Kate SlackThe Minerals Resources Rent Tax: A resolution?
July 8th 2010 06:34
Providing a solid foundation for building a political profile as a leader capable of ‘getting the job done’, Prime Minister Gillard came to terms with the miners (well some of them). On Friday 2 July 2010 the new PM sealed her first deal as leader and although the name has changed, and many of the details vary from the policy that was originally conceived, politically it was a win. Paul Kelly agrees: “For Gillard, this deal is a multiple victory: it defines a new prime ministerial style, an end to the political war with the mining industry and, on the figures, retention of almost all the tax revenue the government had initially projected.”
The details:
• Applies to iron ore and coal. Other minerals are exempt from this tax but some, like both onshore and offshore oil and gas projects, are caught by the Petroleum Resource Rent Tax (at a rate of 40%)
• Also exempt are companies that make less than $50 million in profit. It is anticipated that only 320 companies will be affected instead of the 2500 or so that the Rudd government had their sights on
• The headline tax rate was cut from 40% to 30% (a detail that under Rudd was ‘non-negotiable’)
• Miners are able to capitalise on the 25% extraction allowance which effectively means that the headline rate drops to 22.5%
• The tax will kick in once profits exceed the government bond rate (12%)
• Miners can claim the market value of their assets (or they can elect to use the book value)
• In total, accounting for this new Minerals Resources Rent Tax (30%), the excavation allowance(25%), and the company tax (which is to be cut to 29% in 2013-2014) will equal an overall tax of around 46% for mining company profits
• The way explorations costs are deducted now will remain the same
• It seems as though the government will honour it’s intention to give QLD and WA $2 billion each from proceeds
It was reported in The Australian on July 3-4 that “the government is counting on a big jump in coal and iron ore prices and a change in the way mining companies write off their investments to shore up its budget bottom line in the face of the concessions it has given to the miners.” Updated modelling suggests that the profits for the government are projected as being $1 billion more in the first year than originally thought. However, that will drop significantly in the second year to $2.5 billion less than originally anticipated. Further, Daid Sinclair, an RMIT University economist has expressed doubts about how a substantially different tax scheme can raise a comparable amount of money.
The rest of the details
A transition policy group headed by Mr Ferguson and BHP chairman Don Argus is to be established which will address the intricate details and issues such as whether the States and Territories would keep their existing royalties.
Things are looking up
The miners are contentment was captured in a statement reported in The Australian by Minerals Council of Australia chief Mitch Hooke said “This package is broadly consistent with the minerals industry’s underlying principles of tax reform: international competitiveness, sovereign risk, and competitive neutrality across company size, commodity mix and ownership structure.” As such, Xstrata is said to have reversed its decision to cease expansion work on projects in northwest Queensland and is said to react in the same way to another in southern Queensland. Despite this Tony Abbott continues to insist that “The government has trashed Australia’s international reputation with its proposal for a great big new tax on mining and you do not restore the situation by turning a $12bn tax into a $10.5bn tax.” While this may be true, the miners are content with the deal that resulted.
Political Hay
While Gillard certainly sealed the deal, it is unlikely that the tax will be heralded as a Labor government success during the election campaign. A leadership triumph for sure, but not an issue the government is going to want to draw significant attention to. This is because of the time it took them to reach a deal under Rudd, the non-consultative nature of the policy announcement, the emotive reaction by the miners and the polar position that Abbott and the Coalition are taking with regards to the issue. Mr Abbott declared last Friday that “The next election is a referendum on tax. Let’s be absolutely clear about this. The next election is a referendum on tax…Labor supports a great big new tax on minding; the Coalition doesn’t. Labor needs the tax because it’s addicted to spending. Labor needs the tax because it’s turned a $20 bn surplus into a $57 bn deficit.” While the Coalition polls strongly with regards to its ability to handle the economy, Abbott’s combatant approach may be doing more harm to his own political hopes when the issues has fundamentally been resolved with the miners. The principle behind the tax – that the profits from non-renewable resources should be shared by all Australians – is something that the voters largely agree on. Now that the design has been fixed, and the miners are content, using it as an election platform is perhaps misguided.
Ultimately, a compromise on an issue that three weeks ago looked as though it would sink the government was reached without either party ending up to scathed. As George Megalongenis neatly put it in the Australian on the weekend, “Labor conceded that its resource super-profits tax failed the real-world test of business. And the mining companies admitted that they weren’t paying their fair share of tax after all.
The details:
• Applies to iron ore and coal. Other minerals are exempt from this tax but some, like both onshore and offshore oil and gas projects, are caught by the Petroleum Resource Rent Tax (at a rate of 40%)
• Also exempt are companies that make less than $50 million in profit. It is anticipated that only 320 companies will be affected instead of the 2500 or so that the Rudd government had their sights on
• The headline tax rate was cut from 40% to 30% (a detail that under Rudd was ‘non-negotiable’)
• Miners are able to capitalise on the 25% extraction allowance which effectively means that the headline rate drops to 22.5%
• The tax will kick in once profits exceed the government bond rate (12%)
• Miners can claim the market value of their assets (or they can elect to use the book value)
• In total, accounting for this new Minerals Resources Rent Tax (30%), the excavation allowance(25%), and the company tax (which is to be cut to 29% in 2013-2014) will equal an overall tax of around 46% for mining company profits
• The way explorations costs are deducted now will remain the same
• It seems as though the government will honour it’s intention to give QLD and WA $2 billion each from proceeds
It was reported in The Australian on July 3-4 that “the government is counting on a big jump in coal and iron ore prices and a change in the way mining companies write off their investments to shore up its budget bottom line in the face of the concessions it has given to the miners.” Updated modelling suggests that the profits for the government are projected as being $1 billion more in the first year than originally thought. However, that will drop significantly in the second year to $2.5 billion less than originally anticipated. Further, Daid Sinclair, an RMIT University economist has expressed doubts about how a substantially different tax scheme can raise a comparable amount of money.
The rest of the details
A transition policy group headed by Mr Ferguson and BHP chairman Don Argus is to be established which will address the intricate details and issues such as whether the States and Territories would keep their existing royalties.
Things are looking up
The miners are contentment was captured in a statement reported in The Australian by Minerals Council of Australia chief Mitch Hooke said “This package is broadly consistent with the minerals industry’s underlying principles of tax reform: international competitiveness, sovereign risk, and competitive neutrality across company size, commodity mix and ownership structure.” As such, Xstrata is said to have reversed its decision to cease expansion work on projects in northwest Queensland and is said to react in the same way to another in southern Queensland. Despite this Tony Abbott continues to insist that “The government has trashed Australia’s international reputation with its proposal for a great big new tax on mining and you do not restore the situation by turning a $12bn tax into a $10.5bn tax.” While this may be true, the miners are content with the deal that resulted.
Political Hay
While Gillard certainly sealed the deal, it is unlikely that the tax will be heralded as a Labor government success during the election campaign. A leadership triumph for sure, but not an issue the government is going to want to draw significant attention to. This is because of the time it took them to reach a deal under Rudd, the non-consultative nature of the policy announcement, the emotive reaction by the miners and the polar position that Abbott and the Coalition are taking with regards to the issue. Mr Abbott declared last Friday that “The next election is a referendum on tax. Let’s be absolutely clear about this. The next election is a referendum on tax…Labor supports a great big new tax on minding; the Coalition doesn’t. Labor needs the tax because it’s addicted to spending. Labor needs the tax because it’s turned a $20 bn surplus into a $57 bn deficit.” While the Coalition polls strongly with regards to its ability to handle the economy, Abbott’s combatant approach may be doing more harm to his own political hopes when the issues has fundamentally been resolved with the miners. The principle behind the tax – that the profits from non-renewable resources should be shared by all Australians – is something that the voters largely agree on. Now that the design has been fixed, and the miners are content, using it as an election platform is perhaps misguided.
Ultimately, a compromise on an issue that three weeks ago looked as though it would sink the government was reached without either party ending up to scathed. As George Megalongenis neatly put it in the Australian on the weekend, “Labor conceded that its resource super-profits tax failed the real-world test of business. And the mining companies admitted that they weren’t paying their fair share of tax after all.
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