Tax to drag on mining industry for '100 years'

AUSTRALIA could take 50 to 100 years to recover its position in mining activity because of the excessive cost impact of the government's resource rent tax, Access Economics director Chris Richardson has warned.

Mr Richardson, one of Australia's most widely respected economists, persuaded the mining industry to endorse the idea of a resource rent tax in 2008. But at the Minerals Council conference yesterday, he tore into the assumptions on which this version of the tax was designed.

At the same conference, KPMG tax partner James Macky warned that the tax would not work in its current form, which in effect makes the government a 40 per cent partner in mines but not putting in any money until the mine is profitable.

Mr Macky, who heads the KPMG Melbourne team who modelled the impact of the tax for the Minerals Council in opposition to the KPMG Econtech who did the modelling for the government urged the government to pay its share of the money upfront.

"It could become the lender of last resort, and provide funding at the long-term bond rate", he suggested. Otherwise, mining firms would lose 40 per cent of their profits to the government, while having to borrow at higher cost to fund the government's share of the project.

In a day dominated by mining industry chiefs warning of doom, that was the one positive proposal put forward.

Mr Richardson said Treasury had set out to design a "perfect" tax that would have no impact on activity, but forgot that "no real world tax is perfect".

While it was true that in the very long term, the new tax would allow more mining than the state royalties it is designed to replace, over the next few decades it would reduce mining, by sharply reducing investors' returns.

"Although the minerals aren't mobile, the investment in them is," Mr Richardson said. "As the new tax more than doubles the tax take in royalties, that will add to the cost of mining in Australia, which will push Australian development options up the global cost curve.

"The cost impact of the new tax will send some greenfield developments towards Canada, Indonesia, Brazil and others.

"It will raise output in the long run, when Australian mines have returned to their initial relative position on the global cost curve, in 50 to 100 years' time."

The KPMG Melbourne modelling found that of six key minerals, only bauxite (the raw material of aluminium) could survive much damage. Coal and iron ore mines would become significantly less profitable, while the tax would make it uneconomic to mine gold, nickel and copper in Australia.

But Mr Ferguson said tax rates were only one of many factors in investment decisions, and and Australia was very competitive internationally.