2013 Budget – Changes affecting the mining sector

The Federal Government’s 2013-2014 Budget (the Budget) contains a number of changes to existing tax rules some of which are expected to have adverse implications on the mining sector.

Changes to accelerated tax depreciation arrangements

The Federal Government announced immediate changes to Australian tax laws which impact income tax deductions available to mining companies. The changes defer deductions for the cost of acquiring mining rights (e.g. exploration permits or mining leases) and information which is first used in exploration, from an immediate deduction to a deduction spread over:

• 15 years; or
• the life of the mine, whichever is shorter.

Although full details are yet to be released, the following expenditure will continue to be immediately deductable:

• costs of acquiring mining rights and information from government authorities;
• costs incurred in generating new information or improving existing information; and
• mining rights acquired under a recognised “farm-in, farm-out’ arrangement.

The changes apply to taxpayers who start to hold the mining right or information after 14 May 2013.

These changes may significantly impact the acquisition prices of exploration assets and also have the potential to inhibit junior mining companies ability to obtain investment through the sale of prospective interests to investors on a full or partial cash basis.

Practically, there are also a number of issues surrounding the 15 year or life of mine deduction mechanisms which are yet to be clarified.

Reduction in funding for mining and energy initiatives

Funding has also been significantly reduced to the following mining and energy initiatives in the Budget with:

• $500 million withdrawn over three years from the Carbon Capture and Storage Flagships Program;
• $370 million deferred over three years from the Australian Renewable Energy Agency;
• $274 million withdrawn over two years from the Coal Sector Jobs package;
• $88 million withdrawn over two years from the National Low Emissions Coal Initiative; and
• $29 million withdrawn over two years from the Coal Mining Abatement Technology Support package.

For further details, please visit the Federal Government Budget website. 

Coal industry uproar over State budget’s increase in mining royalties

The LNP Government’s first State budget has caused a stir in the Queensland coal industry after last week announcing an increase in mining royalties of up to 50 per cent per tonne, to commence 1 October this year.

In an attempt to stabilise State debt levels, the government expects to raise $1.6 billion over four years by increasing the coal royalty from 10 per cent, to 12.5 per cent for coal prices above $100 per tonne and 15 per cent for coal prices above $150 per tonne.

Queensland Treasurer, Tim Nicholls, said the government is obliged to deliver extra money to fund mining infrastructure projects, such as RG Tanner, Abbot Point and Connors River Dam. He said that the State did not receive extra money in the Federal Government’s budget this year for the infrastructure. Mr Nicholls addressed the Mineral Resources Rent Tax (MRRT) and claimed “Queenslanders should receive the benefits of the resources they own, not the Commonwealth. As the value of State royalties paid is netted off against MRRT liabilities, the incidence of taxation ought not to increase”.

However, the MRRT presupposes that Queensland miners will face significant MRRT liabilities. It was designed during the peak of the resources boom to capture super profits. Queensland Resource Council’s Michael Roche dismissed the notion that coal companies will be able to offset the new State royalties against the MRRT obligations. He said, “it’s hard work to find a coal mine in Queensland making a profit, let alone a super profit”.

The coal industry has argued the increased coal royalty is another governmental tool, along with the MRRT and carbon tax, that is squeezing them from both sides, with coal prices slashed and their costs continuing to rise. The problem that coal producers face will be if there is a marginal difference between the spot price of coal that is over $100 and the cost of production.

According to Wilson HTM analyst, Andrew Pedler, the spot price of hard coking coal is around $US155 a tonne as opposed to about $US150 cost of production in Queensland. Mr Pedler said the notion of increased royalties does not take into account increasing costs; “it just takes notice of the top line”.

XStrata Coal claimed that a significant portion of the coal industry was unprofitable at current prices and that “there is a risk that the increase in royalties could result in production cutbacks in marginal operations.” He predicted that as a consequence, estimates regarding the amount of additional royalty revenue may be optimistic.

Yancoal took on a different attitude. Managing Director, Murray Bailey, acknowledged that the royalty change was concerning but said that the exchange rate was having a bigger impact on profits.

The government guaranteed that coal royalties in Queensland will not be increased for a ten-year period. However, this promise is seemingly flawed; constitutionally, it is not enforceable since a parliament cannot bind the next to not change the law.

This post is written by Freehills Mining Lead Partner Jay Leary