The tax is dead. Long live the tax.
“There will be no resources super profits tax,” announced Prime Minister Julia Gillard this morning. Instead, the neatly branded Minerals Resource Rent Tax (MRRT) has been agreed between the federal government and the three companies that appear to now have a veto power over key laws, BHP Billiton, Rio Tinto and Swiss-based Xstrata.
To fully underline the cost relationship between the government and mining industry, former BHP chairman and critic of the former tax Don Argus was named as chair of a policy transition group who will be implementing the tax.
While the opposition looks set to oppose the MRRT, Gillard has come up with what appears to be a very well-designed compromise in a remarkably short time. Still not perfect (and the intricacies need to be fully digested) and complex enough to keep accountants and lawyers well looked after, the MRRT represents an almighty improvement on the poorly designed super profit tax and rectifies the inefficiencies associated with the current regime.
Last month, I listed a series of major faults with the RSPT — in pretty much every respect, Gillard’s MRRT rectifies those problems:
|Kevin and Wayne’s Super Profits Tax||Julia’s Mining Resource Tax|
|Rate at which the super profit was imposed was the risk-free bond rate, rather than companies’ ‘cost of capital’.||Fixed — The MRRT applies at the long-term bond rate plus seven percent, which in most cases is a reasonable proxy for miners’ cost of capital. (Commentators have wrongly dubbed the MRRT rate as being 12 percent – this is not correct, as the rate will change as the bond rate changes).|
|The RSPT provided mining companies with a ‘refund’ in the event that a project was closed, exposing Australian taxpayers to potentially billions of dollars in payments to (largely foreign owned) mining companies should commodities prices fall.||Fixed –Co-investment plan, which was a centerpiece of the RSPT has been removed in favour of the lower tax rate. The MRRT also allows losses to be transferred between coal and iron ore projects.|
|Risked investment not occurring due to negative net present value for projects.||Fixed — the rate of the profits tax has been reduced from 40 percent to 30 percent and the minerals covered by the tax has been reduced to only coal and iron ore (meaning that only 320 companies, rather than 2,500 companies will be affected). This means that BHP’s Olympic Dam copper and uranium project will be unaffected by the tax.|
|Chinese slowdown may reduce taxation revenue raised by the tax||Improved — This may still occur, but he removal of the refund mechanism and the lower rate of tax imposed.|
|Mining companies were already highly taxed||Fixed — This impost is minimized by the lower rate of tax imposed (30 percent) and allowing companies to depreciate existing assets based on ‘market value’ rather than written-down book value.|
The changes mean that the tax will raise $10.5 billion rather than the forecast $12 billion. As a result, the company tax rate will now be reduced to 29% (instead of 28%). This is a sensible change, given the benefits from a lower company tax rate will accrue largely to foreign owners of Australian companies — local company owners gain only a small timing benefit from the change. In addition, the resource exploration rebate, which was another criticised proposal has been scrapped, saving another $1.12 billion.
What remains surprising is that two of the three authors of the now rejected super profits tax — Wayne Swan and Ken Henry — remain two of Australia’s most important decision makers. In fact, Swan was promoted to deputy Prime Minister as a reward for his policy failure (it was Swan who, while on a beach last year, came up with the idea to tax the highly profitable fiends in the mining sector).
In the end, the new tax represents a victory for common sense and pragmatism and an early victory for Australia’s new Prime Minister.