Resource Rent Tax Proposals In Australia

THE ECONOMIC THEORY It will assist in the understanding of the Resource Rent Tax ("RRT") proposals in Australia if the economic theory behind the tax is briefly explained. The idea goes back to the concept of rent put forward by the nineteenth century economist David Ricardo. His analysis was broadly as follows: A tenant who farms land which is just on the margin of economic viability cannot afford to pay his landlord any rent, because the value of the crop produced by such marginal land is equal to the cost of producing the crop, plus the cost of keeping the tenant alive. There is nothing left out of which to pay rent to landlord. A tenant who farms good land can afford to pay his landlord rent -- but the maximum amount of rent that he can be asked to pay is the excess of the value of the crop produced by the good land over the cost of producing the crop and of keeping the tenant alive. Adapting this theory to the taxation of mining projects, modern economists who favour this system of taxation say that a profitable mining (or resource) project produces rent in the Ricardian sense. The amount of the rent is the excess of the profits by the project over the amount of profit which is required to attract the taxpayer to invest in the project in the first place. This explains why the tax is called "Resource Rent Tax". PAPUA NEW GUINEA PRECEDENT Although Papua New Guinea ("PNG") is now independent of Australia, there are still close links between the two countries, and strong similarities between their respective tax regimes. PNG introduced an Additional Profits Tax ("APT") in 1978. In many respects, Australia's RRT proposals follow the precedent set by PNG1s APT. However, in practical terms, not a great deal can be learned at this stage from PNG's experiences since, according to the writer's understanding, no PNG mining project has yet paid any APT. The Bougainville mine is not liable to APT, being subject to tax under its own separate Act, which contains a different formula. Outline of PNG Additional Profits Tax. PNG has two versions of Additional Profits Tax ("APT) - one applying to general mining, the other to petroleum mining. The two versions are very similar. The general mining version is described below. The tax applies on a licence by licence basis. This means that losses on Licence A cannot be offset against profits on Licence B. Expenditure relating to two or more licences, is apportioned "in such manner as the Chief Controller thinks reasonable". Tax is levied on the "accumulated value of net cash receipts" at the rate of (70 - n)% where n=the rate of income tax. The accumulated value of net cash receipts ("av") is calculated as follows: Calculations commence from the first year in which substantial expenditure was incurred on the construction of facilities for the carrying out of mining operations on the licence. For that year the av consists of the total allowable expenditure to date on that lease. For the second year, the av is the av at the end of year one indexed in accordance with the statutory formula set out below, plus the total allowable expenditure in year 2. For year 3, the av is the av at the end of year 2 adjusted by the index factors, plus the total allowable expenditure in year 3. This process is repeated year after year. When the licence starts to earn revenue, the revenue is deducted from total allowable expenditure for that year. If revenue exceeds total allowable