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
- 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
- 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
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.
Starting Base
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.
Well you seem to be missing one vital point.. the minerals in the ground belong to the states, no the Commonwealth.
The minerals (and therefore the income from them) in the Kimberley belong no more to the people of Melbourne than the people of Manilla.
And the states are already profiting from royalties very well, thank you.
Trish,
Well said.
At the end of the day, governments need to raise taxes to fund their expenditures. The election should be about the expenditure policies of the parties and how they intend to fund them. Everything else (leaders’ personalities etc.) is secondary. Whether the MRRT is a good tax or not depends upon one’s view as to the relative merits of mining companies, sometimes, paying more as against the rest of the taxpayers paying more. I for one, favour, them paying more even though I am a shareholder in several mining companies.
As regards Rob’s comments, maybe he is the one who needs to ‘take the time to look a bit deeper’. It is true imputation means shareholders receive a credit for tax paid by companies on dividends distributed and so as the tax paid by companies goes down, the value of that credit goes down but that does not apply to earnings retained by companies (and most mining companies for example are not payers of significant dividends) nor does it take into account that the after tax earnings go up as tax paid by companies goes down and therefore there is potential for higher dividends. In the same vein, superannuation contributions are usually tax deductible to employers so an increase in the SG does result in a reduction in the tax paid and therefore is, in part, funded by the government.
Comments that any tax is a transfer of wealth from the private sector to the government show only the political leanings of the commentator. ‘Tax grab’ is such an emotive but fundamentally meaningless statement. The government spends what it takes in subject to it retaining a surplus (which i suspect Rob would think is a good idea). Consequently, all government income is returned to the private sector either in payments to suppliers or wages to civil servants. Governments reallocate wealth they do not make or reduce it.
Trish, I have to disagree with you re your comments on the MRRT. At the end of the day this is another tax which discourages mining development and will cost jobs. It has also scared the wits out of foreign investors, judging by the comments made by several foreign investment newsletter writers whom I subscribe to. In one publication out of the US I subscribe to, they commented on the takeover by Newcrest Mining of Lihir. Lihir is listed in Canada & the US as well as the ASX. They have recommended North American Lihir shareholders sell and not take the Newcrest shares on offer as the political risk of investing in Australian mining is too great. As Newcrest is mainly exposed to Australian mines, they advise investors avoid exposure to the Australian mining industry in general, not just the coal and iron ore stocks (source: Casey Research Aug 2010 Gold & Resource report). One must remember that capital always moves to the friendliest locations and Australia is no longer considered as such from a mining investment perspective by foreign investors. And it is capital that creates sustainable jobs, not new taxes.
And the benefits claimed to arise from the introduction of the tax are spurious at best. For example, the reduction in the coy tax rate to 28 or 29% is irrelevant, as once franked dividends (now carrying a reduced franking credit) are ultimately paid to the shareholders, the ATO will still collect the same amount of tax due to the reduced franking credit. The overall tax take will still be equivalent to the shareholder’s marginal tax rate. Refer to: http://en.wikipedia.org/wiki/Franking_credit for an illustration of what I mean.
How can the govt offer an additional 3% SG as a benefit to the public of introducing the MRRT. The govt is giving the impression to the public that they are footing the bill for this additional SG. But the cost of the additional 3% super is not being met by the govt. This additional cost will be borne mainly by employers and employees, not the govt. Why do I say this? Employers pay the super, not the govt! Furthermore many employees have their salary package expressed in terms of “total employment compensation”. So as the additional SG is rolled out, take home pay for people in this position will drop, as their total package does not change, but the proportion of super vs take home pay shifts in favour of more super. Not sure where the cost to the govt is here? How can the govt claim to offer a benefit linked to the MRRT’s implementation when the govt is not paying for it? So employers will have less incentive in some cases to create jobs, and some of those with jobs will have less take home pay, stretching family budgets further,
The increasing of the contribution caps to $50k for those with under $500k in super….you will find that people who have under $500k in super have less than $500k in super for a reason – they generally have limited means. They are not in the position to go contributing $50k into their super in a single year unlike like their more wealthier compatriots. So I believe the benefit here will only have limited niche application, and the cost to the govt will be minimal.
The only winners I can see out of this package are to the govt in extra tax collections, and to the superannuation industry in the additional management + contribution fees that will be collected by the fund managers on the extra 3% SG.
There is also the argument that the valuation of companies affected by the tax will fall. Demand from foreign investors fro Australian mining stocks has already waned as evidence by the numerous “steer clear of Australia” calls being made in foreign investor circles. These stocks are the same shares held by mum and dad investors and super fund members which are now worth less than otherwise. The cheerleaders for this tax seem to forget this.
So in my opinion, the govt has sold the MRRT package on a set of spurious claims offering this and that, when the real cost will be borne by the community via less jobs and lower share valuations reflected in the super accounts of members across the board.
At the end of the day this is a tax grab by a govt which needs to raise revenue to pay for its election pork barrelling and the stimulus package. The wool has been pulled over the community’s eyes in my opinion. There will ultimately be a transfer of wealth from the private sector to the govt, with less money/incentive available for investing in businesses that drive jobs growth.
So while I respect your right to hold the opinion you do, I have to disagree vehemently with your arguments, which I believe if you took the time to look a bit deeper, you may find don’t stack up? Happy to discuss with you further if you wish.
PS: I am not a member of any political party, nor do I work in the mining or ancillary industries.
PPS: keep up the good work with your excellent website