Clock Now Ticking for Miners

April 24, 2012 /

The clock is now ticking for miners to evaluate their case to lower their first year Mineral Resource Rent Tax (MRRT) instalment payments.

An estimated 350 iron ore and coal companies are impacted by the MRRT which was passed by the Australian Senate last night.

Of the companies hit by the MRRT that are currently producing, many have not yet begun the process of determining their true first year instalment rate to be paid, according to Ernst & Young tax partner and MRRT leader Andrew Nelson.

“Companies now have until 21 October – the date of the first instalment payment – to reduce their instalment rate,” says Nelson.

“Any producer who does not do this will pay the default instalment rates of 8% for iron ore and 3% for coal on their gross sales – which for most companies will be far higher than their actual liability.”

“The potential negative impact on cash flow is significant. Essentially companies will be putting a lot more money out the door than is actually required.”

However, companies need to be sure the evaluation of their MRRT obligation is accurate if they opt to lower their first year instalment rate or risk being hit with penalties at year end.

“Overwhelmingly the recurring theme with companies we are talking to is that they are underestimating the time and complexity involved in extracting the relevant data from their systems in order to calculate MRRT payable,” he says.

“Existing accounting systems are not equipped to provide the necessary information needed to apportion expenditure across projects, delineate between upstream and downstream costs within a project, and extract statutory excluded expenditure. Add to this systems challenge, the additional challenges of valuing the resource to calculate the starting base and financial reporting obligations, and you can see there is a lot for CFOs and tax managers of these miners to deal with.”

“Setting up the right systems now is essential for forecasting, reporting and ongoing compliance.”

Nelson says CFOs should be aware of the impending financial reporting obligations. “March year end and quarterly reporters will have immediate obligations to consider, while June reporters will need to be planning for financial reporting obligations ahead, the material challenge of which will be to quantify the extent to which and impact of booking a deferred tax asset for the starting base asset.”

Emerging miners

Nelson says while iron ore and coal companies not yet producing have more time to consider how they will deal with the MRRT, there are a number of decisions that need to be made now that will dictate what actions they take in the next 12 months.

“There are many companies with exploration permits and early stage projects that are not yet producing. These companies have a number of decisions to make now that have future ramifications for them,” he says.

“For some smaller players who are eligible this will be whether to voluntarily opt out of the MRRT, while for others it will be to decide whether to take the step of engaging a valuer to provide a market valuation of assets, or to apply the alternative book value or look back approaches.”

“Ultimately, the commercial issue for these emerging miners and their stakeholders is will I pay MRRT, if so when, and how does this impact on the present value of my project.”

 

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