Swan and Rudd must clear up the resources super profits tax chaos: Kohler

The damage caused by the announcement of the resource super profits tax is a tragedy born of misunderstanding; the sort you get when gangs of armed robbers bump into each other in the dark during a heist.

That there is now a bloody shoot-out is entirely the fault of Kevin Rudd and Wayne Swan. They chose not to discuss the idea with the industry first and instead blundered into something they appear not to have understood.

There are two sources of the division between the government and the global mining industry in my view:

  • The RSPT is justified by the government as a royalty – a payment for exploitation of community resources – yet it quacks like a tax and swims like a tax. It’s called a tax. It IS a tax. This might seem like a fine distinction, but it’s a fundamental point.
  • The fairness of the RSPT depends entirely on the idea that there will be a refund from the government in future if a project loses money. But the value of that depends on trust in the government, which has been destroyed by the way the tax was announced with no consultation. So when Treasury Secretary Ken Henry says, as he did last week, that “the tax credit is certain”, the industry replies: “Yeah right.”

The distinction between a royalty and a tax is simple and well understood, but it has been catastrophically disregarded by the government in presenting the RSPT.

A tax is a compulsory levy designed to support government, for which you get nothing in return except the right to political representation and the right to operate as a business. A royalty is a specific payment for the right to mine minerals that are owned by the citizens of a country, and sell them for profit. It’s like a manufacturer’s input cost, and on that basis no one argues with it.

Australia’s minerals are owned by the states. The royalty regime is a delicate web of about 50 different ad valorem (based on value) charges covering a variety of minerals and states. It’s arguably a mess, but everyone is used to it and accepts it.

They even accept the fact that it’s ad valorem, which means it comes off the top line and makes marginal mines more marginal. After all, if you’re paying the community for an input, the amount paid should not depend on the profit you can make from it – a tonne of iron is a tonne of iron. In any case there are adjustments in the existing regime via different percentages of value for different minerals, and sometimes whether it is underground or open cut mining.

The federal government has now blown up this delicate, accepted, structure. In pushing the RSPT, and now spending our money advertising it as if it’s a royalty, the Rudd government is merging two quite separate ideas: putting the RSPT forward as a fair return to the community for the exploitation of its mineral resources, when it is nothing more than a new project-based income tax that includes an Allowance for Corporate Capital (ACC).

In doing so, the government has disrupted the tacit agreement between the providers and managers of capital and the government that miners should pay for the right to extract minerals, on top of the normal income tax.

Now mining companies are simply adding all their taxes together and crying foul, and they are not subtracting the refund for losses that is fundamental to the RSPT, and is what gives this tax the character of a royalty.

In his speech last week, Ken Henry said his tax review panel had decided not to recommend a “Brown tax”, which allows investment to be immediately expensed, and had instead gone for an ACC regime, which puts off the deduction until later. He said: “I will not go into the reasons for this today”.

So naturally we all assume it has to do with bringing forward revenue to the early years so the budget could be got back into surplus more quickly.

Ken Henry argues that the reason the risk free rate, or government bond rate, is the appropriate allowance for this is that: “The government is effectively giving the investor a second asset, a guaranteed tax credit that will be paid, with certainty, at some future date.”

He went on: “The investor therefore holds two assets:

  • a 60% share in a risky resource project; and
  • a risk-free asset in the form of a tax credit, with a government guaranteed present value of 40% of the initial investment.”

Except that investors do not believe in the certainty of the second asset. Whether they would have believed in it had the government properly consulted on the RSPT, and not destroyed their trust by simply announcing it and then using taxpayers money to campaign against them, is moot. But they certainly don’t trust it now.

To restore Australia’s sovereign risk profile the government must do two things: re-establish the distinction between taxes and royalties, and either revert to a Brown tax that provides for immediate investment deductions, or allow a higher risk premium in the ACC because no one now believes the future tax credit is “risk free”.

The way to do the first of those is admit that the RSPT is a tax surcharge for mining companies, because they are making lots of loot and the government wants to relieve them of some of it – that is, to renegotiate the division of the spoils after the robbery.

“Sorry boys,” says the robber holding the gun in the front seat of the getaway car, turning to the bandits in the back, “the rules have changed.”

Having done that, the government must adjust the capital allowance rate to take account of the extra difficulty in getting safecrackers and other accomplices in future, since the risks of joining heists with this gang have gone up.

This article first appeared on Business Spectator.

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