Politics, also known as the art of twisting public opinion, is the game being played by the government. This is hardly surprising considering the paper-thin margin by which it clings to power. That, and the fact Australia has just started its longest-ever election campaign.
Mining, unless it treads very carefully, could easily become the football in the game of politics. Whether fair or not, mining is perceived as the enemy of the left/green alliance that holds power in Canberra.
Worse still, it is the enemy that has committed the unpardonable sin of embarrassing the Australian government by being seen to have blasted huge holes in the Mineral Resources Rent Tax, forcing Treasury to manufacture a few billion dollars of extra debt to replace tax income it has already spent but will never receive.
It is no exaggeration to say that the next eight months will be the most important in the history of Australian mining. It will be a time when the MRRT, or super-tax to give it a better name, is either raised to another more damaging level, or consigned to the dust bin of history.
If The Hog was a betting man, he would opt for the dust bin result. This is simply because: the government has proved to be so astonishingly inept in designing multiple versions of its super-tax; failed to consult with anybody about how it might work; and discovered too late that its tax resembled a Swiss cheese, riddled with loopholes.
None of these points will come as a surprise to anyone who followed the super-tax debate of the past three years, or who actually understood the finer detail of how the tax was supposed to work. Right from the day it emerged as the MRRT from the wreckage of the original version, the Resources Super Profits Tax, it was doomed to fail.
One man who nailed the issue from the inception point, but who has howled down because of his decades-long reputation for self-promotion, was iron ore billionaire Andrew Forrest. He could see that the tax would fail because it favoured bigger and older miners that had huge investments which would benefit from a fresh starting date for depreciation provisions.
If any reader is feeling lost at this point here is a potted guide to what happened.
The MRRT was designed to kill a political revolt by inviting three big miners, BHP Billiton, Rio Tinto and Xstrata, to sit with government and design a tax that might work.
The miners, who actually understood how business and tax works, said they could accept a system that allowed depreciation on the current value of their assets rather than historic value, and they would be allowed to deduct royalty payments to state governments. As an example of what that means, a big miner may have a historic cost of a mine of, say $1 billion, whereas the current value is $10 billion – not as far-fetched as it sounds.
Depreciation on an asset valued at its historic cost of $1 billion at, say, a rate of 10% (and it could be more or less) would allow the miner to set aside as depreciation $100 million. Depreciation on an asset valued at its modern-day replacement cost of $10 billion asset means setting aside $1 billion – and that is effectively $1 billion off a company’s assessable income for tax purposes, which is somewhat better than $100 million.
The state royalties issue is the second big blooper caused by the government failing to even mention to the states what it was planning, hitting them with a “tax surprise” and then expecting them to go along with the game.
Slice or dice the RSPT and MRRT tax fiasco any way you like and you arrive at the conclusion that this was government at its worst, with a raffle as to what took the prize for the biggest blunder – with failure to negotiate with the miners and state governments close to the top of the list, and then failing to understand what the big miners were doing in rewriting the tax a close second.
So much for history. What now?
Will the government try to rewrite its tax laws before the September 14 election? Not likely.
Will it do so after the election (if elected)? Absolutely.
Will it raise the tax, or rope in other minerals? Quite possibly.
Will it seek to punish the mining industry (if elected) for making it look incompetent. Probably.
Tick off those points and then lash yourself to something sturdy because the mining industry is in for a wild ride. The Australian government is about to play hardball politics with the country’s most important industry.
