Friday, May 14, 2010

40% of minerals go to the nation - REALITY CHECK

THE modesty of Tuesdays budget has put the spotlight where the government wants it to be: on the one big reform it accepted from the Henry report, putting a resource rent tax to mining.

Kevin Rudd and Wayne Swan say they are imposing the tax because Australians are not getting a fair share of the wealth generated from mining their resources. They believe most voters will ultimately rally to that cause rather than identify with the mining companies.

But the polls to date have shown the nation divided, with serious damage to Labor in Western Australia. Rudd and Swan have struggled to explain clearly why the tax is needed, why it has been designed as it has, and what impact it is expected (or intended) to have.

Questions about the tax are growing daily with the misinformation flung around by both sides. Lets try a few.

Why is it needed?

The government says mining companies have pocketed huge gains from soaring prices, but state government royalties have remained low. By 2008-09, pre-tax resource profits had soared by more than $80 billion in nine years, yet only $9 billion extra went to taxpayers in royalties.

But the miners say this ignores the far greater sums they pay in company tax and other taxes. In 2008-09, they say, miners paid $25 billion in taxes, making them the highest-taxed industry in Australia. The government has failed to spell out why mining should be taxed more than other industries.

Nor has it explained that what the tax does is give Australians a 40 per cent stake in the mining of their resources in good times and bad.

The tax is double-sided, so that not only would mining companies making money pay over 40 per cent of it to the government, but mining companies losing money would get 40 per cent of their losses back from the government.

How much will the tax cost?

This is where it gets complex. The 40 per cent tax would be charged on super profits, which are defined as profits in excess of the 10-year bond rate (currently 5.5 per cent, which serves as the benchmark of a risk-free return).

The Minerals Council, opposing the tax, quotes a hypothetical example of a (very small) mine generating $300 of revenue, with $195 of expenses. Assume a 5 per cent bond rate, and its super profit is $100.

It pays a 5 per cent royalty, which takes $15. The federal government would refund the $15 royalty but take $40 with the resource rent tax, leaving a pre-tax profit of $60. Company tax would take $17 of that, leaving a total split of $43 for shareholders and $57 for governments. They say thats the highest tax rate on mining in the world.

Any benefits for miners?

Miners benefit in three ways. The aforementioned repayment of 40 per cent of their losses, usually offset against future taxes. It would in effect pay their state royalty taxes. And it would return part of the tax through a tax break for exploration.

What would be the net impact?

The government has muddled its messages. On one hand, Rudd and Swan have implied the tax would help to rebalance the economy, so that sectors suffering from the dollars mining-driven rise manufacturing, farming and tourism would have better prospects ahead. But that would happen only if mining activity declined.

The governments modelling, by economic consultant Chris Murphy of KPMG Econtech, finds that the long-term impact will increase mining activity by 5.5 per cent, or 6.6 per cent including the cuts in company tax.

They cant both be right.

Treasury secretary Ken Henry sharply rejects the Minerals Councils claim that the tax is intended to slow the mining sector, pointing to the modelling. But Treasury and the Reserve Bank agree the strength of the mining sector is pushing up interest rates and the dollar, making life harder for everyone in the rest of the economy.

But wouldnt the mining move offshore?

Only if Australias mineral deposits moved offshore.