TAX NEWS - June 2010

Super confusion on Australia's mining super tax

A possibly tiresome — but still important — update on the Australian government's much-villified plan to impose a 40 per cent "resources super-profits tax" on mining companies:

Confusion reigns on Friday.

That is after much (evidently wasted) optimism drove a rally in FTSE 100 mining stocks late Thursday, with Rio Tinto, BHP Billiton and XStrata gaining from 3.2 per cent to 4.3 per cent, after Australia's Herald Sun reported that Canberra was set to announce "major changes" to the planned tax.

Then again — Australia's prime minister Kevin Rudd burnished his reputation as the resources industry's Number One hate figure on Friday by firmly scotching the speculation, ruling out any quick compromise deal on the planned tax.

"We've got weeks and probably months of consultation yet with the major mining companies," Rudd said on Friday, reports Bloomberg. Somewhat ominously, he added: "We've got the rate of this tax about right."

If you're already sick of the mention of mining taxes, Rudd's estimate of "weeks and probably months" – and his firm signal that the 40 per cent rate of the tax is unlikely to change – tells us there is a lot more argie-bargie to come.

A likely concession, however, according to Sydney-based mining analysts, might be adjustments to remove certain minerals from the tax, for example mineral sands, or reduce tax rates on others.

That, however, doesn't remotely mollify Anglo-Swiss miner Xstrata, which on Friday furthered its image as a leading agitator against the tax by warning that "tinkering" with the levy would not prevent damage to the industry. Reports Bloomberg:

"The government still has not allowed consultation to take place on the key issues with this tax, namely its application to existing investments and the 40 percent rate," Xstrata Chief Executive Officer Mick Davis said in an e-mailed response to questions. "Tinkering at the margins will not avoid the significant long-term damage this tax could do to mining investment in Australia."

Adding a note of resigned gloom, BHP chief executive Marius Kloppers chimed in with predictions on Friday that there would be "no end" to the tax row. As the Sydney Morning Herald reported:

BHP Billiton boss, Marius Kloppers, says he can see no end to the dispute over the proposed resource super profits tax despite fresh industry-fed rumours that the government was about to offer a compromise to flush out the miners.

Mr Kloppers also distanced his company from the increasingly fiery political row over the tax, saying BHP was fighting for its own interests and not aligning itself with the Coalition, which opposes the tax.

Mr Kloppers told the Herald that BHP had been around long enough to know "we have to be compatible with whatever government the people of Australia choose".

Whatever lies ahead, PM Rudd's point that more time will be required suggests some changes are afoot. As BusinessSpectator's Robert Gottliebsen notes on Friday, "there is clearly room for more consultation". He concludes:

The miners have to decide whether to continue the fight and, if so, how vigorously to take up the fight. As of [Thursday] last night the big miners were preparing to keep up the attack, but of course they have not seen the proposal, so no one can be sure exactly what they will do.

The problem with the "consultation" that has now belatedly started between the government and the miners, notes Gottliebsen's fellow BusinessSpectator commentator Alan Kohler, is that "Rudd and the mining bosses speak different languages". He concludes:

The PM speaks politics; they speak arithmetic. He's thinking about whether he can split the mining industry and come out with an acceptable press release, but the numbers will have an impact of their own in future no matter what anyone says today.

It's not, or at least shouldn't be, just a question of whether Kevin Rudd can get enough mining leaders to acquiesce before the election to stop the haemorrhaging of his re-election campaign.

It's about whether the structure of mining of taxation is such that it doesn't harm the Australian economy in 10 and 20 years time, when the current crop of mining leaders has long gone.