Resource Super Profits Tax
On the surface a good idea.
The whole country should profit from our mineral deposits.
Australia is rich in mineral deposits, so why should "multinational" companies make all this profit from digging in our backyard.
However, this proposal is badly thought through.
Mining is the currently backbone of our economy.
Australia survived the GFC, not because of the $10 bn handout, but because of a $22 billion dollar surplus, lowering of interest rates and the mining industry.
Due to the continuing demand from China, the mining industry did very well, consequently Australia did very well.
There was a bit of a downturn even in the mining sector, however due to the continued increased demand for ore and coal, from China, this downturn was short-lived.
In fact, mining companies did very well, with increased turnover and increased employment.
Any investor, be that an individual or a superannuation fund, wants to see a return on their money.
If they want a safe investment they invest in government bonds and receive a relatively low, but guaranteed return.
If they want a higher return, they invest in something a bit more risky, where they can make a lot of profit, or lose it all.
Mining is one of those investments where you may “strike it rich”.
However when a new law is introduced, heavily taxing these profits, investors will take their money out and invest in something or somewhere else.
This new tax does not kill the goose that lays the golden eggs;
The geese just take their golden eggs and leave the country.
This proposed massive increase in tax will lead to a reduction in investment.
And because the tax is regressive, (it also applies to existing projects) investors don't walk, they panic towards the exits.
Share markets react, and frequently overreact, very quickly.
The biggest blunder of the tax is not the tax itself, but the way it was introduced.
The Henry Review was released on 2nd of May 2010, a very comprehensive document well over 1000 pages.
The same day the government announced the 40% tax.
The next day the Treasurer, Mr Swan, confirmed this in the budget: $12 billion additional dollars from the mining tax.
Investors did not have the time to digest the details or even read the report.
They just see "A new 40 percent tax on mining profits" and conclude:
30 % company tax + 40 % profits tax = 70 % tax --------> I'm out of here!
The immediate effect
Shareholders will sell shares and invest where the returns are higher,
and more certain. (The announcement of the tax has created a lot of uncertainty)
As a result share prices drop. (And so does the value of people’s superannuation fund)
Because many shareholders are overseas, this action will take money out of Australia and the dollar will drop. (see graph)
When that happens, everything we import will become more expensive, like oil and therefore petrol.
Update: Since the announcement of the RSPT on May 2, and the budget on the evening of the 3rd of May 2010, the dollar has dropped;
from 0.93075 to 0.81746 or 12.17%
Source OZForex - Foreign Exchange Service
The RBA could do this in two ways:
- Sell foreign currency reserves and buy back Australian dollars or
- Lift interest rates to make it more attractive for oversees investors to invest in Australia.
Update: May 21, 2010 Australian dollar jumped 2 cents from morning lows. There was talk in the market that the Reserve Bank may be intervening in the market to support the Aussie. When asked, the RBA said it does not comment on market moves. [1]
In the Medium Term:
(Days, Weeks or Months)
Mining companies will read the Henry Review, get in the Accountants, Bankers and Lawyers and re-evaluate their projects.
Existing projects are fairly safe as the tax is not due to come into effect until 2012.
In fact they might speed things up, to get as much out of the ground before the tax comes into effect.
Projects, new or expansions will be put on hold, until the uncertainty of this tax has been worked out.
[2]
[3]
[4]
[5]
Mining companies might find it difficult to raise the billions of dollars needed to start new projects.
In the meantime, a war of words will breakout, between the mining companies and the Government,
with both sides digging in.
In the longer term
On existing projects the companies want to maintain their return on investment and reduce cost;Like reducing the number of employees or if possible increase the price of their products;
Like phosphate, fertilizer for farmers, or coal and gas for electricity generation.
This in turn will lead to higher food and electricity prices.
They can’t increase the prices to, for example China, because China can buy their coal and iron ore from other countries.
On currently marginal projects, they may decide to mothball them until such time that the (next) Government will reverse this decision,
with consequences far beyond the jobs of miners.
By closing (less profitable) mines, towns and indeed whole regions have suffered.
Miners move out to look for work elsewhere, businesses supplying the mines (or miners) shutdown, house prices drop, and once thriving towns become ghost towns.
On new projects, resource companies will re-evaluate their investment decisions.
If you have to pay twice the tax compared to other countries, you will re-evaluate where you want to invest.
Every project is evaluated on risk and reward.
Very profitable projects will go ahead, even with this new tax.
But for more marginal ones, the company could decide to invest in Canada, Africa or South America where the tax would be half or even less.
That will affect not just mining but will lead to a loss of related industries and higher unemployment.
Mining giant Rio Tinto Wednesday said it was reviewing all new Australian capital projects in response to "shocking" plans for a 40 percent tax on resources "super profits".
Gas producer Santos has already decided to defer for up to six months a decision on whether to build a $15 billion LNG export terminal in Gladstone.
This could lose Queensland a billion dollars per year and the creation of 18,000 new jobs.
Treasurer Swan commented that he would like to know “why a company would be out there making comments that might hurt their share price”.
It’s very simple: Any listed company must by law inform the ASX of any information that may affect their share price.
It’s called the rule of “continuous disclosure”.
This tax has the potential to do even greater harm:
Australia is dependant on money form other countries.
This announcement is an impediment to investment and not just in the mining sector.
The government is saying: 'Come and invest in Australia'.
(And when you are profitable we will take the money from you.)
Today it’s resources. Tomorrow the banks?
The resources belong to Australia and all Australian should profit from the boom.
The problem is how this government implemented it.
If all resource taxes, and royalties, and rents, and fees were to be replaced by this one tax, that would be reform.
However, this would require negotiation with the States, and one thing this government is particularly bad at, its negotiation - with anyone.
The Problems with this tax
- It is retrospective.
It applies to new and existing projects - The tax has a very low "Profit Threshold" based on the 10 year Government bond rate.
This threshold is currently 6% and the government argues that any profit over the 6% is a "super" profit. - The tax is "at the mine gate"
With the normal company tax, (which the miner will pay on top of the super tax), tax is calculated on profit after expenses.
Expenses such as wages, insurance, maintenance, interest on the money they borrow, fuel, etc.
In the case of the super tax, the government only allows for a deduction based on the capital invested and a refund of royalties.
It does not take into account the cost of that capital, for example interest. - Contrary to popular belief, it does NOT abolish the royalties.
This tax merely allows for a refund of royalties. [6]
The administrative nightmare that is the Royalties Regime continues.
Royalties will still have to be calculated, and paid to the States, but can then be claimed as
a credit against the RSPT or refunded.
The Henry Review recommended: [8]
Recommendation 45: The current resource charging arrangements imposed on
non-renewable resources by the Australian and State governments should be replaced by a
uniform resource rent tax imposed and administered by the Australian government that:
(a) is levied at a rate of 40 per cent, with that rate adjusted to offset any future change in
the company income tax rate from 25 per cent, to achieve a combined statutory tax
rate of 55 per cent;
Note: "replaced", not "in addition to" with a subsequent "Tax Credit".
Dr Henry also suggested a company income tax rate of 25%.
- The 40% RSPT is expected to collect about $9 billion per year.
In 2008-2009 the royalties collected by the three largest states were:
QLD - $3.3 Billion, WA - 2.6 Billion and NSW - 1.4 Billion totaling about 7.3 Billion.
However, according to the KPMG report, commissioned by treasury,
"Resource royalty collections in 2008/09 were unusually high because they were boosted by record commodity prices." [7]
Even when we assume that the total royalties collected by all the states was 9 billion,
then that would mean that this tax would double the amount of tax paid by the mining industry.
(The budget allowed for 9 billion, which would be AFTER the credit for royalties.
In other words the total tax raised is 18 billion, 9 billion to the States, 9 billion to the Commonwealth)
NOTES:
The Queensland Government is relying on the development of the LNG industry to help it regain its AAA credit rating, as the industry is forecast to create 18,000 jobs and pay the government nearly $1bn each year in royalties.
But this LNG project goes far beyond “just a mining project and an export terminal”.
With the gas comes water. Some of it is salty, and water from Origin Energy's spring gully gas field near Roma is cleaned in a $20 million reverse osmosis plant.
Up to 12 million litres a day can be desalinated.
It's stored in dams, and then used to irrigate an unusual plant; Pongamia.
Pongamia is a plant which is very high in oil and has the potential to be a bio diesel crop or it could be used for animal feed.
Currently there is a commercial trial of 180,000 trees on 300 hectares.
Santos stated that if everything goes to plan, they will be planting up to 6 million trees on 900 hectares.
“It's going to be a big work force that's required to manage it.”
Local infrastructure will have to be improved, including an upgrade of the Roma airport, struggling to cope with a 270% increase in traffic since 2004.
Ray Brown, the local mayor, estimated that nearly $81 bn would be spend over the next 5 to 7 years, with 42,815 construction jobs and leaving full time employment of 9,250.
1 Aussie Dollar Climbs From 10-Month Low Amid Intervention Talk - Bloomberg - May 21, 2010, 2:35 AM EDT
2 Xstrata suspends $30 million exploration in light of the Government’s super profits tax - Xstrata News Release - May 10, 2010
3 Rio Tinto to review new Australia investment over tax - AFP Business News - May 12, 2010
4 Fortescue Metals puts $17.5bn projects on hold to review super tax - Fortescue, Notice to the ASX - May 19, 2010
5 Xstrata Suspends A$ 586 million of Expenditure - Xstrata News Release, June 3, 2010
7 CGE Analysis of Part of the Govt's AFTSR Response section 4.3 page 20
8 Australia’s future tax system - Report to the Treasurer December 2009 - Part One Overview - Section C1 — Charging for non-renewable resources - Recommendation 45