Feature: What now for the tax on mining’s super profits?

By Paula Wallace

The industry has, to date, poured millions into its campaign against the Resource Super Profit Tax (RSPT).
But despite a show of strength from both sides of the table, it’s not clear whose message if any has managed to get through.
The pollsters suggested that Rudd’s drop in popularity was due to his stance on tax reform, along with the shelving of the Carbon Pollution Reduction Scheme and his views on asylum seekers.
But with issues as complex as those raised by the Henry tax review, both sides have struggled to provide clarity on whether the new tax on mining will be in the best interests of Australia.
The devil is in the detail and in the methodologies used to come up with the amount of tax the mining industry currently pays and how much it could pay under a RSPT and the possible flow on effects for shareholders and the industry in general.
Reports on the supposed impact of the RSPT have drawn differing conclusions and have largely been designed to serve their masters. The wider issues of natural resources profits; managing the impact of surging mining investment on other sectors and the economy; and the sustainability of the mining industry beyond the boom, seem to have been lost in the debate.

A fresh approach?
The fight began in the first days of May. By June 24th Kevin Rudd was no longer the nation’s leader, but his successor still had the problem figure of 40 per cent to deal with. Forty per cent of prospective mining super profits that had been figured into the Federal Budget to fund tax cuts, boosts to superannuation and widespread infrastructure investment.
At the time of writing, the new Labor leadership team intended to press on with its negotiations with the mining sector but it used the extraordinary changeover of leadership to attempt a fresh approach. It was reported that the Government would overhaul its approach to the tax including the 40 per cent rate.
At her first media conference as Prime Minister, on June 24th, Julia Gillard put up a white flag of sorts. She agreed to remove the controversial Government “information campaign” on the RSPT, which had been tipped to cost around $38 million.
Furthermore, she threw open the “doors of Government” and welcomed the mining industry to “open its mind”.
Gillard said there was an emerging consensus that Australians sought a greater share of wealth from natural resources and that mining companies could pay more. Gillard said the mining industry had conceded it could pay more and that this formed the foundation upon which negotiations would take place. Although, this seemed to be at odds with the Minerals Council of Australia’s (MCA) campaign which has said all along that mining pays its “fair share”.
One mining industry group used the opportunity to call on the Government again to scrap its RSPT which has been branded by industry as ill-conceived and flawed in design. But a few hours later, the Association of Mining & Exploration Companies agreed to withdraw its anti mining tax media campaign, “…subject to immediate resolution of future tax reform as it applies to our industry.”
The Chamber of Minerals and Energy of Western Australia, followed suit, saying it would suspend the roll-out of planned advertising and would urgently review existing advertising in the Perth CBD. Over the ensuing days, the voices which had been the loudest from within the mining industry announced they would call a truce, for the moment.
In her first Question Time in Parliament on June 24th, Julia Gillard thanked BHP Billiton for having already removed its advertisement against the RSPT, only hours after she had taken office and less than a day after it first went to air.
On June 23rd, BHP Billiton issued a statement announcing the release of the advertisement featuring Olympic medallist Anna Meares. Reiterating the central plank of the mining industry’s campaign, Meares said, “…when you hurt mining, you hurt Australia."

The loudest voices get heard
With the crumbling of support for Kevin Rudd, it could be suggested that the mining industry’s emotive appeal to Australians to “keep mining strong” had won out. Some certainly laid claim to that. But it could just as likely be the result of a factional opposition within the Parliamentary Labor Party over a raft of issues. In fact, the Australian Worker’s Union, which was mooted to be pushing for Rudd’s removal, is advocating for greater taxing of mining.
On June 24th, vocal critic of the RSPT, Fortescue Metals Group’s CEO Andrew Forrest said, “Ms Gillard's appointment was a reflection of the concern the Australian community had with various elements of the Rudd Government's handling of policy, and particularly the proposed RSPT.
“In its existing form, the insidious consequences of the RSPT proposal had the potential to seriously deter the continued growth of the Australian mining industry.
“As we had previously declared, the initial structure of the proposed RSPT is dead and buried.”
To Rudd’s credit, explaining the RSPT was not as simple a message as the mining industry might have us believe. One of its claims was that the Government modelling was flawed in the assumptions it makes about the nature of mining investment.
“To accuse the government of suggesting that mining [investment] is completely immobile puts it in black or white terms,” said David Richardson, a senior research fellow at independent think tank, The Australia Institute.
Richardson believes the Henry review was not saying there would be no change in the mining industry, but rather that it is less likely to respond to higher taxes than other industries.
“The issue is the relative mobility of mining investment. If you could somehow show conclusively that a $50 million investment would not go ahead, would that be sufficient reason to stop a tax that raises $9 billion per annum?” he asked.
The mining industry and the Government commissioned several reports from private consultancies on the effects of the RSPT, which were analysed by Paul Frijters, a Professor of economics at the University of Queensland.
In the case of two reports produced by the same firm – one on behalf of the Government and another on behalf of the MCA – the conclusions were starkly different. The former predicted about six per cent increased long-run activity in the mining sector, and the latter foretold the shelving of a significant number of future mining projects.
Frijters was critical of the assumptions and “sleights of hand” in the modelling and methodologies of both reports and concluded that “under more realistic assumptions, investments would be hardly affected.”
“It is easy to say ‘you are wrong and do not understand the industry’”, said Richardson.
“The MCA and their consultants have tried hard to establish there is a potential reduction in the mining industry. Even if you accept those results at face value, the government should be asking what the net benefit to Australia is. It may well be the case that a marginally smaller mining industry is consistent with improved outcomes for Australia as a whole.”
Richardson drew an analogy with the motor vehicle industry, during the time of the Hawke Government.
“When the government decided that Australia as a whole would be better off with reduced protection for motor vehicles even though the impact on car manufacturing was obvious.
“The impact on the mining industry will be nowhere near as dramatic but the motor vehicle industry was wrong to assume that everyone would equate their fortunes with the well being of the economy as a whole.”

‘Hurting’ the big Australians
If nothing else the mining industry’s campaign has succeeded in proving how big it is. According to its figures, the industry has made $80 billion in tax payments over the last decade.
The mining industry represents about 7 per cent of Australia’s GDP and almost half of total exports. Mining company profits were (before tax and royalties) around $8 billion on the eve of the mining boom in 2004-05; increasing to just under $50 billion in 2008-09.
Earnings from energy and minerals exports are forecast to increase by 29 per cent in 2010-11 to around $170 billion, which reflects forecast higher prices especially for bulk commodities and increased export volumes.
So, if the RSPT was to hurt mining, how much would it really hurt Australia?
Richardson does not agree that Australia’s prosperity is dependent on mining and that a contraction in its share of GDP need not spell ruin.
“In the 1950s agriculture was 30 per cent of GDP…Australia was seen to be riding on the sheep’s back. Since then agriculture shrank to less than three per cent of GDP, but Australia is no worse for that,” he said.
It is a fact that for many, the recent mining booms have had a negative impact, with the appreciation of the Australian dollar putting the squeeze on other industries and the rise in interest rates.
The mining industry has claimed it is open to tax reform but to date has not said definitively what it considers to be a fair share of the wealth generated by Australia’s non-renewable resources.
In principle, the mining industry seems to prefer a profit sharing arrangement to the royalty model, but would prefer a tax that does not bite as hard as the proposed RSPT.
The company tax now comes in irrespective of any notion of risk and well before a company has clawed back its initial outlay. By contrast the RSPT does not kick in until capital has been repaid; and repaid more than in full with the ‘uplift factor’ equal to the bond rate.
There have been reports that a comprised tax reform plan may be closer to the design of the resources tax applied to the petroleum industry – that is, modifying the Government’s original plan to carry the industry’s losses and boosting the level at which the tax cuts in.
Before the Government leadership challenge was made public, it was reported that it may have been close to making an announcement along those lines. But Rudd reportedly said that not all industry players would like the Government's adjustments.
''If we reach this balanced and sensible outcome, I can fully predict that a number of the major mining companies will still not be happy with it,'' he reportedly said.
Richardson said the real question is how hard you can tax the mining industry.
“If I say I want 30 per cent of the juice from an orange you will probably make just as much juice as you originally intended. But if I say you make the juice and I will take it all, you don’t have as much incentive to squeeze as hard as you did before. You may not squeeze the orange at all,” he said.
Richardson believes somewhere between 30 per cent and 100 per cent is the optimal tax.
But to keep the RSPT in perspective, the extra tax would only cut in when a mine is super profitable. Whilst the mining industry would be required to fork out billions more dollars in tax, it still gets to keep 60 per cent of its super profits.
It would be interesting to know though, how the industry thinks it should respond to the community’s expectations of a greater contribution from them. Would it be equivalent to the $9 billion in first year RSPT revenues that the Government had pencilled in? Maybe it is something you can’t just put a figure on.