Julia’s brilliant backflip
July 2, 2010 – 1:18PM
Mal Maiden dissects Julia Gillard’s new mining tax. What does it mean for business and who is going to pay?
Is this a massive backflip by the government or a brilliant piece of re-engineering that sets Julia Gillard up for an early election? Both.
The new Minerals Resource Rent Tax is almost unrecognisable from the Resources Super Profits Tax it replaces.
Instead of being applied across the entire resources sector, it focuses on only two mining businesses, iron ore and coal, with the existing Petroleum Resources Rent Tax extending to the domestic oil and gas industry, including the fledgling coal seam gas projects in Queensland.
Prime Minister Julia Gillard and Treasurer Wayne Swan at today’s announcement. Photo: Andrew Meares
Instead of being an elaborate scheme that sees the government take 40 per cent of mining profits but also assume 40 per cent of the development costs and risk on each project, it simply taxes the miners at the mine gate, for 75 per cent of their income at that point, at a rate of 30 per cent.
This concession, that the miners pay only 30 per cent of 75 per cent of their income at the mine gate after costs to that point are deducted means that the real new resources rent tax rate is about 22.5 per cent, not 30 per cent as advertised.
Instead of forcing the big miners into a resources tax regime with the big mines still valued at book value, a fraction of their real worth, it gives them a choice (it’s complicated, but here goes): either bring their existing mines into the scheme at book value, in which case they will be able to aggressively create depreciation tax deduction over just five years, and will not be liable for the 30 per cent resources tax until their mine returns have exceeded the 10-year Commonwealth bond rate plus 7 per cent (about 12 per cent currently), or bring the mines in at market value (defined as cash flow plus the risk value of the resource) but write the value down in smaller increments over a longer period, up to 25 years, and have the tax imposed without a hurdle rate. It’s likely that the big miners will opt to inject their assets in at market value. In either case, they can claim what they invest in their mines as they go.
And instead of applying to all mines, the tax also exempts iron ore and coal miners with profits of less than $50 million. This is an inspired idea, and like the proposal to limit the scope of the tax and exclude not just quarries and other low value operations but copper, nickel, gold and bauxite mines it came from the big three miners who were negotiating the deal, BHP Billiton, Rio Tinto and Xstrata.
These two measures see the number of companies affected by the new tax fall from about 2500 under the original proposal to about 320, significantly reducing the risk that the deal will be seen as one cooked up by the big three miners for the big three miners.
The existing 40 per cent Petroleum Resources Rent Tax is also being extended, to cover not just offshore projects but the entire Australian oil and gas industry, including the merging coal seam gas producers and exporters in northern Queensland, and the oil and gas groups will also be able to elect to inject their assets at market value, and expense their development costs as they go.
Gillard makes the call
So if radical change to the original proposal qualifies as a backflip, this certainly is one. But it’s a backflip from a tax proposal that was launched and prosecuted by Kevin Rudd, not Julia Gillard. Treasurer Wayne Swan was involved in the talks this week, but the key figures were Gillard, who in personal calls to BHP chairman Jac Nasser and other convinced the big miners that she was genuine about settling the dispute, and resources minister Martin Ferguson, who Gillard inserted into the process after her appointment as PM.
And it is one that has been achieved at a manageable cost to the budget. The tax take in the first two years to 2013-14 falls by $1.5 billion to $10.5 billion, as the government loads in higher commodity price assumptions that are closer to what is actually being achieved this year, cuts its linked cut in corporate tax by one percentage point to 29 per cent, and axes its poorly received exploration tax rebate.
The deal seems to cover all the bases. It satisfies Gillard’s only condition, that the government’s tax take from the resources boom rise. And it exempts most mines from a new tax, while charging those captured by the regime less than the 50 per cent plus total tax rate they faced under the Rudd version.
The iron ore and coal miners will pay corporate tax after the resources tax has been paid, and when coal and iron prices are high as they now, will face a total tax bill of more than 40 per cent, with a maximum above 45 per cent, according to one person close to the negotiations.
There’s a way to go. The Greens have been making ominous noises about blocking a compromise, for example. But Gillard’s backflip is politically marketable – and an election campaign must surely now be just around the corner.