Prime Minister Julia Gillard has reached a deal with the three biggest mining companies to replace the Resource Super Profits Tax with a new regime that meets nearly all of the concerns of the mining industry and confines the tax to the coal and iron ore sectors, while extending the present Petroleum Resources Rental Tax to all onshore and offshore oil and gas projects.
Small and medium miners will be excluded from the regime.
Critically, the effective rate of the new tax will be only 22.5%, rather than 40% under the RSPT, nearly halving the tax rate.
The deal, thrashed out with giant foreign mining companies BHP-Billiton, Xstrata and Rio Tinto on Wednesday and Thursday, was this morning welcomed by the Minerals Council of Australia, until today the most dogged and savage opponent of the government on the issue.
The essence of the compromise is:
- the new ‘Minerals Resource Rent Tax’ will only apply to coal and iron ore, and only companies with profits above $50 million per annum will be subject to the tax, removing at a stroke large numbers of small and medium miners and reducing the number of companies subject to the tax to about 320;
- the headline tax rate is dropped from 40% to 30%, and a further reduction for a “25% extraction allowance” that reduces the effective MRRT rate to 22.5%;
- to address the issue of retrospectivity, miners can use market value as the starting point for project assets, although those that elect to use book value will receive more rapid depreciation;
- MRRT will apply at the long-term bond rate plus 7% (presently 12%-13%), rather than the long-term bond rate as under the RSPT;
- carried-forward losses to be uplifted at the long-term bond rate plus 7%;
- profits to be calculated on value at the first saleable form, i.e. “at mine gate” rather than downstream;
- immediate write-off of new investment, allowing miners to access deductions immediately and delaying MRRT liability until mines have paid off their up-front investment; and
- transferability of losses retained, and losses become transferable to other projects.
To offset the reduction in revenue, which will be about $1.5 billion over Forward Estimates (revenue actually increases in the first year of the tax, 2012-13), the government has halved the corporate tax rate cut (saving about $950 million in total), so that will remain at 29% from 2012-13, and cancelled the resource exploration rebate, saving $1.12 billion.
The most popular component of the government’s original package released in early May, the increase in the superannuation guarantee levy from 9%-12% over the rest of the decade, remains intact, as does the government’s small business deduction and infrastructure fund. The government has also reduced its forecast for a growth dividend from the tax by about a quarter of a billion dollars over the Forward Estimates, avoiding the suggestion it has padded its revenue projections.
Foreign multinationals BHP-Billiton, Rio Tinto and Xstrata all issued a statement this morning saying they were “encouraged” by the government’s new proposal and promising to work constructively with the government.
Surprisingly, the Minerals Council of Australia, which has been the most aggressive and partisan opponent of the tax and that co-ordinated its campaign against the government with federal opposition leader Tony Abbott, came out in support of the new arrangement.
In a private message to CEOs of mining organisation, Mitch Hooke this morning said “the combination of the headline rate and the extraction allowance means the effective MRRT tax rate will be 22.5%. This is after the payment of royalties. If the MRRT is greater than the royalties paid then the company will be required to pay the difference. If the MRRT is less than the royalties paid then the company will be given a credit to carry forward losses with an up-lift equivalent to the LTBR plus 7%. The key point is that this is a resource rent tax applying to the resource — it is not a super profits tax — super profits was always a poor proxy for resource rent.” [his emphasis]
By negotiating a deal with the industry giants and excluding small and medium miners, the government has in effect neutered any further industry campaign against the tax, at least until after the election.