Topic 6. You will also need to do some extended
personal research and self-directed learning in order to complete the assignment. The
assignment may be completed either INDIVIDUALLY or in a group of TWO. If completed
as an individual assignment, the length is 3,000 words. If completed as a group
assignment, the length is 4,500 words.
Assignment task:
The Minerals Resource Rent Tax (MRRT) is a tax which will be placed on profits earned
by certain mining companies. The MRRT was introduced by the current Australian
Federal Government and will come into effect on 1 July 2012.
Discuss the potential effects of the introduction of the MRRT on the accounting policy
choices of mining companies affected by the tax. You should discuss the potential
effects on accounting policy choice decisions both prior to the introduction of the tax
and post introduction of the tax.
You are required, and must, read and incorporate academic journal articles and other
relevant materials to justify your viewpoint.
Further Instructions:
ALL STUDENTS (WHETHER GROUP OR INDIVIDUAL) MUST SUBMIT INDIVIDUALLY,
ONLINE VIA DSO BEFORE:
Monday 7th of May 2012, 11.59 pm
(THIS IS THE ASSIGNMENT DEADLINE, NOT THE HARDCOPY DEADLINE- see below)
On-campus students: IN ADDITION TO THE DSO SUBMISSION, a hardcopy of the
assignment is to be submitted to the assignment drop box (Building LB – Burwood,
Building IB – Geelong and Faculty Office – Warrnambool) before 5.00pm on 8 May 2012.
Off-campus students: IN ADDITION TO DSO SUBMISSION, a hardcopy of the assignment
must be POSTED (using DSA assignment tracking) before 5.00pm on 8 May 2012 to DSA.
Penalty for late submissions: Assignments submitted late without an extension being
granted will not be marked. These will be held until final grading and may be taken into
consideration in a pass/fail situation.
SOLUTION
About Minerals Resource Rent Tax
The Minerals Resource Rent Tax has been proposed by the Australian government which will be levied on the mining companies. Another Tax that has been proposed is Resource Super Profit Tax. However both the taxes will be applied in different scenarios
The tax rate under MINERALS RESOURCE RENT TAX will be 30% on the profits earned from mining of Iron ore and Coal and will be applicable only in the case when the annual profits of $ 75 million. This has been done in order to protect the small businesses from being impacted as a result of MINERALS RESOURCE RENT TAX.
The main point of concern is that MINERALS RESOURCE RENT TAX is applicable only on companies that are into mining of Iron Ore and Coal. (Gayles,2011)
It is being argued that with MINERALS RESOURCE RENT TAX in place the effective tax rate that will be applicable will be 42.3% over the complete life of the mining project (Utz, 2011). Meanwhile in the critics view this tax rate is higher as compared to the tax being levied by other international countries which are in the range of 35 to 40%.
Franking Credits, wherein it is allowed to pass through taxes on the corporate profits that have already been made, will also not apply in the case of MINERALS RESOURCE RENT TAX, although there will be benefits arising due to extraction allowance being given for the entrepreneurship and the managerial expertise required in mining. The extraction allowance is 25% thus the effect of MINERALS RESOURCE RENT TAX will be reduced. Another important factor that has been brought under MINERALS RESOURCE RENT TAX is the exploration rebate for which deductions against other income sources could not be done has been made possible. Another factor in favor of MINERALS RESOURCE RENT TAX is the uplift factor. This has been increased from Long Term Bond Rate to Long Term Bond Rate plus 7%. This will be applicable only to those mining companies that opt for book value and decide to carry forward the capital costs and the operating costs un deducted.
Thus the Key Points discussed so far have been summarized below:
1. Applied on: Iron Ore and Coal Mining Firms
2. Limit: The MINERALS RESOURCE RENT TAX will not be applicable for firms making profit less than $50 million annually.
3. Tax Rates: The MINERALS RESOURCE RENT TAX will be 30%. On this extraction allowance rebate will be applicable which is 25%, will reduce the impact of MINERALS RESOURCE RENT TAX. The MINERALS RESOURCE RENT TAX will result in tax rate of 42 to 45% over the project life cycle.
4. Uplift: The uplift has been provided as it has been increased to Long Term Bond Rate plus seven percent.
5. Other Factors: MINERALS RESOURCE RENT TAX losses can be transferred to other iron ore and coal projects but no exploration allowance will be provided. However the extraction allowance will be applicable.
Potential Effects & Impact
Analysis
Below is the example that shows the impact of MINERALS RESOURCE RENT TAX on a mining company.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Resource Charges $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
MINERALS RESOURCE RENT TAX Allowance (13%) 0 130 96 28 0 0
MINERALS RESOURCE RENT TAX profit/ Loss -1000 -740 -216 436 820 820
MINERALS RESOURCE RENT TAX (30%) 0 0 0 131 246 246
Extraction Allowance (25%) 0 0 0 33 62 62
MINERALS RESOURCE RENT TAX after extraction allowance 0 0 0 98 185 185
Royalty (7.5%) 0 39 62 68 82 83
Total Resource Charge 0 39 62 68 82 83
Company Tax
Revenue 0 520 830 910 1090 1100
Operating Expenses 0 130 210 230 270 280
Depreciation 0 200 200 200 200 200
Total Resource Charge 0 39 62 68 82 83
Company taxable income 0 151 358 412 538 537
Company Tax (29%) 0 44 104 119 156 155
PAT 0 83 166 188 238 311
In the above example the MINERALS RESOURCE RENT TAX will be calculated by the following formula:
(Profit from Mining – MINERALS RESOURCE RENT TAX Allowances) X MINERALS RESOURCE RENT TAX Rate
In the above table all the aspects of the MINERALS RESOURCE RENT TAX have been taken into account, which is for example, MINERALS RESOURCE RENT TAX allowance Long Term Bond Rate plus seven percent and the extraction allowance have been taken into account.
While calculating mining profit it has to be noted that upstream capital expenditure will be deductible. Also as discussed above in the introduction section MINERALS RESOURCE RENT TAX allowance does not include extraction allowance. This has been discussed in detail below.
The effects from the accounting perspective as can be seen from the above table will be (EnY, 2011):
Adjustment of MINERALS RESOURCE RENT TAX allowances
Extraction Allowance adjustment
Reduction in MINERALS RESOURCE RENT TAX by Royalty Allowance:
Starting Base Allowance
Other issues due to Cascade effect of other regulations
Measurement of starting base using an appropriate valuation method
Volatility of future tax expense
These effects have been discussed in detail:
1. Adjustment of MINERALS RESOURCE RENT TAX allowance:
The Long Term Bond Rate plus seven percent allowance has been considered to be given under MINERALS RESOURCE RENT TAX. As shown above the adjustments have to be made to the reports that have to be disclosed. This and other such allowances have to be part of the reports and have to be accounted for before calculations for the profit before tax.
2. Extraction Allowance adjustment:
There are extraction allowances which can be given to the firms even though the projects are different. Such provisions have been given to the firms so as to make up for the additional burden due to MINERALS RESOURCE RENT TAX. Because of this suitable agreements and proper transfer of allowance to the existing extraction projects. Such provisions have to be taken into the accounting done for such projects and mentioned at suitable instances in the report.
3. Reduction in MINERALS RESOURCE RENT TAX by Royalty Allowance:
There are royalty allowances given to the firms that come under MINERALS RESOURCE RENT TAX. Also for the mining firms the royalty has been set low so that the impact of MINERALS RESOURCE RENT TAX may be subsided. But the main concern for the firms is that royalty is treated as operating costs and not the tax for accounting purposes. This is because Royalty is applied on the volume of goods and not the profits made by the company. However there are two options that are available for the treatment of royalty which is either royalty is taken as advance payment for MINERALS RESOURCE RENT TAX or it can be continued to be taken as expenses and profit before tax is calculated after accounting it.
4. Starting Base Allowance:
Since there will be mining firms that are already existing, for this purpose base allowance will be provided. This can be done in two ways, book value method or market value method. The book value method will take into account the most recent audited value of the assets of the firm. The market value method will take the market value of the mining firm’s upstream assets. It will be the choice of the miner whether to take the book value method or the market value method. The date that has been given for providing these allowances is 1st May 2010. Below table shows the benefit that the existing mining firms will have as the MINERALS RESOURCE RENT TAX Liability for the existing firms will be $8.28 millions whereas for new firms will be $35.3 millions.
Project Commenced
After 01.05.2010 Before 01.05.2010
Revenue $500.00 $500.00
Expenses $120.00 $120.00
Profit $380.00 $380.00
Royalty Allowance ($166.70) ($166.70)
Mining Loss Allowance ($56.50) ($56.50)
Starting Base Allowance Nil ($120.00)
Total Allowance ($223.20) ($343.20)
MINERALS RESOURCE RENT TAX Profit $156.80 $36.80
MINERALS RESOURCE RENT TAX Liability (22.5%) $35.30 $8.28
All figures in millions
These allowances are being given to the existing firms as MINERALS RESOURCE RENT TAX might impact the feasibility of the project as the MINERALS RESOURCE RENT TAX will not have been taken into account at the time project was started.
5. Other issues due to Cascade effect of other regulations:
The first question that has risen as a result of impact of MINERALS RESOURCE RENT TAX is that whether MINERALS RESOURCE RENT TAX is income tax or not. In the context of Petroleum Resource Rent Tax as confirmed states that it is an income tax which is within the scope of AASB 112. The MINERALS RESOURCE RENT TAX has been laid down which is in line to the PRRT and has a lot of similarities. In the view of mining companies since the MINERALS RESOURCE RENT TAX takes into account the net profit earned by the firms and not the gross profit, it should be considered as income tax. This issue has not been resolved and thus has to be clarified before the implementation as it has impact in the preparation annual accounts of the company. This means that MINERALS RESOURCE RENT TAX has to be brought under the scope of AASB112. Secondly it will be required to reflect the deferred tax will have to be incorporated in the financial statements so that its impact is also accounted in the reports. This however is still pending and will be applicable once it is approved by the senate. There will be impact on the disclosure obligations of the companies that are listed in stock exchange in the sense that they need to make sure whether the impact of MINERALS RESOURCE RENT TAX should be disclosed or not. If it is not required there will separate statements that has to be prepared and disclosed in the market as if MINERALS RESOURCE RENT TAX impact is not there the profit after tax will be more than if the MINERALS RESOURCE RENT TAX was disclosed. Also MINERALS RESOURCE RENT TAX may vary as the allowances may vary from firm to firm.
6. Measurement of starting base using an appropriate valuation method
It is well understood that under AASB112 the entities have give the base tax rate. For this purpose it is required to determine the tax base based on the valuation method adopted. This will also be used for the transitional deferred tax.
As the MINERALS RESOURCE RENT TAX is still not enacted (which will be done by July 2012) the base rate will not be required. To determine the base rate the firms will have to take reasonable and practical approach of valuation and will have to justify the same. If the MINERALS RESOURCE RENT TAX does not provide suitable provisions for the base rate estimations provisions have to be kept by the firms to make appropriate adjustments. There are certain indicative market valuations when the base methodology is on market value.
Recognition of deferred tax balances
Before the implication of MINERALS RESOURCE RENT TAX the companies may have done valuations which would have been more than the value of the firm after the MINERALS RESOURCE RENT TAX is applicable. This would result in deferred tax balances. AASB 12 general recognition criteria for deferred tax are considered. This can be at substantive enactment or can be done periodically on the reporting dates by the mining firms.
Such adjustments in valuations of the firm require the firm to have in place models so as to do forecasting which can make adjustments for the deferred tax. These models will require the skills of not only the making adjustments of deferred taxes but also of how much adjustment has to be made. (Ernst and Young, 2011)
7. Volatility of future tax expense
As discussed above there might be cases of deferred tax balances as a result of MINERALS RESOURCE RENT TAX. Other impacts might be that unavoidable, unforeseen tax implication. This will result in volatile future tax expense there by affecting the accounting estimates that have already been made and also affect the project viability. Such taxes will may also impact profitability as there may be chances that the deferred taxes are not recoverable. Thus experts will be required to estimate such expenses arising due to volatile tax expenses and make suitable adjustments to the reports so as that the profitability of the firms is not impacted.
Issues & Implications
There have been certain issues associated with MINERALS RESOURCE RENT TAX. Firstly it may have impact on investments in the mining sector in the country. The interest of the mining firms internationally would be reduced as the project feasibility and other aspects related to investments like returns and costing will be ambiguous firstly because the MINERALS RESOURCE RENT TAX will increase the tax liability and secondly that the impact of MINERALS RESOURCE RENT TAX may not be correctly estimated. There will be certain issues with regard to the existing firms. These have been discussed below:
Tax Implications: It has to be clearly understood what functions, businesses or services will come under the impact of MINERALS RESOURCE RENT TAX . Also there will be changes in rule related to transfer pricing as the MINERALS RESOURCE RENT TAX will be applicable before the third party sale (PWC, 2011).
Another issue that has to be highlighted here is the mining of multiple projects. In such cases there have to be suitable adjustments so as to estimate the allowance such as extraction allowances will be applicable or not. If such allowances are applicable there might be complicated situations where it will be a huge task to identify for which projects such allowance are applicable in the sense that whether such projects come under the same company and whether the accounting reports show the actual adjustments made.
Mining Revenue is the main concern as it is the revenue which will be subjected to MINERALS RESOURCE RENT TAX. Thus to know what revenue will be applicable for the MINERALS RESOURCE RENT TAX and the allowances. Since a firm can be into many businesses and many project may be running at a time which may have been started at different times. Thus it has to be seen that the allowance such as extraction allowance and base allowance are applicable or not.
Such have to be accounted into the reports and have to be adjusted for the MINERALS RESOURCE RENT TAX that have to be paid.
Another issue is that how much mining product will be considered under the MINERALS RESOURCE RENT TAX. The issue is that it has to be seen how much extraction has been made. Since there can be cases wherein extraction has been done the sales have not been realized. Thus this has to be shown clearly and the MINERALS RESOURCE RENT TAX has to be estimated based on the sales. (UTZ, 2011)
As there is issue with the estimating the revenue, there is the issue with estimating the mining expenditure. The mining expenditure which is part of the accounting reports has to be shown for the mining projects separately so as to estimate the MINERALS RESOURCE RENT TAX. If not done correctly the firm might end up in paying more MINERALS RESOURCE RENT TAX than applicable.
Conclusion
The MINERALS RESOURCE RENT TAX is applicable on the mining firms, where in certain allowances are applicable and at the same time there has been concession and allowances before the MINERALS RESOURCE RENT TAX liability is calculated. The firms will have to make adjustments whether it is an existing project or a new mining firm. This is because not only they have to be in compliance with accounting report rules but also to get appropriate allowance.
The other impact of MINERALS RESOURCE RENT TAX is on the investment prospects in the country as the financial statements of the investors have to be adjusted in line of the MINERALS RESOURCE RENT TAX.
Although these have been additional work for the firms, auditors and the investors, but it does have some positive implications. Firstly the MINERALS RESOURCE RENT TAX hat will collected from the mining firms will be used for investments in other small business to boost investments in such businesses. Secondly it has been seen that the steps have been taken by the government to subside the effect of MINERALS RESOURCE RENT TAX by providing various allowances to the mining firm. The only concern for the mining firm is thus to make adjustments to the accounting report to highlight such aspects so as to correctly estimate the allowance.
Another aspect that adds to the costing of the firms is to develop the models to estimate the deferred taxes and the volatility in taxes. This effect will be because of the implication of MINERALS RESOURCE RENT TAX is new. Once the complete legislation is in place and the increased efficiency of the models this costing could also be easily adjusted by the firms.
However the firms will have to develop a clear framework and use the existing system to get the leverage to this new system. Sample calculations shown above does show that there is additional advantage to the existing firms but at the same time there will be issues in regards to adjust the deferred tax for these firms.
The firms will have to do suitable risk management activities for making adjustments for MINERALS RESOURCE RENT TAX. The issue from the government’s point of view is that the acceptance of the valuation method employed by the firms as there will uncertainty before the complete framework in place.
Thus although there have been a few adjustments that have to be made from the government and the firm but this has to be made in order to have smooth functioning of the MINERALS RESOURCE RENT TAX. This can only be possible if sincere efforts are being put in and correct information is being provided in the accounting reports and the appropriate allowances have been factored for the calculation of the MINERALS RESOURCE RENT TAX liability. The MINERALS RESOURCE RENT TAX will result in the more details being provided in the reports of accounting.
References:
Price Waterhouse Cooper. (2011).” Exposure Draft Legislation: Bringing MRRT to Life”
Gyles, N. (2011). “Proposed Minerals Resource Rent Tax”
Ernst & Young. (2011). “Minerals Resource Rent Tax, The Implementation Challenge”
Utz C. (2011). “Minerals Resource Rent Tax replaces RSPT”, Claytonutz
JH32
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