After months of vocal objection, the Australian mining industry has secured a major backdown from the federal government on its proposed resources super profits tax (RSPT), which has been greatly watered down and given a new name in the process. The new minerals resources rent tax (MRRT) is a 30% tax solely on coal and iron ore producers with profits exceeding $50m. All other commodities producers will remain under existing tax arrangements. This effectively narrows the number of companies affected by the tax from around 2,500 to 320.
Miners also managed to negotiate an increase in the uplift rate to the long-term treasury bond rate (currently at around 5.7%), meaning the tax is triggered at closer to 13% as opposed to 6% under the original proposal.
And the industry got its way too with regard to the thorny issue of retrospectivity, and now has the option of choosing between book and market value when calculating tax responsibilities. And as a final sweetener, miners will be able to pocket 25% of their profits as an extraction allowance. Adding everything together, the miners have negotiated an effective tax rate of 22.5%.
Revised tax – a cause for celebration?
A number of small and medium-sized miners have, however, expressed some dissatisfaction at the outcome which was essentially brokered by resources giants BHP Billiton, Rio Tinto and Xstrata. They had hoped that the new tax would include a flow-through share scheme, which would enable the transfer of tax deductions of individual small exploration companies to individual investors which would then be able to claim a deduction on income tax. They were disappointed.
The Australian Federal Government's RSPT inducement to smaller miners in the form of 40% deduction for unprofitable ventures also failed to impress and has not been included in the new MRRT.
Negotiations continue between the government and miners, however, and it is expected that the MRRT will go through several revisions before the Australian Senate gets to vote on it, at which point it faces a number of new hurdles.
The federal opposition has vowed to block the tax and promised to scrap it altogether if successful at elections due to be held before the end of the year. The Australian Greens, which are expected to hold the balance of power in the senate after the election, have indicated their support would be conditional on a number of changes.
One of the casualties of the revised tax was the federal government's proposed two percent cut in the company tax rate, which has now been halved to 1% to help compensate for the drop in revenues for the government. The Greens have indicated they will obstruct the passage of the tax unless the full two percent rate is reinstated.
A step in the right direction?
Australian Prime Minister Julia Gillard has received praise for her role in negotiating the compromise with the mining industry, whose media scare campaign was beginning to hurt the government in key marginal seats. However, some wonder whether she perhaps went too far. Revised projections for commodity prices released in Australia in July 2010 indicate that the RSPT could have generated double the $12bn in additional tax revenue initially forecast. Based on these same projections the MRRT will raise just $10.5bn.
On the upside, the government's backdown has seen the resumption of billions of dollars' worth of projects halted immediately after the original RSPT was announced in May. The announcement that all onshore and offshore oil and gas projects will fall under the existing petroleum resource rent tax (PRRT) saw the resumption of activity in that sector following months of uncertainty, especially throughout Queensland's nascent coal seam gas operations. Of course, in hindsight it's hard to ignore the reality that all of this disruption may have been somewhat in vain.
Prominent Australian resources analyst Gavin Wendt of research consultancy MineLife described the revised tax as "worse than a complete waste of time", adding that it had done immense damage to Australia's global reputation. "There will now always be a sovereign risk smell to Australia." he lamented.
All of this is academic, of course, until the federal election is decided at the end of 2010. However, if Labor is returned, as appears increasingly likely in the wake of last month's leadership coup, it will once again be in a position to play hardball with the miners, including those with profitable commodities exempt from the current arrangements. How this effects the outlook for Australian miners remains to be seen.
At the end of the day though, the government won't be able to escape the fact that its decision not to consult with the industry on the first iteration of the tax has cost it dearly, both economically and politically all the while creating an aura of risk in Australia that it may very well come to rue.