The mining boom and the MRRT
The economic environment
The Minerals Resource Rent Tax (MRRT) package must be considered in the
context of both the current and the developing economic environment. At present
the Australian economy is strong. It has been able to ride out the global
financial crisis and stands in a stronger position to face the future than many
of its competitors in the developed world.
A significant factor in Australia's recent economic success has been the
huge increase in demand for certain resources from key emerging economies, such
as China and India. As a result of Australia's geographic location and vast
endowment of resources, Australia has seen, and will continue to see, a boom in
its mining sector which will have positive carry over effects on other sectors
in the economy. However, the surge in the mining sector is creating challenging
conditions for many other sectors and is accelerating the structural
transformation of the economy.
A report prepared for the ANZ Bank by Port Jackson Partners looked at
the current economic environment and described the current global situation:
The shift of economic growth from the developed to the
developing world is unleashing extraordinary forces in the global economy. Huge
low-income populations across the developing world are demanding more basic
necessities: minerals, energy, food and fibre. In particular, commodities such
as iron ore, copper, coal, aluminium, gas, grain, protein and fibre are the
central ingredients in the industrialisation and urbanisation of developing
countries. Much of this is happening on Australia’s doorstep, in China, in India
and in South East Asia.
It went on to highlight the opportunities for development created by the
current mining boom:
The direct export opportunity is unparalleled in Australian
history. If Australia expands capacity rapidly enough, commodity export
revenues could reach $480 billion in real terms by 2030, even with significant
price and margin reductions across key sectors. Direct and support sector
employment could double with at least 750,000 jobs created, and likely many
more. Investment related employment in particular is likely to grow faster than
current estimates indicate. To achieve this level of export growth, [gross]
investment of around $1.8 trillion is required over the next 20 years.
Similar statements concerning the opportunities created by the mining
boom have been made by the Secretary to the Treasury, Dr Martin Parkinson:
As the developing economies in the global fast lane have
grown, their rapidly expanding industrial sector and the resource intensive
nature of their economic development have led to remarkable benefits for
Australia. These trends in the global economy are expected to be sustained into
the foreseeable future.
The Deputy Governor of the Reserve Bank of Australia, Dr Philip Lowe,
has addressed the same issue in a recent speech:
The investment boom in the resources sector, which the RBA
has been discussing for some time, is clearly well underway. Over the past
year, business investment has risen by around 20 per cent and there is more to
come. Given the plans that have already been announced, the RBA is expecting
double digit increases in business investment in each of the next couple of
... It is not an exaggeration to say that this is a
once-in-a-century investment boom. It is, of course, occurring at a time when
the terms of trade are also at a very high level, with the industrialisation
and urbanisation of Asia supporting commodity prices and putting downward
pressure on the prices of manufactured goods. This boom is having positive
spill-over effects to a number of industries, with some of these effects being
direct and others being indirect.
While the mining boom has a number of clear benefits for the Australian
economy, there are consequential effects which can have both positive and
negative outcomes. One effect is the high terms of trade associated with the
mining boom, which, along with other factors, has led to a dramatic
appreciation of the exchange rate. As shown by Figure 2.1, the exchange rate of
Australia's dollar is now at post‑float highs.
Figure 2.1: Australian dollar trade weighted index
Note: May 1970 = 100 for
nominal; real indexed to equate post-float averages.
Source: Reserve Bank of
Australia, February 2012; based on RBA, Thomson Reuters and WM/Reuters data.
While this is of likely benefit to consumers—as Australia is a net
importer of manufactured goods it will lead to lower prices for these goods—it
is a significant challenge for trade-exposed industries such as manufacturing,
tourism and education services. The impact that a sustained high exchange rate
could have on tourism in particular is striking. Figure 2.2 demonstrates the
clear and responsive relationship between the exchange rate and short-term
international arrivals in Australia.
2.2: Tourism and the trade
Source: Dr Martin Parkinson,
Secretary to the Treasury, 'Opportunities, challenges and implications for
policy', Annual post-Budget Address to the Australian Business Economists,
Sydney, 17 March 2011, www.treasury.gov.au/
25 February 2012).
Another consequence many industries have to address is the gravitation of
many workers towards the mining industry. The committee received evidence on
some of the direct effects the mining boom was having on the labour market; for
example, the National Farmers' Federation outlined some specific cases to
demonstrate how parts of the agricultural sector have been affected:
CHAIR: Apart from management, highly skilled labour and
labour that requires mechanical or technical qualifications—leaving them aside,
because I suspect that their wages are driven by the market—are your members
complaining yet that they are having to pay above-award wages to attract and
Mr McKillop: Certainly even the unskilled and semiskilled
workers, where they can, are being attracted into the mining industry. Someone
who sits on a tractor out in western New South Wales at $25 an hour can go into
the mining industry at something like double that rate.
CHAIR: I am increasingly told—and my colleagues from Western
Australia will confirm this in due course, I suspect—that a lot of the farm
labour in the south of that state, in regional Western Australia, which is
fairly rich agricultural land, is increasingly doing three-, six- and
nine-month stints up north and using the income to build assets on their property
down south. Are you aware of that development?
Mr McKillop: Yes. We certainly had that with a number of
people we employed in the business I was running before. We had cotton
operations out of Burke, and they would disappear off to Cobar to the mines.
Personally, again, I was on the board of Harvey Beef in Western Australia for a
number of years, and we had the highest paid slaughtermen and boners and
slicers anywhere in Australia, simply because if we did not they went down the
road to the mines and smelters.
While the mining boom may have a multiplier effect on employment in
small, isolated communities, any other job creation effects associated with
mining are limited. As Treasury identified:
... in a well-functioning economy like ours, with unemployment
close to its lowest sustainable rate, it is not the case that individual
industries can create jobs; they are simply redistributing them.
Related to the transformation the economy is experiencing is what has
been described alternatively as the two-speed, multi-speed or patchwork
economy—all of which are characterisations intended to highlight that while the
mining sector is experiencing record growth and investment, other sectors are
struggling. There are many indicators of a patchwork economy; one telling
statistic is that mining profits grew by around 60 per cent in 2010 while over
the same period non-mining profits declined slightly.
In a market-based economy, the government's role in responding to such
developments is necessarily limited. Further reform to taxation arrangements,
however, is one appropriate response. As profits in the mining sector are based
on non-renewable resources that are owned by various governments, on behalf of
the community, the question arises as to whether the community as a whole is
receiving an adequate return from the exploitation of those resources. The
mining boom is a unique opportunity for the Australian economy, and it is
important to ensure that some of the benefits from it help address the
long-term challenges facing the economy, rather than being wasted.
Why a resource rent tax?
It is well known that the MRRT has its origins in the Australia's Future
Tax System Review (the AFTS Review, also known as the Henry Review). In
summary, the final report of the AFTS Review outlined an argument for
introducing a resource rent tax, based on the following rationale:
Australia's non-renewable mineral resources are owned by the
Australian people, through the Commonwealth and state governments;
the community should seek an appropriate return for the
exploitation of those resources by private companies; and
the most appropriate form of obtaining that return is through a
rent resource tax.
The AFTS Review argued that Australia is underpricing its resources as
the current taxation arrangements 'fail to collect a sufficient return for the
community because they are unresponsive to changes in profits'.
Figure 2.3, taken from the 2011–12 Budget papers, supports the AFTS Review's
Figure 2.3: Business
Notes: Index (September 2003 =
Source: Australian Government,
2011–12 Budget – Budget Paper No. 1, Statement 2, p. 23; based on
ABS cat. 5676.0 and Treasury data.
A resource rent tax is based on the concept of economic rent. According
to economic theory, an economic rent is the excess of the return to either
labour, capital, land or enterprise above the amount that is required to
sustain the current use of the factor (or to entice the use of the factor).
In the resources sector, rents can exist where the revenue from the sale of the
resources exceeds the cost of exploration, the cost of extraction and an
appropriate rate of return. The AFTS Review observed:
In most other sectors of the economy, the existence of
economic rents would attract new firms, increasing supply and decreasing prices
and reducing the value of the rent. However, economic rents can persist in the
resource sector because of the finite supply of non-renewable resources. These
rents are referred to as resource rent.
The nature of economic rents throughout the resource sector can differ.
Differences between low cost mines and marginal mines can be characterised by large
and rich endowments of the desired mineral, the nature of the mining operation
(such as whether its open-cut or underground) and other factors such as the
mine's geographic location and its access to infrastructure with sufficient
In theory, economic rents from mining can be taxed with few distorting
effects on the extraction and use of the minerals. The AFTS Review contrasted
its proposed resource rent tax to royalty regimes, while making it clear that a
resource rent tax will not be a completely neutral tax:
A well-designed rent-based resource tax is less likely
to distort investment and production decisions [than an income-based tax or an
output-based royalty]. This is because rent-based taxes do not apply to the
normal rate of return to investment in projects. The government achieves this
by effectively contributing to costs at the same rate as it shares in receipts
from resource production.
The current resource charging arrangements, and associated
mechanisms for allocating exploration permits, distort investment and
production decisions and thereby lower the return to the community. Under
output-based royalties, firms are likely to invest and produce less than they
otherwise would. The calculation of such royalties does not take production
costs into account. This leads to less exploration, lower industry output and
earlier closure of projects. In addition, some investments may not be
undertaken due to higher sovereign risk—specifically the risk of governments
making ad hoc adjustments to royalty rates in response to changes in
The AFTS Review went on to state that, in addition to the relative lack
of distorting effects, a resource rent tax is the most appropriate form of
taxation of economic rents for the following reasons:
For non-renewable resources that are expected to generate
significant amounts of economic rent, a rent-based tax is the most suitable
charging mechanism, as the potential economic efficiency and revenue gains are
likely to outweigh the higher administration and compliance costs of this tax
compared with output-based royalties and income-based taxes.
For non-renewable resources expected to generate low rent and
where the administration and compliance costs are likely to outweigh the
potential efficiency and revenue gains from a rent-based tax, output-based
royalties may be an appropriate charging mechanism.
Noted research economist Professor John Quiggin of the University of
Queensland similarly argued that rent-based taxes are optimal compared to
fixed-rate royalties, as they only tax excess returns from projects where
profits are greater than the normal return to capital, whereas royalties act to
'discourage marginal projects'.
Criticism of a resource rent tax
Resource rent taxes have been criticised on the basis that they are purported
to be more efficient than other taxation regimes and have few distorting
effects on the economy. The Institute of Public Affairs (IPA) contended that:
... the ability to extract resources is contingent upon
entrepreneurs absorbing the costs of mineral exploration and development at
their own risk. No mining tax is completely neutral in its economic effects,
and attempts to tax rents will reduce entrepreneurship and innovation in the
Fortescue Metals Group (Fortescue) also argued about the relative
efficiency of resource rent taxes and royalty schemes. Fortescue accepts that
the royalty regime 'is not, in theory, a particularly efficient form of
taxation'. However, it argued that the current regime has not impacted the
level of production in the mining industry. Contrasting the effect it believes
a resource rent tax will have on existing projects with the impact of the
current royalty system, Fortescue argued that the only activities deterred by
royalties are those:
... that create so little added value that they cannot
cover the required royalty payments that are the ones that are deterred. New
projects that are deterred by the effect of being required to make royalty
payments do not result in the resource being lost or deteriorating in any way –
the resources remains in the ground until such time as more favourable
conditions eventuate that justify their development; existing projects on the
other hand cease to chase marginal ore where rising costs overtake the expected
In its evidence to the committee, Fortescue continued to argue that
alternative methods of taxation would have simplicity benefits and be less
distorting for the industry:
Senator LUDLAM: Do you think there is some way of designing a
resource rent tax that is neutral?
Mr Tapp: In terms of the complexity and everything else, I
just do not understand why there was not some form of variable royalty regime
or some income tax surcharge for resource companies. It would be
administratively easy, and if you were just trying to get more money from
mining to spread for good causes then why not use the existing mechanism? Why
come up with something that is incredibly complex and is a completely new
Dr Alan Moran from the IPA outlined his concerns with attempts to tax
It is very, very difficult to pinpoint an example of when we
have an economic rent. We certainly have examples of firms earning high
profits, but these are normally called quasi rents in the economic profession.
If you tax them they have adverse secondary effects. You can certainly heavily
tax a firm which has found—luckily or by skill—a good find and makes a lot of
money, and that tax might not have any adverse effects in terms of that firm's
behaviour, but it would certainly have clear adverse effects and the additional
tax would be factored into investors' plans.
While critical of taxing economic rent, Dr Moran did acknowledge the
benefits of a profits-based system of taxation compared to one based on the
level of production:
If we were starting on royalties anew, I would suggest that
royalties placed on a profit basis are better than on an output basis. They are
both taxes. One is based on profits and one is based on output. There is a case
against it, but the conventional view, which I subscribe to, is that is the way
that we should impose these taxes.
The Minerals Resource Rent Tax package
On 2 November 2011 the government introduced into Parliament the five
bills that make up the Minerals Resource Rent Tax package:
Minerals Resource Rent Tax Bill 2011 (the MRRT Bill);
Minerals Resource Rent Tax (Consequential Amendments and
Transitional Provisions) Bill 2011;
Minerals Resource Rent Tax (Imposition—Customs) Bill 2011;
Minerals Resource Rent Tax (Imposition—Excise) Bill 2011; and
Minerals Resource Rent Tax (Imposition—General) Bill 2011
The government's reasons for the introduction of the MRRT were set out
by the then Assistant Treasurer, the Hon. Bill Shorten MP, in his second
reading speech on the MRRT Bill:
Australia is experiencing an unprecedented boom in our
resources sector which has delivered record profits to mining companies year
Mining profits have jumped 262 per cent in the last decade.
Along with the coal and the iron ore, a large share of these profits are also
shipped off overseas.
The current arrangements fail to provide an appropriate
return for these non-renewable resources to the Australian community, who owns
the resources 100 per cent.
Royalties just don't keep up with the booming profits of our
Royalties often take a flat amount of revenues or production
regardless of profitability.
Taxes on profit mean the higher your profit, the more tax you
Taxes on mining profit are better for the nation and the
Taxes on profit return more to the nation when times are
good, but they also relieve the tax burden on the industry when times are bad.
Taxes on profit automatically relieve struggling mines and their communities of
tax when times are tough, unlike royalties.
The development of the Minerals
Resource Rent Tax legislative package
The first version of a resource rent tax was the Resources Super Profits
Tax (RSPT), announced by the government in May 2010 as part of its response to
the AFTS Review. The key design features of the RSPT were:
a rate of 40 per cent;
it applied to all non-renewable resources;
losses could be transferred to other projects or carried forward;
it was an allowable deduction for income tax purposes;
existing state and territory royalty schemes would remain in
place, however, tax payers would receive a rebate for royalty payments. The
unused portion of the rebate could be refunded or transferred;
approximately 2,500 companies would be affected by it.
The government ultimately decided not to pursue the RSPT. Instead, it
entered into a period of consultation with representatives of Australia's
largest mining companies—BHP Billiton, Rio Tinto Australia and Xstrata Coal—to
refine the design of the tax and negotiate on the objections to the RSPT that
On 1 July 2010 the government and the mining companies entered into a
heads of agreement that set out the key principles of the MRRT.
To inform the design of the MRRT, the government then engaged in a
process of extensive consultation with other stakeholders through its Policy
Transition Group (PTG), a panel jointly led by the Hon. Martin Ferguson AM MP,
Minister for Resources and Energy, and Mr Don Argus AC, formed to advise on the
technical design of the MRRT. In December 2010 the PTG released its 94
recommendations on the proposed taxation arrangements, all of which were
accepted by the government. The design of the MRRT Bills was based on those recommendations.
The drafting of the MRRT Bills themselves was informed by the Resource
Tax Implementation Group (RTIG) which was set up following the PTG. The RTIG
was made up of representatives of the industry, tax experts, Treasury, the
Australian Tax Office and the Department of Resources, Energy and Tourism.
On 10 June 2011, an exposure draft of the MRRT Bill and the Explanatory
Memorandum was made available for public comment. Changes to the bill were made
and a second exposure draft was released for further comment in September 2011.
Following this process, the MRRT Bills were introduced into Parliament
on 2 November 2011. The package of bills was referred to the House of
Representatives Standing Committee on Economics for inquiry. Its report was
presented to the House on 21 November 2011.
This inquiry, therefore, represents the final stage of a long and
thorough consultation process.
Design of the MRRT bills
The MRRT represents a revised approach to the issue of taxation of non‑renewable
mineral resources. The consensus from industry, even from opponents to any
resource rent tax being imposed on the minerals sector, is that it represents a
significant improvement on the RSPT. One key advantage the MRRT has over the
RSPT is that it focuses on the most profitable resources—iron ore and coal—significantly
reducing the number of companies that would be affected by the new taxation
The main design features of the MRRT are:
an effective rate of 22.5 per cent (30 per cent reduced by a 25
per cent extraction allowance);
it applies to iron ore, coal and coal seam gas produced as a
consequence of mining operations;
losses can be transferred to other projects or carried forward;
it is an allowable deduction for income tax purposes;
existing state and territory royalty schemes would remain in
place, however, tax payers would receive an allowance for royalty payments,
reducing their MRRT liability by the amount of the royalty. The unused portion
of the allowance is uplifted for application in later years at the rate of the
long-term bond rate plus seven per cent;
the low profit offset, meaning that where a miner's projects have
a total mining profit of less than $75 million in revenue, the miner would not
pay the MRRT. The offset will phase out for projects with revenue between $75
and $125 million; and
approximately 320 companies would be affected by it.
Criticisms of the MRRT development
There has been much criticism of the decision by the government to
consult with the big three miners in the preliminary stages of the MRRT's
development. The Association of Mining and Exploration Companies (AMEC) stated,
in its submission, that it considered the MRRT to be:
... ill conceived as it was a direct result of a private
and secret consultation process with three large multi-national companies and
the execution of a Heads of Agreement with those companies, which formed the
basis of the tax design. AMEC was not consulted in any way during this private
'negotiation' process. These companies had no mandate to act on behalf of the
many other mining and exploration companies with projects or interests
throughout Australia ... These companies undoubtedly negotiated the Heads of
Agreement with the Government with the interest of their own shareholders in
mind, and not necessarily for the benefit of the wider industry.
Fortescue's submission contained similar protests.
However, others were more positive about the approach taken by the government.
While critical of the consultation relating to the RSPT, the Minerals Council
of Australia commended the consultation undertaken for designing the MRRT,
praising the PTG process in particular:
That period of consultation was, in contrast, outstanding,
and was actually a pretty good model of how you go about getting an
understanding of reconciling the real world of what companies do and how it
manifests with the companies in terms of the design of a new tax and getting
the policy developments together.
The committee believes criticism about the consultation process for the
MRRT is unfounded and intended to discredit the tax by implication. It is true
that the initial consultation process was with just three companies. The
committee believes that that was a reasonable decision for the government to
take for three main reasons. First, for practical reasons the number of parties
involved in the negotiations had to be limited. Second, the big three were the
miners with the greatest knowledge and experience of the mining industry, and are
most likely to be involved in future developments. Third, Treasury is on record
as stating that they expect that those companies will be the ones that will pay
the greatest amount of tax under the MRRT.
Further, the extensive consultation process that followed provided interested
parties with ample opportunity to comment on the design of the MRRT. Taking all
those opportunities into consideration, the committee does not believe that any
party with an interest in the MRRT, whatever their view, has been denied the
opportunity to make their views on the bills and the concept of a resource rent
Views on the MRRT
The majority of submissions received in relation to the MRRT were from
organisations involved in the mining industry and consequently were opposed to
the passage of the bills.
Support for the MRRT in submissions to the committee generally accept
the arguments put forward by the government. The Australian Council of Trade
Unions, for example, stated:
The outmoded and inefficient system of resource taxation that
presently exists, State royalties, sees the rate paid by companies rise and
fall with the quantity of production, but not (for the most part) with the
price per unit of production. This is a major systemic design flaw in the
present system of resource taxation. A profits-based tax, such as the MRRT,
corrects this flaw ... Failure to implement an improved system of
resource taxation now would leave Australia worse off in the coming years and
Professor Quiggin noted for the record that he preferred the design of
the RSPT, but still argued that the MRRT is a 'beneficial measure'.
Criticisms of the MRRT
A number of submitters and witnesses presented arguments against various
specific aspects of the MRRT's design. These concerns will be addressed in the
subsequent chapters of this report.
On the overall design of the MRRT and the theory underpinning it, the
IPA critiqued it on the basis of economic rents. As noted earlier, the IPA has
argued that economic rents are difficult to identify and efficiently tax. In
economic theory, economic rents can be categorised as either 'quasi-rents',
'differential rents' or 'monopoly rents'. The IPA characterised the MRRT as a
tax on 'quasi-rents stemming from individual successes in R&D and
innovation', not economic rents from the exploitation of a non-renewable
Quasi-rents are, it states, '[h]igh profits from a particular
mine ... They are actually a reward for effort, albeit a reward of
temporary super-normal profits in the short run'.
In arguing that the MRRT will not tax the rents it intends to tax, Fortescue
agreed that 'the majority of economic rent currently being earned would fall
into the category of quasi rent; and the rest should be classed as differential
Other research counters this analysis, instead taking the view that the
MRRT has been designed to be a tax on differential rents, which result from:
... the existence of different 'qualities' of a particular
resource that yield an identical end commodity ... In the case of
mineral resources, differential rents occur because ore bodies yield different
amounts of a commodity given the application of the same quantities of factors
of production, such as capital and labour ... These notions of rent are
implicitly acknowledged in the MRRT Bills because mining profits are calculated
on a project by project basis (although the low profit offset is based on a
miner's 'mining group profits').
Australia's non-renewable mineral resources are assets that belong to
the community, and it is starkly evident that the community is not receiving a
sufficient return from the sale of these assets. However, mining companies,
protected by the significant barriers to entry that impact competition in the
industry, are able to make record profits from the extraction of these
resources. It is proper for the government to take an interest in the price
that these assets are being sold for. The current system of output-based
royalties may be simple and adequate when commodity prices are at lower levels,
but it is clear that they are not adequate for the dramatic and sustained rise
in prices that has occurred over the past decade.
Rent taxes have a noteworthy history in Australia and have an accepted
place in Australian tax policy. They are widely acknowledged by academics and
tax experts as being more efficient methods of taxation than output-based
royalties. As a resource rent tax only targets above-normal profits, it will preserve
the international competitiveness of the mining sector and ensure that
Australians receive a greater benefit from mineral resources for years to come.
Navigation: Previous Page | Contents | Next Page