TAX NEWS - JUNE 2010

Australia Tax: Back to the drawing board on tax model

03 June 2010 -- The government is stretching the nation's patience with its $38.5 million advertising campaign in ways that go beyond the difficulty of reconciling the spending with Kevin Rudd's pre-election diagnosis that government advertising was a cancer on democracy. The arguments mounted in the advertisements so far have amounted to little more than sloganeering and there are reasonable grounds to contest the figures the campaign cites as proof the mining industry is not paying its way. When The Australian's Peter van Onselen rang the inquiry number yesterday to see what more the hotline team could tell him about the proposed new tax, he received no joy from staff, who said their job was simply to post out copies of the Henry tax review. At least the 1800 number was free.

Wayne Swan is living in another era if he thinks an advertising campaign, however slickly run, will satisfactorily answer the many questions still hanging over this untested tax. The Treasurer and his team must back up their central claim that mining royalties have more than halved as a share of profits over the past year. They need to provide more numbers, more modelling, clearer definitions and historical data that spans the full economic cycle. As we now know, Ken Henry's resources super-profits tax was developed by a relatively small team under conditions of secrecy that restricted the opportunities for peer review. Cabinet consideration was restricted to the inner circle of ministers. The mining industry had next to no input in the finished model, which has an elegance that appears to be fascinating theoreticians, but has yet to be tested in the real world of dirt digging.

Short of pistols at dawn, a duel between advertising campaigns is probably the least best way of conducting the kind of mature debate Mr Swan said he wanted about taxation of the mining industry. If the world's smartest advertising teams struggle to persuade us of the merits of competing brands of cola, what hope is there of explaining a complex new tax proposal? Advertising is great at prosecuting a case but is bad at correcting misrepresentation and breeds scepticism.The public is becoming more angry and distrustful of both sides by the day.

Last night, the Rudd government's chief adviser on major infrastructure projects, Rod Eddington, added his highly influential voice to that of other business leaders urging the government to go back to scratch in consulting with industry over the tax. As Sir Rod - a board member of mining giant Rio Tinto as well as the head of Infrastructure Australia - pointed out, poor processes lead to bad policy in public administration. Good policy process, he said, had been absent in the resources super profits tax debate.

Encouragingly, Mr Rudd has indicated he wants direct negotiations with senior resource company executives as an alternative to the megaphone debate. This is where the debate should have begun. At the very least, the government needs to revise the super-profit threshold of 6 per cent. A more realistic level of 11 per cent would bring the tax broadly into line with the offshore petroleum tax. And the idea of underwriting up to 40 per cent of miners' losses needs to be revisited.

Most of all, we need details. The main claim of the government's advertising campaign is that "our share of resource profits has been falling" from $1 in $3 to $1 in $7. This may be a technically correct, but the government is yet to publish the Treasury definitions or detailed numbers that could allow the claim to be verified.

Mr Swan and Mr Rudd are right to predict that miners are unlikely to celebrate any new tax. But class-war rhetoric is unlikely to convince voters that this is indeed genuine reform and not the lazy tax grab the opposition claims it to be. Australians with long memories, or those who have paid attention to economic reform, will remember that the Hawke-Keating reforms were formed in a very different atmosphere when corporate leaders were treated as partners in the national project, rather than enemies of the people to be pilloried for their wealth. As Sir Rod said last night, cool heads must prevail and proper consultation on the super-profits tax must now begin.