Super Profits Tax: Miners win concessions in super profits tax settlement
The agreement will mean miners pay less tax in the early years of their operations than under the initially proposed regime.
The deal, scheduled to be announced this morning, is expected to buoy mining shares when the market opens.
After days of talks in Canberra, BHP Billiton, Rio Tinto and Xstrata have brokered a deal with the new government that will deal with the mining industry's key issues and keep its multi-million-dollar advertising campaign on the shelf.
Importantly for BHP and Rio, the new arrangement will shield their years-old, high-margin iron ore and coal businesses from the brunt of the full tax by neutralising the issue of retrospectivity.
To do this, the government will let them depreciate their assets from a starting point of current market value, rather than at generally far lower book values that had already been depreciated for years.
The government has agreed to reduce the 40 per cent super-profits rate and raise the threshold at which the tax kicks in from the long-term commonwealth bond rate (of about 6 per cent) to 7 per cent above that level — close to 13 per cent. It will also ring-fence commodities such as nickel, copper and gold, which require hefty processing once they come out of the ground.
Investors and analysts said the changes were encouraging.
"It's heading in the right direction for the miners," Perennial Growth Management fund manager Ken West said.
"The market will need to run analytics through whatever the final outcome is, but the sentiment should be broadly positive."
Credit Suisse analyst Paul McTaggart said the change in valuation methods was a good outcome for the industry, but it meant the government's tax receipts would not be nearly as high in early years.
One of the key issues the mining giants had with the super-profits tax was that it would be applied to projects approved under the current tax regime, and that these projects would be taxed harder than new projects because their values had already been depreciated.
The massive Pilbara iron ore operations of BHP and Rio in Western Australia, which were started in the 1960s and were among the main targets of the tax, are the best example of how being able to apply the tax to them at market value, rather than book value, will mean huge tax savings in the early years.
According to Rio's latest financial reports, the depreciated book value of its Pilbara iron ore mines, ports and infrastructure was $US11.2 billion at the end of last year.
This is less than one-fifth the market value of $US64bn placed on the Rio assets in its agreement to merge its Pilbara iron ore operations with those of BHP.
The scale of the benefits of depreciation are expected to be just as large, although the amount it is calculated on will be different because the new tax is not expected to apply to ports and rail.
"Allowing for mines to be brought to market values is simply the only fair way of doing it," said a high-level executive at one of the big-three miners.
"Mines that have decade-long lives would have simply been closed under the proposed RSPT."
A source at one of the miners involved said the deal could not be heralded as a complete victory, because the miners would end up paying more tax than under the current regime.
An analyst at a major broking house said the new deal was a substantial improvement on the tax rate BHP would pay under the super-profits tax, if it was assumed the government cut the tax rate from 40 per cent to 35 per cent.
On a back-of-the-envelope calculation, he said that when company tax was added BHP's tax rate would fall from 57 per cent under the initial proposal to about 45 per cent.
This was just 1 per cent higher than the current tax rate of 44 per cent BHP pays, but is expected to grow as the miner depreciates fewer assets.
Grange Resources managing director Russell Clark was encouraged by the outcome, but wants concessions for magnetite, which needs heavy processing. "It sounds like the proposed tax will affect the big three miners more than anyone else, so that's good."