Chapter 4
The Mineral Resources Rent Tax and expanded onshore Petroleum Resources Rent
Tax
Introduction
4.1
The chronology of the mining tax's flawed development was set out in
Chapters 2 and 3. As detailed in those chapters, the RSPT was replaced by the proposed
MRRT and the onshore expansion of the offshore PRRT. The fundamental design
features of the revised national mining tax arrangements were put in place by the
Heads of Agreement, negotiated exclusively and in secret, between the
government and the three largest miners operating in Australia.
4.2
This chapter examines the proposed MRRT and the expanded PRRT, as set
out under the Heads of Agreement. It demonstrates that the new taxation
arrangements do not meet the government’s stated objective of being simpler and
fairer than the status quo. The new arrangements increase distortions, are
narrowly based and manifestly more complex. They are also unfair to large parts
of the mining industry because of the competitive advantage the MRRT design
gives to those three companies who were exclusively involved in the
negotiations with the government. They are also unfair to those states and territories,
like Queensland and Western Australia, whose 'own source revenue' includes a
larger proportion of revenue from mining royalties. They are more heavily
impacted by the Commonwealth Government's attempts to limit their capacity to
make their own sovereign decisions about royalty arrangements into the future.
4.3
The cost of the government's related commitments to increase compulsory
superannuation from 9 to 12 per cent over ten years, to reduce the company
income tax rate and invest a small proportion of the anticipated revenue into
infrastructure, are also assessed in this chapter. That assessment is
particularly relevant given Treasury projections that MRRT revenue is expected
to decline over the next ten years when the annual cost of those related
commitments will continue to increase beyond the projected annual revenue from
the MRRT.
The MRRT[1]
– Increasing distortions
4.4
On 1 July 2010 the government signed a Heads of Agreement which detailed
the broad features of the MRRT. In announcing the MRRT as a so called 'breakthrough
agreement', the government explained that the 'improved' reforms
(i.e. the MRRT) would focus on the most profitable resources, provide certainty
to the industry, and in doing so, ensure that the government's 'central goal'
to deliver a better return to the Australian people for the resources they own,
was met.[2]
But the proposed new tax on mining has been criticised on all fronts by the
majority of stakeholders. Key aspects of the MRRT are outlined below:
Table 4.1: Key aspects of the Mineral Resources Rent Tax
Taxation feature |
Mineral Resources Rent Tax |
Rate |
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 |
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. (The PRRT does not
presently apply to the North West Shelf; rather petroleum royalties and crude
oil excise apply.[3]
Treasury have indicated that the existing royalty and excise arrangements
will continue to apply to the North West Shelf project in the short term with
liabilities being credited against the expanded PRRT. This is another
unresolved area with longer term arrangements yet to be confirmed).[4] |
Transferability |
MRRT losses would be transferable to offset MRRT profits the taxpayer
has on other iron ore and coal operations.[5]
(Losses referred to here are those generated by having expenses larger than
revenues. Transferability does not apply in respect of credits arising from
royalties.)[6]
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.[7]
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.[8] |
Deductibility |
An allowable deduction for income tax purposes. |
Royalties |
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%
Small companies would have tax rate reduced to 29% from 2012-13. |
Superannuation Guarantee |
9% to 12% by 2019-20. |
Regional Infrastructure
Fund |
Allocated $6 billion to a Regional Infrastructure Fund over ten
years. |
Scope |
Approximately 320 mining companies. |
A distortionary 'top-up' tax
4.5
The Henry Tax Review proposed the introduction of a resource rent regime
that would apply to all minerals and replace state royalties. The proposal of a
replacement tax, however, was not pursued by the government. The tax model put
forward by the government through its announcement of an RSPT did not envisage
replacement of the existing state and territory royalty regimes.
4.6
The government's RSPT did not envisage technical replacement of the
existing state and territory royalty regimes, although it proposed a refundable
credit for such royalties.
CHAIR—...It is fair to say that your recommendation was for
the national resource rent tax to replace state royalties completely. That is
right, isn’t it?
Dr Henry—Yes, that is correct.
CHAIR—And under the RSPT the distorting effects of royalties
were effectively removed because they were completely refunded—is that right?
Dr Henry—That is correct.
CHAIR—But under the MRRT they are not, are they?
Dr Henry—No, clearly they are not.
CHAIR—So the distorting elements of state royalties, to the
extent that they exist, have not been removed, have they?
Dr Henry—To the extent that there is not a full credit
provided for those royalties under the MRRT, the royalties would be impacting
on investment decisions.
CHAIR—Would be impacting on investment decisions?
Dr Henry—I would expect so, yes.
CHAIR—And, potentially, production decisions too, wouldn’t
they?
Dr Henry—Indeed.
CHAIR—Smaller projects that are not yet subject to the MRRT
would continue to pay royalties?
Dr Henry—That is correct.[9]
4.7
Under the RSPT there was effectively a full refund of State royalties
irrespective of whether any or how much RSPT was payable. In contrast, under
the MRRT there is only a credit 'up to any MRRT liability' which is not
transferable and not refundable. As a result, a mining project in the decline
phase would have received a refund of royalties paid under the RSPT, but under
the MRRT will only get a credit.
4.8
Given that once a project reaches its 'decline phase' it is never likely
to make sufficient profit to incur an MRRT liability ever again, and the
credits it has accumulated are not transferable between projects, those credits
will be useless; the entity will not incur any MRRT liability against which the
credits can claimed.
...With respect to royalties and companies' liability to bear
the burden of royalties, there is a very significant difference between the
original proposal—that is, the RSPT—which would have refunded those royalties
to the companies, and the MRRT. The MRRT, instead of refunding the royalties in
full to the companies, provides a credit against an MRRT liability. So as you
say, Senator, if there is no MRRT liability then there would be no refund of
royalties.[10]
4.9
It is this aspect of the design that makes the MRRT a top-up tax and
makes the MRRT more distortionary than the status quo.
CHAIR—So we have just found a fourth area where the
distorting effects, which Dr Henry has described as state royalties, will
continue to play out—that is, within big companies, such as BHP, Rio or
Xstrata, as well as within smaller companies, if I accumulate royalty credits
within one project I cannot actually use those credits for other projects. Is
that what you are saying?
Mr Parker—Yes, it is not a big company/small company issue at
all.
CHAIR—With small companies the situation is very clear: if
you have one project you accumulate them, you cannot offset them and you cannot
get a refund, so they are distorted. We have already gone through that. But
there is now a fourth element. What we said before is that the big companies
which are likely to pay MRRT will actually also pay state royalties that are
not creditable or refundable on projects within their portfolio of projects and
will not be able to offset that against their MRRT liability. That is right,
isn’t it?
Mr Parker—That is right. There is a slight nuance here
relating to the definition of a project, and that is a matter which is being
worked on by the Policy Transition Group. You will see in the paper put out by
the Policy Transition Group a discussion of the extent to which the concept of
‘project’ may cover more than one, if you like, mine.
...
CHAIR—...So whatever you might do to the definition of
‘project’ might help the BHP Billiton's, Rio's and Xstrata's; it will not help
anybody else to soften the impact of ongoing state royalty payments on them.
Mr Parker—It is a basic feature of the tax that if the MRRT
implicit liability is less than the royalty then there is no refund of the
royalty. It is a basic feature of the tax. It is, if you like, a top-up tax at
a lower rate than—
CHAIR—It is a top-up tax rather than a replacement tax.
Mr Parker—That is right—a top-up at a lower rate than the
RSPT.
CHAIR—It is a top-up tax, but the RSPT was a replacement tax.
Mr Parker—That is right.
Dr Henry—That would have raised more revenue.
CHAIR—The RSPT was a replacement tax which would have raised
more revenue, and this is a top-up tax where the Commonwealth raises a bit less
revenue—
Mr Parker—Which raises less revenue, that is right.
CHAIR—but all of the complications and all of the features
criticised in the royalty regime are still ongoing.[11]
4.10
What the Henry Tax Review recommended was a profit based tax which would
replace production based royalties. What is proposed by government is a tax
that will be inefficient and have a distorting impact on investment and
production decisions.
4.11
According to the Heads of Agreement, under the MRRT:
[a]ll State and Territory royalties will be creditable
against the resources tax liability but not transferable or refundable. Any
royalties paid and not claimed as a credit will be carried forward at the
uplift rate of the LTBR plus 7 per cent.[12]
4.12
By requiring the MRRT to operate in addition to the existing state and
territory royalty regimes as well as the company tax regime, the proposed
regime will be more complex and more distortionary than the status quo.
4.13
When questioned by the committee, Treasury acknowledged that as a top-up
tax, the proposed MRRT would result in additional complexities.
Mr Parker—It is a basic feature of the tax that if the MRRT
implicit liability is less than the royalty then there is no refund of the
royalty. It is a basic feature of the tax. It is, if you like, a top-up tax at
a lower rate than—
CHAIR—It is a top-up tax rather than a replacement tax.
Mr Parker—That is right—a top-up at a lower rate than the
RSPT.
...
CHAIR—but all of the complications and all of the features
criticised in the royalty regime are still ongoing.
Mr Parker—That is right. Of course, under the RSPT the
replacement of royalties, as you mentioned, was a replacement in economic
terms—that is, the royalty regime still existed; it was not replaced as a
matter of law or as a matter of administration. It was replaced as a matter of
economic effect. The complexity, which you have referred to, remained in place.[13]
4.14
This view was shared by Professors Henry Ergas and Jonathan Pincus, who
identified that the requirement for existing royalties to interact with not
only the company income tax regime, but also that of the proposed MRRT, would
raise a 'myriad' of issues.[14]
Royalties do discourage some economically valuable activity.
A mine nearing the end of its useful life may get sales proceeds that cover the
cost of extraction and marketing, but if it does not cover the royalty
payments, the ore remains unmined. So the task of designing mining taxes is to
find the best compromise between the desire of the tax collector to gather in
pure rent and the desire not to discourage the effort, talent and risk
involved.[15]
4.15
Professors Ergas and Pincus, together with economist Dr Mark Harrison of
the Australian National University, also wrote in a recently published, peer
reviewed journal article that:
...the
MRRT keeps the main inefficiencies of royalties and adds the inefficiencies of
a rent tax. For example, royalties discourage production from mines near the
end of their life, causing them to shut down too early. But that is precisely
when profitability is likely to be low, so there are insufficient resource-rent
tax payments against which to credit the royalty payments. Overall, the MRRT
is likely to be an extremely inefficient tax, more distorting than the RSPT.[16]
4.16
Evidence received by the committee suggests that issues of complexity
will be greater for smaller miners. The continuing application of royalties, in
addition to the MRRT, and the fact that excess royalties are not transferable,
will act as a disincentive. It will be a disincentive as royalties will be
payable during both the slower start-up period, and the decline phase, during
which times profits may not be realised, yet royalties will remain payable.
This would not have been the effect had state and territory royalties been
'replaced' with a resource rent tax, as had been recommended by the Henry Tax
Review.
4.17
The Henry Tax Review proposal was comprehensive and suggested not only
that a Resource Rent Tax regime replace royalties but that the Commonwealth and
state governments should negotiate the allocation of both revenues and risks
from the regime.
4.18
Had the Henry Tax Review proposal been implemented, with state royalties
being replaced by the proposed tax, during the less profitable phases (mine
start-up and decline), taxation would only be payable on realised profits. In
that situation, to the extent that there is a distortion caused by royalties, it
would have been removed under the Henry Tax Review recommended resource rent
tax; under the Gillard government's MRRT it is not. In fact the MRRT is more
distortionary than the status quo.
4.19
It was the view of economists who appeared before the committee that, the
application of both royalties and a rent tax, in the form of the MRRT, also has
a negative effect on more risky projects.
...the reason the MRRT is going to tax risky investments is
that if your project is a failure, the government does not want to know about
it, is not going to pay you anything and gives you a credit that you can never
use. But if your project is a success, the government is going to take their
share. That is where the disincentive to risk-taking arises. On that basis if
you look at existing projects, in my view there is a strong element of
expropriation; the government is effectively acquiring shares. It does not
actually acquire the shares, so it avoids the legalistic definition of expropriation,
but it acquires the stream of cash flows that give the shares their value. So,
from an economic point of view, it comes to exactly the same thing—even if it
does not from a legal point of view—at less than their market value.[17]
4.20
The economists who appeared before the committee shared the view that
both the RSPT and its replacement, the MRRT, through their treatment of
royalties would result in inefficiencies and distortions:
The MRRT has many of the same inefficiencies as the RSPT but
adds some further serious inefficiencies of its own. Like the resource super
profits tax, it discourages cost reductions and revenue expansions by miners
and, like royalties, it discourages production from mines near the end of their
lives. In addition, it distorts the distribution of the rates of return from
mining, thus differentially discouraging higher risk profits. The MRRT reduces
the expected rate of return for risky projects by more than it reduces those
for less risky projects. In other words, the realised tax rate on risky
projects after the event turns out to be higher, maybe far higher than that on
less risky projects.[18]
4.21
In fact, Professor Freebairn, one of the 20 economists who had
previously signed a letter in support of a resource rent tax, explained that the
MRRT on top of ongoing royalties puts miners in a much worse position than the
status quo:
Prof. Freebairn—...the MRRT clearly increases the risks faced
by miners because all it is doing is taking gains if there are gains to be had,
and if there are losses it is not sharing in those losses at all. The MRRT, as
proposed, is an asymmetric tax treatment of wins and losses.
CHAIR—So it increases risk for miners. In that sense, it has
a distorting effect in its own right, doesn’t it?
Prof. Freebairn—Yes.
CHAIR—This is on top of the distorting effects of the
royalties, to the extent that they are there?
Prof. Freebairn—Yes.
CHAIR—Compared to the status quo, does the MRRT put us into a
better or worse position?
Prof. Freebairn—It puts the mining companies into a more
riskier position because they still get the same treatment if it is a dud and
they lose more if it is a success.[19]
4.22
Professor Pincus explained, in practical terms, the potential negative
impact on smaller mining companies:
A whole series of efforts by mining companies may end up
leading to tax liabilities on MRRT which, without the tax, they would have
engaged in more fully—more exploration, more thoughts about research and
development and reducing their costs. All of those things could add to the
profits they make but they are not a consequence of the value of the ore in the
ground; they are a consequence of their efforts to make a profit. A tax on
profits discourages all those things which make profits.[20]
4.23
Professor Freebairn and Professor Rolfe were invited to give evidence to
the committee at the request of a government Senator as they were two of the 20
economists who had signed a letter in support of a resource rent tax.
4.24
In that context, it is telling that both Professor Freebairn and Professor
Rolfe told the committee that they did not support the MRRT and that they would
not have signed such a letter if the MRRT had been the proposal at the time.
According to Professor Freebairn:
CHAIR—...You captured again that royalties are the worst of all
taxes. But of course, as you have said, the MRRT in a sense is worst than
royalties.
Prof. Freebairn—Yes.
CHAIR—You say yes to that. When you signed the statement in
support of a resource rent tax which would replace state and territory
royalties, you would not have signed a similar statement in support of the MRRT
as it is on the table?
Prof. Freebairn—When we wrote that statement the MRRT was not
actually out. It was the super profit resource tax which was going to be a
replacement.
CHAIR—If you were asked to sign a statement supporting the
MRRT, you would not sign it?
Prof. Freebairn—No.[21]
4.25
According to Professor Rolfe:
CHAIR—...Would you have signed a statement in support of the
MRRT as it is on the table?
Prof. Rolfe—I would not have, actually.[22]
4.26
Professor Freebairn made it clear that while he was in favour of a
resource rent tax that replaced royalties, such as that proposed by the Henry
Tax Review, he was not in favour of the MRRT.[23]
A further distortion – the market
based valuation for establishing the starting base
4.27
The distortions that will arise as a result of the arrangements to
credit royalties is but one of the distortions that will provide larger miners
with a competitive advantage over their more junior counterparts. In addition,
the arrangements that the government has announced in respect of determining
the starting base will favour the well established three multi-national,
multi-commodity and multi-project miners.
4.28
In the Heads of Agreement, the government announced that the starting
base for project assets (defined to include tangible assets, improvements to
land and mining)[24]
can be determined using either:
(a)
book value, excluding the value of the resource; or
(b)
the market value of the project (as at 1 May 2010).[25]
4.29
The taxpayer is to elect which method of valuation they will apply.
4.30
Evidence given to the committee by smaller miners in respect of this
feature of the MRRT highlighted their concern that this design consideration
inherently favours their larger competitors:
The definitional aspects of ‘projects’ seem to be biased
towards BHP and Rio. There is the issue of possible treatment of black-hole
expenditure, which is particularly relevant for companies that are trying to
develop but may not meet the definition of a project at this point in time.[26]
4.31
The ability to choose a market based method of valuation delivers larger,
more capital intensive companies, a bigger capital base and therefore, a larger
pool of deductions to draw from before they are required to start paying the
MRRT. Such a pool is a consequence of the large investments that mining
companies have made in the past.
4.32
Many smaller mining companies are instead less capital-intensive and
often pay for access to the infrastructure of larger companies. This means that
they will not have access to as large deductions as the bigger mining
companies. In addition, the payments they have made in the past to gain access
to this infrastructure (and service the capital costs of the bigger miners)
receive no recognition in terms of higher deductions for the MRRT. As commented
by Mr Flanagan, Managing Director of Atlas Iron:
Atlas is the classic example of those companies. We have gone
in. We actually do not own our mining fleet. We do not own a railway line. We
do not own a trucking fleet. So we do not get the benefit of the mine gate sale
the way the majors do, where they can inflate the value of the service provided
and those sorts of things, and that is a significant thing to point out. In
this MRRT, effectively, for those companies which do not get the benefit of the
transition provisions—and that is pretty much all of those iron ore companies
that come after us now—they will not get the benefit of using market value of
their assets and an accelerated write-off, which means that they can only use
the book value to write off the assets.
...... We will get caught in the transition provisions and we
will get the benefit of the market value, but there are going to be a lot of
companies to come in the future which are going to be penalised by only having access
to that book value.[27]
4.33
Professor Ergas further pointed out that the greater risk involved in
investing in smaller companies probably lowers their market values and hence
limits the extent to which they have access to a tax shield.
CHAIR—Would it be as advantageous for the smaller to mid-tier
mining companies, having a market valuation method as part of the MRRT design?
Prof. Ergas—Probably not because, their mining projects being
typically more uncertain, it is likely that their current market valuations are
relatively low and hence provide a much lower tax shield. Again, that is
significantly affected by the precise way in which the depreciation provisions
are ultimately crafted.[28]
4.34
Overall, although the market valuation method can protect against the
government retrospectively taxing private investment, it is another design
element which benefits larger companies, which had a voice inside the room,
relative to the interests of smaller miners who were not even involved in the
discussions.
4.35
These smaller miners consider that the introduction of the proposed tax
will impede their ability to innovate, particularly through the scrapping of
the exploration rebate, and the changes to the starting base calculations which
favour larger, well established operations.
4.36
The obvious competitive advantage to the three big miners as a result of
the design of the MRRT and expanded PRRT is covered in more detail in Chapter
5.
The MRRT - A narrowly based tax, but for how long?
4.37
The Henry Tax Review recommended that resource taxation be reformed
through the introduction of a uniform resource rent tax. The RSPT put forward
by the government in May 2010 would have applied uniformly to all minerals.
However, in the Heads of Agreement negotiated between the government and the
three big miners in the shadow of a difficult election for the government, the
proposed MRRT would apply only to coal and iron ore, excluding all other
minerals.[29]
4.38
Under the MRRT, the government’s revenue is generated by the coal and
iron ore industries. The original Resource Rent Tax and the RSPT were far
broader, encompassing other non-renewable resources rather than two arbitrarily
chosen resources. The table below, sourced from Treasury through a Freedom of
Information process, demonstrates the narrowness of the taxation base:
Table 4.2: A narrower tax base, revenue from the MRRT[30]
Year / Total |
Iron Ore ($m) |
Coal ($m) |
TOTAL MRRT ($m)[31] |
2012-13 |
3,500 |
500 |
4,000 |
2013-14 |
5,000 |
1,500 |
6,500 |
2014-15 |
4,500 |
2,000 |
6,500 |
2015-16 |
3,500 |
2,000 |
5,500 |
2016-17 |
2,000 |
2,000 |
4,000 |
2017-18 |
1,500 |
1,500 |
3,000 |
2018-19 |
1,500 |
1,500 |
3,000 |
2019-20 |
1,500 |
1,500 |
3,000 |
2020-21 |
2,000 |
1,000 |
3,000 |
Total |
25,000 |
13,500 |
38,500 |
Table 4.3: A comparison of the revenue from the RSPT and
the MRRT[32]
Year / Total |
TOTAL MRRT ($m)[33] |
TOTAL RSPT ($m)[34] |
DIFFERENCE ($m) |
2012-13 |
4,000 |
3,000 |
1,000 |
2013-14 |
6,500 |
9,000 |
-2,500 |
2014-15 |
6,500 |
12,500 |
-6,000 |
2015-16 |
5,500 |
12,500 |
-7,000 |
2016-17 |
4,000 |
12,500 |
-8,500 |
2017-18 |
3,000 |
14,500 |
-11,500 |
2018-19 |
3,000 |
13,500 |
-10,500 |
2019-20 |
3,000 |
11,500 |
-8,500 |
2020-21 |
3,000 |
10,000 |
-7,000 |
Total |
38,500 |
99,000 |
-60,500 |
4.39
Table 4.2 also shows that while the MRRT has a narrow base, most of the
revenue from the MRRT is expected to come from iron ore production. According
to the Treasury modelling, about 65 percent of MRRT revenue will come from iron
ore production over the next decade. Given currently 99 per cent of iron ore
royalties nationally are generated in Western Australia,[35]
that means about 65 per cent of the MRRT revenue over the next decade will be
generated from iron ore production in Western Australia. Imposing one national
tax which has such a disproportionate effect on one state economy raises
serious equity issues.
4.40
Table 4.3 compares the revenue that would have been raised under the
RSPT with that projected to be collected under the MRRT over the initial ten
years. These figures, however, give no insight into the assumptions used to
calculate the forecasts; assumptions that, to this day, remain secret.
4.41
Although the RSPT would clearly have collected more revenue, the
forecast MRRT figures remain misleading given the government's changed
commodity price assumptions on which they were based:
Sources familiar with the Treasury forecasts confirmed...that
the original resource super profits tax (RSPT) projections were based on
significantly lower iron ore and coal price and volume assumptions than the
revised minerals resource rent tax (MRRT). If the higher price assumptions the
government are now relying on are applied to the original mining tax, the
result is that it would have raised more than $20 billion a year.[36]
4.42
This creates more doubt about the ability of the proposed tax to cover
the cost of the related budget measures, thereby placing further pressure on
the government's budget position.
4.43
The Organisation of Economic Cooperation and Development has identified
the narrow and distortionary nature of the MRRT as a concern, specifically:
As conceived, 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, regardless of their underlying
merits.[37]
4.44
Indeed, Professor Ross Garnaut, an economic adviser to the government,
suggested that the decision to exclude the tax from all minerals, except coal
and iron ore, was arbitrary and had no economic foundation.
CHAIR—...Resources, as you mentioned earlier, are the
properties of the states and it is the states on behalf of the people in those
states who sell those resources, for royalties, to those mining companies. A
butcher would buy it in a private market but the principle is the same. Why is
it appropriate for this sort of tax to be applied to iron ore and coal but not
to uranium, nickel or gold? Is there an economic argument in favour of picking
those two resources and excluding others?
Prof. Garnaut—There is no economic reason. 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.
CHAIR—So why do you think the government has picked them? ...
Is it fair to say, then, that it is an arbitrary choice?
Prof. Garnaut—I think that is fair to say. In the public
discussion there has been some suggestion that these happen to be very large
and very profitable activities at the moment, but not every iron ore mine is
large and profitable, and not every other kind of mine is small and
unprofitable. So yes, I think you would be struggling to find an economic
justification for the distinction.[38]
4.45
Further, apart from having no economic foundation, there is a real
concern that the restricted application of the proposed tax on iron ore and
coal will have a distorting effect on investment in these two sectors as
minerals other than coal and iron ore become more attractive to investors:
Looking at the status quo, the answer has to be it makes
these other minerals not touched relatively more attractive than the ones that
are now facing a slightly higher tax bill.[39]
4.46
Professor Ergas concurred with this view:
What is more likely to happen is that it will shift the focus
of efforts of expanding the supply of coal and iron ore, a greater share of
those efforts will ultimately go to other jurisdictions [overseas
jurisdictions].[40]
4.47
The government's decision to limit the application of the MRRT to coal
and iron ore production reduced the number of affected companies from 2,500 to
approximately 320.[41]
4.48
There are however serious question marks as to how long other minerals
and resources would be excluded from the scope of this new mining tax if it was
passed by the Parliament. In evidence to the committee the Construction, Forestry,
Mining and Energy Union (CFMEU) submitted that:
The RSPT was a more consistent and fairer proposal than the
MRRT. The MRRT is at best a useful starting point for fairer taxation of the
resources sector and for greater returns to the Australian community...[42]
4.49
In evidence before the committee the CFMEU argued that:
The Resource Super Profits Tax
was a broader and better proposal than the MRRT. The MRRT represents a
compromise with the mining industry that is undesirable with respect to its
impact on fiscal policy, community benefit and overall economy-wide impacts. The MRRT is
restricted to coal and iron ore. While these are hugely profitable industries
and prime candidates for resource rent taxation, they are not alone in that
respect and a more consistent tax would be applied more broadly.[43]
4.50
Senator Cameron, a government member of the committee, also recently
argued that the minerals resource rent tax should be increased, flagging that
an increase in the minerals resource rent tax will be proposed at this year's
Labor Party National Conference:
Labor's Left faction will demand an increase in the amount of
money raised by the proposed mining tax, a challenge to the authority of the
Gillard government's leadership... "We should have another look at whether
the mining industry is paying their fair share, and whether the community is
getting a fair outcome from it," a national convenor of the Left, Doug
Cameron, told the Herald.[44]
4.51
Others argued that the limited application of the proposed tax to iron
ore and coal will discriminate against these particular sectors of the mining
industry:
There is no justification for applying the MRRT only to iron
ore and coal while exempting other minerals. While different types of mines
have different distributions of costs and revenue across their working lives,
the differences in their tax bills should be determined by applying the same
set of rules to different circumstances—not by having one set of rules for iron
ore and coal and another set of rules for the rest, as if the cost and revenue profiles
depended only on the target mineral. Arbitrary line-drawing invites endless
lobbying and rent-seeking on both sides of the line.[45]
The Washington-based IMF, in a report on the Australian
economy, said the mining tax should be broadened beyond coal and iron ore to
other commodities to help reduce inflationary pressure, and many have pointed
to the injustice of just targeting iron ore and coal, particularly when other
commodities such as copper and gold have enjoyed and are forecast to continue
enjoying meteoric price rises. Since the MRRT agreement gold and copper prices
have continued to escalate.[46]
The MRRT - Uncertainty and compliance burdens
4.52
The proposed MRRT would be imposed on top of existing resource royalty
and other taxation arrangements. Evidence before the committee indicates that
the government has not adequately resolved issues with the interaction between
the proposed MRRT and state and territory royalties. Resource royalties are
only one aspect of Australia's current taxation arrangements applicable to the
mining industry. In determining the impact of the proposed minerals resource
rent tax, the cumulative effect of royalties, company tax and all other taxes
needs to be considered. Investors are concerned not only with the applicable
royalty rate but the effective rate of overall taxation.[47]
The specific royalty regimes and implications for federal-state financial
relations from the proposed mining tax are discussed in more detail in Chapter 6.
4.53
However, as identified, the Henry Tax Review recommended the replacement
of state and territory royalty regimes with a uniform resource rent tax regime.
This is not what the government has proposed to do with its MRRT/expanded PRRT.
The fact that the proposed MRRT will apply in addition to existing royalties
rather than replacing those state and territory royalty arrangements has been the
focus of much criticism during this inquiry.
4.54
Because the government had not taken the time to make the effort to
engage with state and territory governments on genuine tax reform, it had to
come up with a work-around in relation to the issue of royalties. The three big
mining companies which were involved in the government's negotiations on the
MRRT, were particularly sensitive about this issue. In their evidence to the
committee, they indicated on a number of occasions, how central the treatment
of royalties under the MRRT was to their ultimate agreement.
We are concerned with the recent comments made by some
parties seeking to move away from all royalties being creditable. It was clear
from the context of discussions we had with government and later with Treasury
that ‘all’ meant all, current and future. The ‘all’ is essential for the MRRT
to set a maximum rate of tax on the earnings of the iron ore and coal
operations which, combined with the proposed company tax rate, is approximately
45 per cent. Any departure from this point would undermine a critical design
feature of the MRRT.[48]
What I will say is that the heads of agreement entered into
by the then government and the three mining companies in our view begins the
process of rebuilding Australia’s reputation as a predictable place to invest.
On this basis Rio Tinto has recently made a number of
significant investment decisions. These reflect our expectation that the terms
of the heads of agreement entered into with the government will be honoured in
full. This includes the crediting of all state and territory royalties
including future increases. This is absolutely vital to ensure that the overall
rate of taxation remains internationally competitive over the long haul.[49]
4.55
Xstrata Managing Director, Mr Peter Freyberg, went so far as to say that
if the government had not addressed the issue of state and territory royalties
they would not have signed the MRRT Heads of Agreement.
For us the statement 'all royalties' is very clear. We would
not have signed the agreement had we thought it was ambiguous.[50]
4.56
In the Heads of Agreement signed on 1 July 2010, the government committed
the Commonwealth to crediting all state and territory royalties:
All
state and territory royalties will be creditable against the resources tax
liability but not transferable or refundable. Any royalties paid and not
claimed as a credit will be carried forward at the uplift rate of LBTR plus 7
per cent.[51]
4.57
Following the public release of the Heads of Agreement on 2 July, the
arrangement regarding royalties received widespread attention. It came under
particular scrutiny following speculation that, despite the statement made in the
Heads of Agreement, the government would not credit future royalty increases but
only those royalties that were in place at the time the announcement was made.
Such speculation caused widespread concern:
Mr Edwards—If there is uncertainty of the crediting of state
royalties or if state royalty rises are not credited what will happen is the
maximum effective tax rate companies pay will increase. That will lead to
uncertainty and they will face a double tax whammy. What we are looking for is
certainty in that all royalties are credited so investors in the resources
industry know the maximum effective tax rate that they will be paying. If you
do not credit royalties, they will not know. It could go up and up and up.
CHAIR—The Commonwealth would say two things though. First,
they would say, ‘We do not want to erode our own revenue by states increasing
their royalties’. The second thing is that if the states were to increase their
royalties now that would essentially be an unexpected increase in your tax
burden as well. What is the difference?
Mr Edwards—We would ask for the same process that we are
asking the federal government in that we would sit down with the state
government and understand what the impact of those royalty increases is going
to be. Until we fully understand that, do not increase the royalty rate.[52]
4.58
The mining companies who had been involved in the exclusive and secret
negotiations with the government in relation to the MRRT, raised their concerns
in relation to the government’s unwillingness to confirm their commitment to
credit all state royalties against the resources tax liability with the committee:
For the MRRT to be successful, all of the elements of the
heads of agreement need to be delivered. On the treatment and crediting of
state royalties, it was made very clear by Xstrata, BHP Billiton and Rio that
our understanding was that all state royalties would be credited and refunded
under the MRRT. The wording of the signed heads of agreement was quite specific
for that reason. From Xstrata’s perspective, all means all.[53]
The 'big three mining' companies
4.59
When giving evidence to the committee, Xstrata Coal indicated that the
crediting of all royalties was a critical issue necessary for their support of
the tax.
Mr Freyberg—For us the statement ‘all royalties’ is very
clear. We would not have signed the agreement had we thought it was ambiguous.
One of the big subjects discussed during the consultations was the issue of
sovereign risk. The fact that the spectre of sovereign within the Australian
resource sector had now been opened up made us argue the point that, given that
this was an increase in tax, we needed certainty for the future and hence
argued for the point of all royalties being credited. This went a very long way
to addressing the sovereign risk issues that we were concerned about,
particularly with reference to investments we want to make in the future...
CHAIR—So this was not just an incidental discussion; it was a
significant focus of the discussions with the government.
Mr Freyberg—The discussions were comprehensive on a number of
issues: retrospectivity, sovereign risk, royalties and so forth. We saw the
heads of agreement as a complete set of criteria against which the MRRT needed
to be detailed.[54]
4.60
BHP Billiton was also of the view that their discussions with government
had been very clear concerning the issue of royalties.
CHAIR—There is a well publicised dispute now...between the
government and principally BHP Billiton and Rio...about the mining tax and the
treatment of state royalties. Are you certain that under the agreement you
reached with the government on the MRRT all state royalties would be credited
and refunded, including future increases?
Mr Bond—Yes, I am.
CHAIR—Why are you so certain?
Mr Bond—The discussions we had in relation to the proposed
MRRT tabled by the government centred round prospectivity and competitiveness
as threshold issues. The tax as designed is a top-up tax and by definition it
sets the maximum rate of tax that would be levied on these two products. A
top-up tax only operates when the royalties are credited in full. The point
around prospectivity and competitiveness as it pertained to the royalties was
paramount to that discussion. This was not a wedge tax; this was a top-up tax
and the government made it very clear that the royalties would be credited
against the MRRT liability in full.
CHAIR—Including future increases?
Mr Bond—That goes to the point of prospectivity and
competitiveness.
CHAIR—So how much discussion was there on this point in your
discussions with the government?
Mr Bond—The discussions extended for many hours on a range of
matters.
CHAIR—Sorry, on this matter: was it an incidental discussion?
Mr Bond—I do not believe it was incidental. The point was
also discussed with the Treasury representatives when we reviewed the document
referred to as the heads of agreement.[55]
CHAIR—...How important was your understanding that all state
royalties, including future increases, would be credited?
Mr Bond—It is very important and it was also very clear. The
mere absence of any other wording pertaining to the royalties, such wording
that that did exist in relation to the RSPT, also evidences in our opinion that
the points of discussion on the point have been fully reflected in the heads of
agreement: all means all.[56]
4.61
When asked to explain their understanding of the agreement they had
struck concerning royalties, Rio Tinto also advised:
Mr O’Neill—Our view is that the words in the heads of agreement
accurately reflect the understanding that we reached in the discussions at
least from our point of view. We signed that agreement on the basis that that
issue had been resolved. I know that there has been some doubt cast on that,
but our very clear view is that those words were carefully chosen and they are
an important part of the agreement.
CHAIR—You say that it is your view that the words in the
agreement accurately reflect this. So are you certain that under the agreement
that you reached with the government all state royalties, including future
increases, would be credited? Are you certain that, under the agreement that
you reached with the government, that would be case?
Mr O’Neill—From our point of view, the answer would be yes.
CHAIR—What makes you so certain? Was there a specific focus
on this point in the discussions that led you to the conclusion that there was
a clear understanding? When this particular passage in the heads of agreement
was put together was there a particular discussion around the specific wording?
Mr O’Neill—I cannot recall clearly the exact moment at which
this was agreed, other than to say that all of the wording in the heads of
agreement was extensively discussed—every clause. That included this particular
section.
CHAIR—So every clause was extensively discussed, including
this particular section. If this particular section had not been part of the
heads of agreement would Rio Tinto have signed up to the agreement?
Mr O’Neill—...it was a key point for us, so I believe that it
would have created significant difficulty for us in signing.[57]
The Treasury
4.62
The Treasury, however, took a different view:
Dr Henry—It is my understanding that there would be no credit
provided under the MRRT for those future increases.
CHAIR—No credit. So that means that companies would be
subject to paying the MRRT as well as the increases in state royalties moving
forward?
Dr Henry—That is my understanding.
CHAIR—...Once a mine becomes less profitable towards the end
of its mine life, presumably it might fall out of the MRRT liability
situation...
Dr Henry—That is correct.[58]
4.63
The discussion continued:
CHAIR—Thank you. You mentioned earlier that future state and
territory royalty increases will not be creditable against the mining tax
liability, but the heads of agreement is pretty clear, isn’t it? It does say:
All State and Territory royalties
will be creditable against the resources tax liability ...
Why is there any argument about
this?
Dr Henry—Well, I could point out that it does not say ‘all
future royalties’, for example.
CHAIR—What limitation is there on ‘all’?
Dr Henry—Obviously, as my colleague Mr Parker indicated
earlier, there is some dispute, which you are obviously well aware of, among
various parties about the meaning of that particular phrase, and that suggests—
CHAIR—But ‘all’ is pretty all-encompassing, isn’t it?
Dr Henry—'All' is obviously all-encompassing. I think that is
a tautology.
CHAIR—Indeed.
Dr Henry—But does it refer to all things in existence now or
all things in existence at any point in time? That is the question.[59]
4.64
Treasury disputed that the reference in the Heads of Agreement that all
State and Territory royalties would be credited did not mean 'all future
royalties.'
Dr Henry—Well, I could point out that it does not say ‘all future
royalties’, for example... But does it refer to all things in existence now or
all things in existence at any point in time? That is the question.
...What I am suggesting to you is that there was a lot that
was in people’s heads that is not captured in that document [the Heads of Agreement]...when
the MRRT is legislated you will see, quite possibly, hundreds of pages of
legislation to give effect to that agreement. You should not expect, I suggest,
that that agreement captures all of the detail that you as a senator would want
to see in a piece of legislation you were scrutinising.[60]
4.65
While the Heads of Agreement clearly stated that 'all state and territory
royalties' would be 'creditable against the resources tax liability', the
government continued to dispute that 'all' meant 'all'. So it was left to the Policy
Transition Group to consider and resolve this issue.
4.66
The PTG has since made its recommendation to the government.[61]
In its report,[62]
it confirmed the government should comply with the terms of the Heads of
Agreement and credit all royalties, including future increases in royalties:
...the PTG recommends that there be full crediting of all
current and future State and Territory royalties under the MRRT so as to
provide certainty about the overall tax impost on the coal and iron ore mining
industries. Equally, the MRRT should not be used as a mechanism to enable
States and Territories to increase inefficient royalties on MRRT taxable commodities.[63]
4.67
The PTG did however suggest that, in crediting all current and future
royalties, the Australian Government:
...put in place arrangements to ensure that State and
Territory governments do not have an incentive to increase royalties on coal
and iron ore. This would limit their negative impacts, while allowing the
Australian Government’s taxation regime to maximise the return to the community
during the highpoint of the resources cycle, so achieving the balanced outcome
described above.[64]
4.68
On 24 March 2011, the Treasurer and Minister for Resources announced
that the government had accepted all 98 of the PTG's recommendations. In making
that announcement the Treasurer and the Minister for Resources specifically
stated that the government accepted the PTG's recommendations in relation to
royalties:
We’re pleased to accept all 98 recommendations of the Policy
Transition Group (PTG)....The Government supports the recommendation that all
current and future royalties be credited, and that all levels of government
should ensure the taxation of Australia’s resources preserves our international
competitiveness. We agree with the PTG that the Mineral Resource Rent Tax is a
more efficient way to provide Australians with a return on their mineral wealth
and that we shouldn’t give a green light to the states to increase their
royalties.[65]
4.69
Just how the government will ensure that the states and territories are
not given a 'green light' to increase royalties has yet to be clarified.
Treasury suggested to the committee, however, that such action might occur
through the payment of tied grants.
CHAIR—Would the Commonwealth be able to force states and
territories into a position where they cannot either charge or increase state royalties?
Dr Henry—Of course the Commonwealth could, if it wished...
The Commonwealth has the power, and it has used it on
occasions to have the states do things or not do things. Principally the
Commonwealth’s power comes through the state’s reliance on the Commonwealth for
such a large proportion of their funding. The Commonwealth is pretty much in
control of that funding. I say ‘the Commonwealth’ because I am talking about
the Commonwealth parliament, since mostly what I am talking about is
appropriations made by the Commonwealth parliament to the states. If the
Commonwealth parliament decided the states should do something they are not
presently doing, or stop doing something they are presently doing, the
appropriations power affords the Commonwealth parliament a fair degree of
leverage.[66]
The Western Australian Treasury
4.70
The Western Australian Treasury department sought advice about the
interaction of the state royalty regime with the proposed MRRT and expanded
PRRT. Their requests for clarification, however, went unanswered:
Mr Marney—We have sought clarification as to how future
increases...would be treated. We are yet to receive clarification.
CHAIR—Since you appeared before the previous Senate committee
on
13 July, have you had any in-depth discussion with federal Treasury on how the
mining tax and interaction with state royalties is to operate?
Mr Marney—No, we have not. We have a number of pieces of
correspondence in to them and we are awaiting a response.
...
Mr Marney—We have had one meeting with the Policy Transition
Group. Many of the issues we have sought clarification on fall outside the
terms of reference of that group.[67]
MRRT – Less fair, royalty credits which are non-refundable,
non-transferable
4.71
Although the PTG has now settled the issue of crediting all future
royalties, the fact that royalties will be creditable but not transferable or
refundable means that distortions and disincentives will remain under the
proposed MRRT model.
4.72
The distortions and disincentives occur because, in some circumstances,
credits will accrue but will not be able to be used. Economists who gave
evidence to the committee identified this as an issue:
CHAIR—...the mining tax deal between the government and the
big three miners that all state royalties will be credited against the mining
tax. The mere fact that they are going to be credited does not actually mean
that they are going to be refunded, does it?
Prof. Pincus—No. They are only credited and not refundable.
If no MRRT tax is paid you do not get a refund from the Commonwealth.
CHAIR—So if your project is in the decline phase, as has been
said—and royalties supposedly accelerate the closure of a mine—presumably you
are at a stage of your mine life where you are never again going to be
sufficiently profitable to be subject to the mining tax. Whatever credits you
accumulate will not serve any purpose whatsoever, will they?
Prof. Ergas—That is correct. In the simple case of an entity
which operates a single mine and where there is no scope to transfer the
liabilities associated with royalties or the credits associated with royalties
across projects, then the royalties will have whatever distorting effects they
have at the moment. The situation may be more complex if you are an entity that
is operating multiple projects and can transfer.
CHAIR—Is it? In the heads of agreement it says very clearly
that royalty credits are not transferable between projects. So even if you have
got multiple projects, if you cannot transfer—which, as I understand it, you
cannot—then the problem is still there. If you are a mine in the decline phase,
you are not any better off; in fact you are probably worse off because you have
got to go through the administrative processes of the mining tax.
Prof. Ergas—That is indeed the case. The point we make in the
article is that the risk is that you will accumulate the distortions associated
with the royalties with the distortions associated with what is effectively a
profits based tax.[68]
4.73
The government's proposed MRRT, as a top-up tax, not only results in
complexities due to its interaction with the existing state royalty regimes,
but, by treating royalties as creditable but not transferable or refundable,
the government has perpetuated a further distortion through the proposed 'carry
forward' arrangements that can be applied. Although the government views the
'carry forward of unused credits' feature as a solution to the problem of
potential double taxation, if it results in a change in taxpayer behaviour,
distortions may in fact be compounded.
4.74
Submitters to the inquiry identified that this feature of the proposed
MRRT may in fact result in two different distortions. In some instances, smaller
miners will be discouraged from investing in riskier projects as credits for
royalties paid will accumulate but may not be able to be used whereas, on the
other hand, a larger miner with larger operations may choose to delay or
restrict production volumes to future years in an attempt to capture the gains
that can be realised as a result of the uplift factor that will be applied to
carried forward credits.
The 'carry forward' arrangements
for royalty credits
4.75
Under the Heads of Agreement, credits accumulated (for royalties paid) but
unable to be transferred or refunded are to be carried forward for future use. The
government announced that these credits would be carried forward at the uplift
rate of the long term bond rate (LBTR)[69]
plus 7 per cent.
4.76
The application of an uplift factor to the carried forward credits is
appropriate in order to recognise the effect of the passage of time on the
value of money; however, the uplift factor to which the government has now
agreed (of the LTBR plus 7 per cent) is considered by some to be far too
generous and a source of further distortion:
On the one hand, the treatment of tax credits by the
government is mean in the sense that, if the project fails, you cannot use
them. So there is the disincentive to taking risk. On the other hand, the
treatment of the tax credits by the government is too generous. They are being
accumulated at 12 per cent tax-free, whereas they should be accumulated at five
per cent and pay tax—in other words, at 3½ per cent tax-free. I do not think
that produces an incentive to minimise profits. You still want however much of
the profits the government takes and still want more rather than less as long as
the tax rate is less than 100 per cent. But it gives you an incentive to
develop a mine more slowly than you would if the tax credits were being carried
forward at 3½ per cent.[70]
4.77
This treatment of unused royalty credits, as set out in the Heads of
Agreement, differs from the treatment of royalties proposed under the original
RSPT model as, under that model, taxpayers would have received a refundable
credit for state royalties paid. There would be no carry-forward required.
4.78
Professor Fane identified the possibility for distortion that could
arise from the proposed carry forward provisions. Professor Fane suggested that
the ability to carry forward unused credits at such high rates would encourage
those within the mining industry to develop more slowly because by doing so
they would avoid some taxation:
CHAIR—...You talked about how, because of the crediting
arrangements, there is an incentive to delay projects and hold credits because
there is a 12 per cent risk-free return, effectively, by just holding the
credits. Can you talk us through that in a bit more detail?
Dr Fane—Under the Brown tax, suppose that in a particular
period a company has no receipts and it spends $2 and there is a 50 per cent
tax. Under the Brown tax, the government would give it $1—or $1 billion if we
wanted to make it large numbers. Under the Henry proposal, the government is
going to give it one dollar’s worth of government bond. If it really gave it
one dollar’s worth of government bond the company would have to pay tax on the interest
on that bond.
CHAIR—So it is a tax-free return?
Dr Fane—But in the case of the Henry proposal, the idea was
to give them a tax-free government bond.
CHAIR—I am interested in the MRRT.
Dr Fane—It has a still larger effect because instead of
giving them a tax-free government bond that pays five per cent, they will give
them a tax-free government bond that pays 12 per cent. A company that have been
given a government bond that pays 12 per cent and is tax-free have an incentive
to hold onto that bond. They cannot sell it to somebody else; they want to keep
it as long as possible. To keep it as long as possible, they want to delay
earning the revenue against which they will eventually use it. This is because
the way in which they are going to get their return is by taking their credit
and offsetting some receipts in the future.
CHAIR—Of course, the MRRT would not apply. They will not be
paying additional tax on the 12 to 13 per cent that they have received from the
uplift factor the credits. That is right?
Dr Fane—It is free of company tax.
CHAIR—It is free of company tax, but would they pay any tax
on it?
Dr Fane—No, they would not. It is going to be used as a
credit against future payments of resource rent tax.
CHAIR—Which would be less because the credits have been
escalated. What you are really saying is that by holding those credits and not
incurring the tax you can have a risk-free and tax-free return of 12 to 13 per
cent, which you would not be able to get anywhere in the market?
Dr Fane—That is right. But if you earn the revenue next year
that you have to pay this against, then the party is over next year. But if you
wait for two years the party goes on for two years.
CHAIR—Is it compounded?
Dr Fane—Yes.
CHAIR—So a compound return of 12 to 13 per cent, tax-free,
does provide quite a perverse incentive to not go ahead with making profits.
Dr Fane—It is an incentive to develop more slowly or extract
the resources more slowly.[71]
4.79
To address this issue, Professor Fane suggests that a much more
appropriate uplift rate at which to carry forward unused credits would be 3 per
cent:
The point that the Henry committee did not make, but it
should have made, is that it is the long-term government bond rate after tax.
Because if you give a company a government bond it is paying interest, if you
want to have a neutral tax system, the company should be paying tax on that
interest. So the appropriate interest, unless the implicit interest on the tax
credits is included in company tax, which I am confident it will not be in
Australia, then the appropriate interest rate is not, let us say, five percent
of the government bond rate it is that minus the company tax rate, so it is a
number like three per cent which is the appropriate carry forward interest
rate.[72]
MRRT – More complex and administratively burdensome, the $50 million profit
threshold
4.80
The MRRT and expanded PRRT are designed so that taxpayers with low
levels of resource profits would not have to pay the tax. The threshold at
which liability to the tax commences has been set at $50 million. Concerns have
been raised that the $50 million threshold increases compliance costs of the
proposed tax, adds complexity and further discriminates. In addition to these
concerns, confusion remains in regard to how the threshold would operate:
CHAIR—Have you made a decision on the $50 million threshold,
how it will operate—as to whether the MRRT will apply to $51 million or to the
$1 million et cetera above $50 million?
Mr Parker—That is a matter that the PTG is consulting on. We will
be making a recommendation to the government, and the government will make a
decision.[73]
4.81
Smaller miners raised concerns that the calculation of the threshold
would only occur after the end of the financial year and, therefore, they would
incur a complex administrative compliance burden in order to ascertain their
liability. Because of this, they have advocated for the threshold to be raised:
Mr Bennison—I think it is fair to say that there are some
concerns about how it is going to apply.
CHAIR—Do you know how it is going to apply now?
Mr Bennison—No, we do not. We put a tax-free threshold at
that mark. We have obviously asked for it to be increased from $50 million to
$250 million and we want a tax-free threshold up to that point.
CHAIR—Has anybody been able to explain to you how they
determined the $50 million?
Mr Bennison—No.[74]
4.82
The Chamber of Commerce and Industry of Western Australia agreed with
the view put forward by small miners that the $50 million threshold may not be
appropriate:
Mr Richards—...I think the problem there is that we do not
know where that $50 million figure comes from, and that is why our comments in
that area have been fairly limited. We do not really know what assumptions and
calculations went into actually calibrating that threshold. What is clear in
our minds is that the threshold ought to serve primarily the issue of tax
efficiency in order to protect smaller miners and also to ensure the government
is not allocating resources unnecessarily where they are going to have a small
tax intake from that particular part of the sector. So our feeling is very much
that that threshold ought to be calibrated around the issue of tax efficiency
to ensure that smaller miners are protected and administrative efficiencies are
achieved in the tax so that the government is not exerting too many resources.[75]
4.83
Their concerns were shared by the Chamber of Minerals and Energy Western
Australia who say that the threshold would be particularly detrimental to
miners of low value/grade minerals:
The chamber has significant concerns over the quantum of the
threshold, how it was arrived at, whether $50 million is adequate and also how
it is operating. We advocate it operates as a tax-free threshold. The chamber
also has significant concerns with regard to low-value resources, which usually
require significant processing to value add and whose operators will be
required to undertake significant and costly compliance measures even though
they will be paying minimal or no tax under the MRRT. These concerns also apply
to junior developers trying to get their projects up and running.[76]
Mr Edwards—As I have said before, the MRRT does go some way
to providing competitive neutrality. Having the taxing point at the mine gate
to some extent addresses that. Having a tax-free threshold goes some way to
addressing that. Getting your full realisation of your downstream assets when
valuing your resource goes to an extent to get competitive neutrality. However,
our argument is: is the $50 million threshold adequate to provide that
neutrality? We do not know; the government has not modelled it.
Senator MARK BISHOP—We are talking about the principle. You
and I both know that financing costs and the taxation imposts are different
between a gold mine, a coal operation and a high-quality iron ore proposition.
None of those are competitively neutral. So how do you reconcile the two?
Mr Edwards—A higher valued resource will pay more tax. That
is fine. But what I am saying is that the impact of the tax relative to each of
the commodities must not adversely affect that...[77]
4.84
The Magnetite Network, a lobby group representing magnetite miners,
(magnetite is a low value mineral that requires extensive processing to produce
a saleable good),[78]
confirmed that their inclusion in the tax regime would result in substantial
compliance costs:
Ms Megan Anwyl—...when it is mined magnetite has a very low
value and it is very difficult to even track this because it has not
traditionally been sold as raw ore. It is really only after the beneficiation
process that magnetite has a value. We note that the beneficiation process is
similar to some other base metals that have been exempted from the tax and we
will come back to that shortly. We also think that the taxation of magnetite
concentrate is contrary to the policy intent stated by the Prime Minister and a
range of other senior ministers...
Mr Mackenzie—...Essentially, our case is for exclusion of the
production of magnetite concentrate.... Less than two per cent of Australia’s
iron ore is produced as magnetite concentrate and that is because we are well
endowed with the direct shipping stuff. The USA, China, Canada and Brazil have
extensive deposits of magnetite, which they are mining and concentrating into
magnetite concentrate and using as feedstock into their steel business...[79]
4.85
The concerns raised by industry stakeholders were acknowledged by the
government through the PTG which, through its terms of reference, was asked to
consider the issues that had been raised, and develop a workable exclusion for
taxpayers with profits of less than $50 million. The PTG was asked to develop
an exclusion that would address the concerns of smaller miners in regard to
increased compliance costs even though they would not be liable to pay the tax.
4.86
In response, the PTG advised government that although the existence of
the threshold would be unlikely to reduce compliance costs for taxpayers (as
they will still be required to maintain records and undertake the full MRRT
calculations regardless of whether they are above or below the threshold), to
avoid a large change in their MRRT tax bill as they cross the $50 million
threshold and changes in production behaviour, the PTG recommended phasing in a
taxpayer’s MRRT liability from an annual MRRT profit of $50 million.[80]
4.87
Further, in recognition of concerns raised by smaller miners that they
would be required to account for the MRRT but never be liable to pay the tax,
the PTG recommended that tests be designed to identify those taxpayers and
provide them with a low cost compliance option.[81]
The Petroleum Resource Rent Tax
4.88
The government's revised mineral taxation framework also included
changes to the existing PRRT regime. The existing PRRT is a profit-based tax,
which is applied on a project basis - each entity with an interest in a PRRT
liable project is liable for the PRRT.[82]
4.89
The existing PRRT is levied at a rate of 40 per cent of a project's
taxable profit (that profit being calculated for PRRT purposes). Taxable profit
is the project's income after all project and other exploration expenditures
have been deducted from all assessable receipts. PRRT payments are deductible
for company income tax purposes.
4.90
Under the proposed changes, the PRRT will be extended and be payable by
all onshore and offshore oil and gas projects including the North West Shelf.[83]
4.91
The extension of the PRRT to onshore projects will involve:
(a)
the tax's continued application at a rate of 40 per cent;
(b)
a range of uplift allowances for unused losses and capital write-offs
will be offered;
(c)
all expenditure can be immediately expensed;
(d)
the tax value of losses can only be transferred in limited
circumstances;
(e)
all state and federal resource taxes will be creditable against current
and future PRRT liabilities; and
(f)
transitional arrangements will be provided for oil and gas projects
moving into the PRRT.[84]
4.92
Since the government's announcement of the changes to the MRRT and PRRT
however, there has been little focus on the extension of the existing PRRT
regime to onshore oil and gas. Despite this lack of attention, there remains
concern within the industry that broadening its application would have
significant detrimental impacts on domestic gas production. The concerns that
have been raised by industry participants have focused on two main issues:
(a)
the extension of the PRRT to onshore oil and gas would have a
detrimental effect on domestic energy supply and lead to increased costs for
consumers; and
(b)
the application of both royalties and the PRRT would add administrative
complexity and costs.
4.93
There is a view amongst the onshore oil and gas industry that the lack
of attention that has been given to their concerns in relation to the extension
of the PRRT is due to the industry's small size compared to the offshore
industry:
CHAIR—Most of the focus in the public debate on this mining
tax package, which was announced on 2 July, has centred around the MRRT. There
has not been much discussion on the impact of the onshore expansion of the
PRRT. Why is that?
Mr Streitberg—We are the most active onshore explorer in
Western Australia, and my staff who can focus on these things are me and my
CFO.
CHAIR—You are saying there are not enough people who are able
to dedicate the time to hit the drum on it.
Mr Streitberg—Absolutely.[85]
The impacts of the expanded PRRT
4.94
The DomGas Alliance[86]
is concerned that Australia's limited domestic energy supply would be put under
further strain as a result of the changes leading to higher prices for
consumers:
We believe that any proposal to extend the PRRT to onshore
and near onshore projects could have serious unintended consequences for
supply...our studies show that a 40 per cent PRRT could make some of these
projects uneconomic. It could also lead to high energy prices. If this were
able to be passed through to customers we believe that such a pass-through
would be contrary to the principle of the tax on resources and therefore it
should not flow through to the customers. Our preference would be that domestic
production of gas should be exempt from the PRRT. ...there are other options
available.[87]
4.95
There is a concern that the extension of the PRRT to onshore gas has not
been fully thought through, that its extension has been based on a simplistic
understanding of the operation of the offshore model, yet, in comparison to
offshore gas, onshore supplies are smaller and much more costly to extract.[88]
As you are aware, the onshore oil and gas business has been
subject to the royalty regime and then, to our astonishment, we were told that
we were going to be pulled in under the PRRT regime. That raises a significant
number of issues for us. It is both in relation to what the tax burden might
happen to be and also the fact that we are trying to force a tax that was
designed for the offshore into the onshore where the structure of the industry
is quite different, and that raises all sorts of issues for us...apart from the
other coal seam gas producers on the East Coast, the rest of the onshore
industry is relatively small.[89]
4.96
Stakeholders who will be affected by the extension of the PRRT to onshore
oil and gas have identified that the changes will raise significant issues.
They have identified particular concerns with the administration of the PRRT,
and how it might interact with royalties.
The revenue from the application of PRRT to the small onshore
explorers is likely to be very small but it will bring a compliance burden that
is extremely difficult for us. It is a complex tax. Nobody really understands
it very well. It is not administered particularly effectively by the ATO
[Australian Taxation Office]. We have a very small number of people in the
company, as do most small companies, and the compliance burden is going to be
very onerous for us.[90]
...it is an extraordinary administrative burden. We do not
really understand how it all works because there is only a handful of companies
that pay PRRT at the moment—the Chevrons, the Woodsides et cetera—and most of
the PRRT expertise is actually inside those companies, so it is very difficult
to find it, even amongst the consultants. We have had to make a lot of
assumptions about how all this stuff will work.[91]
The PTG's findings in respect of
PRRT
4.97
The concerns raised by stakeholders who would be affected by the
extension of the PRRT to onshore oil and gas were, however, recognised by the
PTG. As a result, although the PTG’s limited terms of reference restricted it
from making recommendations, it did acknowledge there were problems in the
proposed design of the expanded PRRT and suggested that the government consider
improving the design of the tax:
The PTG’s terms of reference are limited to providing advice
to Government on the extension of the PRRT. There is no PRRT equivalent of the
MRRT Heads of Agreement that outline design features of the transition so the
PTG has looked to the principles already in place in the PRRT... While it is
not within the PTG’s terms of reference to make recommendations on these
matters, in several instances, the PTG considers there is merit in improving
the design of the PRRT as part of its extension to transitioning petroleum
projects. This could include modernising the PRRT Act and aligning it with the
tax code.[92]
4.98
Whilst appearing before the committee, Alliance members drew the
attention of the committee to what they consider to be an inconsistency between
the government's decision to extend the PRRT to onshore gas, and actions taken
by government in Western Australia to provide incentives to domestic gas suppliers
to encourage supply to the domestic market:
...in Western Australia, where we face a shortfall for
domestic gas in the coming years. We also recognise that the government here in
Western Australia has relaxed royalties on tight gas from 10 per cent to five
per cent to encourage this investment in tight gas exploration and development,
and we would ask that the committee make sure that there is no contrary effect
by the PRRT on these royalties to incentivise domestic gas production.[93]
Committee comment
4.99
The committee is concerned that with the MRRT and expanded PRRT the
government has not put forward genuine and well thought out tax reform
proposals, but rather went for a quick and opportunistic grab for additional
cash.
4.100
The MRRT and expanded PRRT are top-up taxes which will increase
complexity and increase distortions in the market.
4.101
When
it comes to the treatment of royalties, the MRRT, structured as a top-up tax,
was always going to expose either the mining companies or the Commonwealth Government's
budget bottom line to additional risks. Either the mining companies liable to
pay the new tax would still face ongoing exposure to state and territory
royalty increases; or the Commonwealth Government had to carry the risk to its
budget bottom line that state and territory governments may increase their
royalties on iron ore and coal production in the future.
4.102
As
it turned out, the three big mining companies had enough leverage over a
government facing a difficult election and exhausted from two months of intense
public fighting over the RSPT. They obtained a commitment that all state and
territory royalties would be creditable against any MRRT liability.
4.103
The recent decision by the Western Australian Government to remove a
royalty concession on iron ore fines is the first practical consequence of the
Commonwealth Government's failure to think through the implications of the mining
tax for royalty and GST sharing arrangements. The Western Australian Government's
decision to remove that concession has already blown a $2 billion hole in the
federal budget over the current forward estimates. Other states could make
similar decisions about royalty arrangements in their jurisdictions and there
is nothing the Commonwealth could do about it. Every time a State government
decides to increase its royalties, federal revenue from the mining tax would be
reduced. Yes, there would be implications for GST sharing arrangements; but all
that would do is share more GST revenue across all states and territories, not
return any of the additional revenue to the Commonwealth.
4.104
The committee considers that the government has only got itself to blame
for this outcome. The promise in the mining tax deal to credit 'all state and
territory royalties' was always going to expose the federal budget to this
risk.
4.105
The committee is at a loss to understand how the federal government ever
thought they could 'reform' resources taxation and royalty arrangements without
actively engaging the states and ultimately reaching agreement with them. The
government knew they needed to negotiate with the states, as the Henry Tax
Review had recommended it. It seems they never even tried.
4.106
Yet when the Prime Minister and the Treasurer signed the mining tax
deal, they went ahead and committed the Commonwealth to crediting all state and
territory royalties against any national mining tax liability. That was always
going to expose the federal budget bottom line to future royalty increases in
any state or territory.
4.107
The Commonwealth Government ought to have known that under our
Constitution, changes to royalty rates are the exclusive prerogative and
responsibility of the states.
4.108
The committee is not surprised the government failed to deliver on its stated
commitment to a simpler and fairer tax system given the inadequacies of its
policy development process. The evidence received by the committee is clear – distortions
of investment and production decisions under the MRRT would be worse than under
the status quo. That is the conclusion not only of mining industry
stakeholders, but also of two economists who appeared before our inquiry having
previously signed a statement in support of resource rent taxes. The proposed
new tax is not competitively neutral and it would have a disproportionate
impact on resource rich states like
Western Australia, Queensland, New South Wales and the Northern Territory.
4.109
When the Henry Tax review was commissioned it was supposed to be root
and branch reform to deliver a simpler and fairer tax system. The government
has failed spectacularly to deliver on that objective.
4.110
The government's decision to pick up the Henry Tax Review recommendation
to introduce a resource rent tax, change it, pursue it in isolation of
everything else and without consultation, was never going to work. The
government chose not to engage in the more difficult and challenging processes,
such as negotiating with the mining industry as a whole or engaging with the
states and territories, reaching agreement on necessary related changes to federal-state
financial relations. The policy and political mining tax mess the government is
faced with today is the inevitable conclusion of the government's mismanagement
of the issue and a deeply flawed process.
4.111
In summary, the MRRT and expanded PRRT would impose more economic
distortions than the existing royalty arrangements. The MRRT is imposed on a
narrow base which penalises some resource sectors (iron ore and coal).
Negotiations were rushed which led to an ambiguous agreement and degenerated
into a semantic argument over the definition of 'all'. Moreover, these new
taxes would impose substantial compliance costs even on sectors which may not
necessarily have a large liability (such as the onshore gas and petroleum
sector). Overall, the government's response to the Henry Tax Review has exposed
the Commonwealth Budget to a higher degree of risk. The government has proposed
various associated measures which will become increasingly costly over time to
be funded by a tax which could be dramatically impacted at any time by
increases in royalties by state governments. These deficiencies completely
refute the government's argument their proposed changes create a more efficient
tax system.
4.112
In the committee's view the design of the MRRT and expanded PRRT is
irretrievably broken. Any attempt to 'fix' the defects in these taxes would
sucker a government into a series of quid-pro-quos with affected companies
which could never be the foundation of enduring taxation reform. Instead, the
government should scrap its first but failed attempt to respond to the Henry
Tax Review and start again.
Recommendation 6
4.113 The committee again recommends that because the
government's proposed MRRT and expanded PRRT would impose more economic
distortions than existing royalty regimes, the Parliament not support any plans
by government to pass legislation to give effect to these proposed new taxes.
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