Minority report by the Australian Greens
The unprecedented growth of the Chinese economy and its re-engagement
with the global economy have seen commodity prices soar over the past decade,
bringing vast windfall gains to mining companies from their operations 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.
Furthermore, the mining boom has led to an appreciation of the
Australian dollar, higher interest rates and shortages of labour in certain
regions or with certain skills. These impacts are in turn leading to lower profits
and lower returns to shareholders in other industries such as manufacturing and
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. The boom mentality is leading to over-investment in ports and other
infrastructure in remote areas which will have little other use.
While the record investment undertaken and proposed by the industry ($120 billion
next year alone) suggests the prospect of the mining tax is having little
impact on activity, were it to lead to some cooling in the feverish expansion
of the mining industry this could be desirable rather than a problem.
Australians have led the world in thinking about the impact of resources
booms and the optimal taxation treatment of them. Australia should also be
setting an example to the world in implementation of an efficient tax to ensure
the people get a fair share of the returns from their national natural
A better designed mining tax could raise a lot more revenue than the
Minerals Resource Rent Tax (MRRT) – in the order of an additional $100 billion
over the next decade – which could fund needed initiatives in areas such as
education, modern public transport and dental health. Some of the funds raised
could be placed in a sovereign wealth fund to share the benefits with future
Such design improvements would include broadening the coverage of the
tax and restoring the MRRT rate to the 40 per cent recommended by the Henry Tax
Review, so that there would be a uniform (and hence non-distortionary) resource
rent tax of 40 per cent. Other design features, such as the uplift rate and the
starting base, should be returned to be close to those recommended in the Henry
Review, and royalties (especially increased royalties) should not be rebated.
The Government has linked the mining tax to a proposed increase in the
superannuation guarantee (SG) from 9 to 12 per cent, as the mining tax proceeds
will partly be used to make up the cost to the budget resulting from some wage
increases being replaced with concessionally taxed superannuation. The Greens
are supportive of the SG increase but want to take this opportunity to address
inequities in those tax concessions. Tax concessions should not be giving more
benefits to high income earners making superannuation contributions than they
do to low income earners.
The Government is also reducing and simplifying some tax arrangements
for small business. The Greens support this simplification but would like to
see examination of whether it would be preferable to extend the small business
instant asset write-off threshold from $6 500 to $10 000 instead of the
accelerated initial deductions for motor vehicles.
While not part of this package of bills before this inquiry, the
Government has said that the MRRT will fund a cut in the company tax rate from
30 to 29 per cent, with small businesses receiving the cut from July 2012 and
larger businesses from July 2013. As it is small rather than large businesses
who have most suffered from the effects of the mining boom, the Greens would
prefer not to proceed with the latter cut but to consider more benefits for
The package of bills seeks to introduce the Minerals Resource Rent Tax
(MRRT), a tax on the economic rents mining companies make from the extraction
of certain non‑renewable mineral resources; extend the coverage of the
existing Petroleum Resource Rent Tax to all offshore and onshore petroleum
projects; increase the superannuation guarantee (SG) charge from 9 per
cent to 12 per cent; and lower and simplify some small business taxation
arrangements. The Greens support these goals but seek to improve and extend the
bills with a series of amendments described in this minority report.
Conduct of the inquiry
The committee held only two public hearings, and both were in Canberra.
While evidence was taken from public policy think tanks, academics, trade
unions, superannuation funds, superannuation industry bodies, Treasury and the
Australian Taxation Office; there was an overrepresentation from mining
industry representatives and other opponents of the bills. It would also have
been desirable given the importance of the issues to have held more hearings in
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,
taking Australia's terms of trade to their highest point on record (Chart G1).
Source: Reserve Bank of Australia, Statement on Monetary Policy,
The value of mining production has soared. The contribution to GDP of
the mining industry has increased from $35 billion in 2003-04 to $123 billion
in 2010-11. Most of this 250 per cent increase has been a windfall gain from
higher prices; the corresponding volume measure rose by less than 30 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.
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, some of it is in superannuation
funds. The mining companies also pay royalties and company tax (discussed
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 and about a quarter 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.
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 the 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.
...the high Australian dollar is having a negative effect on
manufacturing, it is having a negative effect on tourism, and there are other
things as well that are impacting on the finance industry. We are very
concerned that the Australian economy is being unbalanced as a result of the
We certainly are in a position where the expansion of the
mineral sector has led to an appreciation of the exchange rate which is
damaging to other traded goods sectors.
The mining boom has led to shortages of skilled labour and increased
costs for many other industries:
Someone who sits on a tractor out in western New South Wales
at $25 an hour can go into the mining industry at something like double that
The mining boom has also bid up the prices of raw materials used in
These 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. As
the Australia Institute observe:
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.
As mining is concentrated in Western Australia and Queensland, these
'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.
Table G1: Gross state
average annual % change, 1999-00 to 2010-11.
New South Wales
Sources: ABS, Australian
National Accounts: State Accounts (5220.0).
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
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:
...we are a massive knock-on employer; the multiplier effect is
anything from two and a half to three, all the way up to eight or nine or 10...
The week before, Treasury had 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. 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
The mining sector is notorious for its boom and bust mentality. For
those commodities where Australia provides a significant proportion of the
global supply, rushing to increase production is going to lower the prices
received. A sharp rise in production also increases the number of people, and
physical resources, that will need to be shifted back to other sectors, either
when the minerals run out or when there is a price drop that ends the period of
super profits. It may also be leading us as a nation to over-invest in ports
and freight rail in remote areas that could have little value after a mining
boom. So even if the mining tax does lead to some slowing in the rate of
exploitation of Australia's minerals, this may be no bad thing.
As Professor Quiggin told the Committee:
...to the extent that the proposed tax deviates from an ideal
rent tax and tends to constrain the growth of the minerals sector, it is
unlikely to be economically damaging in Australia's current economic
circumstances, given the great strength of the mining sector and the
corresponding pressure that high exchange rates are putting on other sectors of
The tax paid by mining companies
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.
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 Treasury Secretary has recently 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 concede 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.
Rents and royalties
There was an assertion by some opponents of the MRRT that there are no 'rents'
or 'super profits' in mining.
This is clearly not the case. Mining is very different to the typical industry.
Take the example of a suburban pizza restaurant. If it attempts to take
advantage of a rise in demand for pizzas by markedly increasing prices to earn
abnormal profits, it is a simple matter for someone else to establish a rival
restaurant. If the currently operating restaurant is operating very
inefficiently, a more efficient newcomer can enter the market and offer cheaper
pizzas and make a good profit. In contrast, once a mining company is mining a
particular ore body, no other company can come along and mine the same deposit,
no matter how profitable the project has become or how inefficient is the
existing miner. This lack of 'contestability' is magnified by the sheer size of
the major mining companies and their control over the transport infrastructure.
Furthermore, unlike pizza restaurants or retailers or manufacturers who
must pay for the goods they sell and their raw materials, mining companies are essentially
selling non‑renewable resources owned by the people. The only payment
they make for these at present are royalties imposed by state governments.
Royalties, however, 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
The mining industry makes apocalyptic predictions of the impact of
higher taxes on their international competitiveness, backed by negligible
Mining companies are currently earning above normal or 'super' profits,
or 'rents' well in excess of the returns necessary for them to attract capital,
undertake investments and continue production. There is no indication that the
prospect of the MRRT, which in one form or another has been discussed publicly
for at least three years, is proving any significant deterrent to mining
companies increasing their operations in Australia.
The latest data show that mining investment in Australia reached another
record high in the December quarter of 2011.
Chart G2: Capital
expenditure by the mining industry
Source: Australian Bureau of Statistics, Private New Capital
Expenditure and Expected Expenditure, December 2011.
Furthermore, the mining industry’s expectations of how much investment
they will do in 2011-12 as a whole has been revised up. And they expect another
large increase in investment in 2012-13. Investment next year is projected at
$120 billion, compared to the $80 billion they expected for 2011-12 at this
time last year.
A similar picture is shown by the list of proposed projects long published by
the Australian Bureau of Agricultural and Resource Economics and Sciences.
Even if the MRRT were to deter a mining company from undertaking a
project in Australia, there are plenty of rival firms who would be keen to
...there are any number of willing investors in the Australian
mining industry that are willing to invest on the basis of making good profits
rather than super profits. Chinese and Indian investors in particular are
falling over themselves to invest in Australia. Even various American mining
companies are keen to invest in Australia, despite their difficulties back
While the inquiry heard about the supposedly more welcoming tax regimes
in developing countries in Africa and South America, and the supposed 'sovereign
risk' from Australia's proposed tax reforms, in reality Australia is a much
safer and secure environment for mining companies. As The Economist
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...
Worldwide there are 25 countries announcing plans to boost their share
of profits, and these extra taxes are moderate compared to countries such as Indonesia
that are forcing companies to cede a majority stake in their mines to locals.
Some examples of other countries with resource rent taxes are given in Table G4
Designing a better tax regime
A good point about the balance of risks in setting tax rates on mining
is made in the Fortescue submission:
...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 resource 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 resource 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. These gains were as a result of the commodity price boom
resulting from the sustained rapid growth in the Chinese economy. The Rudd
Government proposed the Resource 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 Resource Rent Tax which has operated successfully in Australia
for twenty years. The mining companies, however, responded with an advertising
campaign costing around $20 million. Prime Minister Gillard announced in July
2010 that the RSPT would be replaced with a watered down Minerals Resource Rent
Tax (MRRT). The outline of the MRRT had been developed in 'negotiations' with
the three largest miners; BHP-Billiton, Rio Tinto and Xstrata. 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. After a short inquiry by the House Economics Committee, the bills
were passed by the House of Representatives in November 2011.
The majority report comments:
The consensus from industry, even from opponents to any
resource rent tax being imposed on the minerals sector, is that it represents a
significant improvement on the RSPT.
That is a fair representation of the industry's view. But the
industry holds this view just because the MRRT imposes much less tax on them
than would have the RSPT. All industries would regard it as an improvement to
halve a prospective tax on them. This is not a reason to think that in a public
policy sense the MRRT is preferable to the RSPT.
As Professor Quiggin noted:
The original [RSPT] proposal was designed more in line with
the theoretical ideal... It would have been better to raise substantially more
with the original proposal for the RSPT and to use that to finance the various
tax reductions that were proposed...It would certainly be desirable to go back to
the original RSPT proposal.
There have been claims that the resource rent tax should have been
subject to lengthy consultations with mining companies and a green paper/white
This ignores the extensive consultation on the theory of the tax done by the
Henry Tax Review and the extensive consultation by the Ferguson-Argus group on
the details of the implementation. If mining companies chose not to put their
views to these reviews about the best mechanisms for returning a fair share of
mining profits to the community, this is their own fault.
Resource rent taxes
The majority report is quite right when it comments:
Rent taxes have a noteworthy history in Australia and have an
accepted place in Australian tax policy. They are widely acknowledged by
academics and tax experts as being more efficient methods of taxation than
This view has been reiterated by academic experts:
Resource rents are larger in this economy than in any other
developed country except Norway. A resource rent is potentially a source of
taxation that has relatively little distortion of economic activity, so it is a
lower cost form of taxation than most of the ways in which we raise taxation.
...a tax targeted at rents, at the profit in excess of the
normal rate of profit gained from access to these mineral resources, is the
most efficient basis for taxing minerals.
The Greens had called for a resources rent tax even before the Henry Tax
Review was released.
Even the mining industry lobby and some trenchant critics of the MRRT acknowledge
the merits of a resources rent tax:
We have conceptually...argued that there is a strong case for...a
shift from output based royalties to profits based where there is a better
sharing of risk and reward.
...in theory, resource rent taxes are a very good idea...if you
were designing a system ab initio you would actually use a combination of
taxes, so in theory you would use properly designed royalties, properly
designed resource taxes and properly designed upfront auctions.
...the normal economics profession generally would say a
profits rated tax is better than a royalty...
It is likely that the reason the large mining companies were so opposed
to the original RSPT was not that this resource rent tax would not work but
that it would have worked very well and been adopted around the world. As
Professor Quiggin put it:
...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.
Estimates of revenues from MRRT and RSPT
It has increasingly become apparent that the MRRT not only foregoes much
of the revenue the RSPT would have raised, but that design flaws may mean that
it will not cover the cost of programmes intended to be funded from it. Over 40
per cent of the revenue may be returned to the mining industry through cuts in
company tax and infrastructure spending to benefit the mining sector.
The table below summarises revenue projections. 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.
The Treasurer questioned these estimates at his recent appearance at the
National Press Club.
If he wants these criticisms to have credibility he should release Treasury
calculations on the different amounts of revenue based on the same assumptions
on exchange rate, commodity prices and volumes, instead of just saying that the
RSPT is no longer government policy.
Given the reduction in revenue projections for 2014-15 revealed in the
2011‑12 Budget and MYEFO, it is likely projected revenue from the MRRT has
also fallen for the subsequent years. If revenue projections for the out-years
are scaled down as much as for the forward estimates, then the cumulative
revenue to be collected by 2020-21 would now have dropped from $39 billion to
around $25 billion.
G2: RSPT and MRRT revenue projections, $ billion
Sources: 2010-11 Budget
Paper No. 1, pp 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.
The projections above do not include the impact of the increases in
royalties announced by the NSW Government last year, which is projected to
raise $0.9 billion over the forward estimates for the state government and will
be rebated to the companies paying the MRRT.
Many commentators have become increasingly concerned about the generous
provisions in some of the details of the MRRT, leading them to lower their view
of the likely revenue.
The definitions of mining expenditure which can be deducted from revenue seem
quite broad. For example, they extend to provision of a community aquatic
centre in a nearby town.
Native title payments are also deductible.
Budgetary impact of the package of
On available information the package of bills will result in a net
addition to government revenue over the forward estimates period (Table G3). It
appears, however, unlikely that there will be enough net revenue to fund the
company tax cut and regional infrastructure fund which the Government has also
linked to the MRRT. It is arguable that as the MRRT is only around 1 per cent
of government revenue it does not matter unduly whether the revenue from the
MRRT matches the cost of the other initiatives and that 'what matters is the
overall fiscal balance'
which is budgeted to be in surplus over the forward estimates. But it would
still assist in having an informed debate for the Government to clarify their
intentions regarding the company tax cut.
Table G3: Budgetary
impact of the MRRT package
Minerals resource rent tax
Superannuation rebate for low
contribution cap for >50s
Small business instant asset
write-off and pooling
Company tax cut
Early company tax cut for
Regional infrastructure fund
Sources: MYEFO; budget papers;
Treasurer, 'Documents for Senate Order Relating to the Mineral Resource Rent
Tax', 8 February 2012.
There have been concerns expressed that in the longer term commodity
prices may fall back from their current highs, and so the revenue raised from
the MRRT will be on a downward trend. One countervailing factor will be the
increasing volumes that should flow from the vast amount of investment
Professor Quiggin pointed out another countervailing force:
...as the mineral sector declines, we can expect to see
expansions in other parts of the traded goods sector that have been constrained
by the strong growth in the mineral sector.
Another area of contention is the extent to which increases in the superannuation
guarantee reduce the cost of age pensions. On the one hand, Mercer claims
'higher short term tax concessions are more than offset by long term savings in
funding the age pension'.
On the other hand, ACCI claim 'projected budget savings on pension outlays are
grossly outweighed by the cost to the budget from the increase in the
A Treasury memo says that 'only part of the revenue foregone in tax concessions
in superannuation will be offset by a reduction in pension outlays'.
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.
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
Resource 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, commented '22½
per cent tax is not too high. And it could be higher without distorting
Other countries with resource rent taxes often apply higher rates.
Table G4: Resource
Timor Leste (petroleum)
70 less standard
company tax rate
Mongolia (copper, gold
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 to 40 per cent
would raise almost an additional $20 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.
An example of a project now excluded is the Olympic Dam, the world's largest
uranium deposit and fourth largest copper deposit.
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. Indeed, Treasury has said:
Treasury is not aware of any independent research or reports
recommending the restriction of the Minerals Resource Rent Tax to iron ore and
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.
A global expert on resource rent taxes commented:
...if two mines are equally profitable, are the same size, take
the same length of time and the same amount of exploration to bring into
production there is no economic reason to tax iron ore more heavily than
uranium, for example...not every iron ore mine is large and profitable, and not
every other kind of mine is small and unprofitable.
At the Committee's hearings, a number of witnesses, from across the
political spectrum, questioned the restriction to just coal and iron ore:
I see no reason for exempting these other commodities.
The fact of taxing those resources while not taxing others
will distort investment as between coal and iron ore on the one hand and
untaxed resources on the other.
...we have introduced it for just two industries...one should
treat all corporations in a similar way...
...plenty of other sectors of the mining industry are also
hugely profitable, and I think of copper and gold. A more consistent tax would
be applied more broadly.
The only justifications proffered for this restriction is reducing the
number of companies paying the tax and the statement in the majority report
...it focuses on the most profitable resources—iron ore and
coal—significantly reducing the number of companies that would be affected by
the new taxation arrangements.
Where it says 'most profitable', it should read 'currently most
profitable'. It is hard to predict in advance which commodity prices will rise
sharply and generate windfall profits. For example, there is discussion
currently about the prospects for prices of rare earths rising very high. This
is another reason why 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
A particular anomaly is gold. The price of gold is, even after some
recent decline, near an all-time high. An analysis commissioned by the Greens
estimates that removing gold's exemption from the MRRT would restore around $2
billion to revenue collected over the next decade.
Asked to defend the restriction to iron ore and coal at the hearing, the
Minerals Council's CEO, Mr Mitch Hooke's response was:
At the risk of appearing flippant, oils ain’t oils and
minerals ain’t minerals.
When then asked specifically about the exclusion of gold, Mr Hooke
...there is no money in it, in putting a resource rent tax on
Asked to justify this, Mr Hooke claimed there was modelling of the gold
sector in the Minerals Council's submission.
The submission contains no such modelling.
There is a reference in a footnote in the submission to a paper prepared at the
request of the Minerals Council by KPMG.
A Google search for this title produced a short paper asserting a result from
modelling but no details of this modelling. The Minerals Council should provide
an explanation to the Committee for this discrepancy.
When Treasury were asked to justify the exclusion of gold, Treasury
argued 'if you just chose to apply a rent tax on gold, which is often found in
deposits with a number of other minerals, and you were not intending to tax
those other minerals, then there would be complexities associated with
apportioning revenue and expenses to work out the profits that are attributable
to the gold as opposed to the other resources that are found in the same mine'.
This would not be an argument against taxing all minerals. It also seems
inconsistent with the fact that for decades gold mining was exempt from tax.
Treasury have not disclosed the cost to revenue of excluding minerals
other than coal and iron ore but they should. The excluded minerals account for
about a quarter of the value of mining exports but it is not known what
proportion they comprise of mining profits. For illustrative purposes, if their
exclusion cuts the MRRT revenue by a quarter, then this alone reduces revenue
over the forward estimates by around $3½ billion.
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. At an absolute minimum, gold miners, who are garnering windfall
profits from an unanticipated near record price for gold, should be brought
under the MRRT along with coal and iron ore miners.
That if 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 Expenditures Statement.
The MRRT and state royalties
Many economists believe that royalties are an inefficient tax 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 resource rent tax.
The MRRT in its current form, however, rather than replacing royalties
leaves them being paid but then rebates them for some projects. The administrative
and compliance costs of collecting royalties remain.
Given these problems it would now be better to remove totally from the
bill the refund of royalties. This would leave the states able to set royalties
as they see fit but be answerable for doing so rather than having the
Australian taxpayer meet the bill. It would also increase the amount of revenue
raised by the MRRT by perhaps around $7-8 billion, depending on how much of the
$8.6 billion in state royalties on coal and iron ore come from projects below
the MRRT threshold.
Table G5: State
Mining Royalties, 2011-12, $ billion
Source: State budget papers.
That royalties are not rebated under the MRRT.
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 in royalties'. 
Under the RSPT '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'.
Given this, it is very odd that the large mining companies apparently
assumed when negotiating the MRRT that 'all royalties' included all future
increases, rather than seeking that this be clarified. The wording used in the
heads of agreement between the new Gillard Government and big three mining
companies said 'all state and territory royalties will be creditable...', leaving
this unclear. Dr Henry's interpretation was '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 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 and Tasmanian Governments have
already 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, which could reduce revenue from the MRRT by a further $3
billion over the next few years, and possibly a cumulative reduction approaching
$10 billion by 2020.
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". As the OECD put it, '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
This point was made by a number of witnesses:
The tax invites state governments to increase royalty rates,
thus exacerbating any inefficiencies those royalties cause...
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 has now added this problem to the terms of reference for
the GST Distribution Review being conducted by Nick Greiner, John Brumby and Bruce Carter.
A better response if royalty rebating is not removed totally would be to
restrict it to royalties that were in place when the MRRT was first announced.
That if royalty rebating is not totally removed from the MRRT, it should
at least be removed for that component of state royalties increased after 1
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. (The 'uplift
rate' is also known as the 'allowance for corporate capital'.)
To understand where it 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
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.'
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.
The CFMEU argue that:
The restriction of the uplift rate in the RSPT to the long
term bond rate was possible overly restrictive relative to the cost of funds to
mining companies. However the major increase in the uplift rate in the MRRT to
the LTBR + 7% is overly generous. So much so that at several points
in the Issues Paper of the Policy Transition Group there is discussion of
measures to minimise potential company practice of holding on to MRRT
deductions/losses in order to simply derive profits from the uplift rate.
Starting base and depreciation arrangements
For new mining projects starting after July 2012, the initial investment
can be written off immediately rather than depreciated over years. This means
companies will pay no MRRT until they have made enough profit to cover the
initial investment (compounded at the uplift rate).
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.
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. 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
Mining companies had argued that the MRRT 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...
There has also been criticism of this approach from academics:
...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.
There is very little information publicly available about the likely
size of these allowances. Fortescue at the hearing 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.
While Fortescue said they would be depreciating over 'well under 25
years', Treasury is only assuming the industry as a whole is depreciating over
'slightly less than 25 years'.
Treasury's defence of the starting base was to point out it was in the
heads of agreement between the Government and the largest mining companies
rather than to defend it in economic theory.
There also may be anti-competitive aspect to the manner in which the
starting base allowance operates. A number of witnesses believe the
arrangements will favour large miners at the expense of small:
...well established mines will not produce the MRRT profits on
which MRRT will be paid initially, whereas emerging miners will have MRRT
profits on which MRRT tax will be paid.
...independent financial modelling by the University of WA...shows
that small emerging miners will pay a higher effective tax rate than large
[the MRRT] is prejudicial to the junior companies...a mining
company who just by nature had an asset before an arbitrary date which means
they pay a lower rate of tax because of the shelter they get from those assets.
They happen to be the biggest and because they happened to be the ones who were
in the room on that day negotiating, they got that provision built in.
The arguments are 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.
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.
The taxing point
The MRRT is applied at the 'run of mine stockpile' (colloquially the
'mine gate') rather than the point of sale. 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. This poses a particular challenge for
Victorian brown coal, which is predominantly used by vertically integrated
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
One of the mining companies affected said there is a:
...lot of subjectivity as to how you calculate those...
The CFMEU submit that:
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...
A similar concern is expressed by the Uniting Church who comment:
...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.
Refundability of losses
Under the RSPT losses would be refunded when a project is closed and the
loss unable to be transferred to another project. This was a feature of value
to smaller miners with single projects that could not transfer losses from one
project to another. It never attracted much support from the industry. As most
small miners are likely to be excluded from the MRRT due to the threshold anyway,
it is hard to see this change – the only change since the RSPT with the
potential to increase revenue – having any significant effect.
To the extent that an uplift rate above the bond rate is justified as
being to compensate for the risk that the company never benefits from credits
for losses because it never makes a profit, it would be double counting to also
Other concerns raised by the mining industry
Fortescue described the MRRT as 'a tax that is biased against debt
financing because it doesn't allow financing costs as a deduction'.
But the MRRT also does not allow deductions for the cost of raising equity
finance. So it is not biased against debt financing, it is neutral towards it.
(By contrast, it can be argued that the company tax regime is biased towards
debt by allowing interest as a deduction.)
The producers of magnetite argued that this kind of iron ore should be
treated differently to the hematite variety of iron ore. On current forecasts
magnetite will make only a modest contribution to MRRT revenue collections. But
the aim is to have a regime in place that will be appropriate for the future
and if some magnetite projects become more profitable they should be covered.
For the Greens, the argument about whether magnetite mining more resembles
hematite iron ore mining or nickel mining is moot as the Greens want both iron ore
and nickel treated the same way. Exempting magnetite would also be an unhelpful
precedent as it would likely lead to claims for similar exemptions for categories
of other minerals when they are temporarily less profitable.
Review of the MRRT
The majority report suggests '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'.
Given the doubts that have been raised by the smaller miners and others about
whether the MRRT will raise the budgeted revenue, this is too late to start
such a review.
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. By this time the first two quarterly instalments
will have been paid. The review should involve independent experts as well as
Treasury officers. It should also cover the additional revenue that would be
raised were more minerals added to the coverage of the MRRT.
Sovereign wealth fund
The Greens believe that a proportion of the proceeds from the MRRT should
be quarantined in a sovereign wealth fund which could invest overseas while the
economy is booming and be drawn down after the boom.
There are two reasons. The first is inter-generational equity. There
should be a fund that can be drawn on after the resources are exhausted as a
means of sharing the benefits with future generations. The second reason is to
address the challenge of the 'two speed' economy. A sovereign wealth fund
investing offshore, by providing a partial offset to the purchases of
Australian dollars to buy our mineral exports, will partly counteract the
appreciation of the Australian dollar which has eroded the international
competitiveness of important export industries such as sophisticated
manufacturing, tourism and international education.
The CFMEU submits in favour of at least some of the revenue raised from
the MRRT being saved in a sovereign wealth fund:
...a resource taxation regime that provides for very long term,
publicly‑owned funds that provide for investment capital and income
streams after the mining boom ends...resources rent taxes will inevitably be
subject to major fluctuations, so it is important that year-to-year government
budgets not be heavily reliant on it.
Professor Quiggin said:
...in prosperous economic times we should run substantial
surpluses and identify those as a rainy day fund is one I endorse. Sovereign
wealth funds, including the Future Fund, have been one approach to that.
Norway is often cited as a good example:
The Norwegians have been particularly successful...They would
be really the ideal example of a country that has done a very good job in
maximising the returns from its natural resources. Norway is routinely ranked
at the top of international living standard comparisons. he result has been the
capacity to finance a very wide range of social services while maintaining,
certainly by Scandinavian standards, a pretty competitive tax regime for the
rest of the economy.
That a sovereign wealth fund to established and a proportion of the
revenue raised from the expanded mining tax, envisaged in the above
recommendations, be placed in the fund.
Small business tax simplification
Part of the proceeds from the MRRT is being directed to assist small
business. Many small businesses are suffering from the impact of the mining
boom on the exchange rate, interest rates and wages while only a relatively
small number, concentrated in certain regions, are benefiting from the boom.
Apart from the company tax cuts (discussed below); there are three measures
which will make the tax system simpler for small business:
the small business instant asset write-off threshold will be
increased from $1,000 to $6,500;
the general and long-life small business pool will be
consolidated so that assets can be written off at one rate (15 per cent in the
year of allocation and 30 per cent in other years); and
small businesses purchasing a motor vehicle will be able to
write-off up to $5,000 of its value immediately.
Business groups are unsurprisingly supportive:
...the proposed accelerated depreciation or instant write-off
up to $5,000 and $6,500. We certainly would welcome that, albeit that it is of
limited value relative to the size of some of the investment that most of our
Our small business members are supportive of a proposal in
respect of the accelerated depreciation arrangements. They will provide some
cash flow benefit to the small business community at a time when the small
business community is very constrained...
An increase in the instant asset write-off was recommended by the Henry
Tax Review, but the recommendation there was for an increase to $10,000. The
Review also suggested that the definition of small business be expanded from a
turnover of less than $2 million to less than $5 million.
There seems less justification for specific concessions favouring motor
vehicles over other asset purchases.
That the Government examine whether it would be preferable to extend the
small business instant asset write-off threshold from $6 500 to $10 000 instead
of the accelerated initial deductions for motor vehicles.
The cut in the company tax rate
While not part of the package of bills before this inquiry, the
Government has said that the MRRT will fund a cut in the company tax rate from
30 to 29 per cent.
Professor Ergas initially expressed sympathy for a cut in the company
tax cut but then warned:
My first concern is where we are dealing with foreign
investment and that taxation on that investment is subject to dual taxation
arrangements. In those cases it may be that all that really happens is we lower
our company tax rate and taxes payable overseas rise, so there is merely a
shift in taxable income, not a net reduction in taxable income.
Another problem he identified with cutting the company tax rate was:
...when you have too large a difference between the top
marginal, personal income tax rates and company tax rates, that you create
undue incentives for income shifting and then add to compliance costs as you
try to offset the effect of those incentives.
Australia's company tax rate is compared with those in some peers in Table G6.
The standard rate is not out of line, although some countries apply much lower
rates to small business.
G6: Company tax rates, %
Small company rate
Source: OECD tax database.
Company tax is budgeted to contribute around $80 billion a year in the
coming years so a cut in the rate from 30 to 29 per cent will lower company tax
collections by around $2½ billion a year.
Large and highly profitable mining companies and banks will be major
beneficiaries of the company tax cut. The mining industry accounts for the
largest share—around a fifth—of gross operating surplus and is dominated by
large companies while the finance industry has the second largest share and is
dominated by the big four banks. A study estimated that BHP-Billiton and Rio
Tinto may save around $0.6 billion and the big four banks around $0.3 billion
By contrast with mining and banking, the industries which are suffering
in the two-speed economy, such as tourism, are more characterised by small
businesses. Sharing the wealth of the mining boom around would argue for directing
reductions in business taxation towards smaller businesses.
That the general company tax cut not be proceeded with, but that
consideration be given to providing more benefits for small business.
The MRRT and superannuation bills are related because, due to the
concessionary tax treatment of superannuation, there is a cost to the budget of
replacing some wage increases by superannuation contributions. This cost is
(supposed to be) funded from some of the proceeds of the MRRT.
The SG increase is budgeted to cost $250 million in 2013-14,
but as the SG increases over time the cumulative cost up to 2020-21 could reach
Retirement income adequacy
There is considerable debate about whether a 9, 12 or 15 per cent SG is
sufficient to give someone working full-time an 'adequate' retirement income
without needing to call on the aged pension. This reflects differences in
opinions on what level of income is 'adequate' and assumptions about how many
years the typical worker will spend working and the rate of return earned by
the superannuation fund.
The ACTU comment that 'adequate retirement income is widely agreed to
comprise between 60 and 65 per cent of gross pre-retirement earnings'.
Consistent with this, the Financial Services Council assumes that an 'adequate'
retirement income is 62.5 per cent of pre retirement income. On this basis they
calculate that a 9 per cent contribution rate is insufficient to generate an
adequate retirement income.
The situation is worse for women than for men as women are more likely to have
time out of the workforce for child-rearing and have longer post retirement
Industry body ASFA provide the following example:
For someone on an income of $60,000 a year (a typical wage
earner), with SG at 9%, their income in retirement (including part Age Pension)
after 35 years of contributions would be around $29,300 per annum (based on
retirement savings in today’s dollars of $260,600). With the SG at 12%, their
retirement lump sum would be around $350,000 and their retirement income would
be $33,500. This can be compared to the ASFA Retirement Standard expenditure
needs for a single person of $21,957 for “modest” and $40,412 for “comfortable”
as at September 2011. The maximum single Age Pension (including supplements) is
$19,470 per year.
Australian Super give an example that increasing the SG from 9 per cent
to 12 per cent would result in an additional $90,000 in superannuation accruing
over a working life.
While libertarians object in principle to the compulsory nature of
there is broad support for the idea that individuals when young can be myopic
and when they reach retirement age may regret not having saved more. There is
also an 'externality': those who have adequate retirement savings in
superannuation are not drawing on the public age pension and so reduce the load
on other taxpayers.
This is recognised by some business groups:
The main argument for compulsion is that it protects people
from the regret of not having saved enough for their retirement when they were
younger. It also protects societies from having to pay for safety-net benefits
for those irresponsible individuals who did not provide for their old age.
The Henry Tax Review did not recommend increasing the SG from 9 to 12
per cent. This was, however, as ASFA point out,
in the context of other recommendations that would increase incomes in
retirement such as halving the tax on super funds earnings and raising the income
tax threshold to $25 000.
The macroeconomic argument for compulsory superannuation is that (i)
Australia as a whole should save more and (ii) that compulsory superannuation
is an effective means of doing this. Saving more would allow Australia to invest
more without drawing so much on foreign savings, potentially allowing higher
economic growth, a smaller current account deficit and lower foreign debt. But
it is not obvious that Australia's national saving rate is 'too low'. Australia
currently saves more than its peers (although invests much more, hence the
large current account deficit). If Australia wants to save more, compulsory
super probably achieves this. While there is likely to be a partial offset from
less voluntary saving, the best estimates suggest this only offsets less than a
third of it. (As high income earners already save a lot regardless of tax
concessions, making the superannuation tax concessions less skewed to high
income earners would also raise overall saving.)
Who bears the cost of increasing the SG?
There has been some confusion about who will bear the cost of the
increase in the SG. Some argue the impression has been created that the entire
cost will be funded by the government from the proceeds of the mining tax
(rather than just the cost to the government of the tax concessions).
But this is clearly not the case. Administratively the cost will be paid by the
employer and the issue is whether the ultimate incidence of the SG stays with
the employer or is passed on to the employee in the form of lower pay rises.
Most economists believe that the ultimate incidence of the increased
guarantee will be on workers (in the form of slower growth in wages) rather
than on employers, and this view was confirmed at the hearings:
The expectation is that it [the SG increase] will be largely
borne by wages.
The increase in the super guarantee will ultimately come out
The increase in SG is affordable. It is over seven years. It
will be more than covered by wage negotiations...
As the SG increases slowly though time, this should still allow real
wages to increase. A minority view held by some business groups is that
employers will bear the burden.
These business groups do not explain why if workers have enough bargaining
power to force employers to meet the cost of the increased superannuation over
coming years, they cannot use the same bargaining power to get higher wages.
As the SG increase will be borne by workers rather than employers, there
is therefore no reason to think that the SG increase would have an adverse
impact on employment.
A trade union witness at the inquiry opined:
...a figure of 0.25 per cent of an increase in wages is not the
sort of number which causes difficulty in terms of workplace wage negotiations.
It is more likely to be something like a rounding error than any sort of
substantive claim or a matter that there is a disagreement about. Government
has given business really longer than it needed to transition this and it
should be able to do it very comfortably...it is about half as slow as the last
time that we substantially moved the SG component.
Supporting this view is the experience over the period when the SG was
increased from 6 per cent in 1997-98 to 9 per cent in 2002-03. Over this
period, wages grew by 33 per cent and profits grew by 41 per cent while
employment increased by 10 per cent.
Further suggesting that the transition to a 12 per cent SG will not be
disruptive is the observation that:
...around 40 per cent of Australian workers already receive
more than nine per cent through a function of either workplace bargaining or
additional voluntary employer contributions. So there is already a substantial
number of people in the economy receiving up to about 12 per cent, or more in
some cases. This is about catch-up for the remaining 60 per cent of the
Impact of expanding superannuation assets
The SG has helped Australian superannuation funds to accrue almost $1½ trillion
in assets, the fourth largest in the world, and bigger than Australia's annual
GDP. According to the Financial Services Council, increasing the SG to 12 per
cent will add around another $½ trillion to superannuation assets by 2035.
The Government claims that among advantages from this large pool of
funds are that 'when the global financial crisis hit in 2008, our national
savings were sandbags against the leakage of capital we saw elsewhere in the
world' and implies that the large pool of superannuation assets lowers the cost
of capital for Australian companies.
Tax concessions for superannuation
The Greens regard the increase in the SG as a good time to address
inequities in the taxation concessions for superannuation which are actually
exacerbating inequalities in society. Tax concessions on superannuation cost
around $30 billion each year.
In 2008 about half of the tax concessions on superannuation contributions were
going to the wealthiest 12 per cent of income earners.
The caps on concessional contributions introduced since would have meant the
wealthiest receive a smaller proportion of the benefits now. ASFA estimates
that the wealthiest 12 per cent now receive 35 per cent of the benefits.
There are three stages at which superannuation can be taxed;
contributions, earnings and payments:
Currently, superannuation contributions up to $25 000 (or $50 000
for people over 50 years of age) are taxed at a flat rate of 15 per cent, which
is a very concessional rate for a high income earner in the 45 per cent tax
bracket but no concession for a low income earner in the 15 per cent tax
bracket and a penal rate for someone below the income tax threshold.
Earnings by superannuation funds are taxed at a concessional rate
of 15 per cent compared to the company tax rate of 30 per cent.
Superannuation payments are tax-exempt when paid after the age of
sixty, regardless of the income of the recipients.
A proposal for reform suggested by the ACTU
is to tax superannuation contributions at the individual’s marginal rate minus
a fixed margin. The most commonly suggested margin is 15 percentage points. So
for a person whose marginal tax rate is 45 per cent, their superannuation will
be taxed at 30 pre cent. A person whose marginal tax rate is 15 per cent will
not pay tax on their superannuation contributions. This would be consistent
with the view of the Henry Tax Review that 'superannuation contributions should
be taxed at a progressive but concessional rate'.
The concession should only apply to contributions up to a cap, with
contributions beyond this taxed at the marginal rate.
Taxing superannuation contributions at the individual’s marginal rate
minus 15 percentage points would increase the concession for low income
earners, leave it about the same for average income earners and reduce it for
high income earners. As well as being fairer, as high income earners already
save a lot regardless of tax concessions, making the superannuation tax
concessions less skewed to high income earners would also be more effective in
raising overall saving.
ACOSS propose a different, but in essence similar, means of reaching the
goal of a more equitable tax incentive. They suggest that contributions be
taxed at the employee's marginal income tax rate but that the government makes
a rebate. For low levels (say contributions up to 0.5 per cent of average
earnings or around $350 a year) this could be dollar-for-dollar but beyond that
it could be at a rate such as 20 per cent and then cut out at a ceiling (say at
a contribution of 12 per cent of average earnings or around $8,000 a year).
The existing tax breaks are so skewed in favour of high
income earners that it would be possible to design the rebate so as to ensure
that at least the bottom 80% of superannuation fund members with current
contributions were financially better off in retirement, at no cost to public
That the increase in the superannuation guarantee be accompanied by
changes to the taxation concessions for superannuation to remove the regressive
elements, such as by replacing the flat 15 per cent tax on superannuation
contributions by a tax at the employee's marginal rate less a fixed amount of
around 15 percentage points. The best technical approach for doing this should
be recommended by the Superannuation Roundtable.
Low Income Superannuation
The Government has announced a measure that will reduce but not remove
the regressivity of the existing superannuation tax concessions. Under the
proposed Low Income Superannuation Contribution, from 2013-14 there will be tax
rebates of up to $500 a year for those on incomes up to $37,000 with
This will effectively offset the tax they pay on superannuation contributions.
The $37,000 threshold and the maximum $500 contribution are not indexed.
Furthermore, there is no phase out, so earning increasing income from $36,999
to $37,001 could mean the loss of $500 in rebate.
It will have a more immediate impact than the SG increase which is being phased
in over time.
The Government's proposal still means that superannuation contributions
from high income earners are treated more generously than those by middle
income earners (even if the treatment of middle and low income earners becomes
That if the tax concessions for superannuation are reformed as suggested
above, the low income superannuation contribution be dropped, but if the
current superannuation tax concessions are retained, the low income
superannuation contribution proceed.
Concessional contribution cap
The Government proposes to increase the concessional contributions cap
from $25,000 to $50,000 for people under 50 (with less than $500,000 in
superannuation assets). ACOSS regards this as:
...a step in the wrong direction that would mainly benefit high
income earners...Treasury estimates that less than 5% of people with incomes
below $100,000 a year made over $25,000 in concessional contributions, compared
with over half of those on incomes above $300,000 per year. This poorly
targeted increase in tax breaks to individuals who are already relatively
well-off would cost more than $500 million per year.
As ACOSS argues:
It is likely that many of those on middle incomes who
contribute (or receive in employer contributions) more than $25,000 in a single
year are not increasing their savings by doing so. Since this is almost half of
an average full-time wage, it is clear that few middle income earners could
afford to make such a high level of contributions unless they are transferring
existing financial assets into superannuation, ‘churning’ their wages through
superannuation accounts through ‘transition to retirement’ arrangements, or the
contribution is gifted by a family member. In these cases, it is very doubtful
that the proposed extension of tax concessions would boost private saving
By moving away from a uniform contributions cap, the proposal also
increases complexity and compliance and administrative costs.
ACOSS warns that to achieve a fairer system of superannuation tax
...the annual cap on concessional contributions would need to
be significantly lower than $25,000. In order to increase tax concessions at
the bottom end something has to give in a revenue-neutral reform, and in our
view it would be the caps...The cap should, however, be high enough to encourage
people on around average earnings and below to make modest voluntary
contributions to super in order to attain an adequate retirement income.
That the Government reconsider plans to increase the concessional
contribution cap and seek the advice of the Superannuation Roundtable on an
appropriate level for it.
Senator Bob Brown Senator
Senator for Tasmania Senator for
Navigation: Previous Page | Contents | Next Page