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TAX NEWS - 2010

Australia Tax: 40 percent mining tax rate to be cut

Julia Gillard has caved in to the mining industry, watering down the tax on so-called super profits as she clears the decks for a federal election.

After a two-month-long dispute that ultimately cost Kevin Rudd his leadership, the new Gillard government has agreed to:

- Cut the 40 per cent headline rate of the tax.

- Raise the threshold at which the tax cuts in from 5 per cent to about 12 per cent.

- Change the rules to allow miners to reduce their taxable income.

- Apply the new tax to only a limited number of commodities - not across the resources sector as envisaged by the Henry review.

Ms Gillard, who flew back from Queensland last night to seal the deal with the big mining companies, is expected to make an announcement before markets open this morning.

Shares of the main resources companies, BHP Billiton, Rio Tinto and Xstrata, rose sharply yesterday after The Age broke key details of the compromise on its website.

The backdown comes despite the government insisting before the coup that installed Ms Gillard that the 40 per cent tax rate was non-negotiable. Treasurer Wayne Swan had described it as "the bottom line".

It is the latest in a series of retreats for the Rudd-Gillard government, following the delay of the emissions trading scheme, the abandonment of the insulation program and the freeze on the processing of asylum seekers from Sri Lanka and Afghanistan.

Speculation last night suggested the government might have had to wind back its proposed corporate tax cuts - a gradual reduction in company tax from 30 per cent to 28 per cent - as well as its promise to increase employer superannuation contributions from 9 to 12 per cent.

Those measures were supposed to be funded by the original super profits tax.

Rio chief executive Tom Albanese, speaking from Namibia, praised Ms Gillard's willingness to conduct the talks "without preconditions" after she toppled Mr Rudd.

But a potentially damaging split has emerged within the mining sector over the backroom deal thrashed out with the industry heavyweights BHP Billiton, Rio Tinto and Xstrata.

The Association of Mining and Exploration Companies, which represents 220 smaller miners, said last night that it had been left out of negotiations and "that kind of divide-and-conquer strategy is underhanded and unacceptable".

The mining industry had unleashed a barrage of anti-government advertising after the resource rent tax was announced at the beginning of May along with the release of the Henry review of taxation.

The government responded with a $38.5 million, taxpayer-funded "extreme urgency" campaign of its own.

It had spent $10 million of this when Ms Gillard became Prime Minister and, as her first act in office, called a truce and fresh negotiations, led by Mr Swan and Resources Minister Martin Ferguson.

Under the original proposal, the 40 per cent tax kicked in when profits increased above what the government pays on 10-year bonds, currently about 5 per cent.

This has been raised to the bond rate, plus 7 percentage points, making the new trigger point about 12 per cent.

Miners will also be able to reduce their taxable income in order to reduce the impost on current investments, dealing in part with arguments the big mining companies raised about "retrospectivity".

Current investments will be assessed for tax purposes at full market value - a more generous measure than the one originally proposed by Mr Rudd - meaning they will be able to claim greater tax deductions.

The government has partly funded the changes through higher than expected forecast commodity prices for petroleum, coal and iron ore.

Low-value sectors such as sand and quarries and the nickel industry will sit outside the super profits tax regime, as will other commodities.

This morning's announcement follows three marathon days of talks between officials, the ministers and senior executives of the big companies in Canberra.

Ms Gillard yesterday attended the funeral of Australian soldier Ben Chuck at Yungaburra in Queensland and was therefore not present at yesterday's meetings in the national capital.

The Greens, meanwhile, warned that the new Senate would get final right of reply on the deal.

The new tax is not due to come into being until 2012.

Any legislation would be dealt with after the looming election.

The Greens signalled yesterday that they would not support a deal that raised less revenue from mining industry profits. The original forecasts put the mining tax revenue at $12 billion.

Greens leader Bob Brown said that less revenue would be a guide to whether the government had "maintained the public interest or caved in".

Simon Bennison, chief executive of AMEC, which represents small miners, said an "overwhelming" number of his members had been in contact to express their frustration at being left out of what Prime Minister Julia Gillard promised last week would be "a genuine negotiation process".
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