TAX NEWS - JUNE 2010
Australian super tax increases investment risk
Global supplies of minerals prevalent in Australia – such as iron ore, coal and uranium – may also be pinched as investment in marginal deposits is deferred, say representatives of an industry in a state of apoplexy.
The resource-rich country's government wants to raise tax on mining company profits that exceed an approximately 6 per cent rate of return. Any "super profits" above that threshold would be taxed at 40 per cent. On top of corporation taxes that would be lowered to 28 per cent, this implies a total effective tax rate of 57 per cent on Australian mining operations from 2012.
The proposition, in other words, is for mining companies to take on 100 per cent of the costs and risks associated with their investments but pay more than 50 per cent of gains to the government.
The industry is united in its depiction of the tax as "Robin-Hooding" that will threaten jobs, in the words of Marius Kloppers, chief executive of BHP, which is both Australia's and the world's biggest mining company.
"The Australian people own those resources, and they deserve a fairer share," said Kevin Rudd, prime minister, in a television interview, summing up the case for super-taxing companies that have grown very rich supplying China with the materials to build its cities and fuel its power plants.
The 57 per cent tax figure, while imprecise, has taken on an air of spurious inevitability. But nothing is certain.
Australia's powerful mining industry is at war with the government, and until the dust settles the impact on future earnings will not be known.
For now the greatest threat is the inability of miners to make investment decisions without knowing the result of any final compromise.
"We believe the tax is likely to be watered down," said Andrew Keen, mining analyst at HSBC. "Political pressure to backtrack or ease the tax will be significant."
The government may not budge on the 40 per cent super-tax figure. But concessions could come in the form of the tax-free threshold rising from a 6 per cent rate of return to something closer to 12 per cent, which would better reflect the returns investors expect from stocks exposed to the volatility of commodity cycles.
The fiercest debate revolves around whether the new tax should apply to all projects present and future, as the proposal states, or only to future projects. Mining companies are midway through years-long, multibillion dollar mine developments whose economic viability assumes a certain, lower, tax rate. Those models are now scrambled.
Xstrata on Thursday acted on industry rhetoric. It suspended all expenditure on two approved projects that now appear unviable. The proposed tax rate "eliminates the net present value of the [A$6bn] Wandoan coal project almost entirely", Xstrata said.
Rio and BHP, the two biggest miners, have been more circumspect, waiting for clarity before announcing projects at risk.
With so much to gain and lose from even minor revisions, the industry and government are locked in a propaganda war.
Wayne Swan, Australia's treasurer, complained of the mining companies launching an advertising campaign of "co-ordinated misinformation about the changes," as he asked the government for a special advertising budget to mount a counter-campaign.
BHP, like Rio, is claiming that it has paid its "fair share" of taxes in Australia. The company is planning "shareholder information sessions around Australia" to lobby individual shareholders – and voters.
Australia's centre-left Labor government led by Mr Rudd has turned the mining tax into an election battleground issue ahead of a poll that could come as soon as August.
Labor's standing has dropped sharply in recent polls to the extent that it is only marginally ahead of the opposition conservative coalition, which has slammed the tax as an act of economic vandalism.
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