Tax to Drill Holes in the Mining Industry’s Pockets

With controversy and debate circling above the federal government’s resources super profits tax proposal, Australian Prime Minister Kevin Rudd met with senior mining figures yesterday morning in Perth to discuss the new tax and its conditions.

The prime minister described the meeting as ‘robust’, but was adamant that despite criticism the tax level would remain at 40 per cent.

The tax proposal, which has come in response to the Henry tax review, aims to introduce a 40 per cent tax on profits that reach above-normal proportions, made from non-renewable resources.

Under the tax, larger mining companies will be taxed 40 per cent for profits they earn over the super profit threshold of 5.7 per cent, while smaller to medium-sized businesses will be aided if they are having trouble making profit.

What are the benefits?

While large mining companies are labelling the tax as a ‘handicap’, Rudd has defended the tax, saying it will boost activity in the mining industry.

‘We believe the Australian people deserve a fair return on the resources which they themselves own,’ he said in a radio interview on Monday.

According to the government, Australians have missed out on $35 billion over the past decade because tax levels have not responded to the boom in the mining and resources industry.

The Local Government Associations of Queensland (LGAQ) believe the tax to be suitable and practical, saying that it could relieve the pressures and disruptions mining activity causes to neighbouring communities.

‘We’re seeing very large pressures on airports, we’re seeing very large pressures on community facilities, child care, recreation sport and the like,’ LGAQ executive director Greg Hallam told the ABC.

Central Queensland University economics professor John Rolfe also believes that the tax is quite good in principle and could deliver substantial benefits to Central Queensland.

However, he recommends that the government start the tax at a lower scale to ease the impact.

Professor Rolfe, alongside many others, is pushing for the revenue to be used to improve infrastructure, including social infrastructure, in mining regions.

‘It is important that any income from a resources rent tax is not used to simply increase regular government spending, or to even replace normal government investment,’ says Rolfe.

The Government looks set to use the money raised from the tax into cutting company tax to 28 per cent and funding new infrastructure.

The money will also be used to fund new superannuation incentives with the lifting of the compulsory superannuation rate.

What are the negatives?

Mining magnates and resource companies have lobbied furiously against the tax, which is yet to be passed through Parliament, saying that it will encourage investors to take their business to countries with lower tax jurisdictions.

The tax is the reason behind Perth-based iron ore explorer Cape Lambert Resources’ decision to suspend projects at its Cape Lambert site and move funding to an iron ore project in Sierra Leone.

Shares in mining have also plummeted since the announcement of the tax, indicating the anxiety amongst investors over the uncertainty about whether the Senate would pass the proposal.

Chief executive of BHP Billiton, Marius Kloppers, has also criticised the federal government’s claims that the mining industry had not been paying its fair share of taxes, stating that the industry was already the highest-paying business sector in the Australian economy.

‘Over the last nine years the resources industry has paid an average tax rate of 43 per cent compared to banks and retailers paying an average of 30 per cent,’ he said in an email to BHP staff.

With the tax in place Australia would have the highest taxes in the world for a mining country, which would negatively affect its competitiveness in the industry.

The Opposition have also slammed the proposal, labelling it as a ‘tax grab, not a tax reform’, with Opposition Leader Tony Abbott saying he felt ‘deeply hostile’ towards the resources tax.

‘This is the industry which kept us out of the global financial crisis, this is the industry which most of all gives us a competitive advantage in the world,’ Abbott told Macquarie Radio Network.

The next step

It appears that mining industry heavyweights will aggressively lobby for the proposal to be scrapped entirely, or – as the next best thing – the super profit threshold scaled back.

However, while the government is willing to negotiate in other areas of the tax, it seems set on the 40 per cent tax level.

While the recent meetings only signal the beginning of negotiations, only time will tell how the proposal will affect existing businesses, as well as future prospects in the mining industry.