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Why miners will backflip on tax

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Lump of coal sitting on $50 notesOn 3 June I wrote in my blog that the large foreign owned mining companies in Australia may yet regret that they rejected out of hand the Resources Super Profits Tax (RSPT) that the Rudd Government proposed. Politically, the miners will never admit it, but I suspect that at some point the wiser heads among them will look again at a tax arrangement based on profit performance rather than royalty taxes that the states are now increasingly levying.

This is not to say the Rudd proposal was well handled. It was not. In particular the Rudd Government failed to involve the state governments whose budgets depend heavily on mining royalties. Quoting from a GST Distribution Review Report of October 2012, I pointed out that:

Well designed rent-based taxes are likely to be more economically efficient than royalties, particularly in periods of low commodity prices or high costs ... Other factors, such as the size, variability and timing of the return received by government, as well as administration and compliance costs are also important considerations when choosing between alternative resource charging regimes.

With the slow-down in the mining boom, and with lower commodity prices, states such as Queensland and Western Australia will look increasingly to mining royalties to help their difficult budgetary positions.

A clear trend is now apparent. The mining royalties of all the states have increased five-fold from about $2 billion in the early 2000s. And it is continuing. It is estimated that from October 2012 coal royalties in Queensland will raise an additional $1.6 billion over four years. The WA Government has lifted iron ore royalties by about 14 per cent since July 2013. This is expected to raise an additional $2 billion over three years. It is already clear that WA will need to look to more mining royalties to underpin its budget.

A feature of these increases in royalties is that they are deducted from the Minerals Resources Rent Tax. This tax has raised much less for the Commonwealth Government than expected. But in the political argy-bargy over Commonwealth mining taxes, the states have seized the opportunity to substantially increase mining royalties.

Some miners must be wondering whether they took the right course in opposing the RSPT, in which taxes are levied on the profitability of the enterprise rather than royalties based on the value of the output. Higher state mining royalties, lower commodity prices and higher costs will put the squeeze on the mining companies. It will be quite delicious to see them then urging a tax based on profits/losses rather than royalties.

The business community seems to have been similarly short-sighted. It was proposed that the company tax rate be reduced by 2 per cent as part of the package with the RSPT. The miners complained long and hard to defeat the RSPT, and effectively sidelined the business sector, which lost its tax reduction. This doesn't sound to me as if the business sector was looking after the interests of its members. The Business Council of Australia in particular was so inclined to barrack for Tony Abbott that it forgot to look after the interests of Australian companies.

John Menadue headshotJohn Menadue is a founder and Board Director of the Centre for Policy Development. He was formerly Secretary of the Department of Immigration in the Fraser Government 1980–1983. The above article originally appeared in his blog.

Coal and cash image from Shutterstock

Topic tags: John Menadue, Resources Super Profits Tax, mining tax



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Existing comments

Thank you for your article. What delicious irony!

P Russell | 18 October 2013  

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