Kate SlackThe Super-Profits Tax
June 17th 2010 01:51
What is it?
The Resources Super-Profits Tax, announced on 2 May 2010 by the floundering Federal Government has dominated the broadsheets and political commentary since it was revealed. On a basic level this is a tax designed to ensure that profits generated from the exploitation of Australia’s non-renewable resources will be taxed at a rate of 40%. To be introduced on 1 July 2012 it was set to replace the crude oil excise and will operate parallel to the State and Territory government royalty regimes.
In a press statement delivered on 4 June 2010, Minister for Trade, Simon Crean pointed to the strong growth in exports from the resources industry as evidence that Australia is “on the cusp of a second-wave mining boom and the Australian Government is determined to get the tax regime right so that Australians receive their fair share from the sale of Australia’s non-renewable resources…It is vital that as prices for Australia’s non-renewable resources grow, the Government takes the opportunity to invest the proceeds in the cause of nation-building. The Resource Super Profits Tax will allow the Government to do this.” While 40% is undeniably high, is it not fair that the profits generated from exploiting the resources located deep within Australian soil and that can only be mined and sold once are reaped largely by the mining companies?
How does it operate?
By way of background, Australia is rich with non-renewable energy resources which represent one of our major industries. Demand for this product has continued to increase in recent years predominantly driven by China and India. Government (and by extension the community) has ownership of all non-renewable resources in Australia. The Government currently receives revenue by charging mining companies to exploit those resources through royalty and tax programs. In a Fact Sheet released by the Government to accompany the announcement of this tax, the Government argues that “Current resource charging arrangements provide an inadequate return to the community and do not recognise the cost of resource investment and production, which can be particularly important during periods of low resource prices. Royalties are quite unresponsive to changes in resource profits, and the community has largely missed out on sharing in the vast wealth generated from the sale of Australia’s non-renewable resources.” The government further argues that not only will the tax raise significant funds for the Australian community but it will also encourage more expansive investment and employment in the resource sector. The Government forecasts that, based on modelling by Econtech, under this scheme, “investment will rise by 4.5%, jobs by 7% and mining production by 5.5% in the long run.” One of the concerns is just how long this long run will be.
Problems
Jobs
Just as concerning are issues that have been raised by those expected to be hit hardest by the imposition of this tax. Lyn Brever, the South Australian Speaker and Labor MP last week expressed her concern over the impediments that such a tax could cause to the sustainability of some mines and mining companies and the risk that could pose to mining towns. She offered the example of OneSteel in Whyalla, a town located 394km from Adelaide where the majority of its workers are employed by either OneSteel or related companies. In fact, OneSteel employs 3000 people at the Whyalla Steelworks. OneSteel is in a particularly precarious position because the tax as it currently stands would result in them being hit twice; once on the magnetic iron it mines to use in steelmaking and again on the hematite ore it sells overseas. Mark Parry, chief executive of the Whyalla steelworks believes that “it would tax this site out of being a profitable site.” Not only are OneSteel representatives pushing for the Whyalla plant to be exempt from the tax. The Australian reported today that Labor and Liberal representatives are pushing for the exemption. Rowan Ramsey, whose Federal seat of Gray takes in Whyalla said yesterday that ‘If they don’t exempt it, the steelmaking will shut…Whatever they do will add cost, and we know that steelmaking in Australia is a very tenuous operation at best.” Therefore, the security of this plant and the jobs of those whom work there is a significant concern for this community and others just like it.
Kevin Reynolds, WA State Secretary of the Construction Forestry Mining & Energy Union pointed out last week that union members have expressed concern about their jobs. “They are worried about whether projects are going to get shelved”, and that as a consequence, so will their jobs. These opinions may be well-founded considering Fortescue Metals Group chief Andrew Forrest’s comment that “we literally cannot employ at least 30 000 Australians if this tax were to go ahead.” Colin Barnett, Premier of Western Australia expressed his concern for Aboriginal people living and working in regional Australia. “The mining industry is by far the biggest employer of Aboriginal people in this country…All those speeches about saying sorry and ‘we’re going to do better for indigenous people’ – we’re doing nothing for them with this tax because they will be the ones whoa re probably less trained and more vulnerable in the marketplace or job market.”
Reduced Investment?
If the Government forecast is incorrect at least for the short term, David Flanagan, Managing Director of Atlas Iron raises an important issue with regards to the consequences of what reduced investment by the mining companies could mean; “It goes into housing, it goes into restaurants, it goes into everything.” As Australia’s biggest mining states, Queensland and Western Australia are feeling the most nervous. The Australian reported on 9 June 2010 that QLD Budget Papers reported that the QLD Government need “the parameters of the new tax, in particular the allowance rate, [to be] set so that current production and planned new investment in the mining industry are not deterred…It is also critical that the Australian government, in consultation with industry and other stakeholders, quickly settles the major design features of the tax in order to provide investment certainty and business confidence in this vital industry…” Considering that Queensland’s mining sector will contribute an extra $1.25 billion to the state’s bottom line in the next year their nervousness is not unfounded. To alleviate this Kevin Rudd on Wednesday 9 June promised to allocate $4 billion collected from this tax to improve infrastructure in both Queensland and Western Australia. This may prove to be yet another ‘little to late’ rescue plan as many have recognised this spending shift for what it is: a further change in rhetoric from the original announcement of the tax. While originally promising that the revenue raised from this tax would be spent on infrastructure for all Australians, he told the Perth Press Club last Wednesday that “It’s not right that the regions and towns producing so much of Australia’s wealth should suffer from poverty of investment.” But will this extra injection of cash negate the potential loss of investment that is being threatened by the mining industry? A month ago Fortescue informed the stock exchange that it was putting on hold expansion plans for its $US9 billion Solomon Hub and its $US6 billion Western Hub in the Pilbara region due primarily to this tax. Smaller firms are also anxious - Western Areas, a nickel producer believes the tax will repress the development of the next phase of its high-grade Forrestania project in Western Australia. Just as concerning is the decision of Andre Lawry, director of Polymetals Group to look overseas for investment opportunities instead of maintaining their commitment to Australian business as is Santos Chief Executive, David Knox’s decision to cease encouraging investors to consider Australia as a responsible investment opportunity due to its fiscal stability.
Government Guarantee
Another concern that has particular resonance at the moment considering the BP oil spill and the enormous impact it is having on, particularly the environment, but also on the US economy is the fact that as part of the super profits tax, government would guarantee 40% of a company’s losses sustained through a major environmental incident.
The benefits
However, while their voices are being somewhat drowned out by the dissenters (although while mining companies might be seen to be grandstanding, they are required by law to announce matters that may impact on their share price), there are certainly a great number of those whom support the need to tax non-renewable resource mining. Jeff Lawrence, Secretary of the Australian Council of Trade Unions said last week that “the ACTU is strongly backing the government on this issue and we don’t want to see a small bunch of selfish billionaires hold the country to ransom.” He is of the view that “once the tax is explained to them, workers understand why it’s needed and are backing it.” It’s true that while many support the need for this tax, very few support Prime Minister Rudd’s handling of the announcement. Dean Mighell, Secretary of the Electrical Trades Union VIC expressed that he is “firmly of the view that mining companies need to pay their share but I think…Rudd has failed yet again to sell the message…People don’t understand how it works…and the way its been spun has given the mining companies PR machine a massive free kick.” Regardless, their support of the tax has ensued. In a joint statement released on Monday 14 June the Australian Conservation Foundation, the ACTU and the Australian Council of Social Service defended the tax on fairness grounds. Coming out with guns blazing refusing to negotiate on the 40% tax rate and then holding out for as long as possible until finally negotiation began with industry stakeholders was certainly not a smooth move.
Negotiations
As the issue gained momentum, Mr Rudd’s own ministers began to realising that the Rudd Government’s strategy was inappropriate. Late on Wednesday of last week Mr Crean admitted that the government should have consulted business and Resources Minister Martin Fergusson told the ALP caucus that when it comes to the tax “one size doesn’t necessarily fit all.” After feeling the heat Mr Rudd and Treasurer Wayne Swan agreed to negotiate. What will be interesting are the party’s bottom lines. Originally Mr Rudd announced that the 40% tax rate was “non-negotiable” but is now willing to discuss some aspects of the scheme. The Coalition would prefer for the tax to be completely abandoned and is pushing the hopeless cause line with Tony Abbot suggesting that “the problem with this tax is that [Mr Rudd] can’t change it without destroying his budget strategy, and he can’t keep it without destroying the resource’s sectors expansion in this country.” Other politicians are expressing opinions that lay somewhere in the middle. For example, Colin Barnett, Australia’s only Liberal Premier thinks it would be simpler and more logical to increase the company tax rate instead because he agrees that “some mining companies should pay more.” The negotiations are very important to the success and acceptance of this tax. Kevin Foley, the South Australian Treasurer told The Institute of Public Accountants earlier this week that “the current impasse needs to be broken through a more constructive discussion about how the tax can be changed to win broad support from the mining sector.” Stuart Wilson of The Australian believes that compromise is possible and that it should perhaps be reflective of this: “lower the 40% rate; raise the profit threshold rate to better reflect risk; apply the tax only to new projects to remove the complaint of it being retrospective; ensure a fair balance between the federal and state levies.” Surely compromise has to be reached on this issue. If the Government is right and we are on the cusp of the second mining boom then Australia cannot afford to risk loosing further investment during a boom and while commodity prices are high.
The political implications
Politically, the announcement of this tax which was supposed to be the Government’s saving grace was mishandled. Laurie Oaks in the Daily Telegraph pointed out that “It’s the current government being damaged by the issue. This mining tax scheme was intended to help them out of an electoral hole, not ‘dig in deeper’. The Sydney Morning Herald went further and reported that the handling of the announcement and the advertising back flip meant that Rudd “handed the Opposition a gift”. Even more dangerous though from the Government’s perspective is that this tax is alienating both the Greens and Labor’s Left base. On top of everything, this is an election year and the Rudd Government simply cannot afford to make any more mistakes.
Where are we at now?
As it stands now, the Government is considering modifying the tax for the coal-seam gas industry and changing the rules on the 40% tax for different minerals. Other concessions include not attaching the same amount of tax to: the quarry industry supplying building materials and superphosphate for farming due to the inherent difference between them and high-value minerals; and coal-seem gas and offshore gas and petroleum projects. There are also suggestions that the low-value industries such as quarrying would be largely exempt and all other minerals would be in a third category. Our biggest mining companies have also called for the government to sign tax guarantees similar to those in developing and unstable nations after the first round of top-level negotiations failed to yield any results. After those negotiations the chief executives of BHP Billiton, Rio Tinto Australia and Xstrata Australia declared the government was not negotiating and had given “no formal acknowledgement” that their issues “will be addressed”. As Jennifer Hewett of The Australian put it, it certainly seems that “Rudd and Swan remain wedded to the fundamental design of the tax.” Whether legitimate negotiations that are considered satisfactory to all parties involved will eventuate is uncertain. What is certain is that a) the Rudd Government needs the money raised from this tax; and b) cannot afford to continue to ostracise their support base.
The Resources Super-Profits Tax, announced on 2 May 2010 by the floundering Federal Government has dominated the broadsheets and political commentary since it was revealed. On a basic level this is a tax designed to ensure that profits generated from the exploitation of Australia’s non-renewable resources will be taxed at a rate of 40%. To be introduced on 1 July 2012 it was set to replace the crude oil excise and will operate parallel to the State and Territory government royalty regimes.
In a press statement delivered on 4 June 2010, Minister for Trade, Simon Crean pointed to the strong growth in exports from the resources industry as evidence that Australia is “on the cusp of a second-wave mining boom and the Australian Government is determined to get the tax regime right so that Australians receive their fair share from the sale of Australia’s non-renewable resources…It is vital that as prices for Australia’s non-renewable resources grow, the Government takes the opportunity to invest the proceeds in the cause of nation-building. The Resource Super Profits Tax will allow the Government to do this.” While 40% is undeniably high, is it not fair that the profits generated from exploiting the resources located deep within Australian soil and that can only be mined and sold once are reaped largely by the mining companies?
How does it operate?
By way of background, Australia is rich with non-renewable energy resources which represent one of our major industries. Demand for this product has continued to increase in recent years predominantly driven by China and India. Government (and by extension the community) has ownership of all non-renewable resources in Australia. The Government currently receives revenue by charging mining companies to exploit those resources through royalty and tax programs. In a Fact Sheet released by the Government to accompany the announcement of this tax, the Government argues that “Current resource charging arrangements provide an inadequate return to the community and do not recognise the cost of resource investment and production, which can be particularly important during periods of low resource prices. Royalties are quite unresponsive to changes in resource profits, and the community has largely missed out on sharing in the vast wealth generated from the sale of Australia’s non-renewable resources.” The government further argues that not only will the tax raise significant funds for the Australian community but it will also encourage more expansive investment and employment in the resource sector. The Government forecasts that, based on modelling by Econtech, under this scheme, “investment will rise by 4.5%, jobs by 7% and mining production by 5.5% in the long run.” One of the concerns is just how long this long run will be.
Problems
Jobs
Just as concerning are issues that have been raised by those expected to be hit hardest by the imposition of this tax. Lyn Brever, the South Australian Speaker and Labor MP last week expressed her concern over the impediments that such a tax could cause to the sustainability of some mines and mining companies and the risk that could pose to mining towns. She offered the example of OneSteel in Whyalla, a town located 394km from Adelaide where the majority of its workers are employed by either OneSteel or related companies. In fact, OneSteel employs 3000 people at the Whyalla Steelworks. OneSteel is in a particularly precarious position because the tax as it currently stands would result in them being hit twice; once on the magnetic iron it mines to use in steelmaking and again on the hematite ore it sells overseas. Mark Parry, chief executive of the Whyalla steelworks believes that “it would tax this site out of being a profitable site.” Not only are OneSteel representatives pushing for the Whyalla plant to be exempt from the tax. The Australian reported today that Labor and Liberal representatives are pushing for the exemption. Rowan Ramsey, whose Federal seat of Gray takes in Whyalla said yesterday that ‘If they don’t exempt it, the steelmaking will shut…Whatever they do will add cost, and we know that steelmaking in Australia is a very tenuous operation at best.” Therefore, the security of this plant and the jobs of those whom work there is a significant concern for this community and others just like it.
Kevin Reynolds, WA State Secretary of the Construction Forestry Mining & Energy Union pointed out last week that union members have expressed concern about their jobs. “They are worried about whether projects are going to get shelved”, and that as a consequence, so will their jobs. These opinions may be well-founded considering Fortescue Metals Group chief Andrew Forrest’s comment that “we literally cannot employ at least 30 000 Australians if this tax were to go ahead.” Colin Barnett, Premier of Western Australia expressed his concern for Aboriginal people living and working in regional Australia. “The mining industry is by far the biggest employer of Aboriginal people in this country…All those speeches about saying sorry and ‘we’re going to do better for indigenous people’ – we’re doing nothing for them with this tax because they will be the ones whoa re probably less trained and more vulnerable in the marketplace or job market.”
Reduced Investment?
If the Government forecast is incorrect at least for the short term, David Flanagan, Managing Director of Atlas Iron raises an important issue with regards to the consequences of what reduced investment by the mining companies could mean; “It goes into housing, it goes into restaurants, it goes into everything.” As Australia’s biggest mining states, Queensland and Western Australia are feeling the most nervous. The Australian reported on 9 June 2010 that QLD Budget Papers reported that the QLD Government need “the parameters of the new tax, in particular the allowance rate, [to be] set so that current production and planned new investment in the mining industry are not deterred…It is also critical that the Australian government, in consultation with industry and other stakeholders, quickly settles the major design features of the tax in order to provide investment certainty and business confidence in this vital industry…” Considering that Queensland’s mining sector will contribute an extra $1.25 billion to the state’s bottom line in the next year their nervousness is not unfounded. To alleviate this Kevin Rudd on Wednesday 9 June promised to allocate $4 billion collected from this tax to improve infrastructure in both Queensland and Western Australia. This may prove to be yet another ‘little to late’ rescue plan as many have recognised this spending shift for what it is: a further change in rhetoric from the original announcement of the tax. While originally promising that the revenue raised from this tax would be spent on infrastructure for all Australians, he told the Perth Press Club last Wednesday that “It’s not right that the regions and towns producing so much of Australia’s wealth should suffer from poverty of investment.” But will this extra injection of cash negate the potential loss of investment that is being threatened by the mining industry? A month ago Fortescue informed the stock exchange that it was putting on hold expansion plans for its $US9 billion Solomon Hub and its $US6 billion Western Hub in the Pilbara region due primarily to this tax. Smaller firms are also anxious - Western Areas, a nickel producer believes the tax will repress the development of the next phase of its high-grade Forrestania project in Western Australia. Just as concerning is the decision of Andre Lawry, director of Polymetals Group to look overseas for investment opportunities instead of maintaining their commitment to Australian business as is Santos Chief Executive, David Knox’s decision to cease encouraging investors to consider Australia as a responsible investment opportunity due to its fiscal stability.
Government Guarantee
Another concern that has particular resonance at the moment considering the BP oil spill and the enormous impact it is having on, particularly the environment, but also on the US economy is the fact that as part of the super profits tax, government would guarantee 40% of a company’s losses sustained through a major environmental incident.
The benefits
However, while their voices are being somewhat drowned out by the dissenters (although while mining companies might be seen to be grandstanding, they are required by law to announce matters that may impact on their share price), there are certainly a great number of those whom support the need to tax non-renewable resource mining. Jeff Lawrence, Secretary of the Australian Council of Trade Unions said last week that “the ACTU is strongly backing the government on this issue and we don’t want to see a small bunch of selfish billionaires hold the country to ransom.” He is of the view that “once the tax is explained to them, workers understand why it’s needed and are backing it.” It’s true that while many support the need for this tax, very few support Prime Minister Rudd’s handling of the announcement. Dean Mighell, Secretary of the Electrical Trades Union VIC expressed that he is “firmly of the view that mining companies need to pay their share but I think…Rudd has failed yet again to sell the message…People don’t understand how it works…and the way its been spun has given the mining companies PR machine a massive free kick.” Regardless, their support of the tax has ensued. In a joint statement released on Monday 14 June the Australian Conservation Foundation, the ACTU and the Australian Council of Social Service defended the tax on fairness grounds. Coming out with guns blazing refusing to negotiate on the 40% tax rate and then holding out for as long as possible until finally negotiation began with industry stakeholders was certainly not a smooth move.
Negotiations
As the issue gained momentum, Mr Rudd’s own ministers began to realising that the Rudd Government’s strategy was inappropriate. Late on Wednesday of last week Mr Crean admitted that the government should have consulted business and Resources Minister Martin Fergusson told the ALP caucus that when it comes to the tax “one size doesn’t necessarily fit all.” After feeling the heat Mr Rudd and Treasurer Wayne Swan agreed to negotiate. What will be interesting are the party’s bottom lines. Originally Mr Rudd announced that the 40% tax rate was “non-negotiable” but is now willing to discuss some aspects of the scheme. The Coalition would prefer for the tax to be completely abandoned and is pushing the hopeless cause line with Tony Abbot suggesting that “the problem with this tax is that [Mr Rudd] can’t change it without destroying his budget strategy, and he can’t keep it without destroying the resource’s sectors expansion in this country.” Other politicians are expressing opinions that lay somewhere in the middle. For example, Colin Barnett, Australia’s only Liberal Premier thinks it would be simpler and more logical to increase the company tax rate instead because he agrees that “some mining companies should pay more.” The negotiations are very important to the success and acceptance of this tax. Kevin Foley, the South Australian Treasurer told The Institute of Public Accountants earlier this week that “the current impasse needs to be broken through a more constructive discussion about how the tax can be changed to win broad support from the mining sector.” Stuart Wilson of The Australian believes that compromise is possible and that it should perhaps be reflective of this: “lower the 40% rate; raise the profit threshold rate to better reflect risk; apply the tax only to new projects to remove the complaint of it being retrospective; ensure a fair balance between the federal and state levies.” Surely compromise has to be reached on this issue. If the Government is right and we are on the cusp of the second mining boom then Australia cannot afford to risk loosing further investment during a boom and while commodity prices are high.
The political implications
Politically, the announcement of this tax which was supposed to be the Government’s saving grace was mishandled. Laurie Oaks in the Daily Telegraph pointed out that “It’s the current government being damaged by the issue. This mining tax scheme was intended to help them out of an electoral hole, not ‘dig in deeper’. The Sydney Morning Herald went further and reported that the handling of the announcement and the advertising back flip meant that Rudd “handed the Opposition a gift”. Even more dangerous though from the Government’s perspective is that this tax is alienating both the Greens and Labor’s Left base. On top of everything, this is an election year and the Rudd Government simply cannot afford to make any more mistakes.
Where are we at now?
As it stands now, the Government is considering modifying the tax for the coal-seam gas industry and changing the rules on the 40% tax for different minerals. Other concessions include not attaching the same amount of tax to: the quarry industry supplying building materials and superphosphate for farming due to the inherent difference between them and high-value minerals; and coal-seem gas and offshore gas and petroleum projects. There are also suggestions that the low-value industries such as quarrying would be largely exempt and all other minerals would be in a third category. Our biggest mining companies have also called for the government to sign tax guarantees similar to those in developing and unstable nations after the first round of top-level negotiations failed to yield any results. After those negotiations the chief executives of BHP Billiton, Rio Tinto Australia and Xstrata Australia declared the government was not negotiating and had given “no formal acknowledgement” that their issues “will be addressed”. As Jennifer Hewett of The Australian put it, it certainly seems that “Rudd and Swan remain wedded to the fundamental design of the tax.” Whether legitimate negotiations that are considered satisfactory to all parties involved will eventuate is uncertain. What is certain is that a) the Rudd Government needs the money raised from this tax; and b) cannot afford to continue to ostracise their support base.
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