CHARGING FOR NON-RENEWABLE RESOURCE DEPLETIONOrSLIMMING THE GOOSE: Less

Foie Gras

but More Golden Eggs?Ben Smith

Visiting FellowCollege of Business and EconomicsAustralian National UniversityPaper prepared for the conference:

Australia’s Future Tax System:

A Post-Henry Review

Sydney, 21-23 June, 2010

- 1 -Together with its release of the report on

ustralia’s Future

Tax System

(AFTS,2009), the Commonwealth government announced the intention to introduce aResource Super Profits Tax (RSPT) applying to all mining activity, coupled with thecapped refunding to mining companies of royalties paid to state or territorygovernments. Also foreshadowed was an amendment to the company tax provisions,introducing a Resource Exploration Rebate whose effect would be to ensure that allcompanies were able to take advantage of the immediate deductibility of explorationexpenditure. The exploration rebate was not a recommendation of the AFTS Report,nor was the Report responsible for the name given to the proposed new tax.The RSPT announcement has given rise to a heated debate, if that term appropriatelydescribes a barrage of assertions and counter-assertions degenerating into a largelymisleading advertising battle. The premier of Queensland has recently appealed to

both the mining industry and the government to “put away the baseball bats”

and toengage in serious and sensible discussion. A prerequisite for that is a clearrecognition and understanding of the issues.There are, I think, four central questions:



how does the RSPT compare with other means of charging for the depletion of non-renewable resources, assuming a

“

green

fields”

situation and a singleauthority responsible for implementation;



what are the issues and effects associated with applying that mechanism toprojects that have previously been operating under a different regime;



how should the revenue flows from resource charges be treated in the context

of the government‟s

budget; and



what issues and problems result from the fact that more than one level of government asserts an interest and responsibility in this area?The last of these questions arises because, while they may loosely be described asbelonging to

“the Australian people”,

onshore mineral resources are constitutionallythe property of the states in which they are found. Mining companies access themthrough leasing agreements with state or territory agencies and the Commonwealthhas no direct power to regulate or charge for their exploitation.Part 1 of the paper focuses on the first question, and is concerned with the applicationof resource depletion charges, and the RSPT in particular,

to “new” investments in

exploration and mining, abstracting

from the question of which “government”

is theresponsible authority. It makes up over half of the paper. The other three questionsare addressed more briefly in succeeding parts.

1. CHARGING FOR NON-RENEWABLE RESOURCE DEPLETION

Production and sale of mineral commodities involves the use of three main factors of production: the capital and organisational expertise of mining companies, the labouremployed, and the non-renewable resources whose stocks are depleted by mining.The value of the last of these depends on their ultimate scarcity, on their quality (afunction both of the nature of the material produced and its extraction cost) and,because these goods are bulky and relatively expensive to transport, on their location.For the last 50 years, Australia has been able to exploit the good fortune of havingabundant, high quality stocks of a wide range of mineral commodities, most notably