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Scrutinising Australia's Mineral Resource Rent Tax

Gaurav Sharma 21/07/2010 Australia's new Prime Minister Julia Gillard reached a deal with mining companies over the country's controversial resources taxation plans in as much haste as her Labor party got rid of the unpopular Kevin Rudd. As the political dust settles, it is worth looking beyond the headlines. Soundbites coming out Canberra are a bit monosyllabic. The unmusical hymn sheet for the press could almost read: "Rudd had announced plans for a 40 per cent tax on miners' profits but a compromise agreement negotiated by his successor - the country's first female PM has now reduced the rate to 30 per cent for coal and iron ore miners." The markets clearly bought it; at least to begin with. In intraday trading on July 2 nd, when the news first emerged, mining stocks spiked in London with the share prices of Lonmin, BHP Billiton and Rio Tinto all rising about 1 per cent and Xstrata by a whopping 3 per cent. Australian media reports were awash with commentators opining that several of the mining giants who had threatened to halt or cancel projects because of Rudd's proposal, would now withdraw their threats. Over the last two weeks I have been pouring over documents and reports in the public domain as Rudd's Resource Super Profits Tax (RSPT) was transformed into Gillard's Mineral Resource Rent Tax (MRRT) ahead of the general election she has called for August


Apart from the token reduction in headline tax, closer scrutiny suggests that under the deal oil and gas operations will still pay a pre-existing 40 per cent tax rate. Furthermore, the tax will hitherto cover onshore oil and gas projects as well as the offshore operations previously subject to it. The new proposals also indicate that smaller iron ore and coal companies, with annual profits below Aus$50 million (US$41.9 million) will not be required to pay the new tax. However, the ambiguity arises when the total tax burden projection on miners is worked upon. Popular speculation suggests that MRRT reduces the total tax burden on miners from about 57 per cent under the RSPT to somewhere in the region of 42 to 43 per cent. Katrina Parkyn, tax partner at Allens Arthur Robinson in Brisbane, notes that the figure of 57 per cent is being arrived at by adding the existing Australian corporate tax rate to the

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effective additional RSPT impost of 28 per cent. After tax, the RSPT would have been deductible for income tax.

MRRT: A lot remains to be ironed out (Photo © Rio Tinto, Australia) "In reality, however, the position is more complicated than this because the tax base for corporate income tax and RSPT was different. A more meaningful comparison is between the effective additional impost under RSPT, which would have been 28 per cent on an after-tax basis, and the effective additional impose under the MRRT, which is in the order of 15.75 per cent on an after-tax basis and after allowing for the 25 per cent extraction allowance," Parkyn explains. Most tax advisers in Australia near unanimously suggest that a lot of the detail is still to be worked out. "It will impact different players in the mining industry differently and because of the interaction of the two taxes - the effective tax rate will depend on each miner," says Jock McCormack, Head of Tax at DLA Phillips Fox in Sydney. A range of further consultations and ironing out of the details is expected to follow. The policy transition group is being led by the Minister for Energy and Resources and the ex-chairman of BHP Martin Ferguson and its recommendations are not due for some time yet. Then there's the small matter of the general election and McCormack thinks it will be a long while before the wider world sees any draft legislation. "This proposed tax regime is not set in cement - all we have are a couple of press releases issued at beginning of July. We are a million miles away from a discussion paper and ultimately the legislation. That is if we ever get to that point, given the opposition even from a lot of the smaller miners and opposition politicians," he adds. Indeed, the earlier row between the Rudd government and miners played out on prime time TV and we are not just talking news bulletins and talk-shows. Both sides aired confrontational

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and somewhat controversial advertising campaigns in the domestic print and broadcast media. Companies including BHP Billiton and Rio Tinto also launched a lobbying campaign against the RSPT, warning that it could harm Australia's economic growth. Rudd's departure and Gillard's MRRT has at least put a stop to confrontations of this nature. Gillard describes her new resources tax draft as a breakthrough agreement that could "deliver a better return for the Australian people for the resources they own and which can only be dug up once". Initial signs are that the mining lobby have cut some sort of a deal with her and are perhaps in a "wait and watch" mode pending outcome of the election. Australians believe their personal prosperity is linked with the fortunes of the country's mining sector, so the wider public response will matter. Furthermore, taxpayers who may be potentially subject to the new MRRT or the extended Petroleum Resources Rent Tax (PRRT) regime will be faced with additional tax obligations, not just in terms of the levy itself, but also from a compliance perspective. Parkyn feels the RSPT raised the same issues. "A challenge for the industry as we move forward will be in working out not only the detailed design of the new MRRT but also how this will have an impact on the business at an operational level," she adds. Rhetoric aside, finding common ground holds the key to restoring international confidence in Australia; a country often called the 'quarry of the world.' Tax professionals and political commentators believe nothing is certain. The stated government policy coupled with a long drawn out legislative process and a general election thrown in the mix could see Australians ending up with something that is quite different from Gillard's MRRT - especially if there is a change of government.

This feature was first published by Infrastructure Journal on July 21, 2010. An online copy of the feature may be seen here.

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