Labor's mining tax, a policy shemozzle indeed

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.