
Resource super profits tax
Kali Sanyal and
Paige Darby
The government announced its intention to introduce the Resource
Super Profits Tax (RSPT) in its response to the
Australia’s Future Tax System (Henry Tax Review)
report on 2 May 2010.[1] A resource rent tax was one of five
recommendations the government accepted from the 138 presented by
the Henry Tax Review.[2]
Budget measures
As part of the 2010–11 Budget, the government has proposed
to introduce the RSPT from 1 July 2012, with revenue from
the tax estimated at $3 billion in its first year of
operation, increasing to $9 billion in 2013–14.[3]
Of this $12 billion in revenue, $700 million will be
used to set up a Resource State Infrastructure Fund in
2012–13, with another $735 million budgeted for the fund
in the following financial year.[4] When announcing the fund, the government estimated
that it would constitute ‘more than $5.6 billion over
the next decade, particularly for mining states’.[5]
In addition, the government has set aside $1.8 billion over
four years for a resource exploration tax offset which will be
available for expenditure incurred from 1 July 2011.[6]
The RSPT
The RSPT constitutes a 40 per cent tax on the
‘super’ profits made from ‘the exploitation of
Australia’s non-renewable resources’. It will replace
crude oil excise and involve a refundable credit for royalties
mining entities pay to the states and territories. Also, entities
currently covered by the Petroleum Resource Rent Tax (PRRT) will be
able to opt into the RSPT scheme.[7]
The Henry Tax Review specifically recommended a resource rent
tax with the following characteristics:
A uniform resource rent tax should be set at a
rate of 40 per cent. It would use an allowance for corporate
capital system, with taxable profit associated with a resource
project equal to net income less an allowance for undeducted
expenses or unused losses. The allowance rate would be set by the
long-term government bond rate, as the government would share in
the risks of projects by providing a loss refund if the tax value
of expenditure is otherwise unable to be used.[8]
The Government has largely followed these recommendations in its
design of the RSPT. Under the RSPT scheme an entity can deduct the
costs outlaid on a project from the project’s RSPT income or
income of another project owned by that entity. Any remaining costs
will be carried forward to be deducted as a loss against future
income, or potentially refundable at the 40 per cent rate
on a reasonable basis (to be determined through consultation with
stakeholders). Undeducted costs will be held in an RSPT capital
account which will earn an interest allowance (set at the long-term
government bond rate—as recommended by the Henry Tax Review).
Entities with existing projects subject to the RSPT will have
access to an RSPT starting base to recognise past investment. This
‘starting base’ will operate over the first five years
of the RSPT, however the starting base will not be refundable or
transferable to other projects.[9]
Deductions will be allowed for the cost of extracting resources
and getting them to the taxing point, but not for the following
types of expenditure:
- payments of interest and financing costs, including the cost of
issuing shares, the repayment of equity, the payment of dividends,
and financial hedging costs;
- payments to acquire an interest in an existing exploration
permit, retention lease, development licence, production licence,
pipeline licence or access authority;
- payments to acquire interests in projects subject to the RSPT;
and
- payments of income tax or GST.[10]
The main implication for existing projects is that if they are
very profitable, they will pay more tax under the RSPT, and if they
are in a net loss position they will not have to pay any RSPT. In
particular, the government maintains that ‘no project that
was profitable under the royalty system will become unprofitable
because of the RSPT’.[11]
However, specific details—such as the ‘taxing
point’ of these super profits—are still unclear. The
Government has committed to an extensive consultation period in
order to determine the design of the tax in discussion with
industry:
There will be a period in excess of two years
between announcement and commencement of the scheme, which will
allow for extensive consultation on the details of the system and
ensure technical design is settled before commencement.[12]
The consultation period will cover, inter alia:
- the need for exemptions from the RSPT (for example, in respect
of low value minerals or micro businesses)
- the basis on which deductible costs will be refundable (for
example, when an entity exits the resource sector)
- arrangements for projects covered under the PRRT to irrevocably
elect into the RSPT
- the design of the transitional arrangements into the RSPT
and
- establishing a methodology for taxing super profits (especially
those methodologies for establishing taxing point values where
arm’s length prices occur downstream of the taxing
point).[13]
Consultation will include the announcement paper (which was
released on 2 May 2010), an issues paper to be released in July
2010, the final design paper to be published in late 2010, and
exposure draft legislation to be released in mid-2011.[14] Initial consultations
based on the announcement paper are scheduled to start in Sydney on
24 May 2010 and end in Adelaide on 11 June 2010.[15]
The current arrangements
The current system of resource taxation involves excise duties
administered by the Commonwealth and royalties administered at the
State level.[16]
Both of these types of taxes are typically levied ad
valorem—that is, mining is taxed on a per unit of output
basis which, as resources increase in value, is increasingly
distant from the profits being made from these resources. In other
words, if a tax is levied on the amount per tonne of a resource
(say coal), the tax collected by the government does not increase
if the value of that resource increases on international
markets—direct tax revenue only increases if the mining
company chooses to mine more coal.
The RSPT will replace the Commonwealth excise, but in order to
avoid the need to force states to remove their royalty-based
systems, the government is introducing a refundable credit for
royalties paid to the states and territories. This essentially
means the Commonwealth Government will pay the states their royalty
revenue (through the mining companies).
The Commonwealth Government also administers the PRRT which was
introduced in the 1980s. While the RSPT is similar to the PRRT as
they are both profit-based taxes levied at a rate of
40 per cent, there are some key differences:
Resource Super
Profits Tax
|
Petroleum Resource
Rent Tax
|
Most capital expenditure
written-off over time
|
Capital expenditure is
immediately expensed
|
Transferable
expenditure
|
Limited transferability of
exploration expenditure
|
Refundability of
unutilised expenditure
|
No refundability of
unutilised expenditure
|
One allowance (uplift)
rate for all capital expenditure
|
Eight uplift rates for
capital expenditure
|
Source: The resource super profits tax: a fair return to the
nation, op. cit., p. 25
An important lesson to learn from the PRRT will become apparent
when determining the taxing point and valuation methodologies for
the RSPT—both of which have been a point of concern for the
petroleum resource industry under the current regime.[17]
There are arguments in favour of both profit-based taxes like
the RSPT and royalty-based taxes. The Henry Tax Review argued that
royalty-based taxes lower the return available from resources:
Current charging arrangements fail to collect a
sufficient return for the community because they are unresponsive
to changes in profits. Further, the current arrangements distort
investment and production decisions, thereby lowering the
community's return from its resources.[18]
However, many countries retain mining royalties because they
create a direct link between use of the resource and the State:
While the trend has been to move toward
profit-based taxes, many nations still retain royalty taxes. There
are many reasons for this but the most important one is probably
the issue of patrimony. In most nations minerals belong to the
state. If a company extracts the state’s resources, the state
may deem it necessary to demonstrate that it has received something
in return for its lost minerals. Mining companies do not always
generate taxable profits, and thus there is no guarantee that the
state will receive any income-based taxes for its lost resources.
There are many examples of mines that operate at a loss. The policy
question then is, should a miner be allowed to extract the
state’s resources, sell them, and pay the state nothing if
the mine is operating at a loss? Some nations have answered this
affirmatively but many developing economies impose a royalty thus
insuring that anytime a mine extracts the state’s minerals,
the state receives at least a nominal payment.[19]
Pros and cons
The government has argued that applying a resource rent tax on
all non-renewable resources enables the government to address the
‘risk of a “two speed economy”’. In
addition, only applying the tax to profits recognises the large
investments required for resource projects. These large investments
are further recognised because losses will be able to be credited
to future years (which is not possible under the PRRT).[20]
The Government has based its proposal on modelling conducted by
KPMG Econtech for Treasury.[21] This modelling suggests that under the RSPT
scheme:
- mining investment will rise by 4.5 per cent
- employment in the mining industry will increase by
7 per cent and
- mining production will increase by 5.5 per cent, in
the ‘long run’.[22]
For further analysis on this modelling and the implications on
the RSPT on the Budget see ‘Budget 2010–11: Key
features’ by Scott Kompo-Harms in this Budget Review.
However, the scheme has been criticised over a number of issues
including:
- it will apply to existing projects, rather than just
‘greenfields’ projects (when the PRRT was introduced it
excluded existing projects)
- the profit threshold of 6 per cent—the same as
the long-term government bond rate—is too low (the PRRT kicks
in at the bond rate plus 5 percentage points, i.e.,
11 per cent)
- it applies the same tax rate to all commodities, rather than
applying commodity-specific tax rates, and
- it could make Australia look like a less stable and less
competitive place for long-term investment, especially given
details of the tax will be uncertain while they are discussed over
the next two years.[23]
[1]. K Rudd (Prime Minister) and W Swan
(Treasurer), Stronger, fairer, simpler: a tax plan for our
future, media release, 2 May 2010, viewed 17 May 2010,
http://www.futuretax.gov.au/documents/attachments/100502_stronger_fairer_simpler_a_tax_plan_for_our_future.pdf
[2]. K Henry (Chair), J Harmer, J Piggott, H
Ridout, and G Smith, ‘Part one: overview’,
Australia’s future tax system: report to the
Treasurer, Commonwealth of Australia, Canberra, December 2009,
viewed 17 May 2010,
http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf
[3]. Australian Government, ‘Part 1:
revenue measures’, Budget measures: budget paper no.2:
2010–11, Commonwealth of Australia, Canberra, 2010, p.
45, viewed 17 May 2010,
http://www.aph.gov.au/budget/2010-11/content/bp2/download/bp2.pdf
[4]. Australian Government, ‘Part 2:
expense measures’, Budget measures: budget paper no.2:
2010–11, Commonwealth of Australia, Canberra, 2010, p.
297, viewed 17 May 2010,
http://www.aph.gov.au/budget/2010-11/content/bp2/download/bp2.pdf
[5]. Rudd and Swan, op. cit., p. 1. See also:
Australian Government, Fact sheet: state infrastructure
funding, Commonwealth of Australia, 2010, viewed 19 May 2010,
http://www.futuretax.gov.au/documents/attachments/4_Fact_Sheet_State_infrastructure_funding.pdf
[6]. ‘Part 2: expense measures’,
Budget paper no. 2: 2010–11, op. cit., pp.
297–298. For further information on the resource exploration
refundable tax offset please see the ‘Climate change and
energy’ brief in this Budget review
2010–11.
[7]. Australian Government, Fact sheet:
resource super profits tax, Commonwealth of Australia, 2010,
p. 1, viewed 17 May 2010,
http://www.futuretax.gov.au/documents/attachments/10_Fact_sheet_Resource_Profit_Tax_Final.pdf
[8]. Henry et. al., Australia’s
future tax system: report to the Treasurer, op. cit., p.
48.
[9]. Fact sheet: resource super profits
tax, op. cit. pp. 3–4.
[10]. Australian Government, The resource super profits
tax: a fair return to the nation, Commonwealth of Australia,
Canberra, 2010, p. 30, viewed 17 May 2010,
http://www.futuretax.gov.au/documents/attachments/Announcement_document.pdf
[11]. Ibid., p. 9.
[12]. The resource super profits tax: a fair return to
the nation, op. cit., p. 3.
[13]. Fact sheet: resource super profits tax, op.
cit.
[14]. The resource super profits tax: a fair return to
the nation, op. cit., p. 4.
[15]. Australian Government, ‘Consultation
calendar’, Stronger, Fairer, Simpler: a tax plan for our
future website, viewed 17 May 2010, http://www.futuretax.gov.au/pages/Consultation.aspx
[16]. Mining companies are also subject to business taxes,
such as the company tax.
[17]. See: Fact sheet: resource super profits tax,
op. cit., p. 6.
[18]. K Henry (Chair), J Harmer, J Piggott, H Ridout, and G
Smith, ‘Part two: detailed analysis’,
Australia’s future tax system: report to the
Treasurer, vol. 1, Commonwealth of Australia, Canberra,
December 2009, p. 217, viewed 17 May 2010,
http://taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf
[19]. JM Otto, Mining taxation in developing
countries, study prepared for UNCTAD, November 2000, p. 6,
viewed 17 May 2010, http://r0.unctad.org/infocomm/Diversification/cape/pdf/otto.pdf
[20]. Rudd and Swan, op. cit., p. 1.
[21]. KPMG Econtech, The Treasury: CGE analysis of part
of the Government’s AFTSR response, report prepared for
Treasury, KPMG, 2010, viewed 17 May 2010,
http://www.kpmg.com.au/Portals/0/KPMGEcontech-Report-CGE-Analysis-of-part-of-Governments-AFTS-Response.pdf
[22]. Fact sheet: resource super profits tax, op.
cit., p. 9.
[23]. T Colebatch, ‘Swan’s budget numbers hide
ugly reality’, Age, 18 May 2010, p. 11, viewed 18
May 2010,
http://parlinfo.aph.gov.au/parlInfo/download/media/pressclp/YIQW6/upload_binary/yiqw62.pdf;
A Fraser and A Burrell, ‘State pushes Swan to bend on
tax’, Australian, 18 May 2010, p. 1, viewed 18 May
2010,
http://parlinfo.aph.gov.au/parlInfo/download/media/pressclp/6HQW6/upload_binary/6hqw60.pdf