Bartholomeusz: forget the class battle, RSPT is a mining civil war
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One of the more perverse aspects of the resource super profits tax is the way that it is being characterised as a kind of class struggle, with the champions of the proletariat (aka Kevin Rudd) set in an unfair battle against the mining plutocrats (Andrew Forrest, Clive Palmer and Gina Rinehart). That is an easy caricature to draw, given the visibility of Forrest and Palmer in particular in the debate, and the incongruous sight of Rinehart shouting “axe the tax” in Perth last week. The reality of the tax is somewhat different. While the RSPT undermines Fortescue Mining’s financing model – and indeed, if implemented, would spell the end of the project financing model used by most emerging miners – the most affected by the tax are the big long-established mines. BHP Billiton and Rio Tinto will pay a high proportion of the tax because of their very profitable operations in the Pilbara and the coalfields of Queensland. BHP’s effective tax rate is estimated at 55% if the tax is introduced. While the government and its supporters have tried to demonise the big miners, referring to them as greedy foreigners, corporate entities are just vehicles for collective investment. The owners of the miners are either individuals, local and foreign, or institutions investing on behalf of individuals, local and foreign. A majority of BHP’s shareholders are Australian, as would be the case for most of the smaller mining hopefuls. The concept of the dividend imputation system was that corporate earnings would effectively be taxed once, in the hands of shareholders. With the top tax rate and the corporate tax rate misaligned, of course, that’s not entirely the case. Across the sector, however, the underlying truth is that the RSPT ultimately impacts individuals and their savings and the industry, as opposed to a couple of billionaires, is trying to protect those savings and their future growth rather than the bank accounts of a few rich individuals. The $9 billion a year (probably more and certainly more if China is able to continue growing at the rate it has) comes out of the savings of shareholders, directly or indirectly through their superannuation fund. Over time, as the RSPT impacts investment decisions and brings competing investment decisions into play, it will push investment and jobs offshore. The more immediate effect, however, is to diminish the savings and income of existing shareholders. If the RSPT were introduced as it is now constituted, the net present value of many existing mines would be ravaged and sharemarket prices would adjust to reflect that. Australian shareholders would lose both capital (as a consequence of that one-of adjustment) and the income flowing from it. BHP has said that its effective tax rate in Australia under the RSPT would be about 55% and Wayne Swan has conceded that some mines would pay the theoretical maximum of 58%. That is the position of the company. For the local shareholders, to the extent that BHP’s earnings (and those of other tax-paying companies like Rio) are distributed, they receive a rebate at the corporate tax rate under the imputation system. There will be no credits or rebates for the RSPT, which means that the effective tax rate for individuals on resource company income, particularly for those on the top marginal rate, will be significantly higher that the effective tax rate levied on the companies. The effect on personal incomes will be even greater if and when the corporate tax rate is lowered to 28% in 2014-15. If you impose a tax as substantial as the 40% RSPT on a sector the impact is obvious. It is less profitable, it invests less in the high tax jurisdiction and it is less attractive as an investment destination. Not just for billionaires but for individuals and the institutions investing on their behalf. If there is class warfare inherent in the debate between the miners and the government, then it is not the clichéd and anachronistic war of the rich on the poor but, given our compulsory superannuation system and the level of participation of individuals in the market, something far more akin to a civil war. *This piece was first published on Business Spectator |
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15 Comments
So Business Spectator has again provided a doom and gloom analysis of the RSPT.
I would very much like to read Wayne Swan’s response.
However, just one thought for now.
If BHP-B and others have been recipients of surprisingly large prices, and hence, profits, from coal and iron ore, where is this represented in this analysis? The author appears to forget or intentionally ignore the simple fact that commodity prices have risen to the sky whilst royalties have remained static. I contend that this is an iniquitable sharing of the spoils from the marketplace, and that, over time, it must not be permitted to continue without rebalancing royalties versus price.
Now, the federal government does not set royalties - that is for the states. Refer to the Constitution of Australia.
So, the government has proposed to use the corporate taxation system to determine when and by how much super profits have been made by one-time extractors of resources. Note that I do not necessarily agree with either the point at which such a tax commences, or the rate of the tax, only that such a tax is one rational way to proceed.
Clearly, the principle of taxing those who are most able to afford it is one of the planks of all progressive taxation systems, so why not apply this principle to this situation?
It is neither retrospective nor regressive.
All that remains to be done is to determine the correct settings.
That is precisely what the government is trying to do.
A final comment: Nobody seems to be saying the the government is not entitled to budget to reduce the tax on business generally by 2%. There is no argument about that at all. Why, then, is there such an outrage about the notion that this same government may budget to collect more tax from only the most profitable businesses in a sector which is enjoying super profits due to a quirk of the marketplace?
Or, would Australians prefer to see this money head overseas and for our country to slide towards Greek, UK and USA defecits of about 100% of GDP? To run our government (read: social services and defence forces) tax must be raised somewhere. Don’t just complain. Suggest a better method of balancing the books or just get used to it.
To John Bennetts
I would like correct some of the miss understandings in you comments:
1. Royalties are conculated on the invoice value (less some deductibles) of the sales. Please see below the calculation base used by the WA Government
“An ad valorem or value-based royalty is calculated as a proportion of the ‘royalty value’ of the mineral. The royalty value is defined as:
“in relation to a mineral other than gold, means the gross invoice value of the mineral less any allowable deductions for the mineral”.
Therefore, it is incorrect to say that “royalties have remained static”, the rate may not have changed, but the royalty levied has increased as the metal prices have increased.
2. The tax is retrospective, in that it is taxing projects that have been mining for decades and investment has been made over those years to make the projects what they are today. Of cource, without retrospectivity, the tax will not work for the current Australian government as they would not be able to theoretically balance their books over the forward projections.
3. The Government is not able to legitimetly negotiate / consult of the tax, as it has already spent the money in the forward projections and those forward projections are the basis of its so called conservative fiscal management.
4. If, as you suggest, the tax is going to be on those that can afford it, then why not also propose a similar structured tax on the banks, after all, they may not consume the companies mineral wealth, but the do not create anything either. They recycle our money and make billion dollar profits from doing so.
“BHP Billiton and Rio Tinto will pay a high proportion of the tax because of their very profitable operations in the Pilbara and the coalfields of Queensland. BHP’s effective tax rate is estimated at 55% if the tax is introduced.
…
A majority of BHP’s shareholders are Australian, as would be the case for most of the smaller mining hopefuls.”
Did you see what Mr Bartholomeusz did there? First he mentions BHP and Rio in one sentence. Then he cleverly drops Rio out of the equation entirely. A more accurate picture would be to say 60% of BHP shareholders are Australian (which means that 40% are not), and 70% of Rio Tinto shareholders are foreigners. He doesn’t mention those poor 70% of foreign Rio Tinto shareholders who will miss out on the rent that is going to pay the Australians who actually own the minerals.
“Wayne Swan has conceded that some mines would pay the theoretical maximum of 58%.”
This is a good example of the power of words. Mr Swan said that some super profitable mines *could* pay up to 58 percent. Sounds quite different from what Mr Bartholomeusz said he would say. Another thing he fails to mention is that they will only pay this rate if they achieve a return on investment of over 50% (the tax rates kicks in at 6%). As one commentator put it ‘the only way you would get a 50% return on investment is if you fell over a mine with high quality minerals, that was next to a port, with road and rail facilities already built’.
Whats the point in even trying to point out the flaws in work by Sophist hacks like this guy? People like that are generally blessed with personality disorders, the majority of us are not blessed with, that enables them to sleep well at night, whilst at the same time peddling transparently biased fluff like the above. Arguing is like squashing a bowl of porridge; Both impossible and messy. BTW can we get an introduction to Miss Understandings?
The majority of BHP shareholders may be Australians as David Byrnes says, but are the majority of Australians shareholders in mining companies? Certainly they aren’t if they choose ethical investments and I’m not sure they would be if they chose safe investments — witness BP. The more miners muck around with the environment the more their shareholders are going to start to have to pay for it. eg BP.
If BHP are going to pay 55% tax under the RSPT then they must be getting near on 50% returns on their investments. Does 50% qualify as a “super” return ?
According to the AFR the industry average return is between 12 - 20% , and the average tax take with the RSPT increases from about 38% now to about 47%.
If BHP are indeed as profitable as this suggests then why aren’t they paying better dividends ?
The RSPT is not an extra tax burden when viewed across the system, the overall tax take is unchanged. The extra tax from the miners is to be paid out as less company tax, small business tax concessions, more infrastructure spending, and improvements to Super. If we don’t get the RSPT we won’t get these changes, nil effect on the budget forecasts.
It may be that mining returns are lowered somewhat and that may affect my super (I doubt it ) but the positive changes and a 12% mandated employer contribution will more than make up for it.
Even with the RSPT mining is projected to grow strongly, and the net effect of the tax and super reforms will be to improve overall economic output and long term generational savings.
Western Red,
In fact, for them to pay 55%, their return must be about 96%. Not bad. At a 50% rate of return they’d be paying 53.3%.
Also, to the author, the theoretical maximum rate of the RSPT will be 56.8% when the company income tax rate is 40%.
To AL658
The tax is not retrospective in any usual meaning of the term. If we imagine a large or small manufacturing company that has invested in expensive new plant to improve productivity, its justification for the investment will have been based on a continuation of the existing tax rate into the forecast period. If the government then comes along and increases the corporate tax rate or decreases depreciation rates, effective from 1 July next, the investment will no longer be as attractive as it first appeared. However, that’s just tough luck, as it is for the homeowner who takes out a mortgage to buy a house only to be confronted by an increase in personal tax rates in one or two years’ time.
A tax is retrospective when applied to income earned in past years and this is NOT what is proposed for the RSPT.
@ al658@amnet.net.au
So in essence what you are trying to say is because the Olympic Dam mine will continue for the next 100 years, but has already been operating the Govt should not be allowed to change the tax structure because that will make it retrospective? I am not sure if this will go down well with any responsible voter in this country.
This article doesn’t consider the upside for miners that this tax is designed to provide, in supporting the cash position with rebates for losses incurred.
The RSPT threshold to apply to profits above 6% would be a profit after interest is deducted, is it also considered after normal corporate tax is applied? Either way then the miners will be able to raise the required finance and still be able to meet their debt service requirements and covenants. So one of the myths being bandied around that finance would not be available to miners to undertake projects is incorrect.
Is there any way of determining before the next election where mining based political donations fall out?
I am interested in getting some real understanding on what the impact would be to superannuation savings. Has anyone seen any reliable analysis of what the impost RSPT has on mining equity returns vs the boost from a lower tax rate for the remainder of businesses that a typical balanced super fund would invest in?
@ BIV As I understand it the Super funds are in favour of the proposal.
@DAVIDK - yep I have heard the same, that superfunds are in favour, but this could be because they {superfunds} see the increase in super contributions from 9% to 12% that is linked with the RSPT policy as a great benefit to them. That doesn’t necessarily mean the standard balanced super fund will win (or loose) under the RSPT.
An insightful article by Stephen Bartholomeusz.
Some of the comments on this blog suggest a serious lack of understanding as to how the RSPT will work. A few key points to keep in mind
• When government ministers lie as brazenly as they have on this issue, it is clearly a message that the tax cannot stand up to the cold light of day. A few examples
o We’ve heard right from the start that miners are now paying $1 in $7 compared to $1 in $3 10 years ago. This is misleading and deceptive. It is comparing royalties which are based on a % of revenue to profits which fluctuate wildly. Rio Tinto gave more meaningful figures in its report audited by PWC that shows its combined royalties & tax payments have remained fairly steady over the decade at about 35% of profits and it paid over $20 billion to government over the decade. It has re-invested more than its net profit over the period back into Australia.
o We hear often that resource companies complained about the introduction of the petroleum resource rental tax, but the world has not stopped since its introduction. The world may not have stopped, but new projects almost have. How much gas has been exported under the PRRT scheme since its introduction in the mid 80s? Answer – zero. The major Gorgon project is now under development, but that is one project in 25 years!
o We hear that mining companies complained about the introduction of a gold mining tax in the early 1990s, but the world has not stopped. Indeed, but gold mining almost did. At the time of the tax there were about 30 odd gold mining companies in Australia. That had dropped to a mere handful a decade later. Australian gold production peaked around about the end of the 90s and is now in decline. There is probably no reason why gold mining should not be taxed, but we should not pretend that it has not had a detrimental effect on Australia’s gold production.
• For existing projects, this is not a tax on super profits but a 40% tax on profits, with no allowance for deduction of interest payments on debt. The miners are allowed to deduct c. 6% of book value from their net income (before company tax) before the 40% tax is applied. In the case of existing long lived projects where book value is a small fraction of the market value, this is akin to 40% nationalisation of the business, and calculations done by KPMG show this will reduce the value of businesses by up to 57% in the case of coal mines and 46% in the case of iron ore mines. No wonder shareholders are upset and those reductions will flow through to the pension funds of most Australians.
• The government says it will pay 40% of losses incurred to the company. Does anyone seriously believe it would write BHP a cheque of c. $1 billion for its $3 billion loss recently at Ravensthorpe, or Twiggy Forrest a cheque for a similar amount for the failure of his Anaconda Nickel project? Financiers and bankers certainly don’t.
• The government is proposing to use the taxes from a highly cyclical business to fund recurring expenditure. This is illogical policy and will put us in a structural deficit position.
• The government is proposing to make our key wealth generating industry (and the only major industry in which we are a world leader) non-competitive at a time when the world is still in the middle of a generational financial crisis. We have been spared this by the ongoing growth of China and our minerals sales, but this will shortly suffer the usual cyclical downturn with unpleasant repercussions for Oz.
• Ken Henry told the Senate Committee with a straight face it would not matter if the RSPT rate was 40%, 60% or 80% as investment would not be affected. If he really believes this, there is a man with a very poor grip on reality.
By all means bring in the tax if that’s what a majority want, but let’s not pretend that the country and its inhabitants won’t be poorer because of it. The sad thing is that we will never know how good it may have been with more enlightened government policy.
It seems to me that all property belongs to either a person, a person created legal entity or everyone collectively through government (labor or liberal) - what we are witnessing in the RSPT is an attempt to get a fairer price for the latter, (the cost of which has hitherto not been subject to market forces but the negotiating abilities of mining companies) by, in the event of making profits on top of “normal” profits (that is, super profits) as a result of favourable (to Australia) forces in the market place, we, the “everyone collectively”, get a share of the super profit bit - the smaller the super profit bit, the smaller the share.
The price for an “everyone collectively” asset would consist of a royalty percentage negotiated at the beginning of a project by a state government and a super profits tax collected by federal government in the event of more than normal favourable market prices.
This would seem a reasonable proposition to any person, legal entity, government including a free market liberal having “… a stake in saving this industry and that is what I will do as long as there is in breath in my political body.. “[sic]
On this basis it would seem the current system is not fairly or equitably balanced in the event of super profits as it favours persons and/or legal entity at the expense of everyone collectively - bringing things into balance, is what I would expect a responsible government to do.
@AL658, 2:10pm:
1. “Royalties are conculated (sic) on the invoice value (less some deductibles) of the sales. Please see below the calculation base used by the WA Government”
The WA Government’s method of calculating royalties, as quoted, represents one instance only, drawn from one of 7 or 8 States and Territories. I admit to being mistaken in relation to this instance. I now wonder whether, in the main, I was incorrect in assuming/believing that royalties are typically charged at $X per tonne. Any advance on this from other contributors? o ad-valorum royalties apply to other than gold? In states other than WA?
2. “The tax is retrospective, in that it is taxing projects that have been mining for decades and investment has been made over those years to make the projects what they are today…”
This is baloney, pure and simple. See Frank Burchall above.
3. “The Government is not able to legitimetly (sic) negotiate / consult of (sic) the tax, as it has already spent the money in the forward projections and those forward projections are the basis of its (sic) so called conservative fiscal management.”
The Government has spent not one cent of the RSP tax. The forward projections indicate how the budget hangs together, including how the tax may be used post 2012, its starting date. If the Senate votes the budget down, then apart from the constitutional re-visiting of the Whitlam situation where the unrepresentative swill denied the democratically elected lower house the right to do the job for which they were elected, then the current taxation regime continues unamended.
If the Budget is voted down, then the expenditure and the income portions of the budget both fall together. How anybody can believe otherwise is beyond me. Of course, the immediate and most significant issues would be maintaining Supply.
4. “If, as you suggest, the tax is going to be on those that can afford it, then why not also propose a similar structured tax on the banks, after all, they may not consume the companies mineral wealth, but the do not create anything either. They recycle our money and make billion dollar profits from doing so.”
Fair suggestion. I tend to agree, but that is not the topic of this Crikey article.
The banks will have their turn. In particular, I am astounded that the banks were advanced public money to hold their businesses together, without their shareholders forfeiting a large chunk of equity in return for this money. I am also astounded that the banks were not, at that time, forced to agree to split their businesses into conventional banks and high risk shadow banks and for trading by the conventional banks on their own account to be carefully reviewed. These are questions for another day, which perhaps will arrive sooner rather than later via the current skirmish in Europe. Perhaps then these suggestions will be put into action. Goodness knows, but it certainly isn’t the subject of the Crikey article.