This week we summarise the main points of the Resources Super Profits Tax RSPT and look at the arguments for and against. There is a lot of confusion and emotion surrounding the RSPT and its impact on the resources sector and the Australian economy. The main confusion seems to surround royalties and company tax. Furthermore the mining companies are staging a major campaign to have the proposal cancelled or watered down claiming major projects will be shelved and investment moved offshore.  

Key Points: -

•  The proposed tax would start in 2012.
• 40% tax on mining "super" profits. Defined as profits above long term bond rate (close to 6%)
• Resources companies will still pay mining royalties to state governments but these become a refundable credit against the super tax. This cuts out the need for the government to reimburse the states for lost royalties.
• Company tax still applies. The RSPT is deductible for company tax calculation.
• The government applies assistance to start-up projects in exploration and construction phase, by providing deductability of exploration and development costs against current RSPT liabilities. The allowable deductions can be transferred to another project or carried forward.
• The stage of production at which the tax is applied is still subject to debate (consultation). This is a complex area, however generally it is applied when the commodity becomes a saleable product. For oil this may be at the wellhead. For LNG a formula applies. For Alumina it may be raw bauxite and for iron ore it may be at the port.
• Existing projects are subject to the tax, and will be given a starting base (a capital account) for RSPT to recognise past investments in a project.
• Projects subject to RPPT (i.e. the petroleum sector) will be given the option to migrate to RSPT to gain the same advantages of cost deductions in the startup phase.
• Complementing the RSPT is a general reduction in company tax.  2010-2012=30%, 2013=29% 2014=28%

For further details the government has published the following: -

http://www.futuretax.gov.au/documents/attachments/10_Fact_sheet_Resource_Profit_Tax_Final.pdf
and http://www.futuretax.gov.au/pages/FAQs.aspx

The following chart shows Treasury estimates on tax paid for various resources projects showing the effective tax rate under a range of earning scenarios.

 

Rates of return	Effective tax rate under royalties plus 30% company tax	Effective tax rate under RSPT plus 28% company tax
6%	45%	28%
10%	41%	40%
15%	39%	45%
20%	38%	48%
25%	37%	50%
50%	36%	53%

 Now for the arguments for and against.: -

Arguments For	Arguments Against
Resources belong to all Australians not just the mining companies. The community should share the windfall earnings.	Existing investments were made in good faith that the government would not change the rules of the game. This lessens Australia's image as a quality destination for investment.
Burden of RSPT tax falls more on those who can afford it i.e. multinational companies making large profits, and least on those who can not i.e. small start-ups and ordinary Australians.	The global recovery is still too fragile to risk the curtailing of essential Australian investments, with a falling A$, the Greek and Euro crisis and a potential slowdown in China
Super profits have been made as the result of commodity price booms. Even at 40% tax on super profit, the level of profit earned will still be enough to attract investment.	Will deter investment. Mining investment is expensive and risky, being prone to cost overruns. A high level of reward is necessary to offset the risk. Several projects no longer make financial sense as a result of the tax, (The Fortescue Argument).
Current system of royalties is unresponsive to high levels of profit and gives insufficient return to the community. See Treasury chart above. E.g. miner making 6% return pays 45.4% tax and royalties, versus miner making 50% return paying 35.5% tax.	The RSPT at 40% of profits is too high. When combined with company tax the effective top tax on resources becomes 53.3% (see chart above)   The definition of super profits at anything above the long term bond rate (around 6%) is too low.
Miners are not taxed enough compared with other sectors. Miners are big users of accelerated depreciation that effectively reduces company tax from 30% to 17% (Markel and Shackleford Study)	Miners are taxed enough being big contributors to state revenue through the existing royalty regime.
Resources booms negatively impact other sectors of the Australian economy, creating a 2 speed economy. High exchange rates, inflated costs, shortages of skills make it harder for tradeables sector i.e education services, tourism, manufacturing, - and fuels asset bubbles.   Easing company taxes restores the balance and stimulates non resources sectors. (Henry Review wanted company tax to fall to 25%). This will add to GDP.	Resources booms create jobs in mining, construction, and ancillary industries, and higher levels of investment and wages further stimulate consumption and jobs. Generally all parts of the economy benefit even if some benefit more so than others. 2 speed economy = fast and very fast.
Current system of royalties deters some mine developments and causes premature closure of others. Rebates of royalties and deductability of costs of development under an RSPT regime would make some projects feasible.	RSPT appears to favour inefficient marginal projects that would not normally proceed, yet punishes highly efficient capital intensive projects. (BHP argument).     Furthermore, smaller miners appear to be generally against the proposal. In particular they question whether having the government underwriting 40% of the costs will make the projects any more attractive to potential financiers.

By Gary Emmett