The Greens and others will undoubtedly have a role to play in shaping the final version of the MRRT. However, the pressure applied by these groups is likely to be in respect of the headline-grabbing topics.

There are significant design aspects of the tax that are likely to remain relatively unchanged from what has currently been suggested. These aspects of the MRRT will have a critical impact on how efficient and simple the tax will be – key design principles for any tax, according to former Treasury secretary Ken Henry.

A reasonable portion of the PTG’s consultation process was spent discussing how to determine MRRT revenues at the taxing point in various coal and iron ore mining scenarios. For most producers there is no price for their product at the point they are required to determine MRRT revenues, ie the run-of-mine stockpile.

The PTG has recommended that where a price does not otherwise exist, MRRT revenue is determined using the most appropriate arm’s length method. These arm’s length methods are to “approximate” the price “reasonably” expected to have been achieved if the product was actually sold to a third party at the ROM stockpile.

It is no coincidence that transfer pricing partners from accounting firms attended sessions with the PTG. Given the tax community’s (Australian Taxation Office and advisers) familiarity with international transfer pricing methods, these will surely be applied to determine the price of product for MRRT purposes. The problem for taxpayers is that transfer pricing is one of the most subjective and audited areas of taxation in Australia at present.

No two mines are the same. Elements such as the product specifications, extraction and processing methods, and geography all differ. These things all affect the price that the end customer is willing to pay for the product.

Furthermore, the price for different products from the same mine would need to be priced differently for MRRT purposes, for example a high-ash versus a low-ash coal. Taxpayers may be required to perform a pricing study for each product at each mine.

The price of coal and iron, of course, changes daily. Two identical tonnes of product sold six months apart will fetch different prices. So what is the price of these two shipments at the ROM stockpile – the same or different? If the price of the product has decreased from $320 to $220 a tonne in the intervening period, it may not be an insignificant MRRT issue for a Cape-size vessel of product.

Unfortunately, the domestic sale of product for a relatively low price will not set a favourable MRRT transfer price for the rest of the exported product. This idea has been put to Treasury and was quickly dismissed.

There is little doubt that the setting of the revenues for MRRT purposes will produce significant uncertainties and administrative workloads for miners.

The PTG stated that “we have not recommended that a fiscal incentive package for exploration be pursued at this point in time.” On March 24, 2011, the government accepted this stance.

It will be 2015 before the issue is reconsidered, unless it gets some traction at the upcoming Tax Summit. For those who have been promoting tax incentives to stimulate exploration activity, this is not great news.

Explorers still strongly believe a tax incentive is required to attract investment. Outside of land access and tenement approval concerns, this is the issue explorers mention most.

But was the PTG report all bad for explorers? Maybe not, as the recommendation relating to the transitional “starting base” was in fact a win for explorers.

The starting base, which shields the existing value of a project (at May 1, 2010) from tax under the MRRT, can include “the value of potential projects that are yet to commence production”.

This would seem to encompass exploration tenements. Of course, there are some limitations placed on the starting base for a non-producing tenement; it cannot be depreciated until first production and the value is not uplifted by the long-term bond rate plus 7% in the intervening period.

These issues aside, there was a real risk at the start of the PTG process that only production tenements would be included in the starting base.

One disadvantage that explorers will face is that their post-May 1, 2010 expenditure arguably provides significantly better value increment to a project than a dollar spent in production. Unfortunately, that value increase will not be captured in any starting base, just the dollar spent.

With draft legislation yet to be released, the mining industry still has time to influence this important debate before it reaches a conclusion via the Resource Tax Implementation Group and submissions in respect of the exposure draft legislation.

Larras Moore may be contacted on (07) 3237 5601 or via email at larras.moore@bdo.com.au.