Chapter 2
An overview of the development of recent Resource Rent Tax proposals
Introduction
2.1
This chapter provides an historical overview of the development of recent
resource rent tax proposals from the original Henry Tax Review recommendation
to the Resources Super Profits Tax (RSPT) and its successors, the Mineral
Resources Rent Tax (MRRT) and the expanded onshore Petroleum Resources Rent Tax
(PRRT).
2.2
The overview presented in this chapter identifies the key issues that
are elaborated upon in more detail elsewhere in this report. They include the:
-
deeply flawed and secretive process which has dogged the
development of the RSPT and its successors the MRRT and expanded PRRT;
-
poor design of the MRRT and expanded PRRT, which:
-
introduces a new tax on top of the existing royalty and income
tax arrangements making our tax system more complex and less fair;
-
reduces Australia's international competitiveness as an
attractive investment destination;
-
gives an unfair competitive advantage to the three big multi-national,
multi-commodity and multi-project companies who were given the exclusive
opportunity by the government to negotiate the design of this new tax with all
their competitors and other stakeholders locked out of the process;
-
makes federal budget outcomes hostage to decisions by state and territory
governments about their royalty arrangements;
-
raises serious and unresolved constitutional issues; and
-
links a highly volatile and downward trending revenue stream to a
projected increasing cost of related budget measures, which will worsen the
Commonwealth Budget's structural deficit over time.
2.3
Following the election of the Labor Government in 2007, the Treasurer Wayne
Swan announced a comprehensive review of Australia's tax system, the Australia's
Future Tax System Review (also known as the Henry Tax Review). In
announcing the review the Treasurer stated:
[w]e need a tax system that is fairer, that is simpler, that
better rewards people for their hard work, that responds to our environmental
and demographic challenges, that makes us internationally competitive, and that
creates the incentives to invest in our productive capacity.[1]
2.4
A full extract of the Henry Tax Review terms of reference can be found
in Appendix 3.
2.5
The Henry Tax Review final report was presented to the Treasurer in
December 2009 but not publicly released until 2 May 2010. The Henry Tax Review
panel hoped that the report would support 'an informed debate about future tax
and transfer policy' in Australia[2].
2.6
The Henry Tax Review identified nine broad areas of reform[3]
and made 138 recommendations. The review report suggested that the reforms
identified would deliver a robust tax and transfer system which encourages
workforce participation, savings and investment, reduces compliance costs
making interactions easier and simpler, and improves accountability.[4]
The vast majority of these recommendations were either rejected by the
government or ignored altogether.
2.7
The Henry Tax Review made recommendations to introduce a national
Resources Rent Tax to apply to Australia's non-renewable natural endowments to
replace State and Territory royalties.
2.8
The key recommendations from the Henry Tax Review in relation to a
resources tax, were:
-
The current resource charging arrangements should be replaced
with a uniform resource rent tax administered by the Australian government. (emphasis
added)
-
A uniform resource rent tax should be set at a rate of 40 per
cent.
-
It would use an allowance for corporate capital system, with
taxable profit associated with a resource project equal to net income less an
allowance for un-deducted expenses or unused losses.
-
The allowance rate would be set by the long-term government bond
rate, as the government would share in the risks of projects by providing a
loss refund if the tax value of expenditure is otherwise unable to be used.
-
Subject to transitional arrangements, the new rent-based tax
should apply to existing projects, replacing existing charging
arrangements. (emphasis added)
-
The allocation of revenue and risks from the new tax should
be negotiated between the Australian and State and Territory governments.
(emphasis added)
-
A cash bidding system could also be adopted to supplement the
resource rent tax and promote the efficient allocation of exploration rights.
2.9
The policy rationale for these recommendations given by the Henry Tax
Review was that:
-
Such a tax would provide a more consistent treatment of resource
projects and promote more efficient investment and production outcomes.
-
It would also ensure that the Australian community receives an appropriate
return on its non-renewable resources ... .Non-renewable resources such as
petroleum and minerals are a significant asset of the Australian community.
Australia has the world’s largest economically demonstrated resource reserves of
brown coal, lead, mineral sands (rutile and zircon), nickel, silver, uranium
and zinc and the second largest reserves of bauxite, copper, gold and iron ore
(contained iron).
-
The current charging arrangements distort investment and production
decisions, thereby lowering the community’s return from its resources.
-
Further, they fail to collect a sufficient return for the
community because they are unresponsive to changes in profits, particularly output-based
royalties. For example, existing resource taxes and royalties have collected a declining
share of the return to resources over the recent period of increasing
profitability in the resource sector (see Chart 6.1).[5]
2.10
The key features of the Henry Tax Review Resource Rent Tax were:
-
RATE: 40 per cent taxation rate.
-
APPLICATION: Applied to non-renewable resources (oil, gas and
minerals) projects, except lower value minerals which provide no net benefits.
-
TRANSFERABILITY: Allows losses to be carried forward with
interest or transferred to other commonly owned projects.
-
DEDUCTIBILITY: Allowed as a deductible expense in the calculation
of income tax, with loss refunds treated as assessable income.
-
ROLYALTIES: State and Territory royalties would be fully
refunded. The Australian and State governments should negotiate an appropriate
allocation of the revenues and risks from the resources rent tax.[6]
The Government's Response to the Henry Tax Review
2.11
Six months after receiving the final Henry Tax Review report and on the
same day that report was first publicly released, the Treasurer and then Prime
Minister issued a joint media release outlining the government's response to
the Henry Tax Review's comprehensive report.[7]
2.12
The government's limited and narrow response to its comprehensive Henry
Tax Review included the proposal to introduce a RSPT. Treasury modelling
indicates the RSPT would have raised $100 billion in additional revenue over
ten years.[8]
Some of that revenue the government said would be used to offset reductions in
income tax revenue as a result of a phased increase in compulsory superannuation
contributions, a reduction in company tax from 30 percent to 29 per cent by
2013-14 and then to 28 per cent by 2014-15 and $6 billion investment in
infrastructure over ten years.[9]
2.13
Having announced the government's response to the Henry Tax Review, the
then Prime Minister Kevin Rudd and Treasurer Wayne Swan committed to consulting
broadly on the changes, with businesses, the states and the community.[10]
Contrary to the recommendations made by the Henry Tax Review, at the time of
the announcement there had been no negotiation with state and territory governments,
nor had there been any consultation with any other stakeholders or the
community on the Government's plan to introduce the RSPT which had replaced the
Henry Tax Review proposal for a Resource Rent Tax.
The Government's proposed RSPT
2.14
The RSPT announced on 2 May 2010 was intended to commence on
1 July 2012, at a rate of 40 per cent imposed on profits made from the mining
of Australia's non–renewable resources. It differed from the model proposed in
the Henry Tax Review report as rather than replacing state and territory
royalties, the RSPT was to operate in parallel with those royalty arrangements.
Taxpayers liable for the RSPT would receive a refund of the royalties paid creating,
it was argued, the same economic effect as replacing them to achieve the stated
objective of eliminating investment distortions associated with the state
royalty systems and to ensure there was no 'double taxation' of resource
profits.[11]
Table 2.1 below provides a contrast between the Henry Tax Review recommended Resource
Rent Tax and its replacement, the RSPT:
Table 2.1: A comparison of the Henry Tax Review Resource Rent
Tax and the Resources Super Profits Tax[12]
Taxation feature |
Resource Rent Tax |
Resources Super Profits Tax |
Rate |
40% |
40% |
Application |
Applied to non-renewable
resources
(oil, gas and minerals) projects, except lower value minerals which provide
no net benefits. |
Applied to the extraction of
all non-renewable resources in Australia. |
Transferability |
Allows losses to be carried
forward with interest or transferred to other commonly owned projects. |
Transfer to other projects or
carried forward. |
Deductibility |
Allowed as a deductible expense
in the calculation of income tax, with loss refunds treated as assessable
income. |
An allowable deduction for
income tax purposes. |
Royalties |
The Australian and State
governments should negotiate an appropriate allocation of the revenues and
risks from the resources rent tax. |
States and territories keep
existing royalty regimes. Royalties remain payable with a rebate. Unused
rebate can be refunded or transferred. |
Company taxation rate |
Not applicable. |
2013-14: 29%
2014-15: 28% |
Superannuation Guarantee |
Not applicable. |
9% to 12% by 2019-20 |
Regional Infrastructure
Fund |
Not applicable. |
Established a $6 billion Regional Infrastructure Fund. |
Scope |
2500 companies affected. |
2500 companies affected. |
2.15
At the time of the RSPT's announcement, the government stated that a resource
tax consultation panel would also be established to communicate the design
features of the RSPT and liaise with industry to both implement the government's
policy objective whilst minimising compliance costs and ensuring simplicity.[13]
While the government wanted to move the debate onto the implementation of the
RSPT, key industry stakeholders who had not been consulted on the design or
structure of the RSPT were fiercely resistant to the proposed new tax.
2.16
The announcement of the RSPT was followed by a robust public debate.
Criticism of the proposed tax was widespread with the Minerals Council of
Australia, the Association of Mining and Exploration Companies and other peak
industry and business organisations campaigning openly against the tax.[14]
2.17
In a policy brief published in June 2010, the Minerals Council outlined
their argument against the RSPT. Whilst not opposed to genuine reform, they
argued any such reform should be based on comprehensive and genuine consultation.
They also criticised the effect that the proposed tax would have on the mining
industry.
Australia’s minerals resources industry supports tax reform
that is in the long-term national interest. Such reform is best achieved
through broad and comprehensive consultation between Federal, State and Territory
governments, industry and the community. This ensures that the design and
implementation of tax changes are informed by an understanding of the
industry’s contribution to Australia’s welfare as well as the commercial
realities and wider economic ramifications of proposed changes.
...
Regrettably, the Australian Government is not following this
process in the development of its proposed Resource ‘Super Profits’ Tax (RSPT).
The industry was not adequately nor constructively consulted during the ‘Henry
Review’ into Australia’s Future Taxation System. The limited engagement with
the Minerals Council of Australia, related representative organisations and
individual companies during the Henry Review and the Government’s consideration
of its recommendations was either perfunctory at best or deliberately exclusive
at worst. The Government’s announcement of its ‘super tax’ on 2 May 2010 limited
consultation to transitional detail of the new tax system and ‘identify[ing]
any issues in the implementation of the RSPT that could undermine the
Australian Government’s policy intentions’. This excludes any discussion of the
fundamental design elements, their underlying justification and the real implications
for investment and growth in Australia’s minerals resources industry.[15]
2.18
The Fortescue Metals Group also expressed its dismay about the tax. In a
letter from its Chairman, Mr Herb Elliot AC, to all of its shareholders:
We are bewildered by the Government's inability to consult on
this poorly thought proposal. They introduced the tax with no consultation
before they took it into their budget and no real consultation since.
In short, we believe the Resources Super Profits Tax (RSPT)
is bad for every Australian. It harms the mining industry and especially
Fortescue and we are urging the Government to drop this proposal and to open a
new forum for dialogue with all industries to discuss tax reform.[16]
2.19
These concerns were echoed by the majority of those who made public comment.
The public storm that erupted over the mishandling of the RSPT within less than
two months contributed to the removal of a first-term Prime Minister by the
Labor Party caucus.
2.20
Concerns regarding the RSPT were also expressed by professional economists.
For example, one of Australia’s leading experts on mineral taxation, Professor
George Fane of the Australian National University, wrote that:
The RSPT rules are so complicated that they could be changed
with negligible electoral consequences. To adapt an aphorism attributed to Ed
Murrow, anyone who is not confused by the RSPT cannot have understood it. The
accounting rules are too hard for economists, the economics are too hard for
accountants and it is all too hard for everyone else.[17]
2.21
Under significant political pressure, the government attempted to go
back to the drawing board and save the RSPT. On 24 June 2010 the new Prime
Minister Julia Gillard announced that the Government would seek consensus on
the proposed RSPT.[18]
The new Prime Minister made the commitment:
... [t]o reach a consensus, we need do more than consult. We
need to negotiate. And we must end this uncertainty which is not good for this
nation.
That is why today I am throwing open the Government's door to
the mining industry and I ask that in return, the mining industry throws open
its mind. ...[19]
2.22
That commitment was followed by an announcement just 8 days later that an
agreement had been reached, however not with the mining industry but only with
three mining companies who had been exclusively involved in the secret negotiations
on the design of the MRRT.
2.23
Correspondence between the Office of the Treasurer and BHP Billiton
provide an insight into the way in which the MRRT was settled between the
government and the big three miners.
2.24
On Wednesday, 30 June 2010, Gerard Bond of BHP Billiton sent a draft of
the MRRT Heads of Agreement by email to the Treasurer's then Chief of Staff,
Chris Barrett and the Minister for Resources' then Chief of Staff Tracey Winters.
The next day, on 1 July, Mr Barrett provided the email to David Parker who was
at the time the Treasury Executive Director of the Revenue Group as well as to
another senior Treasury officer along with Ms Winters:
David,
Please see the draft heads of agreement sent yesterday by
BHP. We aim to sign this 5pm today with all three companies. Can your troops
read it and ensure all the elements are OK? Please get back to me with any
problems asap. Tracey, you might want to check it with DRET [Department of
Resources, Energy and Tourism].
I will send a separate email on the $50 million threshold,
which is new, but helpful, I think.
Regards,
Chris[20]
2.25
On 1 July 2010, Mr Barrett sent an email to Mr Gerard Bond of BHP
Billiton:
Gerard,
Final, clean version for your signature. Please let me know
if any issues at your end.
Regards,
Chris[21]
2.26
It seems extraordinary that the MRRT Heads of Agreement entered into by
the government in the shadow of the last election and which is to be the basis
of this new tax on mining was in fact drafted by BHP Billiton. Not only was the
mining tax deal negotiated exclusively and in secret with the three biggest
tax-payers, excluding their competitors and state and territory governments and
other stakeholders from that process – but one of those, BHP Billiton appears
to have drafted it. Ms Katherine Murphy appropriately observed, in The Age,
that:
Documents released under freedom-of-information laws suggest
it was BHP Billiton that drafted the terms of the peace deal with the Gillard
government over the mining tax - ultimately costing taxpayers up to $60
billion.[22]
2.27
While BHP Billiton was drafting the peace deal with the overnment, the
Prime Minister's own department was sidelined from the process of developing
the MRRT and expanded PRRT proposal:
Senator CORMANN: I have a series of questions of officers
that provided advice to the Prime Minister on the mining tax deal that was
entered into in July last year—including whether or not and when this is going
to be dealt with at COAG. First up, I assume that PM&C [Department of the Prime
Minister and Cabinet] did provide advice to the Prime Minister before she
signed, along with the Treasurer and the Minister for Resources and Energy, the
so-called MRRT heads of agreement with BHP Billiton, Rio and Xstrata?
Dr English: We provided advice to government on a range of
matters around the minerals resource tax arrangements in 2010. So at various
times we have, yes.
Senator CORMANN: So the answer is yes?
Dr English: I am not confirming a particular briefing at a
particular time; I am just saying that we have supported, as best we can, the
Prime Minister on this matter.
Senator CORMANN: ... My very specific question is for you to
confirm that the Prime Minister's department provided advice to the Prime
Minister in relation to the proposed mining tax deal before the Prime Minister
decided to sign on the dotted line along with the Treasurer and the Minister
for Resources and Energy.
Dr English: On that occasion, the advice was provided to the
Prime Minister by the Treasurer.
Senator CORMANN: So the Prime Minister received advice from
the Treasurer, not from her own department?
Dr English: On that occasion, yes.[23]
2.28
The questioning continued:
Senator CORMANN: It was clearly a pretty involved public
policy issue and I am sure you would agree with that. It was a public policy
issue and one of the three issues where the Prime Minister, on becoming the
Prime Minister, pointed to as an issue that she would personally resolve. In
that context I am well entitled to ask whether it is normal practice. I am not
asking for an opinion, I am just asking whether this is the way it normally
happens that a Prime Minister would make a decision signing off on something
that obliges and signs up the Commonwealth government, that contracts the
Commonwealth government to a whole series of commitments. Is it usual practice,
is this what normally happens, that the Prime Minister would sign without
getting separate advice from her department—that is, advice separate from the
Treasurer's advice?
Dr English: I think it is fair to say that the Prime
Minister's approach to a range of issues is dictated by the circumstances of
the issue.[24]
2.29
In a joint media release, the Prime Minister, Deputy Prime Minster and
Treasurer, as well as the Minister for Resources and Energy and the announced
that the new tax agreements was:
...the result of intense consultation and negotiation with
the resources industry.[25]
2.30
The government had refused repeated requests from the Senate and the committee
for a signed copy of the MRRT Heads of Agreement. So as part of this inquiry,
the committee requested the disclosure of the signed Heads of Agreement by the
three companies involved in the exclusive and secret negotiations:
CHAIR—...Would you have any objection to providing a signed
copy of the agreement?
Mr Bond—The short answer is yes. We wish to respect expressed
desire of the other signatories to not release it. We again note that with the
exception of the signatures, the document in its entirety exists in the hands
of the Senate estimates committee.
CHAIR—When you say you want to respect the wishes of the
other signatories, you are talking about government ministers. That is correct,
is it?
Mr Bond—Yes.
CHAIR—So BHP Billiton as such does not have an objection to
the signed copy of the agreement being released?
Mr Bond—We do not.
CHAIR—Who has expressed to you on behalf of the other
signatories for the government that they do not want the signed copy released?
Mr Delaney—The Prime Minister’s office.
CHAIR—The Prime Minister’s office has told you that they do
not want to—
Mr Delaney—They believe it is appropriate not to release the
heads of agreement with the signatures on it.
CHAIR—Have they explained why?
Mr Delaney—No, they just believe it is not appropriate to do
so.[26]
2.31
A signed copy was provided to the committee the same afternoon the above
exchange took place, but the committee is still waiting for information about
commodity price and production volume assumptions used to assess the revenue
from this tax, for an official breakdown of where the mining tax revenue is
expected to come from on a state by state basis and about the projected cost of
related budget measures to 2020/21 to complement the projected revenue estimates
over the same period.
Replacing the RSPT — Introduction of the MRRT and expanded PRRT
2.32
On 2 July 2010, the Gillard Government announced that agreement on
amendments to the RSPT had been reached with 'the' resources industry[27]
and that that agreement would ensure certainty for the Australian economy while
at the same time:
...keeping faith with [the Government's] central goal from
day one: to deliver a better return for the Australian
people for the resources they own and which can only be dug up once.[28]
2.33
This announcement came after the signing of the Heads of Agreement
between the government, BHP Billiton, Rio Tinto and Xstrata on 1 July 2010. The
government had consulted with only three mining companies. To put that into
context, the Australian mining industry is said to comprise around 2500 firms
with about 320 directly impacted by the new tax on mining proposed by the
government. Every other competitor to the big three mining companies was excluded
from the consultation/negotiation process. The result being a proposed tax
designed in a way which will make it harder for those excluded to compete with
those that had been given the exclusive privilege to help design the new mining
tax.
2.34
Indeed the Heads of Agreement was the result of a highly exclusive
negotiating framework, which left a substantial majority of the industry and
other stakeholders out in the cold without any capacity to influence the
development of a tax that would affect not just their businesses but the
broader Australian and individual State economies.
2.35
The negotiations were so exclusive that not even the states and
territories were included in any of the negotiations despite the significant
implications for them. Particularly, given the promise to credit all state and
territory royalties against the resources tax liability and the government's
ill-informed expectation that state and territory governments would just agree
not to pursue any further increases in royalties as a result of the mining tax
deal negotiated without them. The government never even tried to act on the
Henry Tax Review recommendation that 'the Australian and State governments
should negotiate an appropriate allocation of the revenues and risks from the
resource rent tax'.[29]
2.36
The Heads of Agreement provided that the latest proposal for a new tax
on mining would take the form of a MRRT which would apply only to iron ore and
coal and the onshore extension of the petroleum resource rent tax and to the North
West Shelf. A copy of the Heads of Agreement can be found in Appendix 4. The
detail of the MRRT and expanded PRRT will be discussed in greater depth in
Chapter 4.
2.37
Table 2.2 below provides a further snapshot on the evolution of the Resources
Rent Tax, from the RSPT and to the MRRT:
Table 2.2: A comparison of the Resources Super Profits Tax
and the Mineral Resources Rent Tax[30]
Taxation feature |
Resource Super Profits Tax |
Mineral Resources Rent Tax |
Rate |
40% |
30%. [effective rate of 22.5%]
An extraction allowance of 25% of the otherwise taxable profits will
be deductible to recognise the profit attributable to the extraction process
– this is to only tax the resource profit.
Operators with MRRT assessable profits below $50 million per annum
are excluded from the MRRT. |
Application |
Applied to the extraction of
all non-renewable resources in Australia. |
To the mining of coal and iron ore within Australia. (The
application of PRRT extended to oil and gas projects onshore (on top of state
and territory royalties) from offshore (where no state and territory
royalties apply in Commonwealth waters) including the North West Shelf.
(Under existing arrangements, royalties apply to the North West Shelf and are
shared between the Commonwealth and the WA Government. It remains unclear how
the extension of the PRRT to the North West Shelf will affect this
arrangement). |
Transferability |
Transfer to other projects or carried forward. |
MRRT losses would be transferable to offset MRRT profits the taxpayer
has on other iron ore and coal operations.[31]
(Losses referred to here are those generated by having expenses larger than
your revenues. Transferability does not apply in respect of credits arising
from royalties.)[32]
Note: Although taxpayers will be able to transfer tax losses
generated from expenses that exceed revenues to other iron ore and coal
projects in Australia, transferability does not apply in respect of excess
credits that arise from royalty payments.[33]
In these circumstances, excess credits from the payment of state and
territory royalties are uplifted and carried forward to be applied to a
project’s future MRRT liabilities.[34] |
Deductibility |
An allowable deduction for income tax purposes. |
An allowable deduction for income tax purposes. |
Royalties |
States and territories keep existing regimes. Remain payable with a
rebate. Unused rebate can be refunded or transferred. |
Remain payable. All State and Territory Royalties are creditable
against any resources tax liability. Unused credits can be carried forward
and uplifted but cannot be refunded or transferred. |
Company taxation rate |
2013-14: 29%
2014-15: 28% |
2013-14: 29%
Small companies would have tax rate reduced to 29% from 2012-13. |
Superannuation Guarantee |
9% to 12% by 2019-20 |
9% to 12% by 2019-20 |
Regional Infrastructure
Fund |
Established a $6 billion Regional Infrastructure Fund. |
Allocated $6 billion to a Regional Infrastructure Fund over ten
years. |
Scope |
2500 companies affected. |
Approximately 320 mining companies affected. |
2.38
The RSPT and its replacement, the MRRT/expanded PRRT, are an intrusion by
the Commonwealth into the own-source revenue arrangements of the states and territories.
Under our Constitution the royalty arrangements in relation to minerals and
resources continue to be their right and responsibility. The new MRRT is in
fact a 'top-up tax' on top of the existing royalties, where the Henry Tax
Review had recommended a 'replacement tax'. The MRRT is also narrower than the
Henry Resource Rent Tax and more complex and less fair than the status quo,
specifically to smaller mining companies. These matters and their implications are
explored in Chapters 4 and 5.
The MRRT Implementation Committee - Policy Transition Group
2.39
At the time of announcing the MRRT and expanded PRRT the government
established another body, a Policy Transition Group (PTG), to implement the new
arrangements.[35]
That group, led by Don Argus AC and Resources Minister Martin Ferguson, was supposed
to consult with industry, government departments and stakeholders and advise
the government on the technical design and implementation of the new MRRT and
PRRT arrangements.[36]
Mr Argus resigned as Chairman of BHP Billiton on 30 March 2010 after a decade
with the company.[37]
2.40
Its terms of reference however were considered by many stakeholders to
be far too restricted:
CHAIR—...The terms of reference are not really that broad
either, are they? Is it just a matter of time or a matter of focus as well?
Mr Nicolaou—That issue was certainly raised in our submission
to the Policy Transition Group. We were concerned not only that the time was
limited, in that there was one month to report, but also that the scope of the
terms of reference was quite limiting...[38]
CHAIR—You have made some comments about the work with the
Policy Transition Group. Are you of the view that your concerns are able to be
properly considered and taken on board by the Policy Transition Group?
Mr Bennison—We hope so. One of the concerns that has been
uppermost in our mind over recent months has been the lack of transparency in
this whole process... that is a serious concern to us. We can only work within
the process at the moment...[39]
CHAIR—But those terms of reference for the Policy Transition
Group are pretty restrictive, aren’t they? There is one condition in there
which says that any recommendations have to be revenue neutral... Do you think
that there is enough scope for the Policy Transition Group to recommend the
sorts of changes that you need?
Mr Bennison—...no, I do not think there is...[40]
2.41
In December 2010 the PTG presented its report, together with 98
recommendations,[41]
to the government. The government responded on 24 March 2011 outlining that
they accepted all 98 recommendations of the PTG:
...This includes the 94 recommendations relating to
Australia’s new resource taxation arrangements, which will inform the design of
draft legislation to be released for consultation in the first half of this
year. The other 4 recommendations relate to promoting exploration.[42]
2.42
To demonstrate the narrowness of the PTG process, the government directed
the Group not to make recommendations that the proposed MRRT and PRRT would
have no net impact on the Budget over the forward estimates.[43]
Committee comment
2.43
It is important to consider where
this whole process started. The Henry Tax Review was labelled by the government
as the most comprehensive review of Australia's tax system since World War II.
It was supposed to lead to a simpler, fairer more efficient and effective tax
system. There is no doubt that the Henry Tax Review panel delivered a detailed
and comprehensive report, which identified many possible areas for reform.
However, in the committee's opinion the government's incompetent handling of
the tax reform process from the moment the report was delivered to it, has
created massive and unnecessary uncertainty for one of Australia's most
important industries. Australia has wasted valuable time which should have been
used to further the cause of genuine and strategic tax reform.
2.44
What we have ended up with is not
a simpler, fairer and more efficient tax system. The only initiative adopted by
the government out of the Henry Tax Review is a multi-billion dollar new ad hoc
tax imposed on a single industry, a tax which is manifestly more complex and
the committee believes less fair than the status quo.
2.45
The main policy objective advanced
by the Henry Tax Review for a profit based resource rent tax – to remove
distortions of investment and production decisions caused by royalties on
production – is not achieved by the Gillard Government version of the mining
tax. In fact, later in this report it will become apparent that all of the
distortions from royalties on production – to the extent they exist – will
remain, while new and additional distortions are created by the MRRT itself.
2.46
In the Heads of Agreement entered
into with BHP Billiton, Rio Tinto and Xstrata the government committed the Commonwealth
to crediting 'all state and territory royalties' against any mining tax
liability. The committee is greatly concerned that the government never once
sought to engage with state and territory governments about their intentions in
relation to their royalty arrangements before signing that agreement.
2.47
The signatures on the mining tax
deal are those of the Prime Minister, the Treasurer and the Resources Minister
on behalf of the government and the Chief Executive Officers of the three
biggest mining companies. Not a single state Premier or territory Chief
Minister or Treasurer is part of the agreement entered into by the government.
2.48
In the circumstances it is obvious
to the committee that as a direct consequence of the promise to credit all
state and territory royalties, the Commonwealth budget would be exposed to
decisions about increases in royalties.
2.49
The committee finds it very
difficult to understand why the government did not seek to actively engage with
state and territory governments on this before entering into the agreement.
That is if this whole process was indeed about genuine reform of resource
taxation and royalty arrangements as had been suggested by the Henry Tax
Review.
2.50
It is the committee's view that
this whole process was never about genuine tax reform. It was about a fiscally
challenged government in desperate need for some more cash to help create the
illusion of an early surplus in the lead-up to a difficult election.
2.51
Because the government was in a
rush it did not have the time to think things through properly and to engage
with all the stakeholders that ought to have been engaged in the process.
2.52
Declaring a tax war against any state
which ends up putting the Commonwealth Budget under pressure by exercising its
rights and responsibilities under the Constitution to increase royalties is not
an appropriate way to fix the problem the government has created for itself.
2.53
Regardless of the changes the Gillard
Government made to the mining tax, under massive political pressure and in the
shadow of a difficult election, this tax on the mining industry remains a
threat to our economy and jobs, especially in Western Australia and Queensland.
2.54
The MRRT was negotiated by the
government through a highly improper process – exclusively and in private with
the three biggest multi-national, multi-commodity, multi-project companies.
2.55
It is the committee's strong
opinion that this process should not be allowed to stand as a successful
precedent for tax policy design. The Parliament should reject the deeply flawed
tax which came out of this highly improper process.
2.56
The Gillard Government announced that they were throwing open their door
to the mining industry. Yet, the 'breakthrough' agreement was negotiated with
just three miners. The deeply flawed consultation process of developing these
tax changes will be discussed in more detail in Chapter 3.
2.57
The central goal of the Henry Tax Review was to make the tax system
simpler and fairer for all taxpayers. The international competitiveness of the
Australian economy was to be protected. In the committee's view the government
has failed to deliver the intended outcomes. The MRRT and expanded PRRT came
out of a flawed process that produced a complex tax which is less fair and damaging
to our international competitiveness. Chapter 4 explores these issues further.
2.58
The committee is of the view that by announcing the RSPT and its
successors the MRRT and expanded PRRT as a central plank of the government's fiscal
strategy while linking revenue from these taxes to the future cost of related
budget measures, the government has exposed the Budget to a volatile and
downward trending revenue base. This revenue base has effectively been
hypothecated and tied to related costs to the budget which will continue to
increase over time – well beyond the projected revenue from the mining tax over
the next decade. Over time, this will place further pressure on the budget by
worsening the current structural deficit. This matter is discussed further in Chapter
5.
2.59
The committee is of the view that the MRRT and the PRRT go to the heart
of the financial relationship between the Commonwealth and the states and territories.
The current government promised a new era of cooperative federalism in the
past. Not only is there no evidence of cooperative federalism, the Commonwealth
has treated the states and territories with absolute contempt when it comes to
the implications of the proposed national mining tax on their own-source
revenue base. The issues that this raises are explored in Chapter 6 of
this report. That chapter also highlights the significant problems in
effectively linking state and territory royalties to the Commonwealth Budget
still to this day without any constructive engagement about royalty
arrangements into the future.
2.60
The committee is of the view that the Parliament should refuse to deal
with any mining tax legislation until the government has tabled an agreement
with all state and territory governments resolving the interaction between the
proposed mining tax, state and territory royalties and GST sharing
arrangements.
The committee takes the view that if the Henry Tax Review
report had been released for public consultation before the announcement of the
RSPT, it could have led to an informed debate about the future of tax reform
and could have been an important document in shaping the agenda for the coming
tax summit. Chapter 7 of the report assesses what would have been a
better process and what should be the way forward.
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