Assumptions of RSPT may not stack up in the real world: study

The analyst said the long run modelling of the RSPT implicitly assumes that any capital outflows from the Australian mining sector as a result of the introduction of the tax will be matched by new foreign or local capital into the mining sector. However, KPMG said it is unlikely, in the short to medium term, that new entrants will fill all of the void left by large project deferrals. This is because mining companies that have brought forward investment in more financially attractive projects, outside Australia, would have met demand and smaller or new entrants were unlikely to be in a position to develop multibillion-dollar projects.
Australian miners have already reacted to the proposed tax. Fortescue Metals placed $15 billion expansion projects on hold, and Rio Tinto and BHP Billiton indicated that they were investigating the outcomes of the tax on their projects, while Xstrata has suspended a $30 million exploration program.
The report stated, “Given the characteristics of the mining sector (ie. large scale and long life investments), the introduction of the RSPT at 40% means that it will take a long time for the sector to recover.”
KPMG modelled two scenarios at the request of the MCA. The first was a ‘status quo’ scenario which assumed that the corporate tax rate and the royalty rates remain unchanged. And the second scenario, ‘RSPT today”, assumed a 40 per cent RSPT, 28 per cent corporate tax rate and no change in capital structure.
Using these parameters the Net Present Value (NPV) calculated on financial models for iron ore, coal and bauxite mines declined relative to the status quo by 46 per cent, 57 per cent and 15 per cent respectively. Nickel, copper and gold mines also become economically unviable, that is, they produced negative NPVs relative to the status quo.
KPMG used the financial models to calculate indicative tax rates for Greenfield tier two mines on a project basis under the ‘RSPT today’ scenario. The effective tax rates over the life of an iron ore project was 54.7 per cent; for coal 55 per cent; for nickel 55.1 per cent; for copper 55 per cent; for bauxite 54 per cent and for gold 54.1 per cent.
The primary conclusion drawn from the report is that the introduction of the RSPT will result in Australian mining projects having a higher effective tax rate than at present, and the highest effective tax rate of the countries that the report is benchmarked against. These included Canada, Brazil, China, Indonesia, India and South Africa.
The theory of the RSPT is that it will not affect investment decisions in the long run, irrespective of international tax comparisons. However, as the debt markets will be unable to price funding at the LTBR (Long Term Bond Rate) due to risk and pricing issues, the RSPT work will not work as precisely as proposed said KPMG. “Accordingly, international tax comparisons are relevant, particularly in the short to medium term,” it said.
“It is important that Australia ensures that its tax regime, considered both in respect of its tax rate and the base on which tax is charged, is competitive with other natural resource endowed countries,” said the report.
In response to the report, NSW Minerals Council’s Nikki Williams said, “The KPMG report highlights deep flaws in the assumptions used by the Government which underpin the design of the RSPT.
“It is a system constructed on ‘perfect world’ theory which doesn’t stand up to the rough and tumble reality of the real world.”