Dissenting report from the Australian Greens

Dissenting report from the Australian Greens

Executive summary

1.1        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.

1.2        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.

1.3        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 economy.

1.4        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.

1.5        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.

1.6        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.

1.7        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.

1.8        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.

1.9        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.

1.10      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 disabilities.

1.11      This dissenting report provides in detail the reasons for the major design improvements the Australian Greens are advocating:

1.12      The Parliamentary Budget Office has costed these proposals as raising an additional $26 billion over the next four years. 

1.13      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 Australians.


1.14      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.

1.15       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.[1] 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’. 

1.16      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 report.

Conduct of the inquiry

1.17      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

1.18      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).

1.19      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.[2]

...while commodity prices are down slightly on their historic highs they are still well above the long-term average,[3]

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.[4]

Chart G1

RBA Index of Commodity Prices

1.20      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.

1.21      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.

1.22      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'.[5] 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.'[6]

1.23      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).

1.24      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).[7] 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.

1.25      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.[8] 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.[9] With consumers paying less for imports they would have more money to spend on services within Australia, providing some benefit for small business.

1.26      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).[10] 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.[11] 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.[12]

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.[13]

1.27      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.[14]

1.28      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 shortages...[15]

1.29      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 coffers.[16] 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.[17]

1.30      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.[18]

1.31      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.[19]

1.32      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.[20]

1.33      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

Annual average percentage change, 2003-04 to 2011-12

Real Gross State Product

Real State Gross Domestic Income per capita

(Mining share of GSP, %)

Western Australia




Northern Territory
















South Australia




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.

1.34      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 a third.[21]

1.35      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.[22]

1.36      The actual increase is more like 160,000, a little over 1 per cent of the workforce.[23]

1.37      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 regional communities.[24]

1.38      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 claims plausible?

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 Australia.

Senator WATERS: Exactly; that is my point. Is that one/three claim plausible?

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.[25]

1.39      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.

1.40      Communities, both host and source, and family life are being disrupted by fly‑in/fly-out workforces.[26] 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.

1.41      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.[27]

1.42      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. [28]

The taxes and royalties paid by mining companies

1.43      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’.[29] It is therefore important to place on record the facts.

Company tax

1.44      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.[30] Both BHP Billiton and Rio Tinto claim to be Australia’s largest taxpayer.[31]

1.45      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 investment projects.

1.46      The Minerals Council continues to refer to a spurious and discredited analysis by Sinclair Davidson of the Institute of Public Affairs,[32] which compares company tax paid by mining companies to their taxable income rather than to their profits.[33]

1.47      As then Treasury secretary Dr Ken Henry has pointed out, this calculation is:

...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 particular industry.[34]

1.48      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.[35]

1.49      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...[36]

1.50      His predecessor remarked:

...the tax paid by the mining sector of the economy is a relatively small proportion of profit.[37] 

1.51      Two studies by Treasury economists examined alternative measures of average company tax rates by industry, which consistently showed mining as below average.[38] 

1.52      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.[39]

Company tax and royalties

1.53      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.[40]

an essential feature of a tax is that there is no clear quid pro quo.[41]

Royalties are the price paid by the mining industry for the right to extract mineral resources...[42]

1.54      Including MRRT, royalties and company tax, the contribution to the public purse from the mining industry now is still below that in previous mining booms:

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.[43]

1.55      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 in tax.[44] 

International competitiveness and ‘sovereign risk’

1.56      The mining industry makes apocalyptic predictions of the impact of higher taxes on their international competitiveness, backed by negligible empirical support.

1.57      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[45] were right, this would still be below the global average (see Chart G2 on following page).

1.58      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’.[46] 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 profitable.[47] This compares to no mining tax paid in Australia in 2012 and an unspecified small amount in 2013.


Chart G2

Figure 1. Model copper mine: comparative effective tax rates

Source: Paul Mitchell, ‘Taxation and investment issues in mining’, in Extractive Industries Transparency Initiative, Advancing the EITI in the Mining Sector, 2009, p 30.

1.59      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.[48]

1.60      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 in Australia.[49]

1.61      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 investment.[50]  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...[51]

1.62      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

Chart G3: Capital expenditure by the mining industry

Source: Australian Bureau of Statistics, Private New Capital Expenditure and Expected Expenditure, December 2012.

1.63      Furthermore, the mining industry expects to invest around $100 billion in 2013-14 alone, far above their annual investment before the MRRT was introduced.[52] There are over $250 billion in large committed investment projects, which is a record high, and another similar amount at the feasibility stage.[53]

1.64      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.[54]

1.65      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.[55]

1.66      The mining industry, when arguing against paying more tax, often make statements such as ‘costs have risen sharply in recent years’[56], 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.[57]

1.67      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.[58]

1.68      Treasury secretary Martin Parkinson has referred to:

The miners could see massive profit opportunities. They were less focused on cost containment...[59]

Designing a better tax regime: Resources rent taxes

1.69      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’.[60] Two of the Economics Society’s distinguished fellows, Professors Garnaut and Quiggin, gave evidence to the Committee.[61] 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 these parameters...[62]

1.70      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....[63]

1.71      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.[64]

1.72      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...[65]

1.73      The Greens had called for a resources rent tax even before the Henry Tax Review was released.[66]

1.74      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.[67]

1.75      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...[68]

1.76      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

Process issues

1.77      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.

1.78      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.

1.79      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 smaller companies.[69] There were no Treasury or ATO officers present during the negotiations.[70]

1.80      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.[71]

1.81      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.[72] 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’.[73]

1.82      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 written version.[74]

1.83      Its written response refers to ‘iterative discussions’ but does not explicitly deny preparing a draft.[75]

1.84      BHP denied that in signing the heads of agreement they were implicitly promising not to resume the advertising campaign against the Government.[76] This leaves unclear what they were committing to by signing the agreement.

1.85      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’.[77] 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 effective tax.[78]

1.86      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.[79]

1.87      Isaac Regional Council’s submission says:

No formal consultation was undertaken with communities affected by mining.[80]

This is another important deviation from best practice policy design.

1.88      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 tax, saying:

even to discuss changes to that tax right now would create uncertainty. [81]

1.89      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.[82]

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.[83]

Estimates of revenues from MRRT and RSPT

1.90      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.[84] 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.[85] An AFR journalist estimated that the reduction is at least $100 billion.[86] 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’.[87]

Table G2: RSPT and MRRT revenue projections, $ billion




2010-11  Budget


Econ. State.  2010


MYEFO 20101-11

2011-12 Budget

MYEFO 2011-12

2012-13 Budget

MYEFO 2012-13

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.

1.91      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.[88] They were not the result of rethinking how the tax would operate.

1.92      Given that in the first half of 2012-13 the MRRT has raised only $0.1 billion,[89] 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.[90]

1.93      Rio Tinto have booked a deferred tax asset of $1.1 billion and an unbooked deferred tax asset of $12 billion.[91] BHP Billiton have booked a deferred tax asset of under $1 billion but have an unbooked deferred tax asset of around $10 billion.[92] Xstrata have an unrecognised deferred tax asset of $11 billion.[93] 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).[94] Few commentators would expect commodity prices to be higher on average over the coming decade than they have been over the past year.[95] 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.

1.94      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.[96]

Concerns about volatility of revenue

1.95      Concerns have been expressed about the volatility of the revenue from the MRRT:

...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...[97]

1.96      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 put it:

I do not see a problem with governments taxing volatile income sources.[98]

Linking the MRRT to other budget measures

1.97      The Coalition senators that form the ‘majority’ of this committee have claimed that the MRRT ‘actually leaves the budget worse off’.[99] 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’.[100] 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

1.98      The tax rate in the RSPT was 40 per cent. This is the same as that recommended in the Henry Tax Review.[101] 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.[102]

1.99      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.

1.100         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'.[103] Professor Ross Garnaut, a global expert on resource taxation, told the committee:

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.[104]

1.101         Other countries with resources rent taxes often apply higher rates.

Table G3: Resource rent taxes

Australia (petroleum)


Norway (petroleum)


United Kingdom (petroleum)


Timor Leste (petroleum)


Namibia (petroleum)

25 minimum

Malawi (mining)


PNG (mining)

70 less standard company tax rate

Ghana (mining)


Liberia (mining)


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.

1.102         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.[105]

Recommendation G1

1.103         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

1.104         While the RSPT applied to almost all minerals, the MRRT only covers iron ore and coal.[106] 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.

1.105         No cogent argument has been put for this treatment. The Minerals Council vaguely said:

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.[107]

1.106         The Minerals Council were asked to elaborate in writing on what this meant but have not done so.

1.107         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.[108]

1.108         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.[109]

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 high-value minerals.[110]

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.[111]

...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.[112]

1.109         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.[113]

1.110         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.[114] 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 put it:

... 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. [115]

1.111         The Parliamentary Budget Office estimate the cost to revenue of excluding minerals other than coal and iron ore at $3 billion over the forward estimates.[116]

Recommendation G2

1.112         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.

Recommendation G3

1.113         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

1.114         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 are high.

1.115         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 agreements’.[117] 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.

1.116         While royalties are often described as simple,[118] 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.[119] And of course there is a different rate scale for every other mineral.

1.117         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.[120] 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.[121] 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 increases

1.118         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 in royalties'.[122]

1.119         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 factors'.[123]

1.120         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.

1.121         BHP Billiton told the Committee they had clarified the matter with Treasury:

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 Treasury?

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'.[124]

1.122         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.[125]

1.123         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’...[126]

1.124         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.

1.125         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.

1.126         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.[127]

1.127         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.[128]

1.128         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.[129]

1.129         Professor Quiggin noted that the introduction of fiscal equalisation was:

...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.[130]

1.130         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.[131]

1.131         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.[132]

1.132         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 increasing royalties.[133]

1.133         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.[134]

1.134         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.

1.135         The Government added this problem to the terms of reference for the GST Distribution Review conducted by Nick Greiner, John Brumby and Bruce Carter.[135]  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’.[136] 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’.[137]

1.136         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.

1.137         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 forward estimates.[138] 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.

Recommendation G4

1.138         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

1.139         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.

1.140         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'[139], 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.

1.141         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.

1.142         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.'[140] Professor Fane argued the appropriate interest rate would be around 3 per cent, the after-tax equivalent of the then prevailing bond rate.[141]

1.143         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.[142]

...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 flimsy justification.[143]

In the world we are in today it [the uplift rate] seems very high.[144]

It is certainly a relatively high rate.[145]

1.144         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 per cent?

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.[146]

1.145         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.

1.146         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.

1.147         The ‘tops down’ model used by the PBO does not lend itself to costing the generous uplift rate.[147] 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.[148]

Recommendation G5

1.148         That the uplift rate be reduced to the bond rate plus 2 per cent.

Starting base and depreciation arrangements for existing projects

1.149         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 clear guidelines.

1.150         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.

1.151         It is likely that all the large mining companies will elect to use the market value approach.[149] 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.[150] 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.

1.152         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'.[151] 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.

1.153         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’.[152] 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 support.

1.154         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.[153]

1.155         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 liability.[154] 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...[155]

1.156         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.[156]

1.157         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.[157]

1.158         Professor Garnaut told the Committee:

The transitional 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.[158]

1.159         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.[159] 

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 dangerous.[160]

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.[161]

1.160         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.[162]

1.161         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.[163]

1.162         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 base.[164]

...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.[165]

1.163         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’.[166]

1.164         There seems to be a strong case for restricting the starting base for depreciation allowances to the depreciated book value.[167]

Recommendation G6

1.165         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.

Recommendation G7

1.166         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

1.167         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.

1.168         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 challenge.

1.169         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.[168]

1.170         One of the smaller mining companies affected had said there is a:

...lot of subjectivity as to how you calculate those...[169]

1.171         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.[170]

1.172         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...[171]

...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.[172]

1.173         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.[173]

Recommendation G8

1.174         That consideration be given to the MRRT being calculated on the sale price of the minerals, as is done for royalties, removing the complex ‘netback’ provisions.

The threshold

1.175         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.

1.176         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.[174]

1.177         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.

1.178         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.[175]

1.179         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’.

Recommendation G9

1.180         That consideration be given to a lower threshold for payment of the MRRT.


1.181         The majority report describes the MRRT as a ‘tax which doesn’t even raise any meaningful revenue’.[176] 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 principle.

1.182         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 Professor Quiggin:

...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.[177]


Senator Christine Milne
Australian Greens

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