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Mr Deputy Speaker, I move that the bill be now read a second time.
This bill puts in place a package of measures as part of the government’s 2013-14 Budget to amend the Mineral Royalty
Act and Payroll Tax Act. The primary measures contained in the bill focus on protecting the integrity of the Territory’s
mineral royalty regime in order to ensure that all Territorians receive a fair return on the Territory’s mineral wealth through
the collection of mineral royalties.
The bill undertakes to implement the following important measures. Firstly, the bill will cap the amount of royalty a payer
can claim as a transfer pricing margin to a maximum of 5.5% of the value of the relevant mineral. Transfer pricing
generally involves an initial sale of minerals between a miner and a related overseas based trading entity and after which
the minerals are usually on sold to a third party customer or to a related commodities refiner within the group. The price
received by the miner is generally less than the final arms’ length price received by the trading company from the third
party customers.
Accordingly, a profit margin or transfer pricing factor is earned by the trading entity. Although, it is reasonable for a profit
margin to be earned by the trading entity in recognition of its specialisation in procuring sales the danger is that transfer
pricing provides a means for miners to procure a special tax benefit by shifting profits to the country with the most
favourable tax system. Accounting for transfer pricing is also very administratively burdensome, both for the Northern
Territory government and the miner. The cap of 5.5% will be the general rule applied, except in circumstances where the
royalty payer has a relevant transfer pricing arrangement in place with the Australian Taxation Office.
Secondly, the bill will limit the deductibility of head office expenses, management fees and administrative labour costs to
those costs incurred by an office located or for work performed in the Northern Territory.
A recent report on GST revenue sharing relativities released by the Commonwealth Grants Commission highlights the fact
that the Territory remains one of the lowest taxing jurisdictions in Australia. I note that the Commonwealth Grants
Commission report does not take into account the government’s recent revenue raising efforts implemented as part of the
Territory’s 2012 mini-budget. Nevertheless, it is clear that further measures are required to improve the Territory’s overall
fiscal and revenue raising position in order to better align the Territory’s taxation level with the average of other Australian
jurisdictions.
The 2013-14 budget seeks to continue the government’s responsible fiscal policy and adjustment as commenced with the
mini-budget. The measures contained in this bill are expected to increase revenue by about $10.6m per annum and will
assist government to pursue deficit reduction in a sustainable manner in order to return the Territory to a balanced budget
by 2017-18.
However, these measures are about more than just ensuring the mining industry contributes fairly to the Territory
community. These measures are also essential for protecting the integrity and long-term sustainability of the Territory’s
mineral royalty scheme. We will reduce red tape and expenses involved in administering the royalty scheme, which may
also act as an incentive for large miners to set up offices in the Territory.
The Territory’s mineral royalties regime is unique amongst all states. It is the only regime in Australia to impose royalty on
mining profits and applies generally to most mines and minerals across the Territory.
The Territory regime is widely recognised as providing the most fair and economically efficient means of determining
mineral royalty as it only imposes royalty on profitable mines, whereas the quantity or value based schemes administered
by other jurisdictions continue to draw royalty without regard to a miner’s ability to pay.
Unlike other royalty regimes, the Territory’s royalty scheme also promotes capital investment and encourages exploration
activity by acknowledging many facets of the start-up costs new mines incur prior to commencing mining operations.
Together with the significant benefits of efficiency and equity delivered by the Territory’s profit based royalty regime
comes a degree of administrative complexity. It is crucial that government continues to provide industry with measured
rules and frameworks which take into account the contemporary reality of mining operations.
At the same time, this royalty framework must also be sufficiently robust to prevent potential abuses of the regime. The key
measures proposed in this bill reflect the government’s commitment to an equitable and robust royalty regime, and
encourages the mining industry to continue its important endeavours that contribute to the long-term benefit of the
community and of all Territorians.
When the Mineral Royalty Act was first enacted in 1982, most mining companies operated from within Australia. At this
time it was also common practice for a company to conduct every stage of the mining process from initial exploration
through to the processing and sale of the final product to customers.
Technological advances and globalisation over the past three decades have created a fundamental shift in the way large
multinational miners now structure and conduct business. There has been an increase in related party and cross-border
dealings leading to the development of transfer pricing arrangements. Without appropriate mechanisms and rules, transfer
pricing arrangements may distort the proper amount of royalty that should be returned to the Territory for the removal of its
minerals.
The implications reach far beyond Territory royalties, however, as transfer pricing has taxation and economic influences
globally, the leading authority in the field of transfer pricing, the Organisation for Economic Co-operation and
Development, has committed substantial resources to develop a framework and guidance on transfer pricing issues for
revenue authorities of member and non-member countries.
The Australian government incorporated the OECD transfer pricing guidelines into its federal income tax legislation. In
addition, in the federal arena there is a bill before the House of Representatives that seeks to further strengthen the
Commonwealth’s existing transfer pricing rules.
Many other government’s around the world are also seeking to address these issues. It is the process of determining the
correct arms-length value to a miner of a mineral commodity which is the subject of transfer pricing arrangements that is
problematic for federal and state government’s alike, with costly and protracted disputes often resulting.
The proposed amendments to the Mineral Royalty Act reflect the government’s efforts to simplify the valuation process
stemming from a notoriously complex concept. Government believes the mining industry will benefit from the certainty the
proposed amendments will deliver when valuing transfer pricing arrangements. The broader community will also benefit
from the government’s willingness to take steps to ensuring the long-term integrity and sustainability of the Territory’s
royalty regime.
The provisions of the bill that address transfer pricing are designed so royalty payers will have several options available to
establish the methodology that is applied to calculate the value of a mineral commodity, the subject of a transfer pricing
arrangement.
In recognising the considerable expertise and extensive resources of the Australian Taxation Office in managing transfer
pricing arrangements, this bill proposes to allow a mining company to rely on a transfer pricing figure it has established
through select review and verification processes undertaken by the ATO in relation to transfer pricing arrangements for
income tax purposes. For instance, under the bill’s proposed model, when assessing a miner’s Territory royalty liability, the
Mineral Royalty Secretary will accept a submission from a mining company regarding an appropriate transfer pricing
methodology where that methodology is based on the ATO’s finalised audit of a transfer pricing arrangement or,
alternatively, an advance pricing arrangement between the royalty payer and the Australian Tax Office.
The bill is designed to recognise some Territory royalty payers may prefer to avoid the investment administrative burden
which can be involved in establishing one of the previously mentioned ATO accepted transfer pricing methodologies. The
government intends to support mining companies in reducing this potential red tape by allowing the mining company to
substitute a transfer pricing methodology with the Mineral Royalty Secretary in the absence of an ATO endorsed
arrangement.
In delivering this simplified option to mining companies engaged in transfer pricing, the government must also be mindful
to protect the integrity of the Territory’s revenue base. For this reason, the bill proposes the amount of any potential transfer
pricing discount claimed by a miner in these circumstances will be capped to a maximum of 5.5% of the final value of the
mineral commodity. The final value generally represents the amount obtained by a trading entity when the minerals are,
ultimately, sold to a third party customer in an arms-length transaction.
The transfer pricing factor recognises the related trading entities may add some value or incur expenses in the process of
on-selling the minerals. However, the value of 5.5% is expressed as a maximum and royalty payers will still be required to
establish and substantiate the appropriate transfer pricing factor subject to the Revenue Office’s normal risk review and
compliance program.
A guideline will be issued that details the necessary information for a miner to substantiate a transfer pricing methodology
and claim a factor up to 5.5%. In accordance with normal practices, consultation with industry will occur before the final
guideline is published.
Further risk to the Territory’s royalty scheme are accounting strategies that shift to the Territory expenses which were
incurred by related entities in another jurisdiction. The experience of the Revenue Office suggests these related entities may
be based either in other Australian states or overseas, and the external expenses are claimed by the Territory mining
operation under the badge of being a deductable operating cost. The bill contains measures to address the risk this type of
accounting behaviour poses to the integrity of the royalty base.
This government recognises the crucial role mining companies play in the regional and economic development of the
Territory. For this reason, the amendments proposed by the bill are also targeted in encouraging and rewarding those
mining companies that genuinely maintain and operate the bulk of their operations in the Territory. An integral component
of the Territory’s profit-based royalty regime is a royalty payer’s ability to claim a deduction for legitimate operating costs
which include labour costs, head office expenses, and fees for management and services. Currently, these types of
operating costs are claimable if a royalty payer can substantiate the costs are directly attributable to the operation of the
individual mining project.
As I have previously outlined, since the introduction of the Mineral Royalty Act there have been dramatic advances in
communications and technologies which have led to a globalised mining industry. This has made the determination of
allowable operating costs increasingly difficult and administratively complex due to an increasing amount of royalty payers
also having business interests outside the Territory. The bill introduces measures that will establish a geographical
boundary before labour costs, office expenses, and fees for management services can be claimed as an operating cost. The
remaining heads of operating costs remain unchanged by this bill.
For a mining operation to continue to claim labour costs, office expenses, and fees for management services as operating
costs, it will be necessary that their claim relates directly to expenses incurred by an office located in the Territory or for
work or services performed in the Territory. These proposed amendments complement the government’s commitment to
better ensuring stability and certainty in the collection of the Territory’s own-sourced revenue.
In order for the government to make meaningful progress on its promise to eliminate the fiscal problems it inherited from
its fiscally irresponsible predecessor, the removal of unnecessary risks that undermine the integrity of the Territory’s
revenue base is critical. The measures contained within this bill are designed to limit claims for labour costs, head office
expenses, and management services to only such claims that have a sufficient nexus to the Territory will assist in protecting
the integrity of the Territory’s royalty regime by preventing royalty payers from shifting costs that are incurred in overseas
or interstate jurisdictions into the Territory to reduce the amount of royalty payable.
Just as the government is focused on assisting and rewarding other Territory based businesses for their contribution to
growing the Territory economy by creating local jobs and spending, so too does the government intend that these
amendments recognise the efforts of mining companies that have an office in the Territory and engage Territory based
workers and service providers.
To ensure all royalty payers are treated equally, all amendments to the Mineral Royalty Act will commence from 1 July
2013 regardless of when a miner’s royalty year commences. The bill also contains transitional provisions that will allow
apportionment of operating costs where appropriate.
This bill also proposes several minor administrative measures to the Mineral Royalty Act and the Payroll Tax Act to
commence from 1 July 2013. The first measure seeks to clarify that payments to the federal government, pursuant to the
mineral resources rent tax and carbon tax schemes, are not allowable deductions as operating costs under the Territory’s
royalty regime. This clarification is consistent with the existing operation of provisions within the Mineral Royalty Act
which establish that only expenditure necessary or essential for the production of a mineral commodity is allowable as a
deduction.
Payments in the nature of a tax or levy on output, value, or income and profits are not considered to be essential for
production as they are generally incurred after the minerals have been produced and sold. As both the mineral resource rent
tax and carbon tax are relatively recent Commonwealth initiatives, the bill makes it abundantly clear that royalty payers
cannot claim payments made in satisfaction of the mineral resource rent tax and carbon tax as deductible operating costs so
as to reduce the amount of royalty due to the Territory.
Second, the bill amends the secrecy provisions in the Mineral Royalty Act to enable a secretary and other government
employees to share information with the Commonwealth on royalty related matters that are incidental to uranium mining.
While the Territory was granted self-government in 1978 the Commonwealth retained ownership of uranium and other
atomic substances. This meant that the Territory did not have the power to regulate and impose royalty on uranium as it
could on other minerals and resources. Royalty arrangements for uranium projects were entered into by the Commonwealth
on a project-by-project basis and the Commonwealth paid a grant to the Territory in lieu of royalties.
In 2009, the previous fiscally, irresponsible Labor government endorsed the Commonwealth’s proposal to introduce a
harmonised profit-based royalty scheme mirrored on the mineral royalty act for all new uranium projects that commenced
operation in the Territory. Under the scheme the Territory administers the royalty regime on behalf of the Commonwealth,
collecting and retaining royalty payable by uranium miners. A number of important procedural aspects of the scheme are
contained in administrative arrangements including, the requirement that the Territory report to the Commonwealth the
amount of royalties collected, and any changes made to the mineral royalty act.
The amendment proposed by the bill is essential to enable the Northern Territory Public Sector employees to fulfil the
reporting obligations under the uranium royalty scheme, without breaching the confidentially provisions currently
contained in the mineral royalty act. Mr Deputy Speaker the last of these minor administrative measures seeks to align the
payroll tax formula in the payroll tax act with the original intent. As part of the 2011/12 Budget the payroll tax rate was
reduced to 5.5% and the payroll tax threshold changed to be calculated as a diminishing deduction where business with
annual wages below $1.5m were not required to pay payroll tax. The deduction reduced by $1 for every $4 in Australian
wages paid by an employer above $1.5m. An anomaly has been identified and the payroll tax formula which were inserted
into the payroll tax act as a result of the changes to the rate and threshold. This relates to the calculation of an employer’s
part-year payroll tax liability where they commence or cease employment, or join or leave a payroll tax group. The Bill
seeks to remedy this deficiency by amending the formulae to produce the intended results. Minor changes to definition
provisions have also been made to simplify the provisions. As the amendments to the payroll tax act arrange primarily
clarifying the original intent of the provision and reflect the calculations currently performed by the Territories online
payroll tax return system used by registered employers, the proposed changes will no adversely affect Territory employers.
Mr Deputy Speaker, I commend the Bill to honourable members and table a copy of the explanatory statement to the
accompanying Bill.
Members: Hear, hear!
Mr McCARTHY: Mr Deputy Speaker, I move that the debate be now adjourned.
Motion agreed to.