Not since former Prime Minister John Howard announced his intention to introduce the GST over a decade ago has a new tax so divided public opinion. The Resources Super Profits Tax (or RSPT) is contentious for a number of reasons which will be explained in a moment. Its very contentiousness is also the reason I think the tax’s final form will be different from that originally envisaged.

So why have the likes of Andrew ‘Twiggy’ Forest (CEO of Fortescue Metals), Herb Elliott (the same company’s chairman), Clive Palmer (owner of private resource company Mineralogy) and Gina Rinehart (inheritor of Lang Hancock’s iron fortune) taken to calling both the current Labor Government socialist and/or communist (strong terms in democratic Australia!)
in reference to the RSPT? The reasons lie in tax’s several major flaws.

First, the government has chosen to define a ‘super’ profit as one where the annual rate of return on a project’s cost exceeds the commonwealth bond rate – currently around 6%. As any entrepreneur or businessperson will tell you, the risks of starting up any new venture mean its backers would hope to earn considerably more than this measly return. Adding weight to the argument that the government bond rate hurdle is far too low is the benchmark used by the petroleum resource tax imposed in the 1980s, ie the same bond rate plus a margin of 5%. What’s good enough for the oil industry should be good enough for the extractors of other resources too.

Second, another peculiar feature of the RSPT is that the government is proposing to fund 40% of the development costs for startup projects in return for taking 40% of the eventual profits. This sounds fine when there is a mining boom on and many such projects are wildly profitable. But what happens when, as is the case with all booms, this one eventually busts and losses (as we saw during the recession prone 1990s) become commonplace? Rather than the RSPT adding to the nation’s revenue base, there is the distinct possibility that future governments could be forced to write out large cheques to bail out failed projects. Again, the petroleum tax provides a solution in that only genuine ‘super’ profits are taxed and no losses subsidised at all.

Third, the government has argued that a profits based tax is a fairer alternative to state based royalties, as the latter are based solely on production levels and not on companies’ ability to pay. This is an argument with which I have some sympathy, yet the federal government already has just such a profits based tax in place – it’s called company tax! A far simpler option to introducing the new RSPT would’ve been simply to increase the rate of normal corporate tax on all mining companies.

The final really contentious aspect of the RSPT is the assertion by both the Treasurer and Treasury Secretary Ken Henry that investment in the mining industry will not be affected by the proposed changes. This is arrant nonsense, as Australia is not the only place on earth where minerals exist, and large multi-national companies can shift their investment capital to alternative locations if the Australian government tries to take too big a slice of the pie.

What is curious about the inflammatory debate over the RSPT is that most senior members of the mining community accept that their industry probably should make a greater contribution to Australia’s tax revenues. Unfortunately, however, they were not consulted on the structure of the RSPT ahead of time, and as a result see it as a fatally flawed tax which must be bitterly opposed. If the government is prepared to meet the industry half way, then both sides can claim a win (which always the best outcome in any business deal) from this ill conceived policy.

Tom Elliott – MME Capital 03 9601 4515
www.mmecapital.com.au