The Henry Tax Review, the government's initial response and Australia's energy
and fuel security
This chapter discusses the Australia's Future Tax System Review (the Henry
Tax Review), the resulting report Australia's future tax system: Report to
the Treasurer (the Henry Tax Review Report) and the Australian Government's
Tax Policy Statement in response to the Henry Tax Review Report, titled Stronger,
Fairer, Simpler: A tax plan for our future (the government's initial
response). In particular the chapter examines the Henry Tax Review Report recommendations
relevant to the committee's terms of reference, and the government's initial
response to these, in light of the information available at the time of
The committee has followed the progress of the Henry Tax Review
throughout its inquiry, with a particular interest in the influence of the
Henry Tax Review Report on the Energy Green and White Papers. As the Henry Tax
Review was ongoing for a large portion of the committee's inquiry, the
committee encountered some difficulty in obtaining information on issues which
were being considered by the Henry Tax Review.
Following the release of the Henry Tax Review Report and the government's
initial response on 2 May 2010, the committee wrote to state and
territory governments and key stakeholders to ascertain their views. This
chapter discusses the issues raised in those submissions.
On 2 July 2010, the new Prime Minister announced new/revised
resource taxation measures to replace those outlined in the government's
initial response. The committee notes that the majority of the submissions
discussed below were received prior to the announcement of the new/revised
taxation measures and consequently relate mainly to the measures outlined in
the government's initial response. The impact of the new/revised tax measures
and how they compare with the original measures is discussed at chapter 4.
The Henry Tax Review
The Henry Tax Review was announced by the Treasurer on
13 May 2008. It was established to look at Australia's tax and
transfer system and make recommendations to simplify and enhance Australia's
The Review Panel was comprised by:
- Dr Ken Henry AC, Chair (Secretary, Department of the Treasury);
- Dr Jeff Harmer (Secretary, Department of Families, Housing,
Community Services and Indigenous Affairs);
- Professor John Piggott (Professor of Economics and Associate
Dean, Research, Australian School of Business, University of New South Wales);
- Mrs Heather Ridout (Chief Executive, Australian Industry Group);
- Mr Greg Smith (Adjunct Professor, Economic and Social Policy, Australian
The Review Panel delivered its final report to the Treasurer in
December 2009, and it was released by the Australian Government on
2 May 2010, in conjunction with the government's initial response.
The Henry Tax Review Report made a total of 138 recommendations,
covering personal taxation, investment and entity taxation, land and resource
taxes, consumption taxes, taxes to enhance social and market outcomes, the
transfer system as well as institutions, governance and administration. A
number of the recommendations made intersect with the committee's terms of
reference, and these are identified in appendix 12.
The government's initial response
The government's initial response to the Henry Tax Review Report,
released on 2 May 2010, addressed some of the recommendations made by
the review. The measures in the initial government response relating to the
proposal for a new Resource Super Profits Tax were subsequently replaced by the
new/revised resource tax arrangements announced on 2 July 2010. It is
not clear whether the measures proposed by the government address the Henry Tax
Review recommendations in their entirety, as the final form of the measures had
not been confirmed at the time this report was printed.
A number of the recommendations made in the Henry Tax Review Report have
not yet been responded to. The government has indicated that further measures
covering other aspects of the Henry Tax Review recommendations will be
announced over the coming months. The government has also stated that some of
the recommendations made in the Henry Tax Review Report are not government
policy and will therefore not be adopted. Those recommendations which intersect
with the committee's terms of reference, but which will not be adopted by the
government are identified in appendix 12.
While the government's initial response outlines measures regarding
taxation for small business and superannuation guarantees and contributions, this
chapter discusses the measures outlined in the government's initial response Stronger,
Fairer, Simpler: A tax plan for our future, which relate to the committee's
terms of reference. These measures are namely the:
- Resource exploration rebate
- Resource Super Profits Tax
- Cutting the company tax rate
- State infrastructure fund
Concerns regarding the government's
The details of the measures proposed by the government in its initial response
had not been finalised at the time that submissions were sought. Submitters
raised concerns about a lack of certainty which they hoped would be addressed
through further consultation with the government.
The committee sought information about the consultation process that
took place in relation to the government's initial response. Dr Ken Henry AC,
Secretary of the Department of the Treasury, explained:
There was some consultation. I am not sure that I am
personally aware of all the consultation that occurred between ministers and
others; in fact I would be pretty sure that I am not aware of all of the
consultation that would have occurred. I am aware of some consultation that
occurred, in particular with senior people in the resources sector. Of course,
as I indicated earlier, all of the review panel’s consultations, or the
outcomes of those consultations, were available to the government in its
consideration of its response to the report as well.
The Australian Petroleum Production and Exploration Association (APPEA) noted
the ability of governments to undertake fiscal reform, however, stated that this
must be well informed:
From a fiscal perspective, the Australian taxation framework
has provided a stable basis for companies to make large scale investment
commitments. The industry recognises that governments can change fiscal
settings, however reforms must take account of the impact on both current and
APPEA does not agree with the basis on which the government justified
the proposed tax reform:
The case for reform to the taxation of resource extraction activities
was in part justified by the Government on the basis of an estimated decline in
the contribution made by the sector since 2000. APPEA does not agree with the
basis of this claim.
APPEA explained that, as demonstrated in figure 1, if the amount of tax
paid by the oil and gas sector is separated from the aggregated amount of tax
paid by the resources sector as a whole:
Overall, what is clear is that the petroleum industry's total
taxation contribution to governments (resource taxes plus company tax) has approximately
(and consistently) equated to the industry's net profit for the entire decade.
It is APPEA's contention that this dispels any suggestion that the industry
'has not paid its way'. 
1-Total Petroleum Industry Tax Contribution
Petroleum Production and Exploration Association (APPEA), Submission H17, Attachment
1, p. 6.
Resource exploration rebate
The Henry Tax Review Report recommended that a refundable tax offset for
companies which incur exploration expenses be implemented:
Recommendation 32: If earlier access to tax benefits
from exploration expenses (relative to other expenses) is to be provided, it
should take the form of a refundable tax offset at the company level for
exploration expenses incurred by Australian small listed exploration companies,
with the offset set at the company income tax rate.
The government largely addressed this recommendation in its initial response,
proposing a refundable tax offset at the company level, set at the prevailing
company tax rate, for exploration expenditure where the exploration was
undertaken in Australia, and the expenditure was incurred on or after
1 July 2011.
However, the government's proposed measure was to be available to all
companies, not only Australian small listed exploration companies as suggested
by the Henry Tax Review recommendation.
The proposal for a resource exploration rebate was to be the substitute
for a flow-through share scheme which had been promised by the government
before the 2007 election.
The resource exploration rebate (RER) also provided for an expansion of
the definition of exploration expenditure to include expenditure incurred in exploring
for geothermal energy.
Under the measure, expenditure on depreciating assets that were first
used for exploration could be written off immediately, and subject to various
eligibility criteria, expenditure incurred in exploring or prospecting for
minerals, petroleum or quarry minerals could be immediately deducted.
According to the government's initial response, the measure was to
provide a stronger incentive to carry out exploration. The government intended
to consult on the exposure draft legislation which was to give effect to the
On 2 July 2010, the Prime Minister announced that the RER will
not be pursued, however, resource exploration costs will continue to be
deductible and a Policy Transition Group will consider the best way to promote
Comments on the resource
The Australian Geothermal Energy Association (AGEA) noted that the RER
was to provide important assistance to the geothermal energy industry, but
expressed concern about the commencement date of the measure, particularly due
to investors' aversion to risk in the aftermath of the global financial crisis,
and consequently recommended bringing the commencement date forward to
1 July 2010:
A number of the leading companies now have joint venture agreements
with other energy companies who have choices about where to spend funds for a quicker
return and these decisions are outside of the control of the geothermal companies.
Our members with these investors have warned that neither their own finances nor
those of their investors/partners will be spent on any activity likely to gain a
benefit from the proposed RER before July 1 2011. As most of the activity
undertaken by the industry is considered to be in the exploration stage, little
or no activity is likely to occur in the industry over the coming 12 months if the
start date is not bought forward. 
AGEA further stated that clarification of the definition of exploration
activity was required:
Exploration activity in the geothermal sector is all activity
prior to the commencement of commercial expansion or that point in the project where
a reserve can be announced. Before that point a decision to expand to commercial
scale development on the basis of the capacity of the available resource to support
a commercially viable project is not made. The activity prior to this point would
typically include traditional geoscience work, shallow drilling, deep drilling,
rig mobilisation and demobilisation, proof of concept testing, demonstration drilling,
reserves delineation drilling and reservoir enhancement testing. For a typical EGS
or HSA project this can incur tens of millions of dollars in expenditure to get
to this point with most of these funds being raised from the private sector.
The Australasian Convenience and Petroleum Marketers Association
(ACAPMA) noted their expectation that the resource exploration rebate would have
encouraged exploration for resources:
During the 1990s and again in 2004 and 2008, the Australian
Government introduced measures into the PRRT to encourage petroleum
exploration. These included the ability to transfer undeducted exploration expenditure
to other projects held by the same entity, an uplift of 150% on PRRT deductions
in designated offshore frontier areas and a ‘look back’ rule to allow for
retention leases on sites to be explored with deductions on expenditure allowed
where a production is derived. We believe that the implementation of resource
exploration rebate would only bring other mined products into line with the
upstream petroleum industry.
The New South Wales (NSW) Government observed that the RER would have
increased incentives to conduct exploration:
Compared to the current high degree of risk to investors that
is inherent in mining exploration, the proposed tax rebate should reduce the
level of risk exposure and increase their incentive to invest.
The Australian Workers' Union (AWU) noted that the RER would have been
particularly beneficial for smaller exploration companies:
Small exploration companies currently do not get a tax
benefit from their deductible exploration expenses until they become
profitable. For many companies this means waiting for many years to receive a
benefit – years in which a project may stall and jobs can be lost...By
providing the opportunity for immediate rebates for exploration spending, the
RER will provide a boost to the competitiveness of smaller miners for whom
existing tax arrangements preclude deductions until a profit is made.
BP also noted that the RER would have only affected smaller companies:
The resource exploration rebate will have no material
beneficial impact on oil and gas exploration, as it does not apply a multiplier
on frontier exploration expenditure. Therefore only companies that make a tax
loss will see a benefit in the form of a cash refund, but typically such
companies are not large enough to participate in substantial oil and gas
The committee heard evidence that exploration incentives are needed to
encourage small to mid-tier companies to explore for Australian oil, and the
withdrawal of the RER may have placed that in jeopardy:
All small companies certainly want to become big
companies, but the ability to become a big company is the ability to grow and
is dependent to some extent on the ability to raise capital to support
exploration. They also are the companies that can go or are willing to go to
places that the big companies are not able to commercially justify. They are
the ones who can go into the nooks and crannies of some of the basins to where
it is commercially viable for them to do something but not for others. In other
words, they play a very, very important and somewhat unacknowledged role in the
integrated nature of Australia’s oil and gas industry.
Because they tend not to pay PRRT, up until now they have
not been able to pass through the deductions that might be associated with
exploration against a PRRT because they do not have a PRRT liability and
possibly are unlikely to do so even under the new regime. From an investment
point of view, that makes it difficult for them to attract capital, so this
industry has very long argued for what was called a flow-through share scheme,
which was in fact incorporated into the government’s election platform in the
2007 election. That has since been replaced, post Henry tax review, by a
resource exploration rebate, which we also warmly welcomed. It certainly
was not the flow-through share scheme. Some members preferred it; some members
preferred the flow-through share scheme, but it is certainly true to say that
it retained the notion of the need and the acknowledgement of the need to
provide incentive for the small cap to midcap players to continue to explore in
Australia. That was acknowledged. Under the new package now, we have been
quite disturbed to see that that has been dropped. The government have gone
on to say that they would like the new policy transition group to explore, so
to speak, other incentives for exploration... We are optimistic that it will
have a look at this issue. It is a very real issue. We would very much like—and
I think it is in Australia’s best interest—to have Australia’s small and midcap
players exploring for our oil rather than going overseas and exploring for
somebody else, particularly in the context of Australia now producing around 50
per cent of what it is consuming, with a deficit of around $16 billion in
liquids, in oil, compared with only 10 years ago, where we had a net surplus in
oil and we were producing around 108 per cent of what we were
consuming. These are issues of the national interest, and certainly exploration
incentives for the small to midcap companies are an important vehicle for being
able to address those. [emphasis added] 
APPEA noted its support for a flow-through share scheme, as promised by
the government before the 2007 election, over the RER:
APPEA has consistently advocated the benefits that would
arise from an appropriately structured and targeted flow through share regime.
The advantage of such a system is that it will assist companies in raising
capital from equity markets. The exploration credit measure announced by the
Government targets the existing tax distortion that prevents companies without
assessable income from gaining the full after company tax value of exploration expenditure.
While the rebate will address this distortion, the advice from member companies
at this stage is that it may not address the challenges of raising equity
capital. This is because the benefit accrues at the company, not the subscriber
This support was echoed by Mr Simon Bennison, Chief Executive Officer
(CEO) of the Association of Mining and Exploration Companies (AMEC):
The whole issue for the exploration sector is that to get the
amount of capital that is required to drive exploration in this country
requires the raising of significant capital. That is done through equity
finance, and that is why the flow-through shares, for want of a better description,
had been proposed from industry and were supported by government in the
election platform, as opposed to the rebate itself, which was cash back—after
you had made the expenditure you would go and claim the rebate and get
reimbursed the rebate. That is fine, but that allows you only to put a certain
amount—at that stage it was 30 per cent—back into exploration and other
expenses, whereas if you were raising the full equity from the flowthrough shares
arrangement you would be putting all that expenditure on an annual basis, and any
other further raisings, back into the full exploration program.
Further, Mr Mike Young, Managing Director of BC Iron noted to the
committee that a flow-through share scheme would introduce more investor
confidence for the industry.
Noting industry support for a flow-through share scheme, the committee
questioned why the Henry Tax Review recommended the RER over a flow-through
scheme. Dr Henry explained to the committee that:
The [Henry Review] committee was not of the view that there
was a need to provide further exploration incentives. There was also—and I do
not know if this was reflected in the report but I am nevertheless happy to say
it—a view that something like a flow-through share scheme would introduce an
additional level of complexity to the tax system. That was a consideration...
And we came to the view that there was a simpler, neater and, dare I say, more
elegant way of providing much the same incentive for exploration were the
government to judge such an incentive to be important. That was the background
of the [Henry Review] committee’s recommendation.
Given evidence received about the potential benefits of the RER for
smaller companies, the committee sought information on why the measure will no
longer be pursued. Dr Henry merely stated to the committee 'That is a
The committee was told that industry was disappointed about the removal
of the RER, as Mr Stephen Pearce, Chief Financial Officer (CFO) of Fortescue
Metals Group (FMG) explained:
...In our discussions with the government prior to the MRRT
being announced, we had certainly argued that the exploration rebate should be
retained. So we were particularly disappointed that the exploration rebate had
not continued or that the flow-through share scheme proposal, which has been on
the table for probably the last decade, also has not progressed.
Mr Bennison of AMEC explained to the committee that while industry had preferred
a flow-through share arrangement, they had welcomed an RER. However, the RER has
been removed, and has not been replaced with a flow-through share scheme. Mr
Bennison went on to explain to the committee that there are significant
differences between the two programs:
Mr Bennison—The industry has always welcomed an RER and has
made this known to the government on a number of occasions. Given the amount of
conjecture that has been around this over recent times we have actually put a
chronology together that identifies the times at which government has been
engaged in this process from when the RER was first announced. We have gone to
great lengths to explain to government that the RER is very different to what
the industry was initially asking for and what the government committed itself
to in the 2007 election policy platform, which was really an exploration
development program modelled around the flow-through shares. The flow-through
share arrangement was there to address a taxation asymmetry problem that we had
and a distortion that we believed needed to be addressed. That was there to
provide equity finance for the sector; versus an RER, which was more or less
there to rebate industry, and also in part address that asymmetry, but which
really was not addressing the issue of raising equity finance, which is the
major hurdle for exploration and exploration development within this country.
CHAIR—If I can paraphrase what you are saying, the resource
exploration rebate was better than nothing—
CHAIR—It was not as good as what you had been promised before
the last election by the government when they promised flow-through shares but
it was better than nothing, but you have actually now ended up with nothing.
Mr Bennison—Correct. I think the important thing is there are
distinct differences in the roles of both programs.
Resource Super Profits Tax
The Henry Tax Review Report made a series of recommendations regarding
the application of a resource rent tax, and the form it should take. In summary,
recommendations 45, 46 and 47 recommend that a uniform resource rent tax be
imposed and that it:
- replace existing resource charging arrangements on non-renewable
- be administered by the Australian Government;
- be levied at a 40 per cent rate, which is adjusted to
offset any changes in the company income tax rate to ensure a combined
statutory tax rate of 55 per cent;
- apply to non-renewable resource projects, such as oil, gas and
minerals, with the exception of lower value minerals which would continue to be
subject to existing arrangements where appropriate;
- measure rents as net income, less an allowance for corporate
capital, and that the allowance be set at the long-term government bond rate;
- require a rent calculation for projects;
- allow losses to be carried forward with interest or transferred
to other commonly owned projects, and that the tax value of any residual losses
be refunded when a project is closed;
- be allowed as a deductible expense when calculating income tax,
with any loss refunds treated as assessable income;
- not provide concessions to encourage exploration or production
activity at a rate faster than the commercial rate or in a particular
- should not allow deductions above acquisition costs to stimulate
- allow existing projects to be transferred into the new system
with an appropriate adjustment to the starting base for the allowance for
- be implemented in accordance with a time-frame set out by the
Australian Government; and
is implemented with clear guidelines as to how existing
investments and any investment in the interim will be treated under the new
resource rent tax.
In response to these recommendations, the government announced its
proposed Resource Super Profits Tax (RSPT), which was to commence on
1 July 2012, at a rate of 40 per cent on profits made from
Australia's non-renewable resources.
It was proposed that the RSPT would replace the crude oils excise, and
would operate in parallel with state and territory royalty regimes. The Australian
Government was to provide resource companies with a refundable credit for
royalties paid to state or territory governments, allowing the states and
territories to continue to collect a stable stream of revenue from royalties,
while removing the effects that royalties have on investment and production.
It was intended that those projects already covered by the current
Petroleum Resource Rent Tax (PRRT) would remain in the scope of the PRRT unless
they elected to transfer to the RSPT. However, any election into the RSPT was
to be irrevocable.
The government explained the operation of the RSPT in a fact sheet as
The RSPT will apply to super profits made from all non‐renewable resources on
or after 1 July 2012 at a rate of 40 per cent. RSPT
liabilities will be deductible with RSPT refunds being assessable for income
Through the RSPT, the Government will effectively make a
contribution of 40 per cent to the costs of the project outlaid by
the entity. An entity will be able to access the contribution by deducting the
costs outlaid on a project from: the project’s RSPT income; from income of
another project owned by the entity or owned by another entity of the same
wholly owned company group.
Any remaining costs will be carried forward to be deducted as
a loss against future income or be refundable at the 40 per cent rate
on a reasonable basis, such as when an entity exits the resource sector. The
basis for refundability will be determined through consultation with
Delays in utilising the costs could occur due to costs
exceeding income and due to depreciating assets being expensed over the life of
the asset. These undeducted costs are held in an account called the RSPT
capital account. The government will compensate an entity for this delay by
providing an interest allowance on the balance in the RSPT capital account. The
RSPT allowance rate will be set at the long term government bond rate.
Entities that have interests in existing projects that will
be subject to the RSPT will be given an RSPT starting base to recognise past
investment. Special arrangements will be provided to allow the starting base to
be used over the first five years of the operation of the RSPT to reduce the
RSPT payable on these projects interests. Any unused starting base can be
carried forward to be deducted against future income of that project interest,
though it cannot be deducted against income from other project interests and is
Investment expenses by an entity between the time of
announcement and commencement of the RSPT will be given the same treatment as
for that outlaid post commencement.
The government stated that it intended to consult with stakeholders on
RSPT design issues including the taxing point and transitional arrangements for
existing projects prior to the commencement of the measure. The consultation
process commenced with the release of the Announcement Paper, The Resource
Super Profits Tax: a fair return to the nation.
Shortly after the release of the government's initial response, the
initial round of discussions with the Consultation Panel began, followed by
public consultations in various capital cities commencing from
24 May 2010.
On 2 July 2010, the Prime Minister announced that the RSPT
would be replaced by a new Minerals Resource Rent Tax (MRRT), and an expanded
PRRT. Details of the new arrangements are discussed at chapter 4.
Concerns regarding the Resource
Super Profits Tax
A number of the submissions received by the committee regarding the
Henry Tax Review and the government's initial response noted that at the time
submissions were sought, industry and stakeholders had not had the opportunity
to undertake any detailed analysis on the consequences of the RSPT,
particularly as the draft legislation was unavailable at the time, and
consultations between a number of stakeholders and the government were ongoing.
However a series of initial concerns were raised.
The removal of state royalties and
the consultation process
The committee asked questions about the level of consultation which took
place on the resource rent tax measure as recommended by the Henry Tax Review.
The committee confirmed with the Department of the Treasury that the original
resource rent tax proposed by the Henry Tax Review was designed to replace
CHAIR—The resource rent tax model which was recommended by
your review was based on the proposition that state royalties would be
abolished altogether and be replaced with a profit based resource rent tax.
Were state and territory governments ever formally consulted on that proposition
as far as you are aware?
Dr Henry—Yes, at officials level certainly and at political
CHAIR—And you are quite certain about that?
Dr Henry—I am absolutely certain.
CHAIR—And that was before this was announced?
CHAIR—But presumably the response then was that state and
territory governments were not going to abolish their royalties and hence the
government decided to refund them under certain circumstances? That is right,
Dr Henry—That was the government decision...
The committee notes that Dr Henry made it very clear that the RSPT was
designed to replace state royalties, if not straight away, then over time. Dr
Henry also conceded that under the RSPT, there could be a nil return to the
community from the exploitation of these non-renewable resources if there was
no 'super profit' and all state royalties were either refunded or abolished:
Dr Henry—That was the government decision. Whether it is the
case that the government decided on that particular formulation because the
states had indicated they were not going to abolish their royalties is another
matter. I am not sure that that is the reason why the government settled on
that particular design. I think, rather, the issue was that that would be the
easiest way of introducing new taxation arrangements, at least in some
transitional period. I must say—or rather, I do not have to say it but I will
say it—that it was my expectation as an adviser that, were the government able
to legislate that particular package and that particular design, at some point,
not immediately, obviously, but at some point, state royalties would disappear.
So I saw the government’s proposal as an interim arrangement with respect to
CHAIR—So, when you say it was part of the transitional
arrangements and interim arrangements, your assessment or your take on it was
that the refunding of state royalties was going to be a temporary measure?
Dr Henry—That is a personal judgement. As far as I know, the
government did not come to any particular view on that matter. But it just
seemed to me that, with the business of states levying royalties and then the
Commonwealth refunding those royalties to taxpayers and levying the
Commonwealth tax instead, at some point states would see that there was no need
for them to levy the royalties in the first place. But that is a personal
CHAIR—If the federal government had gone along with your
judgement and I guess with the proposition of your review and state royalties
had been abolished or would be abolished then wouldn’t it be the case that some
mining companies would get access to our non-renewable resources for free—i.e. if
they are not making a super profit under the RSPT or if they are not subject to
Dr Henry—Yes, that is certainly the case. It is certainly the
case that under the RSPT, the MRRT and, for that matter, the petroleum resource
rent tax, if businesses are not making a significant rate of return on the
extraction of the mineral resources then, in the absence of royalties, there
would be no tax. That is of course why, in the committee’s report and also in
the government’s initial response to the committee’s report, the abolition of
royalties was said to remove a considerable distortion in the taxation
arrangements applying to natural resources, and it is why the report and the
government’s response to the report indicated that it was very likely that minerals
investment would actually increase under these taxation arrangements.
The committee notes the concerns the Western Australian Department of
Treasury and Finance raised in relation to the Commonwealth's 'unwelcome
intrusion' into the area of state royalties:
Turning next to the issue of the state’s autonomy over mining
and petroleum royalties, we view the Commonwealth’s proposed mining tax regime
as an unwelcome intrusion into an area of state government responsibility,
undermining the state’s autonomy and budget flexibility. While the proposed
MRRT and expanded PRRT are currently envisaged to operate alongside state
royalties, with a tax credit available for state royalty payments, we are
concerned that over time there is a significant risk that states will
effectively be crowded out of this revenue base, at least in respect of iron
ore, coal and petroleum. The intentions of the Henry review committee were
quite clear in this regard. Industry is also likely to bring pressure to bear
on states to abolish their royalties so that companies need comply with only
one regime, rather than two. Such an outcome would increase WA’s reliance on
Commonwealth grants and exacerbate the already high vertical fiscal imbalance
between the Commonwealth and the states. A related issue is the extent to which
the Commonwealth government will seek to cap the royalties that are creditable
against liabilities under the MRRT and expanded PRRT. In our view, it is
essential that states have full flexibility to alter their royalty regimes as
appropriate to their specific circumstances.
Despite Dr Henry's assurances about consultation with state and
territory governments impacted by the RSPT proposal, the committee heard
concerns about the lack of consultation on the RSPT measure, including the
possible future abolition of state royalties, from the Western Australian
Department of Treasury and Finance:
CHAIR—Did the Australian Treasury contact you before the
release of the superprofits tax?
Mr Barnes—Before the original public announcement the
Commonwealth Treasury did give a very general heads-up of the direction that
the recommendations were heading in, but at no stage prior to public release
did we actually see the recommendations, nor—by definition, given that we did
not see the recommendations—were we asked to comment or provide input on the
CHAIR—The original proposal was for the resource superprofits
tax to replace state royalties and that state royalties would be abolished. As
far as you are aware, has anyone from the federal government at an official or
government-to-government level discussed the prospect of abolishing state
royalties with WA Treasury or the WA state government?
Mr Barnes—In the initial heads-up that I mentioned, that
prospect was flagged as the direction that the Henry review committee was
CHAIR—What was your response to that?
Mr Barnes—We were not really given the opportunity to
respond; it was more in the nature of a one-way communication that that was the
direction the review was heading in.
CHAIR—...You are in Canberra today; why wouldn’t Ken Henry
and others pick up the phone or sit down with you and give you some answers to
all these questions?
Mr Barnes—You would probably have to ask Ken Henry that
question. We have sent off a letter or two and emails to try to get clarity
around some of these issues, but so far it has been to no avail.
CHAIR—How many letters and emails have you been sending to
federal Treasury or the federal government?
Mr Barnes—I can recall two.
CHAIR—So you have been trying to have a meeting or discussion
but so far that has not eventuated.
Mr Barnes—Yes—certainly not to the level of detail that we
The committee heard from Western Australian Department of Treasury and
Finance that revenue from royalties has increased with commodity prices because
the royalty system in Western Australia is value based not volume based:
CHAIR—Because there seems to be a general lack of
understanding on how royalties are operating. I am just asking you to explain
it for the benefit of the public. One of the arguments that has been used by
senior cabinet ministers at a federal level, and all of the government members
and senators who run through the talking points around the super profits tax
and its success, is that state royalties are volumes based, taxes based on
volumes, so they have not enabled the community to get their fair share of
increasing commodity prices and only a profits based resource rent tax will enable
the community to get a fair share of the increased value of those commodities.
Would you care to comment (1) on the operation of state royalties in Western
Australia, which I understand to be values based, and sensitive to price; and
(2) on whether in fact a profits based resource rent tax is the only way to
achieve a fair return to the community?
Mr Barnes—The vast majority of Western Australia’s royalty
regime is an ad valorem, or value based royalty system, not volume based;
therefore our royalty revenue rises in line with increases in commodity prices
and in line with increases in volumes. The chart I have in front of me shows
that royalty revenue has increased substantially over the last four or five
years, reflecting the increase in commodity prices that we have seen over that
time. In 2004-05 our royalty revenue was less than $1½ billion; in 2008-09 our
royalty revenue was approaching $3½ billion.
CHAIR—So there have been significant adjustments to your
revenue as a result of the increase in commodity prices?
The committee heard evidence from the Western Australian Department of
Treasury and Finance stating that 'if there is a view that the community is not
receiving a fair return' for its non-renewable resources then the department
would prefer the Commonwealth and states work together to design enhancements
to the royalty regimes:
CHAIR—You recommended that this minerals resource rent tax
should not proceed. Can you summarise the basis for your view that the MRRT
should not proceed?
Mr Barnes—I guess it is because of some of those risks that I
outlined in my opening statement. It is also as a result of the general
principle of a concern that the Commonwealth is intruding in what is
historically and, arguably, constitutionally a state responsibility not a
Commonwealth responsibility and the implications of that for the current
vertical fiscal imbalance between the Commonwealth and the states and the
implications for the revenue autonomy and policy flexibility of the states. They
are issues that we are very concerned about.
Our preference, therefore, is that the MRRT not proceed. If
there is a view that the community is not receiving a fair return from resource
companies, however a ‘fair return’ is defined—a very subjective thing to
define—we would prefer that the Commonwealth and the states work together to
design enhancements to the royalty regimes of the states to address that issue.
APPEA emphasised that the measure should not reward failure:
The industry does not support the introduction of a risk
sharing provision (via a rebate or refund at the end of a project life).
Rather, a higher priority should be placed on the application of appropriate
uplift rates to reflect the risks associated with exploration and development
decisions in the industry.
BP noted, that while in principle, a 'true rent tax' is efficient, the
RSPT as it was initially proposed, was flawed:
Firstly, setting the uplift on expenditures at the Long Term
Bond Rate does not adequately reflect project risk, and the proposal to offer a
refundable offset for loss-making projects does not work as a proxy. Secondly,
depreciating capital investments over long time lines does not reflect the very
deep capital requirements in industries such as Liquefied Natural Gas (LNG),
and would see projects paying a "profit" tax when they are still many
years away from breaking even on a cash flow basis. Thirdly, imposing the
change retrospectively on projects that were sanctioned on a fundamentally
different basis is both unfair and, because it impacts different companies
differently, is inequitable. For example the North West Shelf Venture appears
to be alone amongst current oil and gas projects in Commonwealth waters to be
denied the option to opt-in to the RSPT or to remain on current arrangements.
APPEA were particularly concerned to ensure that existing projects would
not be disadvantaged under the transitional provisions provided:
Any fundamental shift in the investment framework must be
very carefully considered and managed, with projects transitioning into the new
regime not being adversely impacted. In addition, value adding activities post
the taxing point should not be taxed via the RSPT. Changes should only be introduced
on a prospective basis, while retrospective impacts must be avoided, or the
impacted parties should be fully compensated.
APPEA further noted that 'Competitive neutrality must underpin the
design of any new system.'
In their submission, APPEA argued that it is essential that taxation neutrality
is maintained for commodities competing for the same market, so it is important
that natural gas is not disadvantaged in relation to coal and other fuels.
Markets, production and investment
The Australian Energy Market Operator (AEMO) and the Australian Energy
Market Commission (AEMC) both noted that the impact of the RSPT would have varied
between market participants:
The impact of any tax on the cost of generation would then
not only relate to the incidence of the tax on the supplier but also the
specific terms of the contract between parties.
AEMC commented that the RSPT could have potentially impacted on input
costs for market participants, explaining that:
The market rules are designed such that changes in input
costs for market participants can be reflected in market offers – on the basis
of which the market is dispatched, and prices are set. Price expectations are
the main signal for new investment. Hence, price signals might change, but
there is no obvious detriment to ongoing security of supply – and is no
different in principle to other cost changes that the market routinely
ESAA expressed some concern about the possible impact of the RSPT on
energy prices, noting:
esaa observes that, to the extent that the RSPT serves to
increase the input costs of coal and gas for electricity generation (and gas as
a direct domestic energy source), it would be rational economic behaviour to
expect industry participants to attempt to pass through such costs to end
AEMO noted that increased costs and prices could impact on
competitiveness and investment outlook:
Should a generator suffer an increase in marginal fuel supply
cost due to the processes described above, it would be expected that its
marginal offer price would increase as a consequence. Where those impacts fall
differently on different participants, they could also impact on relative
competitiveness and the dispatch of generation. Any impacts of the proposed tax
will first be observed in the short term market outcomes. There may also be
longer term impacts arising from any changes in the investment outlook for the
various sectors of the energy industry.
AEMO further noted that if the RSPT had impacted on investment for
certain sectors, this may have affected future energy demand:
It should also be noted that extractive and processing
industries represent a significant proportion of energy demand in our markets.
Forecast future demand for energy is premised upon strong growth in these
sectors. Any change to investment in these industries, either positive or
negative, would impact on future energy demand.
The Australian Academy of Technological Sciences and Engineering (ATSE)
...considerable concerns about the proposed change in
taxation arrangements for resources due to the heightened sovereign risk it
implies and the consequent reduction in potential investment in badly needed
new energy infrastructure.
A key concern for ATSE has been the lack of investment in new
electricity generating capacity, due largely to uncertainty regarding carbon
pricing, and changing policies on renewable energy targets, and support for
renewables in general. ATSE noted:
Investors have made it clear that even before the RSPT
proposal, Australia had moved from being regarded as a low return/low risk
investment prospect to a low return/high risk environment. With the potential
for higher domestic costs for coal and gas under a new tax regime, appetite for
investment will be further reduced.
Woodside Energy noted that they are concerned to ensure there is
certainty for their existing projects, most of which currently operate under
the PRRT with the exception of the North West Shelf Project, which operates on
a royalty regime. Woodside have noted that they would be very concerned if a
change in taxation regime resulted in a loss of value of its projects. Woodside
further suggested that consideration be given to extending the PRRT regime to
cover all oil and gas projects.
The impact of uncertainty on industry investment was illustrated by FMG:
The uncertainty has a major impact on a company like
Fortescue at this point in time. We have, per our stock exchange release of a
month or two ago, deferred any investment decisions on both the Solomon project
and the Western Hub. The sorts of sums involved that we are talking about are
$15 billion to $20 billion of investment. We would love to have
certainty around these issues so that we can move forward as a company, expand
rapidly and create jobs for Australia.
In its submission in June 2010, the AWU argued that large mining
companies would be able to absorb the new tax, and the RSPT would actually
benefit smaller mining companies:
It is only taxing super normal profits, and the features of
the tax have a lot of benefits to smaller, less profitable mines, operating on
narrower margins than the majors.
These smaller players constitute hundreds of companies
employing thousands of members. These companies produce gold, uranium, copper,
zinc among others.
Compensation for royalty payments and the cut in the company
tax rate will be particularly beneficial to the smaller players.
However, Mr Pearce of FMG, in setting out FMG's concerns with the government's
consultation process over the MRRT pointed out that changes to the original
RSPT favoured larger mining companies at the expense of the smaller miners:
There are seven key items that we believe still need to be
addressed to provide clarity and certainty to the industry. With respect to
interest deductibility, we remain opposed to a tax of this scale being
calculated and levied prior to the deduction of interests and other costs,
particularly in a project’s first five years of operation. With respect to the
uplift rate, the current proposal clearly favours the large multinational
companies with access to cheaper funds over emerging companies. In relation to
the infrastructure recharge, clarity is required so that the arm’s length basis
evidenced by external third party agreements forms the basis of the net back
charge. There is also the issue of the extraction allowance. Similar to LNG,
iron ore is a capital intensive path to market and this allowance should be
structured to encourage innovation and new technology. It is essential to better
recognise infrastructure capital in the transition arrangements and to
encourage ongoing large-scale infrastructure investments. The MRRT threshold
should be increased to $100 million to encourage growth of the smaller players.
And we believe magnetite mines should be excluded.
FMG acknowledge that individual companies in the iron ore
industry will be impacted differently by each of these factors. The two items
that impact Fortescue most significantly are clarity around the arm’s length
principle to be applied and a better balanced approach to the transition
arrangements that recognise the large dollar value invested in high-risk
infrastructure assets. Investment in infrastructure should be encouraged and
companies should be rewarded to risking the large sums of capital for the
benefit of all Australians.
I have a couple of closing comments on the process. FMG have
been a loud and constant opposer of the flawed RSPT for a number of key
reasons: (1) the devastating impact that such an ill thought-through tax
would have had on the whole Australian mining industry; (2) the obvious flaws
in the economic theory and the gap between the elegant economics and the
practical reality; and (3) the lack of process and consultation with the
industry prior to announcing one of the most significant changes to Australia’s
The Gillard government chose a different path of
consultation and worked with three large multinational, multicommodity
companies. In my view, they do appear to have addressed a number of the key
issues with the RSPT, but a number of key factors have been negotiated that
tend to favour them. Genuine consultation and clarity are urgently required
to provide certainty to an industry that has the capacity to build the next
generation of Australia’s wealth. We need certainty of process, manageable
legislative risk and delivery of a fairer outcome for all elements of the iron
ore industry. And we need the key principles addressed prior to moving to
detailed implementation of the heads of agreement that do not adequately
represent all elements of the industry. [emphasis added] 
ATSE noted concerns that the RSPT may have had a negative impact on
overseas investment in Australian projects:
Application of the new tax on existing operations will further
scare overseas investors as they will see it as a potential precedent which
could expand to industries using Australian resources in the event they are
perceived as making more than bond rate returns on capital. International
energy companies have many alternatives for investing their capital,
particularly in higher growth markets in Asia where governments are prepared to
make long term agreements guaranteeing not to vary taxation and other
conditions for the lifetime of the project.
APPEA were also concerned to ensure that exploration and investment in
Australia would not be discouraged as a result of the RSPT. In their submission
to the committee they noted that while the potential impact of the RSPT had
been uncertain, it could have affected investment decisions in two ways:
Firstly, it may influence incremental investment decisions on
existing projects and secondly, it will be important in determining final
investment decisions for future projects and activities. Until such time as the
final details are determined (including the critical transitional details), the
medium to long term impacts will remain uncertain.
A significant concern for ATSE was the impact the RSPT could have had on
The bridge between coal based power and new low emission
technologies in the next decade or more will be gas. The RSPT could well
reduce exploration for new gas resources and therefore the potential domestic
supply, at least on the east coast, so increasing power prices by more than
would have otherwise been the case.
Griffin Energy explained to the committee that coal supply contracts in
Western Australia are often high volume and low margin, and consequently:
While the final details of the RSPT are yet unknown, it is
clear that taxing the profits above the long term bond rate of existing (and
depreciated) mining operations at up to 40% will lead to lower long term
revenues for these operations. Reducing the returns of these marginal businesses
may lead to a future reallocation of capital away from these mining operations,
when further investment is required to maintain mining output. Reduction in
mining output or mine closure would have devastating impacts on the town of
Collie and the surrounding district.
BlueScope Steel noted that while they did not expect an immediate impact
from the RSPT, as a consumer of a range of domestic mineral raw materials they were
...the potential medium term impact of the tax on the cost
and availability of raw materials, especially those raw materials that are not readily
substitutable by imports...If the RSPT was to cause a reduction in the
development of new minerals resources in Australia, this could contribute to
reduced supply, which would increase prices of these minerals. Our ability to
pass on such price increases through increased selling prices for our steel
products would be constrained by the internationally traded nature of these
products. This would erode margins for our domestic iron and steelmaking
AGEA noted that while the RSPT would not have directly applied to the
geothermal energy sector, any impact on the mining sector may have adversely
affected the geothermal industry, as the mining industry will be a very
important early customer of geothermal energy:
While it is AGEA’s understanding that the proposed RSPT will not
apply to the geothermal energy sector, the industry is concerned about any dampening
of activity in the broader mining industry as it will be an important early customer
of geothermal energy. This is particularly the case in central South Australia and
the Pilbara and Mid-West regions of Western Australia Where geothermal energy is
the ideal source of renewable energy for mining projects given its abundance and
base load character. 
ACAPMA noted that the RSPT may have affected employment in the upstream
...the tax on profits reduces the net income of upstream
companies, and this may have an impact on an upstream operator’s appetite to
APPEA noted that if investment in potential projects was hindered by the
RSPT, the potential job opportunities that these projects offer may have been lost:
The final impact on jobs and employment will hinge on the way
the new regime influences project economics, particularly those in the process
of making final investment decisions. Australia has the potential to see
significant growth associated with the development of the nation's gas
resources, with upside potential of more than $200 billion in capital
investment and the creation of around 50,000 jobs. Many of the proposed
development [sic] in the industry require significant capital and human
resourcing in regional areas. Poorly structured fiscal settings may see many of
these opportunities lost.
This argument was echoed by BP, who stated:
The main driver of employment in the oil and gas sector is
the construction of new projects. Current projects that have been confirmed to
remain covered by the PRRT should be unaffected, however projects that either
pre- or post-date the PRRT appear to be covered by RSPT. A reduction in
sanctioned projects will have an impact on employment. This applies at
established projects such as the NWSV as well as Greenfields projects, because
many incremental investments continue to be made through the life of a
AGEA expressed concern that if the mining sector, as an important early
customer of geothermal energy, was negatively impacted by the RSPT, this would
affect the ability of the geothermal energy industry to develop projects and
...the sector could be employing in the region of 17,300 people
by 2050 and 3,800 by 2020. While most of these jobs can reasonably be expected
to be associated with research and development activities in the sector and projects
that are not dependant on the demand from off grid or mining projects, it is reasonable
to expect that there will be some impact on these jobs in the shorter term.
Given evidence received by the committee raising concerns about the
possible impact of the RSPT on jobs and investment, at its public hearing of
5 July 2010, the committee sought information on the potential impact
of the RSPT. Dr Henry explained to the committee:
...the RSPT itself, by design, is a neutral tax. The RSPT
itself, by design, should not affect investment decisions, should not affect
employment decisions, should not affect output decisions and so on. Given that
the RSPT, a neutral tax, was in economic substance replacing royalties, because
they were going to be refunded, one could be pretty confident conceptually that
activity would expand, not contract. Now, as we have discussed, particularly in
some of the questions that the chair asked earlier, it is not possible to
make such a conclusive statement in respect of the interplay between the MRRT
and the royalties, principally because the royalties are now being credited
against an alternative tax—that is, the MRRT—not refunded and secondly
because—the chair also went to this question—one cannot be absolutely sure that
the MRRT provides a neutral uplift rate, whereas the RSPT does by definition.
[emphasis added] 
Energy and fuel security
The South West Interconnected System (SWIS) electricity grid in Western
Australia relies on coal fired generation for 40 per cent of its
installed capacity. Griffin Energy argue that if mining operations had been
negatively impacted, and consequently the supply of coal to the SWIS had been
reduced, this may have affected the security of supply in the SWIS as:
...there are no fuel-substitution alternatives for coal to provide
the balanced generation portfolio that maintains security of supply in the
SWIS. In other words, it will be unlikely that the State can allow these
operations to fail. The only way to do this (in the event of the withdrawal of
private capital) is for the State to step in and subsidise the mining
operations. Reducing royalty obligations would have little or no impact (given
royalties are netted from the overriding 40% RSPT take). This means contracts
would need to be renegotiated between coal suppliers and state-owned utilities,
which would warrant either an increase in electricity tariffs or a direct
taxpayer subsidy. Either way, the impact would distort the electricity market.
BP noted that due to the need of incremental investment in some established
projects such as the North West Shelf Gas Venture, the RSPT could have had an
impact on resource exploration and production, thereby affecting supply and
Undermining the economics of the Venture will make these
investments harder to justify, reducing resource recovery. The same is true of
future offshore projects, if they are forced to operate under the RSPT rather
than the more appropriate framework of the Petroleum Resource Rent Tax (PRRT).
However it is not possible to be precise on the impact in the absence of
further clarity on the RSPT details.
While APPEA observed that the impact of the RSPT on Australia's energy
and fuel security would have to have been assessed in light of the final detail
of the measure, stating that:
Factors critical to Australia's fuel and energy security are
the commercialisation of discovered resources and the exploration for new
petroleum deposits. The RSPT can be expected to impact on both exploration and
Need for further detail
ESAA noted that as a number of details regarding the tax remained to be finalised
via consultation at the time submissions were sought, it was difficult to
determine the possible impact of the RSPT, for example:
As highlighted in the initial Government briefing
documentation, a key issue which will need to be resolved is the determination
of appropriate methodology to determine the value of a resource for taxation
purposes. This is particularly problematic where operations exhibit a high degree
of vertical integration between mine and production facility as is sometimes the
case in the electricity generation sector.
Cutting the company tax rate
The Henry Tax Review Report recommended that the company income tax rate
be reduced, as follows:
Recommendation 27: The company income tax rate should be
reduced to 25 per cent over the short to medium term with the timing
subject to economic and fiscal circumstances. Improved arrangements for
charging for the use of non-renewable resources should be introduced at the
In response the government initially proposed to reduce the company
income tax rate from the current level of 30 per cent, to 29 per cent
for the 2013-2014 income year, and then to 28 per cent from the
2014-2015 income year, in conjunction with the introduction of the RSPT on 1 July 2012.
The Prime Minister's announcement of 2 July 2010 stated that under
the new/revised tax arrangements, the company tax rate will continue to be cut
to 29 per cent from 2013–14 but will not be further reduced under
current fiscal conditions. Small companies will benefit from an early cut to
the company tax rate to 29 per cent from 2012–13.
State infrastructure fund
Recommendation 48 of the Henry Tax Review Report suggests that the
Commonwealth and state governments should negotiate the allocation of revenues
and risks arising from the resource rent tax.
In light of this recommendation, the government's initial response
proposed the establishment of a state infrastructure fund, using some of the
proceeds from the RSPT. The fund was to be created to assist states and
territories in investing in infrastructure, and it was intended that the
funding would be distributed in a manner which appropriately recognised the
significant infrastructure demands of resource-rich states.
According to the government's initial response, the funding was intended
to be provided as projects were built, so that states did not have to wait
until projects were complete and production commenced to receive funds. The
government's initial response stated that the fund was to be paid to the states
each year, commencing in 2012-2013 at an amount of $700 million and was
expected to grow over time.
Credibility of the proposed
regional infrastructure fund
It appears to the committee that the state infrastructure fund is now
referred to as the regional infrastructure fund. The proposed regional
infrastructure fund is intended to provide $6 billion to invest in
critical infrastructure projects with potential partner funding from state
governments, private investors and/or local governments. The government states
that the fund will recognise the large infrastructure demands of resource-rich
states. It is intended that the fund will be distributed in accordance with the
value of mining production paying the tax. 
Details of the fund are still not available. The committee is concerned about
the lack of transparency provided in the detail available about where the
government expects the revenue to come from under the proposed regional
The committee notes that it is difficult, if not impossible, to assess
whether the allocation of expenditure from the proposed fund to individual
jurisdictions is appropriate when the government is not prepared to reveal
where the revenue will come from on a geographical basis.
The Western Australian Department of Treasury and Finance noted in
evidence that the operation of the fund was an issue. They also noted that the
government's 2007 election commitment to Western Australia was still
Another outstanding issue is the operation of the proposed
Regional Infrastructure Fund, including states’ share of the funding and its
treatment under the Commonwealth Grants Commission process. Finally, there is a
need for clarity on the status of Commonwealth election commitments relating to
a Western Australian infrastructure fund financed from Gorgon and/or Pluto
project PRRT revenues and a flow through share scheme to encourage exploration
The committee is concerned that the proposed regional infrastructure
fund will be yet another repetition of the government's promised fund from
2007. The committee notes that Western Australia is still waiting for that fund
The committee's view is that this proposed regional infrastructure fund is
part of the government's strategy to encourage acceptance of its new tax, the
MRRT/expanded PRRT. The committee is concerned that while the MRRT/expanded
PRRT has the potential to raise tens of billions of dollars in revenue over a
decade, the government is only intending to contribute $6 billion under
the fund to infrastructure over the same period. On this basis the committee
highly doubts that this proposal is a serious attempt to invest in
Other issues arising out of the Henry Tax Review Report
Energy and fuel security
Given the substantive nature of the review, the committee sought
information on the possible impact that taxation arrangements could have on
energy security and was informed that:
It is possible that taxation arrangements could have an
impact on energy security in two ways that occur to me immediately. The first
is that taxation arrangements could affect the level of investment in various
energy technologies, potentially in an adverse way if not properly structured.
There is also the possibility that taxation arrangements could be structured in
such a way as to lead to a diversification of energy sources. Of course, the
present tax law contains such provisions that encourage, for example, renewable
However, Dr Henry explained to the committee that the recommendations of
the Henry Tax Review Report did not address energy and fuel security:
...I think it is fair to say that none of the recommendations
were specifically designed to enhance Australia’s energy security.
Cash bidding for exploration
The committee asked Dr Henry for further information on recommendation 49
of the Henry Tax Review Report, which states:
The Australian and State governments should consider using a cash
bidding system to allocate exploration permits. For small exploration areas,
where there are unlikely to be net benefits from a cash bidding system, a
first-come first-served system could be used.
The committee asked Dr Henry about the reasoning behind the
CHAIR—...Can you explain the rationale for promoting
cash-bidding allocation of exploration permits? Wouldn’t that cause a shift in
the grant of exploration permits leading to explorers allocating their budgets
to cash bids rather than actual, tangible exploration work?
Dr Henry—That rather assumes that the companies we are
talking about here have fixed budgets. I am not at all sure that the companies
do have fixed budgets. I know they talk as if they do, but they do not seem to
have a lot of trouble accessing additional financial capital when commodity
prices increase, so I am not at all sure that their financial capital is fixed.
In fact, I know it is not. I do not know if there would be such an effect as
you have postulated, but we did not consider such an effect. Instead what we
were motivated by was something that we have discussed earlier, which was
ensuring that the Australian community generally gets a fair value for its
CHAIR—But I guess we have already gone there, because the
Australian community might get as little as $0 for the resource if—
Dr Henry—Yes, but if somebody is prepared to pay money to
secure rights over those resources then it is appropriate that that money go to
the community. That is all.
Road transport taxes and fuel
The Henry Tax Review Report also made a series of recommendations
surrounding road transport taxes, including congestion charges, charges for
heavy vehicles, fuel taxes, road user charges, taxes on motor vehicle ownership
and road infrastructure.
In particular, the Henry Tax Review Report recommended that the current
fuel excise be phased out over time in favour of road user charges, and that if
fuel excise is retained all fuels should be taxed equally:
Recommendation 65: Revenue from fuel tax imposed for general
government purposes should be replaced over time with revenue from more
efficient broad-based taxes. If a decision were made to recover costs of roads
from road users through fuel tax, it should be linked to the cost of
efficiently financing the road network, less costs that can be charged directly
to road users or collected through a network access charge. Fuel tax should
apply to all fuels used in road transport on the basis of energy content, and
be indexed to the CPI. Heavy vehicles should be exempt from fuel tax and the
network access component of registration fees if full replacement charges are
The committee notes that the government has announced that that it will
not index fuel tax to the Consumer Price Index (CPI).
ACAPMA noted their support for the recommendations in the Henry Tax
Review Report regarding road transport charges:
The removal of all fuel excise and registration taxes, if
replaced by more efficient road user charges, would be positive progress. By
removing the fuel excise, which is largest component of the board price after production
costs, the motorist would be able to understand the relationship of board price
to the wholesale price. By then charging, as recommended in the Henry Tax
Review, congestion taxes as well as ‘mass-distance-location’ charges, motorists
would be able to better manage their personal transport requirements. This, in
some cases, could reduce the cost of transport when managed correctly.
The Australian Automobile Association noted its support for the
introduction of a road user charge to replace fuel excise, as recommended by
the Henry Tax Review.
The introduction of fuel excise on
In 2004, an energy white paper, Securing Australia's Energy Future,
was released proposing that all fuels which can be used in an internal
combustion engine should be subject to fuel tax. Consequently legislative
reforms were made in 2006, which provided for the introduction of an excise on
liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed
natural gas (CNG) from 1 July 2011. The excise is to be phased in
over four years commencing at 2.5 cents per litre in 2011, and
reaching a maximum excise rate of 12.5 cents per litre in 2015.
The LPG industry have raised concerns about the negative impact which
will be created by the introduction of an excise on LPG in conjunction with the
amendment of the LPG Vehicle Rebate Scheme in 2009, which reduced the rebate level
for LPG conversion of vehicles from $2000 every year at a rate of
$250 every year over four years to $1000 until it reaches $1000 per annum:
The imposition of fuel excise on LPG and continued reduction
of the LPG Vehicle Rebate Scheme will have a negative, immediate and sustained
impact on; the private motorist, small businesses and their employees, the
Australian vehicle manufacturing and transport industries and, most
importantly, the Government’s assurance and credibility with regard to
Australia’s energy security and the clean energy debate.
LPG Australia made extensive comment on the introduction of a fuel
excise on LPG, noting concerns that the excise will remove incentive for
investment in LPG, particularly due to the reduction in the price differential
between LPG and unleaded petrol, and consequently:
Severely and negatively impacts on 3,300 Australian small
businesses and ~20,000 employees who are engaged in the LPG vehicle equipment
supply and conversion industry.
The committee received comment from BOC as to the impact of the
implementation of the excise:
The application of excise to LNG will significantly change
the relative economics of LNG compared to diesel for heavy vehicles...There is
already an excise rebate for diesel and the proposed tax on LNG will in fact
negate the price incentive for heavy vehicle fleet owners to switch from diesel
to LNG. By 2015, LNG will incur an excise of 12.5 cents per litre which, on an
equivalent basis, is the same excise as applied to diesel.
LPG Australia further argued that introduction of the excise, and
reduction of the rebate will impact on Australia's energy and fuel security in
respect of manufacturing, reduced choice in LPG options, reduced demand for LPG
Autogas, and a significant impact on small business and employment in the LPG
BOC sees a contradiction in the government's acknowledgement of LNG's
role in Australia's energy future, and the introduction of the excise:
While the Government continues to acknowledge the role LNG
plays in ensuring Australia's energy security, some of the benefits to local
industry in developing this alternative fuel are offset by the proposed
Alternative Fuel tax. What this fledgling industry needs is greater support from
Government to grow the industry that will ultimately support Energy Security in
LPG Australia stated that 'LPG, as an indigenous, abundant, clean and
economical alternative transport fuel directly supports the Government’s energy
Consequently they call for a delay in the introduction of a fuel excise for 5
years, and reinstatement of the rebate at $2000 per annum for five
Risk to investment and
competitiveness of the Australian industry
The committee notes that through the RSPT the government sought to
impose an internationally uncompetitive new tax on mining, an industry of
significant importance to the Australian economy.
The committee notes industry concerns that the RSPT would have a
significant negative impact on investment and Australia's international competitiveness.
Of particular concern is the evidence the committee received regarding the
damage the RSPT could have done to Australia's attractiveness as an investment
destination. The committee remains concerned that due to uncertainty regarding
Australia's changing resource taxation arrangements, Australia's investment
reputation could remain damaged for some time.
The committee specifically notes announcements made by FMG and Xstrata
suspending a series of projects due to the announcement of the RSPT.
The committee is particularly concerned that a decrease in investment in
Australia due to the government's taxation reforms would affect resource
production and consequently energy supply – a situation which would obviously
be detrimental to Australia's future fuel and energy security. Consequently,
the committee considers that future taxation reform should give more serious
consideration to its impacts on Australia's future fuel and energy security.
Impact on jobs
The committee remains concerned that the government announced and
intended to proceed with the RSPT, a new tax which due to its impact on
investment decisions and company income, would have had significant
implications for Australian jobs.
The committee is particularly concerned about the potential for new
taxes on mining to impact on consumer prices, noting evidence provided by
industry highlighting the possibility of industry participants passing through
any additional cost burden to customers.
The committee is concerned that the government has not sought any
assessment of the impact of its new/revised mining tax arrangements on jobs and
investment in the mining industry.
The committee is particularly concerned about the impact of the reforms
on jobs and the economy, given Dr Henry's confirmation that the impact of the
MRRT/expanded PRRT arrangements on jobs and investment in the mining industry
would be worse than the impact from the previously proposed RSPT.
Thorough consultation with all stakeholders
The committee harbours significant concerns about the lack of
consultation with state governments, industry and relevant stakeholders
throughout the government's entire taxation reform process.
In particular, the failure of the government to appropriately consult
with state governments on the proposal to abolish state royalties highlights
the flawed policy process followed in establishing the government's taxation
In the committee's view it was a lack of consultation which led directly
to the failure of the government's proposed RSPT. The committee believes it is
inexcusable that the government failed to properly consult with industry about
the implications of the proposed tax on them.
Impact on state royalties
The committee is astounded that the government would consider proceeding
with a tax designed to replace state royalties without engaging in a thorough
and genuine consultative process with state and territory governments.
The change to the RSPT proposal prior to the 2 May 2010 announcement
from abolishing state royalties to refunding them appears to have been made
very late in the process and without much conviction. Indeed, Treasury
Secretary Dr Henry indicated to the committee that he considered it to be an
The committee does not share the view that a Resource Super Profits Tax
ensures a fairer return for the community where state royalties supposedly do
The committee is concerned about the confusion, even among senior
government ministers, about the operation of state royalty regimes. Contrary to
assertions made by government ministers and others, state royalties on mineral
resources are invariably value based. Suggestions that the community does not
receive an increased return from royalties as commodity prices increase are
plainly wrong. Royalties are a charge on production rather than profits, with
the community receiving a certain and reliable return from the exploitation of
those non-renewable resources irrespective of whether a profit is made. Federal
income and company tax arrangements already provide for the taxation of mining
The committee notes that under a profit based resource rent tax regime
without state royalties in place (or with state royalties refunded) Australians
are not assured of a fair and certain return from the exploitation of those
Furthermore, royalties are imposed by state governments on state owned
resources on behalf of the people in respective states. Royalties are an
important part of state budgets in resource rich states, helping to fund
schools, hospitals, police and many other important services. All Australians
get a fair return from increased royalty revenue for those states through the
Commonwealth Grants Commission process.
Implications for Australia's energy
and fuel security
The committee finds that in imposing a significant new tax on mining, the
Henry Tax Review failed to consider the risks to Australia's future fuel and
Further the committee is concerned that the introduction of an excise on
gas products will be detrimental to Australia's future energy and fuel
security, and is of the view that the government's measures contradict
purported acknowledgement of gas products in ensuring Australia's future energy
and fuel security. In addition, the committee considers that these measures will
negatively affect the incentive for Australians to adopt gas power supplies as
a lower emission alternative.
Need for exploration incentives
The committee notes that the RER would have provided benefits to the
geothermal energy industry, and considers that any future exploration incentive
program should also provide for expenditure incurred in exploring for
The committee notes concerns that now that the RER will no longer be
pursued by the government, the incentive it was to provide to encourage
investment in exploration, particularly for small to mid tier companies is
longer apparent. The committee considers that the Policy Transition Group must
give priority to developing a well considered exploration incentive scheme in close
consultation with industry.
The committee draws attention to the notable industry support for a
flow-through share scheme, and considers that the Policy Transition Group
should give serious consideration to implementing such a scheme, in close
consultation with industry.
3.133 The committee recommends that government proposals to make major
structural changes to Australia's tax system should involve meaningful
consultation on draft proposals with all relevant stakeholders, prior to making
final policy decisions. This will help ensure:
- a more transparent assessment of the merits of any such proposal;
- a more meaningful opportunity to provide input into the policy
development process for all relevant stakeholders, including state and
territory governments whose revenue would be impacted by any proposed change.
3.134 The committee recommends that proceeds from a proposed tax should not be
included in the Budget until the consultation process regarding that tax has
been completed and the legislation has been introduced or is imminent.
3.135 The committee recommends that any future tax reform process give proper consideration
to Australia's future energy and fuel security in formulating relevant taxation
3.136 The committee recommends that the government should not implement any
future taxation reform without first providing the Australian public with
independently verified modelling demonstrating any impact of the proposed
- Australia's global competitiveness;
- Cost of living; and
- The Australian economy as a whole.
3.137 The committee recommends that as a matter of priority, the government
consult with small and mid-tier mining companies, on the design of incentives
to encourage investment in exploration.
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