TAX NEWS - JUNE 2010

Australia Tax: Constructive arguments need to be dug up in resource tax debate

Are miners saying taxes should never change once a project has begun, asks Bill Crawshaw.

by Bill Crawshaw, 04 June 2010 -- The resource tax debate should not have become the political debacle we are now witnessing. Lack of upfront government-to-industry consultation has been followed by both parties cherry picking arguments suited to their vested interests.

The tax's emotive title, ''resources super profits tax'', is unfortunate and has enabled opposition politicians and industry figures to imply that the federal government is introducing a ''great big new tax'' for the mining industry on top of company tax. It is actually a royalty levied on a project's profit which would replace the plethora of existing royalty regimes and crude oil excise that mining projects already pay to the states and Northern Territory government and the Commonwealth as the price for access to resources owned by the Australian people. In principle, such a profit-based royalty, or resources rent tax, is more efficient and investment neutral than the present volume or value of production royalty regimes. In effect, all mining projects would be subject to one national resource taxation regime based on profits rather than production.

While the mining industry appears to support profit-based royalties in principle, its concerns relate to implementation - specifically retrospectivity, the rate-of-return threshold above which the tax rate would apply and the tax compensation for loss-making mining operations. Some of these concerns appear valid.

As with the government's use of ''resource super profits tax'', the mining industry's use of ''retrospectivity'' is an emotive term, one which implies the collection of back taxes recalculated under the new scheme from existing mining projects. That is not proposed. What the industry seems to be saying is that governments should never change any tax or royalty parameters once a mining project has commenced. Nevertheless, the mining industry is not arguing that the company tax rate should remain at 30 per cent.

Many mining and petroleum projects have long lives - 20 to 50 years, or longer. Is the industry seriously suggesting that governments, on behalf of the Australian people, should never review the method of pricing access to the nation's resources once a project has commenced?

Given the fluctuations in the economic cycle, I would be surprised if the prices of the inputs and outputs of any mining operation matched the original projections of a project's cash flow. The iron ore industry has changed sales contract arrangements from an annual to a quarterly basis so contract prices more closely reflect the higher spot-market price. Why shouldn't the government change the way Australia's resources are priced to one that is more efficient and provides a fairer sharing of the value of those resources?

The proposed tax is similar in principle to the petroleum resource rent tax , but is different in a number of design details, including the rate-of-return threshold above which the tax rate would apply and the tax compensation for loss-making mining operations. These go to the heart of why the industry considers the amount it will pay in resources taxation will increase substantially and why financing new projects may be more difficult.

To be fair to the miners, mining is a high-risk business and applying the 40 per cent tax to profits in excess of the long-term bond rate (6 per cent) does not give sufficient recognition to that risk. As one can now get 7 per cent to 7.5 per cent a year for fixed-term deposits for five years, the industry appears to have a legitimate case for leaving its money in the bank rather than risk investment in a new mining operation under the resource tax. The rate of return allowed under the petroleum tax is about twice the long-term bond rate before the 40 per cent tax applies.

The proposed 40 per cent tax compensation for mining projects that fail is a curious feature of the government's plan. It is hard to see how this could be an attractive feature to the mining industry, financiers or the Australian community. Mining projects are not financed on the basis that they may get some compensation if they fail. Usually, financiers expect new projects to show they will be within the lowest quartile of costs for comparable projects and their failure is not contemplated. By having a low threshold (the long-term bond rate) above which the resources tax would be payable, successful projects will be taxed more than they should be to fund possible compensation. Also, the community should not bear the risk of having to refund royalties previously paid if a mining operation becomes commercially unviable.

Surely the public wants to see constructive discussion and an outcome that addresses the legitimate concerns of the mining industry and also provides a fair return to the Australian people reflecting the increasing demand for their resources.

Until his retirement in 2007, Bill Crawshaw spent 34 years in the Commonwealth departments responsible for advising on resources and energy policies.