TAX NEWS - 2010

RSPT: Is the RSPT the breaking point for Australian tax reform?

Does fixing Australia's tax system begin with fixing plans for the super tax?

It was just your typical May Day weekend in Australia, that is, until on Sunday 2, the Australian Government made a shocking and potentially devastating announcement. Commencing July 2012, it plans to impose a 40 per cent tax, now known as the Super Tax [resource super profits tax (RSPT)], on Australian miner's profits. It is part of the government's mass overhaul of Australia's taxation system, and a huge part at that. It is expected to raise A$12 billion in the first two years alone. Upon this news, BHP Billiton, Xstrata, Anglo American, Rio Tinto and Vedanta Resources all fell between 7.9 and five per cent on the FTSE.

It goes without saying, that if you have opened a paper or used a computer in the interim, an awful lot of people are extremely unhappy about all of this. Comment on how "shocking" (Tom Albanese, CEO for Rio Tinto), "highly regrettable" (Mick Davis, CEO for Xstrata) and "a surprise attack on us" (Andrew "Twiggy" Forrest, CEO of Fortescue Metals) is everywhere. A number of high profile, top mining companies have announced plans or potential plans to alter or even halt operations following this news. There are a lot of questions at this stage as to whether the tax will go ahead as is, or if mining companies will eventually kowtow to the government by compromising on the emotional statements already made. But within these questions, it is important to look at exactly what happened here; how might such a bold and industry-washing move be contemplated, let alone executed? Might a similar move be made on a different area of Australia's economy, and what is it really going to result in for our world's greatest miners?


The Australian Tax System Overhaul

Let's go back to September 20, 2008. The Taxation Institute of Australia released new figures showing that four in 10 families in the nation are not paying tax. According to these findings, conducted by the Melbourne Institute of Applied Economic and Social Research, this tax gap has emerged from the increasing amount of government benefits paid, which has subsequently offset income tax. It is these sorts of results and the worrying headlines they created that screamed for tax reform in Australia. The Henry review, which has now become the basis for the taxation overhaul including the Super Tax, was originally announced in May, 2008. Come December, 2008, Ken Henry, Australia's Treasury Secretary, indicated that stamp duty cuts, negative gearing concessions for investment properties, and a general review of housing affordability would be a key area of focus, all within a tax review he would conduct before a looming full overhaul of the nation's taxation system.

Rumours of income tax cuts swirled, but by December, 2009, Henry said his review would seek to alleviate such a strain on individual tax payers by bearing down the process of returns and reducing the cycle of tax. Politically, the process of a full review inevitably presented a very volatile playing field for the government. Talk of state-centric congestion taxes, a nationwide payroll tax and new means of business taxing emerged as the Labor government appeared to do all it could to stay vague about exactly what would happen. After all, making any controversial announcements at such an early stage in an election year was never going to be a favourable option. In the week commencing December 21, the government delivered a 20-year long tax reform plan which, according to an internal document then leaked to news service The Weekend Australian, was based on a "small set of broad-based taxes." So where between these tentative strategic plans and the astonishing resources Super Tax announcement of May 2, 2010, did mining get thrown so harshly into the mix?


Why mining?

Kevin Rudd, Australia's Prime Minister, reasons that the government is targeting the mining industry in this overhaul because Australia has been short-changed by the mega profits potentially made by mining heavyweights for far too long. He says that the majority of profits made end up in foreign hands through dividends. Speaking on May 5, on 6PR Radio, of Perth, Rudd said that he was holding discussions with the mining community to hear its concerns, but made no attempt to appease them or offer any possibility of compromise.

"BHP is 40 per cent foreign owned, Rio Tinto is more than 70 per cent foreign owned. That means these massively increased profits…built on Australian resources, are mostly in fact going overseas," he said.

This didn't sit well with Marius Kloppers, CEO for BHP, who responded in an interview with The Age, denying those claims made by Rudd. "I would like you to make sure that you let as many people as possible know that the Australian resources industry and BHP Billiton pays its full and fair share of taxes," Kloppers said.

The back and forth of commentary that has ensued is, of course, another matter because it doesn't account for why the decision to impose the Super Tax was made. In fact, understanding this decision harks back through the 50-plus years of continual large current accounts deficits (CAD) held by Australia's economy. Australia's balance of payments is heavily shaped by the country's narrow export base, reliance on the importation of capital goods, and what has been perceived as lacking international competition on a number of market fronts. Within these gripes, the nation's reliance on commodities, and in turn mining, is heavy—hence the repeated references to the government having messed with the nation's backbone economy in light of the Super Tax.

Looking specifically at Australia's persistently high CADs sheds vital light on why it looks like profits keep making their way to foreign investors too; it is a case of borrowing and paying back, put simply. However, considering that Henry's tax review, on which this overhaul is based, suggests that the country will have to borrow more from foreign investors in order to finance future mining, the decision to drastically change the mining industry taxation landscape in this way can be understood for quite how dangerous it really is. Although not necessarily economically-astute, this does go some way in explaining why Rudd has chosen mining. He has seen the profits, heard talk of them running overseas and taken a decision to hoist them back into the country.

It does not justify the government's move on the mining industry, but it does offer its potential reasons behind it. In short, those CADs continue to mount and show little signs of improvement, the economic structure bears no easy way out or lenience in this, and mining has proved easily-perceivable in terms of profit, but unfortunately been targeted in what might be seen as a highly flawed manner. With the questionable ideals behind this move covered, it is now important to look at exactly why the government has elected to impose this Super Tax in such a startling manner, with little or no prior input from the industry.


Shock value

In a June 9, 2010, interview with Tony Jones on Australia's Lateline television programme, Andrew "Twiggy" Forrest, of Fortescue Metals, recalled those first days in May when the mining industry was rocked by the original Super Tax announcement.

"I must say when I first heard about this tax, because you do remember Tony it was a surprise attack on us—it was not a surprise attack on others, others were briefed, but no one in the mining industry that I've met was," Forrest said. "The consultation process started with Fortescue at 8:00am in Canberra on the first day. The first words were 'this tax is binary, Mr Forrest. If you want to change this tax you have to change the Government.'"

The mining industry had no input or knowledge of the oncoming Super Tax storm? The mining industry attendees of the consultation process will have to change the government to change the tax? Bearing in mind Forrest once called Rudd a friend, he states he is "really looking forward to genuine tax reform," and has since said that no real discourse between government and the mining industry really took place (despite reports to the contrary from government press sourcing) the entire situation is beginning to look quite suspicious.

The question of industry involvement underlies all reactions since news of the Super Tax broke. Whichever CEO or Chairman from whichever mining company you read about, none have had any involvement in crafting the tax proposed, and all experienced real shock and worry when it was announced, but it is not clear why. There has been much reporting of government/industry discussion since the tax news broke, but still that does not explain why none took place before, and some mining industry sources have debated quite how much discussion is really going on behind the scenes today. In fact, in the week of Monday 7, 2010, Sam Walsh, CEO of Rio Tinto's Iron Ore, told Julia Gillard, the Deputy Prime Minister, that the consultations had been "absolutely hopeless."

On June 15, 2010, Rudd argued against the shock incurred by miners when the Super Tax was announced, saying that it was not a "bolt out of the blue" like mining companies claim, but in fact had been underway since the May 2008 announcement of the Henry review.

"The government is now in the business of negotiating with the mining industry and the government is now engaged in detailed negotiations on details on implementation and on generous transitional arrangements," Rudd said.

"That is the normal way in which you engage in a process of tax reform."

One of the latest outbursts comes from the Mineral Council of Australia. In its latest print advert, the council says there has been "no extensive or meaningful consultation process" of industry involvement to date, and is signed by 20 high profile mining company CEO's including Albanese and Kloppers. The advert has not been well-received by Wayne Swan, Australia's Treasurer. This advert is the perfect example of the other battle here; public opinion and media swing. The mining industry is not satisfied in the involvement, if any, it has had in the inception of the Super Tax, but the Australian government says it has given as much room as it can—and more than the miners claim. Fighting it out in a media and advertising war, of course, presents itself as a clear means of rallying public opinion to your side, regardless of who is right or wrong. All comments and actions made by the mining industry are reactionary to the shock of the Super Tax.

The government is seeking to claim otherwise, which is a potentially difficult thing to accept. The biggest problem in this is that if any real productive discussion is to take place between both sides, the current arguments need to be put to bed. Whether or not this can be achieved looks uncertain.


Is there a way out?

One constant since the May 2 announcement is Rudd's stalwart refusal to go back on the specific 40 per cent sum of the Super Tax. He has claimed that he cannot do that having promised this to the deserving Australian people. Speaking with Bloomberg on June 11, 2010, Rudd told press "We've got weeks and probably months of consultation yet with the major mining companies,"

"We've got the rate of this tax about right."

Despite press honing in and delighting in the unfortunate ambiguity of Rudd's "about right" remark, the fixed rate is the real sticking point. This '40 per cent on excess profits' notion has caused a lot of unrest and, coupled by the government staying so rigid on the rate, looks likely to continue. Instead, the government says it will negotiate implementation and transitional agreements which Rudd indicated to be "generous." Unfortunately, the validity of this claim lies in believing any semblance of productive discussion is taking place at all.

On Friday, June 11, Xstrata's Mike Davis told Bloomberg that the government has not allowed discussions of the key issues in the Super Tax to take place.

"Tinkering at the margins will not avoid the significant long-term damage this tax could do to mining investment in Australia," he said.

BHP's Marius Kloppers spoke equally pessimistic sentiments, saying "I'm always hopeful that sense prevails. I have not seen a path this time how sense is going to prevail as of yet, but I remain hopeful."

It appears that so far the one concrete plan for the future of the Super Tax debate, as has been repeatedly mentioned by Rudd, is that more time is required to sort everything out. The bottom line is that a 40 per cent Super Tax would mean a total tax rate of 60 per cent for the eligible miners in Australia. Rudd wants more time for discussion, the mining community want real discussion to take place, yet ultimately, whatever transitional discretions and breaks are afforded, a 40 per cent rate poses a serious threat to this, one of Australia's most vital and admired industries.

Not to mention, this in an industry whose profitability other worldwide governments will happily take off Australia's hands. There has been an awful lot of talk since May 2. Now it's time for real and constructive work between the government and mining industry. It might take weeks or months, but it looks like overhauling Australia's tax system begins with overhauling the plans for the Super Tax.


Update: in the news

As AUBJ went to press, pivotal news broke. Rudd stepped down and has been replaced by new Prime Minister, Julia Gillard. In the run up to the elections, Gillard has already made a bold decision to abolish the RSPT as we previously knew it. Now there is a 30 per cent tax aimed exclusively at the coal and iron ore miners whose profits exceed a 12 per cent rate of return. A project needs to make more than A$50 million per annum profit to be tax-eligible, the retroactive nature of Rudd's RSPT has gone, and talks continue aimed at shaping tax rebates, including the potential exclusion of magnetite projects.

As Gillard assumed the role of PM, she vowed to "throw open the doors" of government to the mining industry, asking that miners "throw open their minds" to a revised taxation proposal. Is this the beginning of the end of the Super Tax debacle? Australia's Deputy Prime Minister, Wayne Swan, says that there is still "a long way to go" to perfecting the tax, but it is certainly a giant leap in the right direction.