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IAS 12 — Accounting for market value uplifts on assets that are to be introduced by a new tax regime

Date recorded:

The Committee received another submission related to Australia´s Mineral Resource Rent Tax (MRRT). This request asked for clarification on the accounting for the market value uplift on related assets permitted under the MRRT legislation.

The MRRT is levied based on the net profit of a mining project but is deductible for calculating taxable profit for corporate tax purposes. The ‘starting base allowance´ is part of the allowances deducted from mining revenue to calculate mining profit.

The starting base allowance recognises investments in assets that relate to upstream activities of a mining project interest existing before the new tax regime was announced (the ‘starting base assets´) and reflects the annual tax depreciation of those starting base assets. Entities may choose to calculate the starting base allowance using either a market value approach or an accounting book value approach. When the market value approach is utilised, then the difference between the market value and the accounting book value is referred to as the market value uplift.

The staff presented the Committee with three potential alternatives provided by the submitter. The first alternative is an adjustment to the tax base such that deductible temporary differences arise and a deferred tax asset is recognised if it meets the criteria under IAS 12. The second alternative is a tax holiday approach where no deferred tax asset or upfront tax income is recognised. The third alternative is an initial recognition exception approach where, by analogising to paragraph 24 of IAS 12, no deferred tax asset is required to be recognised.

The staff analysis supported the first alternative such that when the market value uplift is used, the change to the starting base asset should be considered as an adjustment to the tax base of the asset and that a deferred tax asset should be recognised to the extent that it meets the recognition criteria for a deferred tax asset under IAS 12. In assessing the Committee agenda criteria, the staff did not expect significant diversity in this area and noted that SIC 25 already interprets IAS 12 for situations where there are changes in the tax status of an entity or its shareholders under a tax regime. As a result, the staff recommended the Committee not add the item to their agenda.

The Committee members were in general agreement with the staff analysis and recommendation not to add this item to their agenda. One Committee member noted that when Australia introduced capital gains taxes this also introduced market uplift issues and the first alternative was the method used so in utilising this approach MRRT would be treated consistently.

The Committee focused on the draft agenda decision rejection notice and a few Committee members suggested removing the discussion of the various alternatives discussed but include further analysis for the approach supported by the Committee and the staff. The Committee Chair noted that this would be appropriate as the rejection notice is communicating a conclusion rather than a basis for conclusion.