Introduction
The following is an essay discussing the Mineral Resource Rent Tax introduced in Australia with the aim of ensuring that the mineral resources in Australia benefit citizens. This is because; they have benefited the mining companies due to the increase in the price of minerals.
This has especially affected large companies that deal with mining of coal and iron ore. The tax law gears towards utilization of the resources in a way that is reasonable and helpful to both the country and the mining industry in Australia. This essay will look into the effect of Mineral Resources Rent Tax on the accounting policies of the affected mining industry prior to the introduction of the tax and after the introduction of this tax.
The essay will have a literature review on the effects of the mining industry on the life of individuals as well as accounting policies of the affected companies. The essay will have a critical analysis of the tax and its effect on the mining companies as well as on the life of the people of Australia. The final part of the essay is the conclusion on the way forward.
Literature Review
The Mineral Resource Rent Tax is a tax proposed by the government of Australia on the mining companies, which extract non-renewable resources in Australia. Such minerals include iron ore and coal. The reason for this tax is that the mining industry is getting a lot of money due to the increased global prices of minerals.
The government of Australia therefore found it prudent to ensure that the taxes or revenues collected by the government from the Taxes reflect the increased revenues from this industry. The revenues generated from such activities will improve the country’s infrastructure as well as ensuring that every citizen has benefited from the mineral resources available in the country.
The government proposes to obtain forty per cent of the profits generated by these companies. This is because previously the companies were paying royalties to the government and they were smaller compared to the revenues generated (Mercer 2011).
The proposal to do this has led to huge public debate on the effects of the Mineral Resource Rent Tax on the accounting policies of the affected companies. This is because the tax policy will change the accounting policies of the affected companies. The main argument however is on the implication of these changes and their effect in future accounting of the affected companies.
Previously, the mining companies were paying royalties to the government. The royalties were a fixed amount of money expected from the mining activities. These royalties are similar to federal taxes and they were not fully dependent on the amount of income generated from the sales of the minerals.
However, the new tax policy on mineral resources will ensure that the companies pay tax according to their earnings. This has raised concerns from stakeholders on whether the tax will apply on the gross income or on the net income (Price Water House Coopers 2012).
Concerning whether the MRRT is an income tax the Australian Accounting Standards Board interpreted the act as an income tax with respect to the previous Petroleum Rent Resource Tax because both are similar in many ways.
The MRRT is therefore an income tax as it proposes taxation on the profits earned after deducting qualifying expenditure from the gross revenues. This then makes the tax an income tax according to the Australian Accounting Standards Board (Price Water House Coopers 2011).
The other issue brought about by this bill is the accounting for transitional tax. This is because transitional tax requires accountability as well as time to ensure that there are no losses incurred from double taxation. MRRT tax requires the financial statements to reflect deferred tax accounting (Hughes 2011).
The other tax accounting issue raised in The MRRT is the mining companies starting base. The starting base is the value of assets required by the company in order to start making profit. The companies must submit their assets value and the methodologies that they have used to determine the starting base.
This aspect is raising a number of issues, as there is need for a standard methodology to evaluate the assets. This is because some of the companies may overvalue their assets with the aim of deferring their tax payment period.
Since there is no formal starting base, it is wise for companies to start preparing their methodologies of calculating the assets and the starting base to ensure that there is appropriate response (Hughes 2011)
This also raises another issue where mining companies may use the starting base to defer tax for a certain period. This is especially in situations where the government may not have formulated clear starting base. This may provide the mining companies with a tax holiday where they are not obliged to pay tax until their assets value reaches a particular point (Hughes 2011).
When the market value methodology is used, the companies will be obliged to support their valuations as per the existing market value of their assets. It is necessary to note that the market value approach only applies to the existing projects. This means that the new projects will not feature as a starting base as soon as the bill comes into effect.
This is because some companies may engage in start up projects to defer their tax payments for unspecified period. This is necessary to support the deferred tax balances and to enable the company prepare market valuations. This calls for the company to have asset valuations to estimate assets before the financial enactment of the bill (Blanchard 2011).
The other issue raised by the bill regards the current treatment of the state royalties. Previously these royalties were pre tax costs deducted before as a pre tax cost. However, MRRT does not specify clearly calculation of these royalties. However, there are two options about how they may be treated. The first one is operational cost and therefore deducted as an expense before taxation. The other option that is very likely to apply is for the inclusion of royalties as part of the MRRT.
This will mean that the royalties charged by the state and federal government will be part of the tax. This means that the forty percent will be inclusive of the state royalties’ deductions. There is need for clarification on the way to handle this to reduce ambiguity (Blanchard 2011).
The other factor for consideration regards the market value of the assets as the market value is ever rising or falling. There is need for a mechanism to determine the value of an asset as per the market value. This is important to ensure that there is cohesiveness between the entity and the government methods of determining the market value (Blanchard 2011).
There is need for the preparation of tax sharing agreements between the taxpayers such that the company receives issues or regulations in a way that is responsible.
The agreement preparation regard the time in which the organization prepares for its time and opportunity of raking in revenues. This is because there are smaller mining companies affected by the PRRT and MRRT in various ways. The first issue of necessity is that of the fact that there is need to establish how tax deductions will be done (Blanchard 2011).
Analysis of the MRRT
The influence of Mineral Resource Tax has many ways of interpreting and calculating the payable taxes. This analysis will delve into the various points of view that are likely to occur resulting from the MRRT proposals with the first being deferred payments.
In respect to the start up base where the company must indicate the initial capital invested in the project, new projects are not considered as starting base. Only the existing or ongoing projects will have the advantage of inclusion in the start up base. This is because there are some companies, which may take advantage of this exemption to find ways of having new projects such that this start up base allowance goes higher. The mining companies can however adopt different policies to incorporate the start up allowances (Donaldson 2011).
The first view is that of the company treating the start up capital as a tax break. This is based on the interpretation that the start up capital of one million may mean that the company is exempted from paying taxes until it makes profit amounting to $ 1million. This view holds that the start up capital is a break or government allowances to enable the mining companies have their return on investment.
This affects the manner in which the accounting policies have operated in the mining industry, as there were no such breaks. Tax calculations relied on the net income after deducting the operational expenses.
It is imperative to note that the normal taxation will apply soon after the start up capital utilization. The period in which the company takes to get to the start up base income is the tax holiday (Donaldson 2011).
The other way in which the MRRT can apply is that the start up base may be a form of government grant to the mining industry to stimulate its performance. When viewed as a grant the companies may not defer their tax arrears but will continue to pay the taxes until such a time when the government refunds the tax to fit the grants given.
This will be one of the ways in which the government can make foreign-based companies that are dissatisfied with the laws and they are looking for other countries with lenient taxation measures to remain in the country. The grant means that although the company pays its tax, the government augments the tax paid and exempts the company from paying the tax until a future date (Donaldson 2011).
The question on how the MRRT will affect the accounting policies of the affected companies is important. The first effect of MRRT on the company’s accounting policies is creative accounting. There is high possibility that the mining companies will look for ways of sheltering their taxable income to ensure that they retain much of their profits.
The creative accounting will involve several ways of reducing the amount paid to the government. The first manner that will apply concerning creative accounting is increasing the operational expenses. The affected companies may increase the operational expenses than the previous expenses indicated.
The operational expenses such as the value of the machines and the value of the goods and services may indeed reflect a deduction in the manner in which the company operates. There is need for proper mechanisms concerning the financial reporting of expenses (Blanchard 2011).
The other major aspect of the effects of MRRT is on earnings management policies. Earnings management refers to a situation where the company manipulates its earnings in order to have a stable income projection aimed at boosting the investor confidence. Nevertheless earning management is likely to apply to the companies privately owned or not listed in the stock exchange.
Public companies will have to pay their taxes, as they will have to apply different accounting policies, as the interest of the public investor is to have higher dividends. This will mean that such companies may not increase their operational costs to reduce the payable income as the interests are in the dividends not the value of capital (Blanchard 2011).
While the company may increase their operational costs such as exploration and development, the Mineral Resource Rent Tax only considered the ongoing projects as exempt from the taxation. However, new projects may not qualify as a start up capital or operational expenses and they will therefore pay tax on such projects (Wood 2011)
The role played by the earning management involves inappropriate estimate of liability. This is where the company underestimated its actual liabilities which it owed to the banks and other institutions.
The companies may use excessive provisions to justify those practices in legal terms. This shows that the management irrespective of manipulating the figures are still within the legal provisions of the company and therefore they are not liable for of any wrongdoing. These legal provisions concerning the company assets and auditing structures create loopholes, which allow the manipulation of figures (Wood 2011)
The MRRT will therefore affect the accounting procedures of the company especially the bookkeeping procedures. The bookkeeping enables the company to track its expenses, and profitability and look for situations where the company may be making losses.
However, the earning management adopted by the companies to increase their operational expenses in order to benefit from the tax base assets may rob the investors their profits as dividends that accrue to the company from after tax profits. The book keeping policies of the company reflect the internal transactions of the company.
For the company to operate effectively the records must be authentic and reflect real transactions of the company. Without this happening, there is likelihood that the company will not have the correct financial statements (Wood 2011).
The other accounting policy that is important concerns the financial reporting procedures. This is where the MRRT policies will have effect. This is because the financial reports need to indicate the real financial position of the company in terms of the profits or losses. This is necessary to ensure that the policy benefits both the investor as well as the government (Eseinhardt 2011).
Recommendations
The Mineral Resource Rent Tax is indeed complicated taxation mechanism, which requires the affected companies to prepare their policies and make the necessary adjustments to cope with the changes. The companies will benefit from the policies to ensure that there is proper governance and timing for the necessary changes to take place (Eseinhardt 2011).
The second manner of dealing with the MRRT is setting the assets base so that the company may benefit from the start up capital base. The investors in the mining companies are the greatest losers due to reduced dividend as a result of increased taxes.
For the public investors to benefit, the earning management or creative accounting policies intended to reduce taxes payable to the government must be abolished to ensure that the investors benefit. This is the major reason why the bill has received opposition from the owners of the companies especially the public investors as this will reduce the huge dividends that they have been generating from the venture (Eseinhardt 2011).
Companies must prepare and program themselves through training their accounting staff to handle the new accounting procedures as indicated by the MRRT. This is necessary, as it will ensure that the companies involved anchor towards ensuring that the company aligns with the taxation recommendations of MRRT. The training will enable the companies to cope with the intense and rigorous evaluation process that is going to come after the bill is effected (Clark 2004).
The company must also conduct prior valuation of their assets before the government comes in to value the assets to determine the start up base of the company. This is important in ensuring that the company has a proper estimation of its start up tax base before the financial year begins (Clark 2004).
Informing the investors is also a very important aspect of the way forward in ensuring that the company aligns with the new tax proposals. The investors have to make decision on whether they want increased cost of operation for the company or higher divided. The increased operational costs may increase the share value of the company while reducing the taxes paid to the government as well as the amount of money that the shareholders or the investors will receive as dividends.
It is therefore imperative for the mining companies to conduct meetings or seminars with their investors to inform them of the implications of MRRT on their entity. The shareholders then may decide the way forward, either to allow earning management or to pay the tax as it should be and continue to get more money (Clark 2011)
There are however two options concerning the implication of MRRT on the revenues collected by the government resulting from the measures and the accounting polices which different companies will have.
The first is that it may result to increased government revenues if the companies comply and treat the taxation recommendations as taxable income. Nevertheless, if the companies adopt earning management policies intended to make the companies shelve its income then the government will not collect as much revenues as anticipated.
The investors may also decide to invest their money elsewhere if they feel that the taxes are high in comparison with other countries such as Columbia and Latin America. This may lead to closure of many mining companies that have threatened to do so in protest of the taxation law.
This is because the tax will affect the cost of operation when there are state royalties that the mining companies pay to the state governments. The other aspect of consideration is that if the companies may decide to relocate there will be massive loss of jobs in mining as major industry in Australia (Clark 2011).
However, the law intends to ensure that every Australian benefits from the resources available in the country. Most of the mining companies located in Australia are foreign based and the profits that they obtain from the venture benefit foreign countries. The Mineral Resource Rent Tax is therefore a milestone in ensuring that the mining industry contributes to the infrastructural development of the country. However, it is important to ensure that there is more clarity concerning the manner of paying tax (Clark 2011).
Conclusion
Taxation is a major part of accounting and the taxation measures and procedures adopted by a government determines the policies which the companies affected by the measures adopt. The taxation policies proposed by the Mineral Resource Rent Tax law will affect the terms of taxation policies especially on how to account for the start up base capital.
The other way is adopting the best means of ensuring profitability without increasing operational costs. The third way is reducing profits by increasing the company equity. MRRT will change the accounting policies of the affected companies. The investigations on the effects of MRRT on the accounting procedures of the mining companies are of importance to all stakeholders in the mining industry and the people of Australia.
References
Blanchard, T 2011, Preparing for MRRT: Deloitte’s perspective, Deloitte Australia, pp. 4-11
Clark, T 2004, Theories of corporate governance: The philosophical foundations of corporate governance, Rutledge, London.
Clark. T 2011, Mineral resource taxes in information age, Long Range Planning Publication, pp.1
Donaldson. L 2012, MMRT on governance and shareholder returns, Academy Of Management Review, vol. 20, no. 1, pp. 5.
Eisenhardt, K 2011, An assessment and review of MRRT, Academy of Management Review, vol. 14, pp. 57-74
Hughes, S 2011, Effects of MRRT on public shareholders, Earnest and Young Reports, pp.1-8
Mercer, P 2011, Australia new mining tax and its implications, International Resource Journal, vol. 11 pp. 2-3
Price Water House Coopers 2011, Complexity of MMRT on accounting policies, Price Water House Coopers Reports, pp. 1-17
Price Water House Coopers 2012, Complexity of MMRT on accounting policies, Price Water House Coopers Reports, Vol. 2, pp.1-8
Wood, L 2011, Implications of mineral resources rent tax, Sydney Morning Herald, Sydney.