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Labor's mining tax, a policy shemozzle indeed

By Chris Lewis - posted Monday, 29 October 2012


Labor's mining tax debacle provides another example of a policy failure explained by poor government skills. The mining tax that began operating from July 2012 reflected the fact that Labor's poor consultative and communication abilities proved incapable of overcoming concerns over the level of overall taxation for miners and federal-state/territory fiscal arrangements..

First, Labor distorted the truth when bidding to win public support for a 40 per cent mining tax that would be charged on profit. Treasurer Swan accused the mining companies of lying with their claim that their effective tax rate would increase to around 55 per cent during early 2010, yet, later, freedom of information requests obtained a note from the Treasurer's office, dated February 2010, that indicated an awareness of an "effective rate" of 55 per cent (The Australian, 12 March 2011).

While Labor argued that the miners had not paid enough tax over the previous ten years, Access Economics calculated that the total tax bill of miners since 1999 had been $78 billion in Australian. More specifically, it had increased to $20.1 billion in 2008-09 from just $2.64 billion in 1999 (The Australian, 4 May 2010). Rio Tinto alone paid $4.8 billion in royalties and corporate tax in 2008, up from just over $1 billion in 2001 (SMH, 17 May 2010).

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Labor also played the foreign ownership card, but the CEO of BHP Billiton (Kloppers) pointed out that, under the proposed tax, Australian mining companies could pay twice the total tax rate of companies in other major mining countries like Canada, Brazil, China" (The Australian, 10 May 2010); with a potential 57 per cent rate comparing unfavourably with rates of 37 and 22 per cent in the US and Canada respectively (SMH, 10 May 2010). A KPMG report also predicted that, if the new tax was approved, billions of dollars of new gold, nickel and copper mines would be scrapped (The Courier-Mail, 3 June 2010).

It is also interesting that support for the Australian miners came from foreign politicians, with Canada's Finance Minister, Jim Flaherty, declaring that Australia's mining tax could give his country a competitive advantage in the global resources market at a time when Canada was reducing corporate tax rates (SMH, 8 May 2010).

Second, there was never uniform support for an overall increase in mining company taxation, with many key players supporting a mining tax only on the basis that it was driven by efficiency and revenue-neutral motivations. Mathew Stevens, writing for The Australian during August 2008, declared: "there is an absolutely valid argument for the consistency and simplicity" of a commonwealth-wide tax that replaces state royalties, as long as it would be essentially revenue neutral and the reform accompanied broader taxation reform such as cutting the corporate tax rate (The Australian, 6 August 2008).

The Mining Council of Australia (MCA), whose members included BHP Billiton and Rio Tint, also made a submission to the Henry Review supporting a mining tax on profits, rather than on revenue, on the basis it better reflected the sharing of risk between mining companies, developing a resource, and the government, which owned it. The MCA acknowledged that the current royalty regime was an incoherent mess, with the states having varied rates for 42 different mineral products, and with some royalties based on the value of production and others set at a fixed amount per tonne, regardless of its value (The Australian, 24 August 2009).

Third, there was always immense state/territory government opposition to the potential loss of mining royalties; a source of revenue that delivered five states and the Northern Territory $7.8 billion in 2007-08, compared with $2.5 billion in 2004-05 (The Australian, 6 August 2008),which remains to this day. So, in June 2009, Western Australia's Barnett Coalition government warned Labor to keep their hands off its multi-billion-dollar mining royalties, while declaring: "if they want to impose a royalty-type mining tax, they can do so under the corporations power, but it would be a tax on top of state royalties" (The Australian, 9 June 2009). The Queensland Labor government, in its 15-page submission to the Henry review, also ruled out handing over control mining royalties, along with gambling and payroll taxes, in any change to Australia's taxation system (The Courier-Mail, 6 July 2009).

Fourth, the government exhibited poor consultation skills. Prior to the Rudd government introducing its proposed Resource Super Profits Tax on 2 May 2010, mining companies argued that Treasurer Ken Henry had not consulted them properly about a mining tax, as they were not invited to Henry's industry roundtable conference, nor had they been personally consulted (The Australian, 18 February 2010).

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During May 2010, a spokesman for Xstrata stated that: "the government has restricted the panel to only discussing implementation issues and it was clearly stated that they will not be consulting on the overall merits of the resource super profit tax, or even key parameters" (SMH, 13 May 2010). BHP's chairman Jac Nasser also indicated that meeting Kevin Rudd achieved very little, given the government refusal to engage in: "genuine dialogue on the fundamental issues" (The Australian, 14 June 2010). The miners wanted the mining tax to: only apply to prospective investment; be internationally competitive and differentiate between minerals; and tax resources, not infrastructure and other activities (SMH, 13 May 2010).

The MCA claimed later that the Rudd government breached the faith of the mining industry in 2010 by publishing budget revenue estimates the month the RSPT was announced. The MCA indicated that the mining industry had been operating under the belief that the government in May 2010 would simply announce "a predisposition towards changing the mining tax system", and that any agreed rate and the targeted commodities would be determined during a lengthy period of industry consultation (The Australian, 27 February 2012).

Swan admitted during March 2012 that the Rudd government hurt itself by locking the miners out of negotiations. He stated: "If we could have sat down in greater detail with the mining industry following our announcement and worked our way through those issues then we might have had a less bloody and bruising experience" (The Courier-Mail, 6 March 2012).

While later newspaper reports indicate that Rudd was close to agreeing to a revised mining tax (The Australian, 18 April 2012), his successor Julia Gillard faced new problems. This was despite Gillard forging a new deal with the big three miners (BHP Billiton, Rio Tinto and Xstrata) by July 2, 2010, which: lowered the tax on profit from 40 to 30 per cent; exempted small miners with profits below $50 million annually, meaning that the number of companies expected to be hit reduced from 2500 to 320; and only applied the tax to the bulk minerals of coal and iron ore (The Australian, 3 July 2010).

Here, smaller miners argued the deal had been made without more than 300 companies at the negotiating table (The Australian, 3 July 2010). So, Atlas chief David Flanagan highlighted the disadvantages for mid-tier groups, arguing that the tax favoured major companies with lower cost of capital, given that only iron ore and coal were hit, while their other commodities like gold and nickel are exempt. Flanagan also condemned the loss of the $1.1 billion exploration rebate, under which mainly smaller companies could have claimed tax deductions for exploration, and argued that the $50 million annual profit threshold for application of the tax should be doubled to $100 million (The Australian, 5 July 2010, 1).

One journalist argued that the revised mining tax now had so many concessions that: "tax advisers should be able to drive a 300-tonne mining truck right through them". Whereas the previous version allowed companies to depreciate at book value only over a period of five years, companies now had the option of depreciating their project assets using market value over 25 years, based on the market value at May 1, 2010, plus additional investment after that date. Companies could now also transfer coal and iron ore losses to other projects in Australia, while immediate investment write-off could occur from July 2012, rather than being depreciated over a number of years, meaning that mining projects could access the deductions immediately and would not pay any mining tax until it had enough profit to pay off upfront investment (Paul Cleary, The Australian, 3 July 2010).

Treasury later confirmed the small miners' fears, with previously secret emails and briefing papers (obtained by FOI) showing that small and medium iron ore miners were likely to pay tax at an average rate of 48.9 per cent, compared to 36.4 per cent for miners, including BHP Billiton and Rio Tinto, with mature projects (The Australian, 12 March 2011). Economic modelling produced by Professor Pietro Guj (University of Western Australia) also suggested that mines that were already established would face a tax rate (including royalties and company tax) of 44.7 per cent, compared to 40.5 per cent for the global miners who negotiated the changes to the tax (SMH, 26 July 2011, 1).

It was later also argued by Atlas chief executive David Flanagan that tax advantages to the foreign miners aided the latter's future ability to outbid smaller companies in the battle to acquire assets and attract investment, given that the bigger players are: "heavily owned by overseas investors" compared to Atlas which had 97% of its 29,000 shareholders living in Australia" (The WA, 4 February 2012).

The Gillard government soon angered the big miners again when the Resources Minister, Martin Ferguson, suggested that they would not be allowed to credit future unscheduled increases in state royalties against the mining tax liability (SMH, 15 October 2010). BHP soon threatened to walk away from the deal, on the basis that this was a clear contravention of the agreement the big miners had signed in July (The Australian, 20 October 2010), while Rio Tinto and Xstrata also demanded that the Gillard government stick to an agreement that all royalties be credited back to the miners (The Courier-Mail, 3 December 2010).

The government backed down (The Australian, 22 December 2010). It was later disclosed that a Treasury email (September 17, 2010) indicated the payment of all future state royalties would be credited back to the miners (The Australian, 12 March 2011).

In the end, the mining tax was legislated by the Senate on 19 March 2012, after comprises with the Greens and independents, including a deal with the Tasmanian independent MP Andrew Wilkie to raise the mining tax threshold to $75 million, with the maximum rate applying after net profit reaches $125 million (The Australian, 22 November 2011). This concession now meant that only 20 to 30 companies would pay the mining tax, not the 2500 initially intended by the first version offered by Rudd (The Australian, 23 November 2011).

In the meantime, the states/territories further increased their mining tax take collectively to $9.6 billion in 2010-11, representing 9.2% of their own source revenue. This was similar to the 2008-09 level, before a decline because of less demand for commodities in response to the global financial crisis.

Despite most recent forecasts appearing quite gloomy about 2012-13 mining tax revenue, Treasury predicted in February 2011 that the new mining tax Gillard version would yield $60 billion less over a decade from 2012-13 to 2020-21, when compared to the original proposal; $38.5 billion compared to $99 billion (The Australian, 17 February 2011). Treasury earlier this year projected revenue of $9.7 billion over the first three years (The Australian, 14 May 2012), although GoldmanSachs estimated that BHP Billiton would pay just $443 million during the first year (The Australian, 24 March 2012).

During the early months of 2012, Swan attacked Australia's rich mining billionaires, yet had little to say against the CEO's of the government's greatest mining opponents who were BHP Billiton, Rio Tinto and Xstrata (Kloppers, Albanese or Freyberg) (SMH, 7 March 2012, 7).

Elizabeth Knight is scathing: "the Gillard/Swan government agreed to a watered-down tax for fear they would be thrown out of government. They could have resisted and taken their chances. The public does not elect billionaires or business leaders to run policy. We elect Swan and Gillard etc, to decide what is in our best interests. If they cave in to business, they should not be complaining about influence" (SMH, 7 March 2012).

I would argue, however, that the federal Labor's approach was flawed in the first place. It reflected poor consultative skills and tactical abilities which proved incapable of overcoming concerns over the level of overall taxation for miners and federal-state/territory fiscal arrangements.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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