Dissenting report from the Australian Greens
China’s unprecedented economic growth and its re-engagement with the
global economy have seen commodity prices soar over the past decade, bringing
vast windfall gains to mining companies operating in Australia. As these mining
companies are predominantly foreign-owned, most of these profits have gone to
their shareholders overseas. The benefits of the mining boom have been the
subject of exaggerated claims and the mining industry pays less than its fair
share of tax.
When the Government introduced the Minerals Resource Rent Tax (MRRT)
it was intended to “spread the benefits of the boom”. However it is failing to
generate any significant revenue. The Australian Greens moved for this inquiry
to explore the reasons for the failure of the tax in raising revenue, including
its design flaws and the process that lead the government to concede so much to
three of the world’s biggest mining companies on the design of the tax.
Furthermore, the inquiry heard evidence of measures that can be taken to
improve the MRRT for the benefit of the Australian community.
Without reforming the MRRT, the Government is in danger of wasting the
mining boom and allowing the mining industry to ride roughshod over the rest of
The mining boom has driven the appreciation of the Australian dollar,
higher interest rates and shortages of labour in certain regions or with
certain skills. This has resulted in lower profits, fewer jobs and lower
returns to shareholders in other industries such as manufacturing and tourism.
The mining boom is also having adverse implications for greenhouse gas
emissions, both during mining in Australia and when exported coal is burnt
overseas. The mining boom is also putting at risk farmland aquifers. Dredging
operations to expand ports and increased shipping are damaging the marine
environment, with implications for both the Great Barrier Reef and the fishing
industry. It is also damaging community cohesion with its use of fly-in/fly-out
workers as explored in the House of Representatives Regional Australia
Committee report, Cancer of the Bush or Salvation for Our Cities? Fly-in, Fly-out
and Drive-in, Drive-out Workforce Practices in Regional Australia. The boom
mentality is leading to over-investment in ports and other infrastructure in
remote areas which will have little other use.
The record investment undertaken and proposed by the industry (over
$100 billion in both 2012-13 and 2013-14) suggests the mining tax is
having little impact on activity, while the big mining companies are still
making significant profits, despite lower commodity prices. Rio Tinto made $9
billion profit from Australia’s iron ore last year and paid no MRRT.
Australians have led the world in thinking about the impact of resources
booms and their optimal taxation. The Petroleum Resources Rent Tax has operated
effectively for many years. Rather than raising the white flag to the mining
industry as the majority report recommends, Australia should be setting an
example to the world by implementing an efficient tax on minerals to ensure the
people get a fair share of the returns from their national natural resources.
Evidence to the inquiry has made it clear that it is the design flaws in
the tax rather than just the recent falls in commodity prices that are
responsible for the significantly lower than expected revenue from the MRRT.
There is no economic justification for iron ore and coal being taxed at 22½ per
cent while oil and gas is taxed at 40 per cent and other minerals have no
profit tax applied at all.
It has become increasingly obvious that the Government agreed to
provisions in the tax that have allowed the biggest and most profitable mining
companies to minimise the amount of MRRT paid to the detriment of the
community. BHP gave evidence that it was well-understood in the negotiations
that all royalties, including future royalty increases, were to be fully
rebated. While the Government has been saying it will use other means to claw
back increased royalty rebates, nothing has yet eventuated. It is also clear
from the evidence that the starting base and depreciation provisions have been
used by the big mining corporations to minimise their tax liability. BHP, Rio
Tinto and Xstrata all gave evidence they had deferred tax assets of over $10
billion. These companies can use these deferred tax assets to write-off their
MRRT tax liability well into the future.
A better designed mining tax could raise a lot more revenue, an additional
$26 billion over the next four years alone, which would allow the
government to care better for people in areas such as education, relieving
poverty, modern public transport, dental health and services for people with
This dissenting report provides in detail the reasons for the major
design improvements the Australian Greens are advocating:
- Applying a 40 per cent rate, as applied under the Petroleum
Resources Rent Tax;
- Extending the MRRT to all minerals;
- Only rebating royalties in place at July 2011, rather than
letting state governments raise royalties that will effectively be paid by
federal taxpayers not the mining companies; and
- Only allowing depreciation on the book value of the amounts
actually spent on mining infrastructure.
The Parliamentary Budget Office has costed these proposals as raising an
additional $26 billion over the next four years.
The Government must take responsibility for the flawed design features
in the MRRT and work with the Greens to fix the tax for the benefit of all
This inquiry reviewed the Minerals Resource Rent Tax (MRRT), a tax on
the economic rents mining companies make from the extraction of certain non‑renewable
mineral resources, in the light of the MRRT’s failure to capture a significant
proportion of the windfall gains accruing to large mining companies.
It is in a sense a sequel to the Economics Committee’s inquiry into the
MRRT last year when the legislation was before the parliament.
The majority report from that inquiry had suggested 'the most appropriate time
to consider amendments to the operation of the MRRT is after it has been in
place for a number of years'. The Greens disagreed, arguing presciently in our
minority report that ‘a review be conducted by March 2013 of the amounts of
revenue being raised by the MRRT and suggestions for redesign if it is not on
track to collect the budgeted amount’.
The Government wants to leave the MRRT as it is and the Coalition, as
reflected in the majority report, wants to scrap it entirely. The Greens in
contrast used the inquiry to refine suggested amendments to the tax so that it
will achieve its original goal and these are described in this dissenting
Conduct of the inquiry
The committee held three public hearings, in Canberra, Perth and
Melbourne, and heard from a fair range of witnesses. The Greens particularly
appreciate the contributions made by the academic witnesses. While
acknowledging that the run-up to the Budget is a very busy period for Treasury,
it is disappointing that no responses have yet been received for any of the
questions they took on notice at the hearing.
The mining boom and the Australian economy
The unprecedented growth of the Chinese economy and its re-engagement
with the global economy have seen commodity prices soar over the past decade.
While they have eased back somewhat in the past couple of years, they are still
way above historical averages (Chart G1).
As the expert economic witnesses told the inquiry:
Today's export prices for the major minerals are very high by
historical standards. They are not as high as they were two years ago in 2011,
but they are still very high. The profits of the most productive Australian
mines—the established mines—like the great iron ore mines of Western Australia
will be higher this year than they will be again in my lifetime.
...while commodity prices are down slightly on their historic
highs they are still well above the long-term average,
The benchmark, as set out by the Henry Review, is the
achievement of normal rates of return to capital. I think it is pretty clear
that the mining industry as a whole is doing that and more, so certainly it is
still a period of high profits.
The value of mining production has quadrupled. The contribution to GDP
of the mining industry has increased from $35 billion in 2003-04 to $142
billion in 2011‑12. Most of this 300 per cent increase has been a
windfall gain from higher prices; the corresponding volume measure rose by less
than 40 per cent.
It should be noted, however, that these data on the value 'created' by
the mining sector includes the value of minerals put on ships but does not
allow for the loss of national wealth from the decreased value of minerals
remaining in the ground. It therefore greatly overstates the contribution to
national wealth from mining operations.
Clearly there have been some winners from this mining boom. The most
notable have been the shareholders of the companies doing the mining. But, as
the Reserve Bank has put it, 'since the mining sector in Australia is majority
foreign‑owned, most dividends and retained earnings accrue to foreigners
and therefore do not add to national income'.
There are no official data on the extent of foreign ownership of Australia's
mining industry but 'most estimates suggest that effective foreign ownership of
current mining operations in Australia is around four‑fifths.'
The remaining fifth of profits accrue to Australians. While direct share
ownership is concentrated among the wealthy, superannuation funds hold some
mining share for the benefit of ordinary workers. The mining companies also pay
royalties and company tax (discussed further below).
There are also winners from people who work in the mining sector who
would not have got jobs elsewhere or who earn higher wages in mining than in
alternative employment. But this is not a large impact: mining employs 2 per
cent of the workforce (less than in agriculture, half that of tourism and less
than a third of the number employed in manufacturing).
There are Australian companies who benefit from providing goods and services to
the mining industry, although most of the capital equipment used in mining is
imported. Landlords in some regions have also benefited from the sharply
increased rents in some regional areas.
Arguably the main way the bulk of Australian consumers may have
benefited from the mining boom is through the associated appreciation of the
exchange rate making imported goods and overseas holidays cheaper.
But this benefit is denied those such as welfare beneficiaries whose income is
tied to the CPI as the cheaper prices also mean their incomes are lower.
With consumers paying less for imports they would have more money to spend on
services within Australia, providing some benefit for small business.
Against this must be put the losers from the mining boom. Australia is
suffering from what is termed 'Dutch disease' (as the first case examined was
the impact of North Sea oil on manufacturing in the Netherlands).
This refers to how the boom in the mining sector has led to the large
appreciation of the Australian dollar, which has made it harder for other
exporters (not just exporters of goods such as farmers and manufacturers, but
also exporters of services such as tourism and education) to compete in
international markets, and for Australian manufacturers to compete with
imports. The strength of the mining sector has also led to the Reserve Bank
setting interest rates at higher levels than they otherwise would.
This has made life more difficult for many Australian companies, including
notably small businesses. Professor Quiggin and Dr Denniss explained:
...the tourist sector suffers. When the dollar is high, people
do not come here and Australians massively increase, as they have done, their
overseas travel to take advantage of the strength of the dollar.
So the agriculture industry,
the manufacturing industry—all of these industries—are experiencing substantial
pain as a result of the mining industry's gain...What happens when the mining
industry booms is the exchange rate goes up, and that crowds out other
industries. This is what happens. So I think it is odd that an industry that
employs such a small percentage of the workforce would make such exaggerated
claims about the rest of Australia riding on its back. There is no doubt that
imported cars are much cheaper thanks to the mining industry, and I am sure
many Australians are happy about that. Similarly, there is no doubt that people
employed in making cars in Australia are quite anxious about that...The idea that
what is good for mining is good for Australia and what is bad for mining is bad
for Australia is simplistic nonsense.
Dr Denniss was drawing on work by the Australia Institute which showed:
While mining exports have increased by around five per cent
of GDP over the period since the beginning of the mining boom, non-mining
exports have declined by around five per cent of GDP over the same period.
Treasury had been asked earlier this year about the impact on other
sectors of the economy had the mining sector extracted resources at a more
moderate rate. Treasury replied that the consequences would have included:
Lower exchange rate...faster
growth elsewhere in the economy...you would not see as much evidence of skills
The impacts from the mining boom on other industries have led to less
activity, less exports, lower profits and lower returns to shareholders
(including investors in superannuation funds) in many non-mining industries
than would have been the case in the absence of a mining boom. In turn these
companies have employed fewer people and contributed less tax to government
Those manufacturing workers who have lost their jobs may not agree with the
Minerals Council’s insouciant claim that:
Clearly, the benefits of this
boom are washing through the economy to the benefit of all Australians.
The Minerals Council further claimed:
...any move to further
increase the tax burden on the iron ore and coal sectors...would undercut the
very foundations of modern Australian prosperity.
Asked to respond, Professor Quiggin told the Committee:
I think that is a nonsensical claim. It is clear that, on the
contrary, while the mining sector has generated very substantial returns to
investors in the industry and some significant benefits, but not gigantic ones,
to employees, the foundations of our prosperity are as they always have been,
in the productivity of Australian workers generally, of whom people associated
with the mining sector are only a very small proportion.
Balancing up the above factors, Professor Quiggin concluded:
The mining boom has already
reached or passed its peak, and most Australians have seen little or no benefit
as a result.
As mining is concentrated in Western Australia and Queensland, the
'Dutch disease' effects have also led to a 'two-speed' economy geographically,
with the northern and western parts of Australia growing faster than the
southern and eastern. While the distribution of the GST revenue based on the
Grants Commission’s application of ‘horizontal fiscal equalisation’ distributes
some of the windfall gains from mining to the non-mining states, they are
clearly not sharing equally in the benefits.
Table G1: Gross state
product and per capita income
percentage change, 2003-04 to 2011-12
Real Gross State
Real State Gross
Domestic Income per capita
(Mining share of GSP,
New South Wales
Source: derived from ABS, Australian National
Accounts: State Accounts 2011-12 (5220.0).
Final column is Mining’s share of gross state product
in the state in 2010-11.
The mining industry has been extraordinarily successful in exaggerating
their contribution to the economy. An opinion poll showed that while mining
actually employs 2 per cent of the workforce, the average person thinks it
employs 16 per cent; and while mining actually accounts for less than a
tenth of economic activity, the average person thinks it accounts for more than
The Minerals Council made its usual exaggerated claims to the Committee:
Direct employment in the
mineral resources industry has increased by more than 200,000 over the period
of the boom.
The actual increase is more like 160,000, a little over 1 per cent of
When it is put to the mining industry that they are actually a
relatively small employer, they often try to take credit for jobs in other
industries. For example, the Minerals Council told the Committee:
The multiplier effects are
in the order of three times and even up to eight to 10 times in some remote and
Treasury have been asked about such claims. The exchange puts the mining
industry's claims in a true light:
Senator WATERS:...are you aware of claims that each new job in
mining creates three other jobs in the rest of the economy? Do you find those
Dr Gruen: If you add up all the jobs created by all the
industries, you will find that we have many more jobs than there are in
Senator WATERS: Exactly; that is my point. Is that one/three
Dr Gruen: It depends on how you do these calculations. The
right way to think about it is that, in a well functioning economy in which
unemployment is close to the lowest rate that is sustainable...any given industry
that is creating jobs is doing that only to the extent that other industries
are employing fewer people.
Aside from the adverse economic impacts that must be set against the
economic benefits from mining are the social and environmental costs. The
process of mining in many areas has significant environmental impacts, including
being a highly energy (and hence greenhouse emissions) intensive industry. The
burning of coal by customers of our ever expanding coal exports, add greatly to
global emissions of greenhouse gases. Australia will have to leave much of the
coal in the ground if we are to contribute our fair share to limiting global
temperature increases to under 2 degrees.
Communities, both host and source, and family life are being disrupted
by fly‑in/fly-out workforces.
Some of our highest quality farmland is being damaged by miners. The increased
tapping of coal seam gas risks serious and irreversible damage to aquifers. The
amenity of life, and in some cases the health of residents, can be damaged by
dust from mining. Roads can become more congested. Dredging operations to
expand ports and increased shipping are damaging the marine environment, with
implications for both the Great Barrier Reef and the fishing industry. These
factors also need to be thoroughly evaluated when decisions are taken both on
individual mining projects, and the economy wide questions on the optimal
amount or pace of mining activity.
The mining sector is notorious for its boom and bust mentality. The
Minerals Council claims that it:
,,,helped to cushion
Australia’s economy from recession in the wake of the Global Financial Crisis.
The reality was somewhat different. As Ken Henry has pointed out:
In the first six months of
2009...the Australian mining industry shed 15.2 per cent of its employees.
Had every industry in Australia behaved in the same way, our unemployment rate would
have increased from 4.6 per cent to 19 per cent in six months. Mining
investment collapsed; mining output collapsed. So the Australian mining
industry had quite a deep recession while the Australian economy did not have a
recession. Suggestions that the Australian mining industry saved the Australian
economy from recession are curious, to say the least. 
The taxes and royalties paid by mining companies
The majority report unquestioningly repeats the mining industry’s
propaganda, arguing that an effective mining tax is unnecessary ‘because the
mining industry already pays its fair share of tax’.
It is therefore important to place on record the facts.
The three largest mining companies are very large companies and like the
big banks and the big retailers pay quite large amounts of company tax in
absolute dollar terms.
Both BHP Billiton and Rio Tinto claim to be Australia’s largest taxpayer.
More relevant is what they pay relative to the size of their profits,
particularly when much of their high profits are the result of windfall gains
from commodity prices which are now much higher than when they planned their
The Minerals Council continues to refer to a spurious and discredited
analysis by Sinclair Davidson of the Institute of Public Affairs,
which compares company tax paid by mining companies to their taxable income
rather than to their profits.
As then Treasury secretary Dr Ken Henry has pointed out, this
...not very meaningful or
enlightening either. We could remove all of the mining industry’s tax
concessions and not change its effective rate of tax calculated in the way that
the MCA has...the MCA numbers...do not actually provide any information at all
about the effective rate of tax applying to the economic income of any
Professor Quiggin presented essentially the same rebuttal:
Senator CAMERON: Professor
Quiggin, I am not sure if you have read the Minerals Council submission to this
inquiry...On page 12 there is a graph compiled by Professor Sinclair Davidson
that shows the average effect of net company tax rate for all industries and
mining, and it shows mining sitting above the average of all industries...
Prof. Quiggin:...I think it
essentially comes down to a statement that, of course, as applied to taxable
income and once all deductions et cetera are taken into account, all companies
pay a rate of 30 per cent. If you take some of those deductions into account,
as Professor Davidson has done, and not others, you will get differences in the
rate, but it will be near 30 per cent. I think the point that is being obscured
here is that, as a proportion of total profits, the rate of company tax paid by
mining companies is relatively low. That reflects the availability of very
large deductions for depreciation, the tax treatment of that kind of
expenditure and so forth.
Senator CAMERON: So we
should not use the Sinclair Davidson graph as a reason to say that the mining
industry should not pay more tax on high profits?
Prof. Quiggin: No, there is
no justification for that. All it shows really is that the company tax rate is
30 per cent and that taxable income is different from profits, but none of that
really addresses the question of whether and how much the mining industry
should be paying for access to valuable Australian owned resources.
The current Treasury Secretary has observed:
Mining companies account for about a fifth of gross operating
surplus, yet only around a tenth of company tax receipts...
His predecessor remarked:
...the tax paid by the mining sector of the economy is a relatively
small proportion of profit.
Two studies by Treasury economists examined alternative measures of
average company tax rates by industry, which consistently showed mining as
Even some mining company executives have conceded the sector should be
making a larger contribution:
In April 2010, before the RSPT was announced, I am on the
record as having said...those [mining] companies who are making a really high
profit actually could afford to pay more tax and that they should.
Company tax and royalties
The minerals industry bulks up their claimed tax payments by adding in
the royalties they pay. Royalties are not strictly a tax, but are the payment
the mining industry makes for its raw materials.
...the royalty is not a tax,
it is actually a charge for taking the material from the state.
an essential feature of a
tax is that there is no clear quid pro quo.
Royalties are the price paid
by the mining industry for the right to extract mineral resources...
Including MRRT, royalties and company tax, the contribution to the
public purse from the mining industry now is still below that in previous
Senator MILNE: Just on that issue, during the resource booms
in the early 1970s and early 1980s, company tax rates were higher, there was no
dividend imputation and personal income tax rates were also higher. Does this
suggest that even now with the MRRT, or even if we put in place the super
profits tax, the effective tax on mining shareholders in Australia is now much
lower than it was then?
Prof. Quiggin: I think that would be correct, yes.
A further example of exaggeration comes from Rio Tinto who includes the
income tax paid by their employees as part of what they claim the company pays
International competitiveness and
The mining industry makes apocalyptic predictions of the impact of
higher taxes on their international competitiveness, backed by negligible
An international comparison of taxes and royalties paid by the mining
industry found that Australian taxes and royalties are among the lowest in the
world. Even if the Minerals Council’s claims that the MRRT would push the
effective tax rate up to 46 per cent
were right, this would still be below the global average (see Chart G2 on
In a crowded field, possibly the most ridiculous hyperbole on the
subject of the mining tax was former Rio Tinto chief Tom Albanese’s comment in
2010 that Australia’s prospective mining tax was ‘the biggest sovereign risk
issue we were facing anywhere in the world’.
Rio has since written off $14 billion on various activities outside Australia,
such as a coal project in Mozambique. Rio is currently involved in a dispute
with the Mongolian government about royalties on a copper mine there, after
having been required to lend the government funds to buy a one-third stake in
the mine, a loan that does not have to be repaid unless the project is
This compares to no mining tax paid in Australia in 2012 and an unspecified
small amount in 2013.
Source: Paul Mitchell, ‘Taxation
and investment issues in mining’, in Extractive Industries Transparency
Initiative, Advancing the EITI in the Mining Sector, 2009, p 30.
Professor Ross Garnaut told the Committee:
I do not think that lawful
changes in taxation arrangements amount to sovereign risk. There is plenty of
real sovereign risk around the world. I have been personally very close to some
of it in the recent past.
Asked to compare Australia’s treatment of the minerals industry compared
to that around the world, Professor John Quiggin told the Committee:
We are much more generous to
the mining companies. A number of other developed countries, of course, have
asserted complete public ownership over those minerals, as well as many others.
I think a relevant consideration here is the continued threats by the mining
industry that activity will move overseas. The nominated countries typically
have been places, first, that do not provide anything like the range of public
goods to the mining industry that Australia does—not only, obviously, things
like infrastructure but also other benefits of a secure legal framework and so
forth—and then many of those countries have sought to raise taxation along
similar lines. So I think the mining industry is getting a very sweet deal here
A recent report by the Behre Dolbear Group, minerals industry advisors
for over a century, ranks Australia as the best place in the world for mining
In marked contrast to the supposed 'sovereign risk' from Australia's proposed
tax reforms are the reality of events in other parts of the world. As The
Economist pointed out,
The list of African governments that have miners in their
sights is a long one. South Africa...is considering imposing a swingeing 50 per
cent windfall tax on mining "super profits"...[Ghana] plans to raise
taxes on mining companies, from 25 to 35 per cent, and a windfall tax of 10 per
cent on "super profits" in addition to existing royalties...
The latest data show that mining investment in Australia reached another
record high in the December quarter of 2012.
Chart G3: Capital
expenditure by the mining industry
Source: Australian Bureau of Statistics, Private New Capital Expenditure
and Expected Expenditure, December 2012.
Furthermore, the mining industry expects to invest around $100 billion
in 2013-14 alone, far above their annual investment before the MRRT was
There are over $250 billion in large committed investment projects, which is a
record high, and another similar amount at the feasibility stage.
Just one company, BHP Billiton, told the Committee:
...since the introduction of
the MRRT we have announced a couple of investments in Australia to the order of
$28 billion gross...they are substantial investments which have been made post
the introduction of the MRRT.
The Australia Institute’s Dr Richard Denniss, told the Committee:
As for the idea that, if a super profits tax were to be
improved, enhanced, broadened, changed, tinkered with, whatever word you want
to use, mining would flee Australia and go to lower tax environments: it is
demonstrably untrue...If we look around the world we see that mining activity goes
where it is profitable and where the risks are minimised...In the scheme of
things, tinkering with our mining tax is small beer compared to the massive
fluctuations we see in commodity prices and the potential for things to go very
wrong in some countries... the idea that, if their taxes went up, they would
leave en masse is demonstrably untrue and begs the question: why do they
operate in Australia at all? We are not the lowest-taxing place in the world to
do mining—why aren't they all off in the lowest taxed places? The answer is
that we have the resources, they are close to the surface, they are cheap to
get out of the ground, we have the skills and know-how to do it and the
infrastructure is there to transport it.
The mining industry, when arguing against paying more tax, often make
statements such as ‘costs have risen sharply in recent years’,
as though this is nothing to do with them. But increases in costs are the
result of the industry’s own manic boom-and-bust approach. The outgoing BHP
Billiton CEO Marius Kloppers said last year:
In the broader mining
industry...most miners took a “volume over cost” approach; the benefits of being
able to produce more outweighed the increased costs that resulted.
Professor Garnaut recalled to the Committee:
I have had a conversation
with Marius Kloppers in which he said exactly that to me... Sometimes putting more effort into reducing costs
could compromise output in the very short term.
Treasury secretary Martin Parkinson has referred to:
The miners could see massive
profit opportunities. They were less focused on cost containment...
Designing a better tax regime: Resources rent taxes
A survey of over 500 of its members by the Economic Society of Australia
in 2011 found that 74 per cent agreed that ‘a national excess profits tax
should be levied on mining industries’.
Two of the Economics Society’s distinguished fellows, Professors Garnaut and
Quiggin, gave evidence to the Committee.
Professor Garnaut, one of the world’s leading authorities on resources taxation,
told the Committee:
For Australia as a whole an
efficient structure would have a version of the MRRT, not necessarily with
He explained that one if its virtues is:
...the inherent flexibility of
the resource rent tax. When a project is very profitable it generates more
revenue and when it is not so profitable it generates less. That inherently
contributes to stability....
Professor Quiggin put a similar view to the Committee:
The most efficient way to
secure such returns would have been through the adoption of a general resource
rent tax, similar to that now applied to petroleum resources. Such a tax was
proposed in the Henry Review and announced as the resource super profits
tax, and then a watered-down version referred to as the MRRT was introduced.
Another respected economist, the Australia Institute’s Dr Richard
Denniss, told the Committee:
...the idea of introducing a resource rent tax, a super profits
tax, is a good one. I think that the vast majority of academic economists would
agree that it is an effective and efficient tax base...
The Greens had called for a resources rent tax even before the Henry
Tax Review was released.
It is likely that the reason the large mining companies were so opposed
to the original RSPT was not that this resources rent tax would not work but
that it would have worked very well and been adopted around the world.
...it is true that some of the multinational mining companies
are concerned about Africa...they are worried that those jurisdictions may follow
our example and also seek to secure a better and more efficient return,
reducing international profitability.
A good point about the balance of risks in setting tax rates on mining
has been made by Fortescue:
...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...
While Fortescue is referring to royalties, exactly the same point
applies to a resources rent tax (or indeed to mining taxes in general). If an
excessively low tax regime is applied, then money is lost to the community
forever. If an excessively high tax is applied, the resources are still there
later when a more appropriate rate can be set.
The Minerals Resource Rent Tax
The Henry Tax Review proposed a resources rent tax to replace the
patchwork of inefficient state royalties which were failing to capture a fair
share for Australians of the windfall gains accruing to largely foreign-owned
mining companies. The Rudd Government proposed the Resources Super Profits Tax
(RSPT) in May 2010, which incorporated many of the features of the tax proposed
by Henry and was similar to the Petroleum Resources Rent Tax which has operated
successfully in Australia for twenty years.
The mining companies, however, responded with a ferocious advertising
campaign costing around $20 million. After ‘negotiating’ rather than just
consulting with the three largest mining companies, BHP Billiton, Rio Tinto and
Xstrata, Prime Minister Gillard announced in July 2010 that the RSPT would be
replaced with a watered down Minerals Resource Rent Tax. Details were referred
to an advisory Policy Transition Group, co-chaired by former BHP chairman Don
Argus and Minister Ferguson. The Government agreed to all the Group's recommendations
in March 2011 and released draft MRRT legislation in June 2011. The bills
passed the Senate in 2012.
This process is a very poor precedent for policy design. A government
should consult with stakeholders in the development of taxation measures. But
it should not be forced to ‘negotiate’ with them. Even worse was that the
discussions were not with representatives of the mining industry as a whole but
with the three largest firms who designed a tax that favoured them over the
There were no Treasury or ATO officers present during the negotiations.
Asked about this process, Professor Quiggin commented:
Obviously the process was
problematic. In political terms, the mining companies at the time exerted
significant political power, and the government was in a position where it felt
it had to negotiate with them... I do not see any justification other than that
of political necessity for the concessions that were made to get the MRRT
through. I would certainly favour withdrawing those concessions if it were
possible to do so.
In rather evasive evidence, BHP Billiton suggested that they saw
themselves as representing the mining industry as a whole – or at least arguing
for principles that the whole industry supported – but apparently did not
consult with any of the smaller companies in the industry.
AMEC, the industry body for smaller miners, states that BHP, Rio and Xstrata
‘had no mandate to act on behalf of the hundreds of mining and exploration
companies with Australian projects’ and it ‘was not consulted in any way’.
Asked specifically whether BHP had drafted the ‘heads of agreement’
under which the Government committed itself to the main features of the MRRT,
BHP’s representative dissembled at the hearing:
It could be. I just do not
know whether we started it off or not. There were discussions and there was a
Its written response refers to ‘iterative discussions’ but does not
explicitly deny preparing a draft.
BHP denied that in signing the heads of agreement they were implicitly
promising not to resume the advertising campaign against the Government.
This leaves unclear what they were committing to by signing the agreement.
There was some semantic debate during the hearings about whether the
aspects of the MRRT that have led to it raising little revenue were ‘design
features’ or ‘loopholes’.
The Greens would argue that unless it was the Government’s intention not to
raise much revenue, they can legitimately be described as ‘loopholes’.
Professor Fargher put it quite well:
...it was surprising how many choices and estimates were
involved in the MRRT. It is taken for granted that taxpayers will choose their
methods, within reasonable allowances, to minimise their taxes. In designing a
good tax policy, some of these choices are sometimes eliminated to get to an
Given the inter-relationship between royalties and the mining tax, it
would have been better had the Government discussed with the state governments
before introducing the tax.
...a well-designed scheme would have started with both the
federal government and the state government in the room.
Isaac Regional Council’s submission says:
No formal consultation was
undertaken with communities affected by mining.
This is another important deviation from best practice policy
It shows both the Government’s fear of the mining companies and their
embarrassment of how this led them to introduce so many flaws into the tax that
the new resources minister recently tried to discourage even discussion of the
even to discuss changes to
that tax right now would create uncertainty. 
The expert witnesses found this rather odd:
As for the suggestion that parliament should provide
certainty, whatever that might mean, in perpetuity to the mining or any other
industry, I am not quite sure what on earth he means. No parliament makes
decisions that bind subsequent parliaments. Laws are changed all the time. It
is often the mining industry itself that is proposing changes to laws, so
clearly they support legislative change that is advantageous to them.
There is already uncertainty given that the opposition party
has promised the removal of the tax, so I think obviously there was always
uncertainty about taxation. To use that as a basis for shutting down debate is,
I think, nonsensical.
Estimates of revenues from MRRT and RSPT
The sorry story of the decline and fall of mining tax revenue
projections is told in Table G2. It should be noted that the first MRRT
projections were based on stronger assumptions about commodity prices than were
the RSPT projections.
The reduction in revenue between the RSPT and the MRRT is therefore understated
in the table. A study commissioned by the Greens estimated that the reduction
(on an 'apples with apples' basis) is between $73 billion and $115 billion.
An AFR journalist estimated that the reduction is at least $100 billion.
Asked about estimates that the revenue foregone in the transition from the RSPT
to the MRRT was around $100 billion, Treasury replied ‘I recall a figure
of that sort of magnitude, yes’.
Table G2: RSPT and
MRRT revenue projections, $ billion
Econ. State. 2010
PBO April 2013
Sources: 2010-11 Budget Paper
No. 1, p 5-15; Economic Statement 2010, p 32; Treasury, Freedom of
Information request, 14 Feb 2011; MYEFO 2010-11, p. 283; 2011-12
Budget Paper No. 1, pp 5‑35; MYEFO 2011-12, p 319; 2012-13
Budget Paper No. 1, pp 5‑29; MYEFO 2012-13, p 305;
Parliamentary Budget Office costing, 24 April 2013. The numbers are the net
contribution to revenue after allowing for the deductibility of MRRT lowering
company tax collections.
Treasury told the Committee that the declines in the projections for
2012-13 collections between the $4 billion forecast in 2010 and the $2 billion
in the latest MYEFO were solely due to less favourable assumptions about
commodity prices, exchange rate and royalties.
They were not the result of rethinking how the tax would operate.
Given that in the first half of 2012-13 the MRRT has raised only
the $2 billion MYEFO forecast for the year is extremely unlikely to be
realised. While BHP-Billiton and Rio Tinto have made some payments in the most
recent quarter, Xstrata has not.
Rio Tinto have booked a deferred tax asset of $1.1 billion and an
unbooked deferred tax asset of $12 billion.
BHP Billiton have booked a deferred tax asset of under $1 billion but have an
unbooked deferred tax asset of around $10 billion.
Xstrata have an unrecognised deferred tax asset of $11 billion.
Fortescue Metals have said that they do not anticipate paying any MRRT for at
least five years and have a deferred tax asset of $3½ billion which they have not booked and to
which they will be able to add $4 billion in royalties over five years,
compounded at the uplift rate (currently around 10 per cent).
Few commentators would expect commodity prices to be higher on average over the
coming decade than they have been over the past year.
It appears that, notwithstanding they continue to make billions of dollars
profits from mining in Australia, the large mining companies will not be paying
much MRRT any time soon.
Professor Garnaut told the Committee of his concerns about whether the
MRRT will ever raise significant amounts:
Your question was whether
the tax in this form will ever raise revenue: it may not, especially because of
two design features. There are others as well, and in my introductory remarks
before you came I mentioned a couple of other features, but the critical ones
for these purposes are the shielding of past expenditure and the way in which
that is done; and the interaction with state royalties.
Concerns about volatility of
Concerns have been expressed about the volatility of the revenue from
...because the tax base is so volatile the value of that tax
revenue to the community is less than the dollars it involves might suggest...
These concerns are exaggerated. Firstly, the MRRT only represents around
1 per cent of government revenue so volatility in it will not translate
into large volatility in overall government revenue. Secondly, a tax that
raises more money during a boom and less during a slump acts as a useful
counter-cyclical 'automatic stabiliser' for the economy. As Professor Quiggin
I do not see a problem with governments taxing volatile
Linking the MRRT to other budget
The Coalition senators that form the ‘majority’ of this committee have
claimed that the MRRT ‘actually leaves the budget worse off’.
Their argument is that with its current flaws (which of course the Coalition is
opposed to fixing) the MRRT will not be able to fund ‘promises the current
government has attached to it’.
There are no government programmes which the MRRT is hypothecated to fund. The
main proposal which the Government has mentioned in this context is the cost to
government revenue from increasing superannuation contributions. The Coalition
do not specifically refer to this as they are in the embarrassing position of
also committing to the superannuation increase, leaving them in effect arguing
that funding a programme from a low-yielding tax is bad but it is perfectly
reasonable to fund it from nothing at all.
The MRRT rate
The tax rate in the RSPT was 40 per cent. This is the same as that
recommended in the Henry Tax Review.
It is also the rate that has applied to offshore oilfields under the Petroleum
Resources Rent Tax and even the harshest critics of the MRRT have offered no
evidence that the PRRT has significantly stifled investment.
The MRRT has seen the rate slashed to an effective rate of 22½ per cent
(obfuscated as a 30 per cent rate less an 'extraction allowance'). No economic
reason was given for the reduction.
As the OECD commented, 'the proposed tax is set at a relatively low
level and therefore the taxation of profits of mining companies is likely to remain
much lower than before the mining boom'.
Professor Ross Garnaut, a global expert on resource taxation, told the
I do not think that 40 is
too high, and it has been shown in the gas industry and oil industry that it is
consistent with efficient operation.
Other countries with resources rent taxes often apply higher rates.
Table G3: Resource
United Kingdom (petroleum)
Timor Leste (petroleum)
70 less standard company tax rate
Mongolia (copper, gold mining)
Sources: Land, B 'Resource
rent taxes' in Daniel, Keen and McPherson (eds) The Taxation of Petroleum
and Minerals, Routledge, 2010; Treasury, 'International Comparison – Mining
Taxation', 9 November 2011.
Even without making any other changes, restoring the MRRT rate to 40 per
cent would raise almost an additional $18 billion over the forward estimates.
That the rate of MRRT be set at the 40 per cent proposed in the Henry
Tax Review rather than an effective 22½ per cent.
Minerals covered by the MRRT
While the RSPT applied to almost all minerals, the MRRT only covers iron
ore and coal.
The exclusions mean that Australia now has in effect three rates of resources
rent tax: 40 per cent for oil and gas, 22½ per cent for iron ore and coal and
zero for other minerals. This will distort investment away from iron ore and
coal towards other minerals.
No cogent argument has been put for this treatment. The Minerals Council
Firstly, the economic
argument centres around internationally competitive tax rates. Secondly, there
is an economic argument about the flatter capital and return profile of
minerals resources as distinct from petroleum....So, yes, there is an economic
argument and it centres around whether you are going to impose tax rates that
put this country's minerals resources into an uncompetitive position, way over
what our competitors are facing in those emerging resource rich countries which
I referred to earlier. That then is the fundamental economic argument. Treasury
itself argues that the 40 per cent under the RSPT was an arbitrary figure
plucked from the air. There is a very strong case to be made for a
differentiation in resource rent taxes.
The Minerals Council were asked to elaborate in writing on what this
meant but have not done so.
The restriction to iron ore and coal has been criticised by the IMF, the
OECD and academic experts. For example, the OECD has argued:
...the MRRT is likely to distort investment incentives between
mining projects of coal and iron ore and those on other resources that are not
subject to the tax.
The Committee heard from its expert witnesses (with a unanimity rare for
economists, extending even to strong opponents of the MRRT):
A very profitable goldmine or copper mine or uranium mine
generates resource rents in exactly the same way as a very profitable coal or
iron ore or gas project.
The most obvious change would be to remove the limitation to
coal and iron ore. There is no obvious justification for that exclusion, so,
whatever the political feasibility of it, it would certainly be the obvious
route in terms of horizontal equity within the mining industry. The rationale
that is applied to coal and iron ore applies equally well to a number of other
There is no good economic reason at all for excluding copper,
uranium or gold. The economic argument for why you would have tax on iron ore
and coal is exactly the same argument that applies to those other resources. It
is more efficient and equitable to have a broader tax base.
...if there is a case for an
MRRT, which is already on three sorts of products, with petroleum also, then
the same case should be thought of as 'on any minerals that you like'. There is
no distinction in my mind between one and another.
There was a telling admission from Treasury at the hearing:
Senator MILNE: Are you aware of any independent research or
reports that recommend that it should be restricted to just iron ore and coal?
Dr Parkinson: I am not aware, no.
The only argument being put for specifically taxing iron ore and coal is
that they have been very profitable in recent years and so would contribute the
most revenue. Calculations by the Parliamentary Budget Office, however, suggest
that taxing gold would actually raise more revenue than taxing coal in the next
couple of years.
But, more fundamentally, it is very hard to predict in advance which commodity
prices will rise sharply and generate windfall profits. Rather than waiting for
the price of a particular mineral to go up, then starting the process of
introducing a tax which may not apply until the price is coming down again, the
prudent approach is to set a uniform taxation regime for all minerals so that
super profits are taxed wherever they may occur in the future. As Dr Denniss
... you put the tax regime in that is a good and fair tax
regime and then you let the commodity cycle determine how much revenue to
collect. You do not look at the commodity cycle and ask yourself, 'Is it a good
time to introduce the tax?' I would suggest that the causation is entirely the
other way around. 
The Parliamentary Budget Office estimate the cost to revenue of
excluding minerals other than coal and iron ore at $3 billion over the
That the MRRT's coverage be extended to that proposed for the
RSPT, including gold, silver, diamonds, uranium, rare earths, nickel, copper,
zinc and bauxite.
That while minerals other than iron ore and coal are excluded
from the MRRT, this be treated as a 'tax expenditure' and the cost to revenue
be disclosed annually in Treasury's Tax Expenditure Statement.
The MRRT and state royalties
Royalties are never likely to capture a fair share of the profits
generated from the minerals. There is an understandable desire not to set
royalties so high that they lead to projects being abandoned. They are
therefore typically set at a level that leaves even the highest cost projects profitable
in years of low commodity prices. This inevitably means that the tax on the
lower cost projects is a very small proportion of profits when commodity prices
Furthermore, the setting of royalty rates for individual minerals is
essentially arbitrary. It would obviously not make sense to charge the same for
a tonne of iron ore as for a tonne of gold. In practice, though, even with ad
valorem royalties different percentages of revenue are charged for different
minerals. These may be partly related to past average profitability of the
mineral but likely also reflects the lobbying ability of various companies or
the marginality of the electorates in which the mines lie. This is even more
likely when royalties vary between individual companies or mines under ‘state
Changing royalties in response to changes in profitability of various minerals
would give rise to the charges of creating ‘uncertainty’ and ‘retrospectivity’
that are raised against the MRRT, but with more validity.
While royalties are often described as simple,
in practice there is a complicated variation in rates imposed in Australia.
Taking coal for example, the situation in 2009 was that in NSW the royalty rate
was 8.2 per cent for open cut mining but 7.2 per cent for underground mining,
and if the mine was regarded as ‘deep underground’ this fell further to 6.2 per
cent; whereas in Queensland the rate was 7 per cent unless the coal was valued
at over $100 per tonne in which case it rose to 10 per cent; in Victoria
differing rates applied to brown and black coal and in Western Australia
different regimes applied depending on whether the coal was exported.
And of course there is a different rate scale for every other mineral.
As noted above, most economists believe that royalties are an
inefficient tax unable to capture windfall gains while a resources rent tax is
a very efficient tax.
This is why the Henry Tax Review recommended replacing royalties by a 40
per cent resources rent tax. The MRRT in its current form, however, rather than
replacing royalties leaves them being paid but then rebates them.
For companies not paying the MRRT in a given year any royalties paid that year
can be carried forward at the generous ‘uplift rate’ of 7 per cent above the
bond rate and deducted in future years.
The treatment of future royalty
While the Henry Review recommended replacing royalties, it also
considered, as a second-best option, crediting the companies for royalties
paid. It was very clear, however, that if the latter option is adopted, 'the
state royalty regimes would need to be fixed at a particular point in time to
ensure that the Australian government does not automatically fund future increases
Under the RSPT it was also clearly stated that 'the refundable credit
will be available at least up to the amount of royalties imposed at the time of
announcement, including scheduled increases and appropriate indexation
Given this, it would be expected that the large mining companies would
have ensured when negotiating the MRRT that references to royalties explicitly
stated whether it meant current royalties or encompassed all future increases.
But the wording used in the heads of agreement between the new Gillard
Government and big three mining companies just said 'all state and territory
royalties will be creditable...', leaving this unclear.
BHP Billiton told the Committee they had clarified the matter with
Senator MILNE: Did you
clarify with Treasury or with the government whether the references to 'all
royalties' encompassed all future royalty increases?
Mr Purdy: Yes. It was always
intended that it covered all royalties.
Senator MILNE: Yes, but did
Treasury understand—was there a clear understanding in negotiation between you
and Treasury—that 'all royalties' encompassed all future royalty increases?
Mr Purdy: Certainly we
believe so. It was a point that was unclear in the RSPT. It was a point that we
felt was made very clear in the MRRT.
Senator MILNE: So—just to be
absolutely certain—all the ministers in the room understood that, as did
Mr Purdy: That was certainly
our understanding. I cannot speak for their understanding, but it was our
understanding clearly. It was unclear in the super tax how future royalty
increases would be treated. Therefore it was made very clear, we believe, in
the MRRT by the use of the word 'all'.
Rio Tinto’s written evidence was:
From the announcement of the
RSPT to the signing of the MRRT agreement, there were numerous discussions
about most aspects including royalties. These discussions at various times
involved ministers, ministerial staff and Treasury officials. The MRRT Heads of
Agreement specified that all royalties would be included. If the intention had
been that royalties would be capped in some way, this would have been made
explicit in the Heads of Agreement. Treasury officials were aware of the
wording. There was no uncertainty among the mining companies that the reference
to all royalties meant just that. This was a fundamental principle and the
Heads of Agreement would not have been signed without this element.
This seems to conflict with Dr Henry's evidence in 2010 that:
...it is my understanding that
there would be no credit provided under the MRRT for those future increases...
it does not say ‘all future royalties’...
After the election the Policy Transition Group (chaired by former BHP
chair Don Argus and then Resources Minister Martin Ferguson) recommended 'all
current and future state and territory royalties on coal and iron ore should be
credited', which the Government accepted. There is also a vague reference that
governments 'should put in place arrangements to ensure that the states and
territories do not have an incentive to increase royalties', but no detail on
what form such arrangements might take.
The Western Australian, New South Wales, Queensland, South Australian
and Tasmanian governments have subsequently announced royalty increases. Under
the terms of its current policy the Gillard Government will have to refund
these additional royalty payments to the companies paying them.
It is clearly intolerable to allow the states to erode the revenue of
the MRRT in this way. They have effectively been given a "blank
cheque". Independent experts have been critical of this provision. For
example, the OECD recommended:
royalties should also be
eliminated, rather than credited to MRRT payers by the federal government, to
simplify the tax system and remove states’ incentives to raise royalty rates
further, with counterproductive effects.
The Senate Economics Legislation Committee, in examining the MRRT bills,
expressed their view that:
Moves by some states to increase royalties have the potential
to undermine the superannuation and taxation reforms the MRRT is intended to
support. The committee sees the announced increases as opportunistic, made in
the knowledge that, long-term, the miners will be compensated for the increased
royalties under the design of the MRRT.
Professor Quiggin has commented:
A situation where the governments of mineral-rich states can
gain revenue at the expense of the Commonwealth, and therefore ultimately at
the expense of other states is antithetical to the principles of fiscal equalization.
Professor Quiggin noted that the introduction of fiscal equalisation
...in part, a response to dissatisfaction with existing
arrangements among residents of Western Australia, reflected in the passage of
a referendum advocating secession from the Commonwealth.
He observed that:
Historically, fiscal equalization has worked to the benefit
of WA and Queensland, offsetting the high costs of providing services to a
sparsely distributed population.
Professor Garnaut told the Committee:
The shielding of liability
for MRRT through credits for new state royalties invites instability in the
overall mineral taxation regime and can be expected to remove the tax's
capacity to raise revenue.
Even conservative economic commentators concede this point:
...they [the states] seem to have a free ride... It has this
tremendously large incentive for the states to try to bid away any revenue by
Indeed at an extreme;
...it is conceivable that the
increases in those royalties could do much to reduce the Commonwealth revenue
take not merely for the MRRT but also in company tax. In other words, the MRRT
could not only itself not raise much revenue for the Commonwealth but it might
reduce its tax take overall if the increases in royalties are sufficient to
reduce company tax payable.
The Government has threatened to cut grants to states which increase
royalties after July 2011 but this may prove politically difficult. This threat
may, moreover, be circumvented by the Commonwealth Grants Commission's principles
of horizontal fiscal equalisation. A state receiving a smaller grant would have
less financial capacity and so would receive a larger share of the GST revenue
allocated between the states.
The Government added this problem to the terms of reference for the GST
Distribution Review conducted by Nick Greiner, John Brumby and
The Review members agreed with the Greens, finding that ‘the Commonwealth’s
decision to fully credit State royalties under the MRRT and PRRT has created an
incentive for States to increase these royalties. This situation is neither
desirable nor sustainable’.
While the Review members’ preference is for the problem to be sorted out by
negotiation between the Australian and state governments, they recognise this
would not be easy, and find ‘if the Commonwealth and the States are unwilling
or unable to reach an accommodation regarding resource charging, the
Commonwealth should amend the design of the MRRT and PRRT to remove the
open-ended crediting of all royalties imposed by the States’.
A better response would be to restrict it to royalties that were in
place when the MRRT was first announced. The Greens introduced a bill in the
Senate on 12 September 2012 and into the House of Representatives on 11
February 2013 which would amend section 60-25 of the Minerals Resource Rent
Tax Act 2012 to provide that any increase in royalties after 1 July
2011 should be disregarded when calculating royalty credits for the MRRT.
The PBO estimated that limiting the royalties that could be credited to
those in place at 1 July 2011 would raise an additional $3 billion over the
This costing assumes the other parameters of the MRRT are unchanged. If other
design features are also improved, the revenue from limiting the rebating of
royalties would rise.
That royalties not be rebated for that component of state
royalties increased after 1 July 2011 and that the parliament passes the
Minerals Resource Rent Tax (Protecting Revenue) Bill 2012.
The uplift rate
The 'uplift rate' incorporated in the RSPT was the long bond yield and
this was increased in the MRRT to the bond rate plus 7 per cent. By comparison
the PRRT has an uplift rate of the bond rate plus 5 per cent.
To understand where the uplift rate comes from, it is necessary to go
back to the 'Brown tax'. US academic Cary Brown proposed that essentially the
government be a 'silent partner' with the mining company, sharing both the
profits and the losses. In a typical mining project there are losses in the
early years as the mine is developed before production starts, so initially the
government will be contributing rather than raising revenue. The Henry Tax
Review did not go quite this far. Instead it proposed that losses could be
carried forward and offset against tax payments when the project became
profitable (or offset against profits from other projects by the same company).
Deferring the government's contribution to losses in this way would, however,
effectively reduce the contribution in present value terms. To avoid this, the Henry
Tax Review recommended that an uplift rate be applied. As the deferral is
'akin to a loan from the investors to the government',
the Henry Review argued the appropriate rate was that paid on government
bonds, rather than any rate related to the riskiness of the investment project.
The RSPT scheme essentially accepted the Henry Review's argument.
It set the 'uplift rate' at the government bond rate. Perhaps due to the term
'super profit' in the RSPT, this was then (mis)interpreted as indicating that
the government viewed any rate of profits above the government bond rate as
'super' or 'excessive' profits.
When the MRRT was announced, the uplift rate had itself been uplifted to
the bond rate plus 7 per cent. There was no explanation given as to why 7 per
cent was chosen. It has been criticised as too high. For example, Professor
Fane said the 'credits have been carried forward at much too high a rate...That
is a very substantial incentive to delay projects, to hold these credits for as
long as possible. That is a kind of subsidy to the mining companies.'
Professor Fane argued the appropriate interest rate would be around 3 per cent,
the after-tax equivalent of the then prevailing bond rate.
A range of economic and accounting experts suggested to the Committee
that the uplift rate is too high:
...it is not obvious why ... the
uplift rate higher than for the PRRT.
...a number more like 2 to 3
per cent would at least have some economic justification based on those bond
yields rather than, again, the seven per cent for which I have seen pretty
In the world we are in today
it [the uplift rate] seems very high.
It is certainly a relatively
Treasury gave the clear impression that the uplift rate was not
determined by any economic reasoning:
Senator MILNE: I want to go
to the high uplift rate—the bond rate plus seven per cent. Has Treasury formed
a view about whether that is an incentive to stretch out projects or not?
Therefore, are you able to assess how much that high uplift rate is actually
costing us? Do you have an estimate of how much additional revenue could be
raised if the uplift rate, the bond rate, was cut back, say, to two or three
Mr Heferen: Those settings
of the uplift are policy issues; they are about the design of the tax.
Senator MILNE: I understand
that. But I am asking you whether you have done any estimate of how much
additional revenue would be achieved if you changed the uplift rate.
Mr Heferen: No.
Some have argued that a premium needs to be added to the uplift rate to
allow for the risk that the government does not meet its promise to allow past
losses to be offset against profits. But the bond rate already includes a small
premium for the small possibility that the government will default on its
obligations. So the only appropriate margin to add to the bond rate on this
basis would be a reflection of any additional risk that the government is more
likely to abandon retrospectively its promise to allow losses to be offset than
it is to default on a bond.
There is a case for an uplift rate higher than the government bond yield
on the grounds that a company may need to borrow while it waits for the
deferred tax benefit. It could be argued that the appropriate rate would be
that charged to a company on a secured loan to buy a government bond. This
would be a higher rate than the bond rate but well below the rate charged a
company undertaking a risky project. Currently AA‑rated companies can
issue bonds with interest rates around 1 per cent above that on government
bonds while for BBB-rated companies the spread is a little over 2 per cent.
The ‘tops down’ model used by the PBO does not lend itself to costing
the generous uplift rate.
Treasury acknowledges that applying an uplift rate higher than the bond rate to
past losses, to unused royalty credits and to unused starting base allowances
are all forms of tax concession and costs each at $10-$100 million a year.
That the uplift rate be reduced to the bond rate plus 2 per cent.
Starting base and depreciation arrangements for existing projects
For existing projects, companies are able to calculate a 'base value'
and the company can deduct depreciation on this base value when calculating its
profit on which the mining tax is levied. Under the RSPT, the starting base for
project assets was accounting book value, the depreciated value of the
investment carried in the accounts. This was changed in the MRRT to allow the
company to choose either a book value which would be uplifted or a market
valuation which is not uplifted. For long-lived infrastructure that was bought
or developed before the mining boom and has been depreciated for a long while,
the market value may be much higher than the book value. While book value is
known and audited, the market value is not. The Argus-Ferguson Group's report
'notes that market valuation of the starting base could have a significant
bearing on taxpayer liabilities for MRRT, and that different valuation
methodologies and assumptions can produce quite different results'. There is a
need to ensure that valuations are done by approved independent valuers under
There is also a conceptual inconsistency in allowing a company to claim
that the value of mine infrastructure has fallen over time when claiming
depreciation deductions to reduce company tax payments and then turning around
and saying its value has increased so that it can be depreciated again to
reduce payments of MRRT.
It is likely that all the large mining companies will elect to use the
market value approach.
The value is at May 2010, a time when commodity prices were very high. Treasury
estimates that the total starting base value is $360 billion.
If depreciated over the maximum 25 years this would result in an annual
allowance of $14 billion, and if it is depreciated over Treasury’s assumed 19
years it would result in an annual allowance of $19 billion but if the average
effective life of existing mines is, for example, ten years then the annual
allowance would be $36 billion. These are large amounts which mining company
profits must exceed before they will start paying significant amounts of MRRT.
To give an example for an individual company, Fortescue has estimated
that they may have a starting base of around $14‑15 billion which they
could depreciate over a period of 'well under 25 years'.
To use round numbers, if this is $15 billion over 15 years, it would be an
allowance of around $1 billion a year. This is a large proportion of
Fortescue's operating profit in 2011 of $2.6 billion and almost the equivalent
of their operating profit in 2010 of $1.1 billion.
Companies electing to use book value will be provided with what the
Government calls 'generous accelerated depreciation'; they are allowed to
depreciate it over five years, giving a ‘substantial tax shield’.
The reason for this generosity is not clear. The Ralph Report had
recommended the abolition of accelerated depreciation and a cut in the company
tax rate from 36 to 30 per cent because of the distorting effects of
accelerated depreciation, and this argument seemed to have won bipartisan
Mining companies had argued that the mining tax was a 'retrospective
tax' as it applied to revenues from mines developed before it was introduced.
This conflicts with the normal idea that retrospectivity refers to taxing
revenue earned before a tax is introduced. Indeed on the mining companies'
definition, any increase in income tax would be retrospective as it taxed the
returns to earlier education. Nonetheless, it appears that fear of the MRRT
being labelled retrospective may be why these concessions were allowed.
Disturbingly the base value includes not just the cost of mining
infrastructure but the value of the minerals themselves. This means the base
value, and so the amount of depreciation that can be claimed, will have been
inflated by the run up in commodity prices. So at the same time as the
Government is claiming to be taxing these windfall gains it is allowing
deductions that increase with the windfall gains. Furthermore, if the starting
base is calculated on the current high commodity prices, and the commodity
prices then fall, the depreciation on the starting base may wipe out any tax
As Fortescue put it:
...with the concessions that have been given that relate to the
market valuation and the ability to write them off there has been an
underestimate in how quickly they can be written off. The tax shield is much
larger than Treasury believes...
Economist Professor Pincus argued that:
...expected profits will be
fully capitalised in the market price of an asset. The value of an asset in the
market should be equal to the present value of the cash flows anticipated from
the asset, discounted at a rate that takes account of risk...Two factors lead to
payment or a liability for an MRRT: first of all, that long-term rate plus
seven per cent is less than what the markets used to discount those profits;
second, the profits turn out to be better than the market expected.
Economist Richard Denniss elaborated on the problem this causes:
...it is unusual and
counterproductive to have allowed the market valuation of the asset to be used,
and allow me to try to explain why. If I spend $100 million building a mine,
that is the capital that I have invested—that is what I am risking. I
presumably spend that $100 million because I think at commodity prices today,
or the commodity prices I expect, I will be able to make a decent return on
that $100 million. By definition, I would not have built it or convinced
someone to give me the money if that was not the case. Now, if commodity prices
double after I build the mine my profits will obviously go up
substantially—probably more than double—and in turn, if I were to sell that
mine I would obviously be able to get a lot more for it than I spent on it
because I am not selling what I built, I am selling the flow of profits. So
when we allow the mining companies to value their investment at the new market
price rather than the depreciated actual expenditure, we have already wiped
out, for the taxpayer, most of the super profit because the super profit is now
built into this new market price. So if the purpose of the superprofits tax is
to collect windfall revenue for the owners of the resource—you and I—then to
let the miner use today's valuation of their mine, rather than what they
actually spent on the mine, as the base is an incredibly generous gift from us,
the owner to them, the miner.
Professor Garnaut told the Committee:
arrangements for the MRRT are extreme in their generosity to highly profitable
established mines...The assessment of market value to assess the offset or
deduction for past investment is problematic on a number of accounts...If you
genuinely were allowing for a deduction for the market value of an asset, the
current market value of those assets includes the value of the untaxed rent. If
you are genuinely deducting the market value, almost by definition you are
giving away the revenue from established projects.
There has also been criticism of this approach from accounting experts:
...depreciating assets based on market valuation is not
generally accepted accounting practice, yet it is allowed in the legislation.
In simple terms, a mining asset that cost $100 million to bring to production
might today be worth $350 million if sold on the open market. A miner could use
this higher valuation to calculate depreciation, which would reduce the profit
subject to the tax.
some assets have been depreciated down to zero, and my understanding
is that they can now be reinstated at a higher value and then depreciated again
for the purpose of their starting base. That seems quite a generous allowance....writing
the tax on unobservable market values does not seem reasonable—or at least seems
I do not believe that the market valuation for the starting
base will erode the MRRT revenue forever, but it would appear to erode the
expected tax collections substantially for at least the next five years and
probably longer... If substantial revenue was expected under the MRRT in the
initial years of operation then a well calibrated start-up allowance would
likely not have included the full market value of existing reserves.
Treasury did not give an impression that the starting base definition
was based on any strong economic analysis:
Senator MILNE: can you explain to me why the starting base
should include the value of the minerals in the ground rather than just the
depreciated cost of the infrastructure at the mine?
Mr Heferen: Again, that is a policy issue. Conceptually, the
starting base could be a whole range of things and that is the one that was
chosen for this particular tax...
Senator MILNE: Can you explain to me what the rationale was
for allowing the mining companies to choose whether they use book value or
market value when calculating the starting base?
Mr Heferen: They are elements that are specifically mentioned
in the heads of agreement so they go to the design of the tax.
The argument has been well summarised by the CFMEU:
Using current market value...enables companies to claim a
deduction for costs they have never incurred. This is clearly a rort. That
mining assets experience capital gains is already a benefit for resource
companies; allowing them to claim starting base losses based on that capital
gain is extraordinarily and unnecessarily generous.
The market value starting base is also a very complicated calculation.
...you have to take the
starting base on 2 May 2010 and you are not allowed to use knowledge since that
time for to for the evaluation basis. So, again, it is a very, very complex
process to work out the value that you are allowed to deduct as a starting
...there are some particular
aspects of the MRRT that generate particular challenges for compliance, one of
which is the calculation of the market value of pre-existing assets...I would
hate to have to go about calculating that... Nowhere
have I been able to read...a very clear definition of how market value of past
investments is actually going to be calculated.
Senator Bishop attempted to defend these arrangements, and the resultant
lack of revenue raised by the MRRT in its early years, as ‘arguably the
intended design feature of the scheme, to allow new projects to come on time,
to recoup their costs’ but as Professor Garnaut pointed out, ‘if that was the
intention, it is inconsistent with the budget papers having shown a rather
large amount of revenue in the early years’.
There seems to be a strong case for restricting the starting base for
depreciation allowances to the depreciated book value.
That the starting base for existing projects be restricted to the
depreciated book value of what the companies have actually spent on mining
infrastructure, rather than including the inflated market value, as this is a
more prudent option to avoid the risk of eroding the revenue.
That consideration be given to the book value of the starting
base for existing projects be depreciated over the expected remaining life of
the mine rather than allowing an accelerated depreciation period of five years.
The taxing point and the ‘netback’ arrangements
The MRRT is applied at the 'run of mine stockpile' (colloquially the
'mine gate') rather than the point of sale, which may be when the minerals are
loaded onto a ship at the Australian port or delivered to a foreign port. This
is conceptually correct as the MRRT is meant to be a tax on the resources
themselves rather than also on the value added in processing (such as crushing,
washing, sorting, separating and refining) and transport. The challenge this
poses, however, is that the taxing point price is not directly observable but
must be calculated by subtracting relevant items from the sale price.
Treasury has said that large vertically integrated companies with their
own railways lines cannot deduct the amount they charge third parties for
access to it, which may contain a monopoly rent component, but can only deduct
the amount that would be charged in a competitive market. Again this is
conceptually right but in practice hard to calculate and potentially open to
Fortescue told the Committee that:
Both calculations and the principles embedded in both the
netback and the starting base are incredibly complex. It has taken us, as I
say, the better part of two years to work through our own circumstances with
the assistance of outside experts and consultants to help us firm up the
opinions, the facts and the database that will support our positions opposite
the tax office... You have to take the sole [sold?] price of a tonne of iron ore
in our case and deduct the shipping or transport costs to get it from the mine
to rail and port. Then you take back the processing costs right back to the
point where you extracted the ore from the ground. There is no natural
reference point for that calculation, so as a taxpayer you need to be very
certain of the positions that you are taking through every step of that process
because you know the tax office will come and look at the books in due course...they
are incredibly complex principles that you are trying to overlay to
artificially create taxing points.
One of the smaller mining companies affected had said there is a:
...lot of subjectivity as to how you calculate those...
Professor Fargher explained to the Committee:
The mining companies have a
choice of at least half a dozen methods that could be considered appropriate.
To make it clear, we have got an observable market price somewhere down the
value chain. We are estimating costs to get back to the tax point. The more
that we can include in that further down the vertically integrated chain, the
less tax base we are going to have. In accounting, wherever that problem
occurs, it generally eventually results in problems between the tax office and
the taxpayer. Basically, joint costs have to be somewhat arbitrarily allocated
at the end of the day. Therefore, because there is an arbitrary allocation
there, the taxing authority might consider reducing the choices available to
the taxpayer to one or two that seem reasonable rather than giving them the
option to take five or six, working out the best one from their perspective and
then using that.
Similar concerns have been raised by other groups in the community:
There will be ongoing tension, and no doubt disputes and/or
litigation over a system where the taxing point is some distance
(geographically and in the value chain) from the point at which a market price
is more readily determined...the design of the taxing point should seek to
maximise tax raised...
...we are concerned with the potential for abuse within this
section of the legislation. We do not believe that the wording precludes
companies from transferring loss between partner and/or associated entities in
order to avoid their obligations under law.
Professor Ergas warned:
...the issues that will arise...will include timing issues,
revenue recognition issues and particularly cost allocation issues; what the
allowed rate of return on the downstream assets should be; how that allowed
rate of return should be allocated; what the relevant asset base downstream is;
and at what pace those downstream assets should be depreciated.
That consideration be given to the MRRT being calculated on the
sale price of the minerals, as is done for royalties, removing the complex
Companies with a group mining profit below $50 million had been
effectively exempted from the tax (through being eligible for a ‘low profit
offset’) on the grounds they should not be subjected to the compliance costs
when they were making relatively small payments. Companies with a group mining
profit of between $50 million and $100 million received a partial
reduction in MRRT.
Under pressure from Andrew Wilkie MHR, this threshold was lifted to
$75 million phasing out at $125 million. The cost of increasing the
threshold was estimated at $20 million a year.
But it appears that many small companies are doing the paperwork for the
MRRT anyway, because they aspire to become large companies (or to be sold to
large companies) and need the information to claim the starting base and other
allowances once they start paying MRRT.
The Minerals Council told the Committee:
...there are a lot of small to mid caps out there who are
having to make a decision about whether—and we went through this last time—they
take advantage of the de minimus provision of $50 million cut-off phasing up to
$100 million, or whether they in fact invest a fair amount of compliance cost
upfront today with the prospect that they might grow in the future.
This raises the question of whether the threshold is achieving its
objective or is just needlessly reducing the revenue collected by the tax. A
company with profits of $50 million is much larger than what would normally be
considered a ‘small business’.
That consideration be given to a lower threshold for payment of
The majority report describes the MRRT as a ‘tax which doesn’t even
raise any meaningful revenue’.
The Greens would agree, with the addition of the words ‘in its current form’. This
dissenting report has suggested a range of modifications which will mean that
the mining tax does raise significant revenue, is simpler and therefore less
costly to administer and comply with, and retains the economic efficiency
advantages that lead most economists to favour resource rent taxes in
At a time when both the old parties are struggling to explain how they
will meet new spending initiatives when revenue is a smaller proportion to GDP
than it had been during the Howard/Costello years, fixing the MRRT in the
manner we suggest should command the support of them both. The government needs
to answer why it will cut university funding and single parents payments rather
than fix the tax and the Coalition needs to address the challenge posed by
...anybody advocating removal
of the MRRT... have to say what other taxes are going to increase or what
expenditure is going to be withdrawn in the long term to finance that.
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