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Mar 20, 2012

Kohler: a mining tax only W. Heath Robinson could love

In 2009 Ken Henry offered a recommendation for a resources rent tax. Two years, three months and one prime minister later, a bastardised version of that idea was finally passed by the parliament.

On December 23, 2009, Ken Henry presented his panel’s review of the Australian tax system to the treasurer, including its recommendation for a resources rent tax.

Two years, three months and one prime minister later, a bastardised version of that idea was finally passed by the parliament last night. Its parents are Compromise and Opportunism, and they are quite prolific breeders, those two: the legislative output of all parliaments is riddled with their progeny.

Instead of 40% it’s 30%. Instead of being simple it’s a Heath Robinson nightmare. (The English cartoonist is best known for his drawings of outlandish, rickety machinery, often kept together with string and tape.)

The 25% “extraction allowance” reduces the effective rate to 22.5%, it is only levied on coal and iron ore and only on profits above $75 million, it doesn’t replace state royalties as proposed, and in fact royalties paid are credited against the tax, and there is an MRRT expenditure allowance calculated as the long-term bond rate plus 700 basis points.

Even companies with a lower profit than the threshold must behave as if they are paying it, just in case they eventually do, and want to claim the deductions.

And as always there are a whole lot of administrative details that will ensure accounting firms have a good year.

Coal and iron ore miners will now have three taxation regimes: company income tax, ad valorem mine production royalties and now a new resources rent tax on profits that must be calculated quite differently to the other two.

There’s nothing at all wrong with the principle of resource rent taxes. Ad valorem royalties on mine output arguably don’t sufficiently capture the profits that accrue from a boom in prices. Indeed, the Henry Report presented a chart of resource profits and total taxes, showing the tax take falling from 55% to 25% between 2001-02 and 2008-09.

To counter all this profiting at the community’s expense, Ken Henry and his band of idealists proposed a 40% RRT that would add to the (proposed) company tax rate of 25% to achieve a “combined statutory tax rate of 55%”. It would apply to all non-renewable resources and replace all existing state royalties.

Ha! Foolish, utopian Ken. The version that was eventually passed bears little resemblance to what was proposed back in 2009 thanks to the operation of Australian politics. It probably also marks the peak of the commodity price cycle.

And it’s not as if the mining companies are not already paying a decent amount of tax. As it happens Rio Tinto last night released details of the taxes it paid in 2011, the second time it has done so.

Last year Rio paid $4.9 billion in income taxes to the Australian government and $1.59 billion to the Western Australian government in royalties. Taxes paid to all Australian governments totalled $8.4 billion. Total tax paid by Rio to all governments around the world was $10.2 billion.

The Australian government’s response? More please.

But the thing is passed now and iron ore and coal miners need to get their heads around it. The Coalition declared last night that it will rescind the tax in government, but no chief executive should hold his or her breath till then — it’s unlikely an incoming Liberal treasurer will be in any position to cancel any taxes.

*This article was originally published at Business Spectator

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7 thoughts on “Kohler: a mining tax only W. Heath Robinson could love

  1. Frank Birchall

    Can anyone figure out Alan Kohler’s own view on what Australia should do, if anything, about a mining super-profits tax? I recall he was adamantly against the Henry RSPT prior to Rudd’s departure; now it (almost but not quite) sounds as though he supports it. In today’s SMH, Ian Verrender sets out a broad case for Australia getting an increased share of mining profits. What’s your position Alan? Should we revert to the Henry plan?

  2. Karen

    @ Frank Birchall – not sure what AK’s solution is but it appears AK doesn’t object to a mining resources rent tax, as his article explicitly states. I similarly recall that he appeared to oppose the first SPRT on the basis of its design and the lack of consultation with the mining sector.

    Now, it appears AL objects to the current tax on the basis of its complexity, including its exclusions, the fact that it creates a third layer of taxation and the fact that parts of the tax were designed and shaped as a result of political backdown and compromise (agree, in general terms, that political motivation is not the best foundation stone for a policy decision, as it can lead to undesirable outcomes). As it is oft said, though, ‘Politics is the art of the possible’.

    Barnett came out tonight and queried why the govt did not consider a company tax surcharge instead – wonder what AK would think about that?

    Looking at the big picture though, I am bemused that barely thirty years ago, petroleum countries coped with a 40% petroleum resources rent tax imposed by the Hawke/Keating government with barely a demur, compared to what’s going on at the moment. Why is this? Is it due to the fact there was perceived to be a greater degree of consultation and the fact that Hawke was famous for his consensus building approach among vested interests, which allowed the govt to pluck these geese without making them squawk as much? Is it because we are now living in a much more conservative era where politics in Australia has moved so far to the right that corporations have grown accustomed to pathetically low effective tax rates so that getting an extra buck from them causes a huge meltdown and a media war?

    Given that other resource rich countries are raising their tax rates, I don’t see why Australia should miss out, given that half the world is industrialising at the moment. Australia’s selling point compared to many other countries is that its not only resource rich but has a wealthy, politically stable environment with a highly educated workforce. Miners can afford to and will pay any additional premium for this. Even Twiggy, if push comes to shove.

  3. Karen

    Oops, “petroleum countries” should read “petroleum companies”

  4. CML

    @ KAREN – I too am puzzled by the different reactions from the petroleum/mining companies to the proposition that the latter should pay their fare share of tax. Guess one can only put this down to greed, greed and more greed. Heaven knows what AK is on about – he has the same disease perhaps?
    What I find more disturbing is the stupid way the new Commonwealth legislation handles the States royalties question. Seems to me the opposite side of politics in the State governments are hell-bent on destroying the mining tax revenue by increasing royalties which the Commonwealth have to refund. Colin Barnett on ABC 7.30 last evening seemed to be saying that he would keep on raising the royalties bar if WA did not receive more GST revenue from the C/W. Now that is surely pure greed. When it was put to him that the eastern states had “‘propped up” WA for generations before the mining boom, and it was now WA’s turn to repay the favour, well that was a “different” argument that had no bearing on the current scenario. Well, sorry Premier, that is exactly the argument. Why does WA believe that, having been funded by the rest of Australia in the past, they can now keep all their mining and GST revenue, and bugg+r the rest of the country? The “commonwealth” has always operated on a fair distribution of money to all the states, and I believe should continue to do so. Perhaps the federal government should revisit the refunding of all royalties in the current legislation, as a matter of urgency.

  5. Peter Ormonde

    “Ad valorem royalties on mine output arguably don’t sufficiently capture the profits that accrue from a boom in prices.”

    If you want to see what happens with state royalties based on production during a boom have a look at Queensland’s rocketing state debt.

    “Queensland’s public debt quadrupled from $21 billion in June 2004 to $85 billion in December 2011. Today, public debt is around $90 billion and on track for $92.5 billion by July. This is despite some 20 billion or so in asset sales during the period.”

    I’ve pinched that quote from a very interesting article and subsequent discussion on The Conversation.

    This what happens when taxpayers fund the infrastructure and the miners’ contribution is based not on the income they receive but from a production rate.

    No accident or coincidence that this has happened in lockstep with the mining boom and the ramping of commodity prices. If “we” keep making money at this rate we’ll be Greeked in a generation or two.

    PS Alan:

    Transfer pricing. Multinationals can and do essentially decide where and when they will declare their income. Now – for some reason – it’s our turn instead of the Caymans, Luxemburg or some other great mining nation. Wonder why.


    Alan Kohler plays fast and loose with statistics here. He mentions tax and royalties paid by big mining companies but neglects to include the most important figures of all–the staggering windfall profits gained by BHP Billiton, Rio Tinto et al because of Chinese demand for raw materials. These profits add up to well over $100 million a year. But I guess Alan isn’t about to let a relevant fact like this get in the way of his argument.
    It would be helpful if Crikey could find an economics writer of the calibre of Ross Gittens, who doesn’t run with the pack or pander to powerful interests but writes clearly about the important issues.

  7. Captain Planet

    Quit sooking alan, for f*ck’s sake.