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TAX NEWS - 2010

Australia Mine Tax: Australia Unveils Compromise Tax Deal With Miners

CANBERRA — The Australian government announced sweeping changes to its planned new mining tax Friday, making major concessions to the mining industry including a reduction in the headline rate of the tax to 30% from 40%.

The reworked tax, which will now only apply to iron-ore and coal mines, has been welcomed by the biggest miners and should go a long way to easing investor fears about the impact on the sector.

It marks a major government step back from the original proposal launched in May. But for new Prime Minister Julia Gillard, who ousted Kevin Rudd from the top job only last week, partly due to concerns over his handling of the heated public debate with miners over the tax, it is an endorsement of her leadership, paving the way for her to call a quick election.

Australians are due to go to the polls by April 2011, but analysts say Ms. Gillard could call an election for August to capitalize on improved voter sentiment for the ruling Labor government since she took over the leadership.

Ms. Gillard said the heads of agreement signed with BHP Billiton Ltd., Rio Tinto Ltd. and Xstrata PLC late Thursday is a "very significant step forward."

Under the revised tax plan, onshore oil and gas projects including the booming coal-seam gas sector in Queensland state will be covered by the existing Petroleum Resource Rent Tax, levied at 40%.

Iron-ore and coal mines will be covered by a new Minerals Resource Rent Tax to be levied at 30%, and the mining of all other commodities will be excluded.

Under the original proposal, the tax would have kicked in at the long-term bond rate, currently about 5%, but the reworked MRRT sees this rise to the bond rate plus 7%, for a total of about 12%.

In a major concession to the industry's complaints, the government will allow companies to insert their mines into the new tax regime at market value rather than book value, thus allowing them to claim back against depreciation of the assets.

This will make a major difference to operations like the giant iron-ore mines of BHP and Rio, which have been operating for decades and have book values written down well below market value.

The government move doesn't completely remove uncertainty in the sector, however, as the tax isn't assured passage through Parliament into law.

Australia's main opposition Liberal-National coalition of center-right parties on Friday reiterated its vow to scrap the tax if it wins the next election.

"We are going to oppose this tax because this tax from the Rudd-Gillard government is a bad tax for investment, it is a bad tax for jobs and it is ultimately a bad tax for Australia," Coalition Treasury spokesman Joe Hockey told Australian Broadcasting Corp. radio.

"If this tax passes through the parliament, we will rescind it," he added.

Labor won a majority in the lower House of Representatives in a 2007 election. But it needs the Senate support of either the coalition, or all seven minor party senators to pass any new laws.

The environmentalist Greens, which hold five of the seven balance-of-power seats, have also expressed reservations about the tax.

Changing the tax will cut 1.5 billion Australian dollars ($1.26 billion) from government revenue over the four-year forecast period. To offset this fall in revenue, the government has pared back planned cuts to company taxes. The company  tax rate will be trimmed to 29% by the year starting July 1, 2013, from 30% now—but won't be lowered to 28%, as originally planned, unless fiscal conditions improve.

Under the revised MRRT proposal, mining investments made after July 1, 2012, can be written off immediately, rather than depreciated over a number of years, allowing coal and iron-ore producers to access deductions immediately.

The government said this meant a mining project won't pay any MRRT until it has made enough profit to pay off its upfront investment.

The new regime will also allow miners to transfer deductions from one mining project to another.

Some miners, including Fortescue Metals Group Ltd., had been unhappy with the way the tax talks were being carried out exclusively with the three big miners, with some worrying that their interests wouldn't necessarily be represented by the majors.

In an effort to assuage these concerns, the government has set up a policy transition group led by Resources Minister Martin Ferguson and former BHP Chairman Don Argus to oversee the development of a more detailed technical design for the plan.

BHP Billiton Chief Executive Marius Kloppers said the company was encouraged by the MRRT proposal, which addressed many of its concerns.

"We are encouraged that the MRRT design is closer to our frequently stated principles of sound tax reform, in that the proposed tax will be prospective in its treatment of profits from our iron-ore and coal businesses, and not apply to the other commodities in our portfolio," he said.

Mr. Kloppers said there was still a lot of work to be done on the detail and design of the tax before it could be enacted.

Xstrata Chief Executive Mick Davis said the reworked tax was an acceptable outcome and he looked forward to the detail being finalized as quickly as possible.

"The [MRRT] respects the principle of prospective application by recognizing the full value of existing investments and imposes a profits-based tax on coal and iron-ore resources at an effective tax rate that does not severely disadvantage Australian mining investment compared to other resource-rich nations," Mr. Davis said.

Xstrata immediately reinstated the underground expansion of its Ernest Henry copper mine in Queensland, which it had suspended, citing the impact of the original tax plan.

Rio Tinto Australia Managing Director David Peever said Friday's announcement was an important step toward tax overhauls that will maintain Australia's international competitiveness as an investment destination.

"As one of Australia's biggest taxpayers, Rio Tinto is committed to working constructively with government to ensure that the tax system continues to encourage investment in Australia," he said.
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