Trying to Understand the Resources SUPER PROFITS Tax (RSPT).

It seems that everybody (even me) has something to say about the RSPT (Resources Super Profit Tax). However, I'm not sure that many of us (me included) really understand it. So .... I've taken on the task of seeing if I can develop an understanding of the mechanics of it and, more importantly, describe it in simple terms.


In this post I am going to just go to the facts. I'll keep my opinions out of it Furthermore, in this post, I'm not looking at the repercussions of introducing or not introducing this tax.  


I hope that I get it right. I'm sure that if I get something wrong then somebody will let me know in quick order!


Here goes ...

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I think it's going to be easier if I take a simple example. Let's start with a brand new company that is going to start a brand new mining project under this new system. 


Our Company raises $10m to establish the company and starts the project. 


The company is going to use that money in two ways (as do all companies). It is going to expend some of the money (wages, fuel etc etc) and some of the money will be used to buy or build assets (mining equipment, rail lines etc).


The Government has now said that, essentially in exchange for contributing the minerals under the ground, they will become a form of partner in the business. They will bear 40% of the expenses - not as cash but as a credit that you can use later. 


Let's say that after a few years, the mining venture is now up and running. To get to this stage we have spent $4m in expenses and $6m on physical assets. (I have no idea if this is a valid apportionment but it doesn't matter, we are just examining the principle here).


At this point the system introduces a new accounting term - "RSPT Capital Account". In essence, this is the un-depreciated cost of the capital asset. That is, all the money that the business originally put in to build the asset.


Now, the Company has an RSPT Capital of $6m and a future RSPT credit of $1.6m (40% of $4m expenses).


Our company now makes a profit of (say) $1m. Our "partner" (the Government) now says to us "It is reasonable that you make 6% profit on your asset investment (ie RSPT Capital), anything over that we will take our cut of 40%"


So...We get to keep the first $60,000 profit (that is our fair return on equity). Of the remaining $940,000, we get to keep $564,000 (60%) and $376,000 is the Governments share. Of course for the first few years we won't need to physically pay that money to the Government as we claim back the $1.6m of the accumulation of the Governments share of the expenses that we have essentially lent to them (RSPT credit).


Now, on our total profit of $624,000 ($564,000 + $60,000) we have to pay our company income tax at 30% - that's $187,200


So, (after we have received payment from the Government for their share of the expenses in developing the mine) we pay a total tax bill of $563,200. (56.32%). Because of the tax structure that includes the "fixed" 6% component, this rate will be lower if we are less profitable and higher if we are more profitable.


There is no longer any state excise to pay because the Federal Government effectively pays it on our behalf.


That's about it.

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Of course the above is simplified. There are a few issues around the edges and no doubt there will be many more as the negotiations with the mining companies proceed.


A couple of interesting points.


Whilst depreciation is a claimable expense (as normal) it is not deducted from the RSPT Capital Account. Hence the divergence of the RSPT Capital Account from Equity. As investors, we will need both the RSPT Capital Account and the RSPT Credits to be reported.


RSPT Credits can be transferred between different projects owned by a single company.


If a Company is wound up (ie it goes bust) with an outstanding RSPT Credit then they will receive that Credit as cash but will pay Income tax on it.


The RSPT will apply both to new projects and retrospectively to existing projects. I imagine it will be a challenging exercise establishing the RSPT Capital Account for existing projects.


I have simplified the above in equating "RSPT Profit" and "Profit". They are actually different because some expenses that would be allowed against Profit are not allowed against RSPT Profit (eg Interest).


The actual accounting process, as I understand it, is slightly different from my example above but I believe my theoretical accounting method is simpler to understand and produces the same result in the end. After all, we are probably more interested in the bottom line of the tax, rather than the way the bean counters shuffle numbers. :)


Does the above make sense?