Historically, mining booms have attracted ‘cowboys’, opportunists and, individuals desperate for a break – a new beginning.
In the early days, regions enjoying ‘gold fever’ or any other type of mining boom have often had an element of lawlessness as thousands of people would descend onto a previously sparsely inhabited area and all vie for their own ‘pot of gold’. Greed, hardship, alcohol, lack of systems and lack of services often resulted in very dangerous places to live.
The families of the speculators would often follow if the speculator struck it lucky or secured a ‘permanent’ mining job, or if they established a business supporting the mining works, or if they secured some type of Government job regulating what was happening in the newly formed ‘town’.
Mining is a dangerous profession for those who work on the ground although the industry has come a long way from its reckless past when looking after its employees and contractors. Even so, workers still die and many suffer serious injuries both on Australian soil and overseas. High-risk work is generally rewarded with higher pay, and often that reward includes a premium for the added risk that a mine or project may close without notice.
In recent years, mining has gained a corporate respectability as Australia enjoys sustained demand for its resources, particularly from China.
Owners of certain Australian resource companies have the opportunity to meet one-on-one with our Prime Minister (PM) and Government ministers, enjoying access to Government that the rest of the community can only dream of.
So, it was with disbelief that I watched on television the CEO of Fortescue, Mr Andrew Forrest and Chair of Hancock Prospecting, Ms Gina Rinehart protesting with mining workers in a Perth park, as if this was the only way Mr Forrest and Ms Rinehart could draw attention to the impact of the original Resource Super Profits Tax (RSPT).
I considered this media stunt a ridiculous charade when in the following week Mr Forrest met with former PM Kevin Rudd one-on-one. Street protests usually garner media attention for those who don’t have ‘open-door access’ to the decision-makers of the country.
Measuring the true cost of mining
Many Australian resources, such as iron ore and coal, are non-renewable resources and are ultimately owned by the Australian people. Mining companies take huge risks to explore and discover where these resources are located, and then spend piles of money to extract these resources, and clearly the mining companies deserve to be rewarded for their efforts.
Even so, I believe there are two main issues facing Australians in this quest for continual dependence on the sustained mining boom:
- how much of the reward enjoyed by mining companies (obviously including shareholders) should be shared with the broader Australian people, especially since the resources extracted from Australia’s soil are non-renewable?
- what are we preserving for the next generation in available resources, or in alternative wealth, if we are plundering the resources now and not carving out an equitable share of the profits for future investment?
Mining today should be at its true cost, and not at a cost subsidised by today’s and tomorrow’s generations.
No need for bullying by mining companies
The bullying tactics of the mining community when responding to the Government’s initial proposal were disgraceful. The tall tales told to the community, and the misinformation spread in television ads was not becoming of companies listed on the Australian Securities Exchange and representing the interests of Australians overseas and domestically.
If anyone has closely followed the circus surrounding the original RSPT and then its replacement, the Mineral Resource Rent Tax (MRRT), then possibly like me, you may be very cynical about what some of these high profile individuals now say about the health or otherwise of their own companies. If they are capable of misrepresenting the RSPT and MRRT facts to the Government and to the public, are they also capable of misrepresenting the facts about their own company to the markets?
Despite the bluster and panic, the mining industry understood that paying a slightly greater share of the profits to the Australian people (through a recalibration of state royalties and federal taxes) was inevitable, even though the initial proposal announced by former PM, Kevin Rudd needed adjustment.
The MRRT Heads of Agreement is set out at the end of this article.
MRRT is the least of the mining industry’s worries
I believe the mining industry has won at the expense of the Australian people, notwithstanding the number of Australians employed by the mining industry and supporting industries.
If the mining industry thinks that threatening to move project overseas will intimidate Australians to side with the owners of mining companies when determining how to fairly share the wealth from non-renewable mining in Australia; then think again. Every country around the world is facing the same dilemma when tackling the use of non-renewable resources. For example, China is close to the industry forefront in researching and implementing the use of alternative energy sources, including wind and solar power.
I expect the Australian Government’s MRRT will be the least of the mining industry’s worries when other countries dependent on Australian resources start to recognise the need to control the use of non-renewable energy sources through special taxes, or providing incentives to ‘green’ energy and material producers, or placing greater environmental controls on when and how iron ore and coal is used.
The biggest elephant in the room of course is the pending climate change policies that both sides of politics are still grappling with, and which will have a significant impact on the costs facing the mining industry. The MRRT will be a pup in comparison.
How the MRRT will be spent
If ALP win the 21 August 2010 Federal Election, the ALP Government has stated that a third of the money raised by the MRRT will fund key superannuation changes, namely:
- Superannuation Guarantee (SG) to increase to 12% (from the current 9%) incrementally from July 2013, with the full 3% increase taking effect by July 2019. For more information, see article Superannuation Guarantee set to jump 33% for more information
- The maximum age limit for receiving SG will rise to 74 (from the current age of 69), starting from July 2013. For more information, see article Superannuation Guarantee now fairer to older workers
- Refund of contributions tax of up to $500 each year, paid into the super accounts of Australians earning $37,000 or less, to ensure they receive a similar incentive for retirement savings, as Australians on higher incomes, taking effect from July 2012. For more information, see article Super tax refund for lower-income earners is a winner
- Retaining the $50,000 concessional (before-tax) contributions cap for over-50s, rather than dropping the cap to $25,000 (or the indexed amount applicable) from July 2012. The one condition is that the individual must have less than $500,000 in super when making the contribution. For more information, see article Over-50s contributions cap of $50,000 now permanent, for some
Another third of money raised by the MRRT will be used to provide tax cuts to companies (reduce company income tax from 30% to 29% over time, and possibly reduce to 28% if fiscal position improves), and provide tax incentives for small business.
The remaining third of money raised from the MRRT will be used to directly assist the resources sector, in particular, infrastructure spending for the resources sector.
If the Liberal Party win Government, my understanding is that the MRRT will not proceed and presumably the superannuation changes announced by the Australian Labor Party will also not come to fruition.
Note: The Liberal Party has announced that they intend to remove the age limit on Superannuation Guarantee, which goes further than the ALP’s policy of increasing the age limit of SG to 74.
My view on the MRRT is that the current Government has reached agreement with the major players in the mining industry, and that Australia should now get on with it.
MRRT Heads of Agreement
The MRRT Heads of Agreement between the Australian Government and BHP, Rio Tinto and Xtrata is set out below
MINERAL RESOURCE RENT TAX HEADS OF AGREEMENT
The Design of the Minerals Resource Rent Tax
The new resource tax will apply from 1 July 2012 only to mined iron ore and coal. All other minerals are excluded.
The rate of tax will be 30% applied to the taxable profit at the resource.
Taxable profit is to be calculated by reference to:
- The value of the commodity, determined at its first saleable form (at mine gate) less all costs to that point
- An extraction allowance equal to 25% of the otherwise taxable profit will be deductible to recognise the profit attributable to the extraction process. (i.e. this to only tax the resource profit)
- Arms length principles on all transactions pre and post first saleable form.
MRRT is to be calculated on an individual taxpayer’s direct ownership interest in the project.
There will be no MRRT liability for taxpayers with low levels of resource profits (i.e. $50m per annum).
All post 1 July 2012 expenditure is to be immediately deductible for MRRT on an incurred basis. Non-deductible expenditure will be broadly consistent with PRRT.
MRRT losses will be transferable to offset MRRT profits the taxpayer has on other iron ore and coal operations.
Carried-forward MRRT losses are to be indexed at the allowance rate equal to the LTBR plus 7 percent.
The MRRT will be an allowable deduction for income tax.
All State and Territory royalties will be creditable against the resources tax liability but not transferable or refundable. Any royalties paid and not claimed as a credit will be carried forward at the uplift rate of LTBR plus 7 percent.
The starting base for project assets is, at the election of the taxpayer, either:
- Book value (excluding the value of the resource) or
- Market value (as at 1 May 2010).
All capital expenditure incurred post 1 May 2010 will be added to the starting base and depreciated against mining operations from 1 July 2012.
“Project assets” for the purpose of the MRRT will be defined to include tangible assets, improvements to land and mining rights (using the Income Tax definition).
Where book value is used to calculate starting base, depreciation will be accelerated over the first 5 years. The undepreciated value will be uplifted at LTBR plus 7 percent.
Where market value is used to calculate starting base, there will be no uplift and depreciation will be based on an appropriate effective life of assets, not exceeding 25 years.
Any undepreciated starting base and carry forward MRRT losses are to be transferred to a new owner if the project interest is sold.