Accounting Policies

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Introduction

Minerals Resource Rent Tax is a tax that will be placed on iron ore and coal projects starting July 1 2012. The introduction of MRRT will potentially have an effect on the accounting policy choices of mining companies affected by the tax. This paper will be split into two sections; a literature review and an analysis. The literature review will look at articles on the Minerals Resource Rent Tax and what it actually entails. Positive Accounting Theory in relation to bonus plans and political costs. It will address articles on accounting methods that were used prior to the introduction of Minerals Resource Rent Tax and why they were used. Finally an article on the implementation of a previous mining tax and its implications on the accounting policies used will be analysed. This paper will then go on to analyse the accounting policy choices used prior to the introduction of the tax and post introduction of the tax using Positive Accounting Theory to explain and predict the accounting practices. While positive accounting theory has many criticisms, this is the correct theory to use.

Literature Review

To obtain a quick overview of the Minerals Resource Rent Tax (MRRT), this paper will review Honey and Mok 2010. On July 2 2010, MRRT was announced to come into effect on July 1 2012. Currently other mining taxes in Australia include; at the federal level there, is a Petroleum Resource Rent Tax (PRRT) and at the state level, there are royalty regimes. MRRT is a tax that requires 30% on the MRRT profits for iron ore and coal projects. Honey and Mok (2010) stated that profits below $50 million will not have a MRRT liability, although it should be noted that after this article was written the figure was revised to $75 million (Mining tax bills pass Lower House 2011). MRRT profit is the company’s revenue, minus associated costs, where revenue is the value of commodity at its first saleable form. The company can have a 25% extraction allowance for costs associated. This allowance means that the 30% MRRT will only apply to 75% of the operating profit and thus the tax rate is in reality 22.5%. There are deductions allowed for ‘project capital expenditures’. To have these deductions there needs to be a starting capital base, which can either be the book value or market value. Book value will have depreciation deducted at an accelerated rate over five years, and the undeducted started base will be uplifted at Australian Long-Term Bond Rate (LTBR) plus 7% annually. Market value, depreciation will be calculated with reference to the life of the project with a maximum of 25 years with no uplift. Capital investments will be written off immediately and new projects from July 1 2012 will not be subject to the MRRT until expenditure is recouped. MRRT liability will be calculated on a project-by-project basis, with any losses transferable to other Australian projects. “Unutilised MRRT losses are carried forward and uplifted annually by the LTBR plus 7%” (Honey & Mok 2010). MRRT payable will be calculated after crediting the state-based royalties, if state-based royalties exceed MRRT payable, the unutilised royalty credit is not refundable but carried forward and uplifted at LTBR plus 7%. The taxpayers that are subject to MRRT are still subject to ordinary income tax, however in calculating the taxpayers’ income they are able to claim a deduction for the MRRT paid. A group was established, the Policy Transition Group (PTG), to oversee development of MRRT. It consisted of representatives from the Government and the business community. Honey and Mok (2010) identified issues that needed to be addressed by the PTG when the tax was announced, such as the fiscal aspect and the domestic and international tax impacts.

This paper will review the Positive Accounting Theory (PAT) put forward by Watts and Zimmerman (1978) as a way of explaining and predicting what accounting policy choices the mining companies affected by MRRT will...
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