TAX NEWS - June 2010

Australia, Miners Suspend Tax Ads

MELBOURNE — New Australian Prime Minister Julia Gillard has for now taken some of the heat out of the government's bitter battle with the mining industry over a planned new mining tax, but a resumption of hostilities looks inevitable.

Both sides have agreed to suspend their advertising attacks on each other as Ms. Gillard promises genuine negotiation and her offer of an open door has been welcomed by the industry.

However, the government's renewal of its commitment to bring the budget into surplus in 2013, a feat that relies on the windfall from the new tax, has raised questions about how much ground the new prime minister is actually willing to give.

Skeptical miners also note that with Treasurer Wayne Swan, an architect and chief promoter of the tax, not only keeping his position but also being promoted to Deputy Prime Minister, there is no guarantee that Ms. Gillard's ascendancy will lead to significant changes to the tax plan.

The hostile standoff with mining companies since the tax plan was announced in May was one of the issues that eroded support for former Prime Minister Kevin Rudd, who was Thursday unceremoniously dumped by his party in favour of Ms. Gillard.

She will be under pressure to neutralize the issue and was claiming an early win after BHP Billiton Ltd. agreed to her request that it suspend its attack ads against the tax.

"Already we are seeing our goodwill reciprocated," she said in her first address to Parliament. "This does give me confidence that there is room for negotiation, there is an ability to work together in the spirit of goodwill."

Ms. Gillard's appointment has sparked an outbreak of goodwill with BHP Billiton saying it welcomes the opportunity for genuine engagement on the tax.

"We are encouraged by the comments of new Prime Minister Julia Gillard, that her government will open the doors for negotiation with the objective of achieving consensus," a BHP spokeswoman said.

Minerals Council of Australia, an industry lobbying group, has also halted its advertising campaign against the tax and has agreed to accept Ms. Gillard's offer. The decision was "a gesture of goodwill in the expectation that consultations will be meaningful and constructive," said Minerals Council Chief Executive Mitch Hooke.

Fortescue Metals Group Ltd. Chief Executive Andrew Forrest welcomed Ms. Gillard's appointment, and said he was confident the negotiations could result in a tax regime more attractive to international investors. "I feel personally that with Julia and Wayne, the original form of that tax is now off the table and we can look at something sensible," said Mr. Forrest at a media conference.

One of Australia's richest men and founder of Fortescue, the largest Australian iron ore producer after global giants BHP and Rio Tinto Ltd., Mr. Forrest has hitherto been a vocal critic of the proposed tax and its potential impact on the growth of the Australian mining industry.

But espite the pleasantries, the parties still look a long way apart and it isn't hard to find deep skepticism in the mining industry about the government's willingness to compromise.

Mineral Council's Mr. Hooke said at a meeting in Melbourne that any new talks would need to address all of the key issues the mining industry has raised, including the 40% rate of the tax, its retrospectivity and its impact on Australia's international competitiveness.

Ms. Gillard made it clear Thursday that she still believes miners should be paying more tax, and a senior union official told Dow Jones Newswires he has been advised the tax will remain, although in what form remains unclear.

"There will still be a super profit tax," the official said.

A person close to one of Australia's biggest mining companies said Ms. Gillard has more room to back down on the tax or to announce a wide-ranging review of it, but that there was no guarantee that she would do so, especially with Mr. Swan as her treasurer.

"The miners see it as potentially a circuit breaker but one that is not automatic, and they will be very wary," the person said.

Tony Sage, executive chairman of Cape Lambert Resources Ltd., said he expected the new leadership team to be wedded to the tax.

"Wayne Swan is the architect of this tax and he has been virulently opposed to any compromise, so it would be a big back-down for him personally. Gillard is from the left and was never a favorite of the mining industry," he said.

A mining analyst at an international bank in Sydney added that the tax was too important to the government's plans to close its budget deficit by 2012-2013 to be lightly sacrificed.

"You'd have to be extremely brave to assume it wouldn't continue in some form," he said, speaking anonymously because his views didn't represent those of the bank.

In its budget papers released last month, the government estimated it would raise 3 billion Australian dollars (US$2.6 billion) from the tax in 2012-2013 and A$9 billion the following year.

The complex Resources Super Profits Tax would be levied at a rate of 40% on all profits from mining projects above a rate of return of about 6%.

Messrs. Rudd and Swan said repeatedly that the 40% rate of the tax wasn't up for negotiation but had never ruled out raising the threshold at which the tax kicked in.

Ms. Gillard is yet to outline what is now up for discussion or how she plans to meet budget forecasts if the tax is amended.

Until she does, there is no guarantee that the combatants in this long running saga will not take up arms again in a battle that could once more flare as a damaging issue for the government.