The biggest problem with the resources super tax is not, as the big miners had earlier tried to argue that it involves too much tax being paid — rather, that the so-called tax may end up being a cost to Australians. That is because under the proposal, the “government will effectively make a contribution of 40% to the costs of the project outlaid by the entity. [With those entities] able to access the contribution by deducting the costs outlaid on a project from: the project’s RSPT income; from income of another project owned by the entity or owned by another entity of the same wholly owned company group”.

Stephen Bartholomeusz in Business Spectator (which, along with the Financial Review, has been a vocal critic of the tax) yesterday pointed out the comments of Herb Elliott (former Olympian and now chairman for Andrew Forrest’s Fortescue Metals), who noted:

“The cornerstone of the RSPT is the concept of the government becoming a ‘silent partner’ by matching the 40 per cent ‘take’ of the RSPT (before normal corporate taxes) with a promise to refund 40 per cent of any losses if a project fails. In effect, instead of owning 100 per cent of a project, the miner owns 60 per cent of it and an IOU from the government, redeemable if the project fails and paying interest at the risk-free rate of less than 6 per cent, in lieu of the other 40 per cent.

“Who believes that companies could fund 40 per cent of an investment on the strength of some future unbudgeted government tax credit after it failed? No bank wants to fund a failed project on the premise that 40 per cent can subsequently, perhaps, be reclaimed through tax.”

Therefore — not only is the government relying on the mining super tax to ensure its economic credibility through predicted Budget surpluses, but it also faces the not unlikely possibility that the super tax will in fact turn out to be a super refund to poorly run (or unlucky) mining companies.

As Bartho explained:

“What if BHP decided to go ahead with its $20 billion-plus expansion of Olympic Dam, a relatively high-risk investment? What if, in a decade’s time, copper prices dived and rendered the project uneconomic to the point where it had to be shut down?

Would a future government — perhaps one struggling with its debt and deficits because the commodity boom that, with the help of the RSPT, had inflated its revenues and spending had ended with a bang, in the process wiping out Olympic Dam and dozens, if not hundreds of other mines, including the marginal production the government expects the RSPT to encourage — be prepared or even able to write a cheque for, say, more than $14 billion to a global company? Along with the billions of dollars of cheques to other miners big and small, domestic and foreign?”

Dan Denning in the Daily Reckoning made a similar point yesterday, noting:

“The government’s offer to subsidise 40 percent of losses on marginal projects is supposed to make marginal projects more economic. The government argues that these projects will be taxed at a lower level thanks to the ability to offset losses, and thus will encourage mining investment in marginal projects.

“Just what we need! More marginal, low-profit resource projects!

“… The innovative entrepreneur captures big initial profits by taking big initial risks. His risk ends up benefiting everyone by luring other producers in. The end result for consumers is an industry or goods and services that didn’t exist before. That is a social benefit which does not accrue to a corporate bottom line.”

The entire concept of the RSPT is that it taxes one of Australia’s most profitable industries (which also happens to be largely foreign-owned), and is able to spread the lucre among a wider collection of Australian voters. Apart from the fact that the government doesn’t appear to understand the difference between the “risk-free rate” and the “weighted average cost of capital”, the tax will turn Australian taxpayers into the world’s only public investors in sub-optimal mining projects.

The super tax effectively encourages mining companies, especially those with profitable projects, to risk investing scarce capital in marginal developments because the losses will be offset by the Australian taxpayer anyway. To make matters worse, Australia’s commodity boom (and the riches to be delivered by the RSPT) is dependant on the continued rampant expansion of an authoritarian and notionally Communist state, which has recently been dubbed “the greatest bubble in history”.

Instead of the poorly thought-out super tax, Kevin Rudd and Wayne Swan must be wondering why they didn’t just increase the company tax rate for miners. Sure, it doesn’t solve the problems of state-based royalties, but it would have avoided the inevitable misappropriation of capital and substantial risk to taxpayers, which will be caused by the RSPT.

Peter Fray

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