Mining associations were united in their description of the new tax as a “revenue grab” that will savage the industry, and all were quick to point out that the resource sector already pays its share of tax through company taxes and state royalty schemes.

However, the federal government claims its new 40% resource rent tax will lead to a 4.5% rise in investment in the mining sector, along with jobs and production growth.

The shift to a resource rent tax was one of the few recommendations to be accepted by the government from the Henry Tax Review, released yesterday.

In its response to the Henry review, also released yesterday, the federal government has said it will introduce a Resource Super Profits Tax (RSPT) from July 2012, slapping a 40% tax on mining profits in order to give Australian taxpayers a “more consistent share in the returns from our non-renewable resources”

The RSPT will be payable at a rate of 40% on the “realised value of resource deposits” – company profits, as measured as the difference between the revenues generated from resource extraction and associated costs, and will be a deductible expense for income tax purposes, so that after income tax, the effective rate of RSPT will be less than 40%.

The company tax rate will also be cut to 29% in 2013-14, and to 28% from the following financial year.

The government will credit firms for the tax value of their extraction and exploration costs, and will rebate existing state government royalty payments in a move to stem criticism of the new tax as a “double hit” for resource companies.

The government will use about one-third of the revenue raised from the resource super-profits tax to establish a new infrastructure fund, and says that fund will mostly benefit Western Australia and Queensland, which bear the brunt of resource-related infrastructure demands.

The government believes the move will effectively encourage greater investment in the sector, saying modelling by KPMG Econtech suggests that, under the RSPT scheme, mining investment will rise 4.5% in the long-term, jobs will grow by 7% and mining production by 5.5%, compared with what would happen if existing arrangements were retained.

According to Treasury’s response to the Henry review, taxation will even out across the sector somewhat, and the net effect of applying the RSPT and refunding royalties will be that highly profitable projects will pay additional tax, and less profitable projects will pay less tax than at present.

That said, however, the new tax will collect an extra $635 million for the federal coffers from 2012-13, rising to $2.6 billion the following year.

The government expects to pull in $3 billion from resource companies in 2012-13 and $9 billion in 2013-14.

Response

Mining giant BHP Billiton said the new tax would increase the total effective tax rate on the group’s profits earned from its Australian operations from around 43% now to about 57% from 2013.

“The stability and competitiveness of the tax system have been central to the investment in resources in Australia,” BHP chief executive officer Marius Kloppers said.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardise future investments, and will adversely impact the future wealth and standard of living of all Australians.

“The government has not defined all aspects of the design, implementation and application of the new tax, and until they are clarified we cannot be certain what the full implications for the industry will be.

“However, this significant new tax will have the effect of making investments in Australia much less attractive.”

Minerals Council of Australia chief executive Mitch Hooke described the plans for a RSPT as an “unprecedented double-tax” that will hit the industry’s workforce, as well as the millions of Australians with shares in superannuation or minerals companies, and the thousands of small businesses that service the industry.

“In the rush to extract more than the $25 billion already paid to governments in taxes and royalties, the Commonwealth appears to have inadequately accounted for the stifling effects of this new tax on the minerals industry,” he said.

Tax specialists agree, with BDO corporate tax director Russell Garvey saying the imposition of the resources rent tax could undermine the competitiveness of Australia’s mining sector in the global marketplace.

The government had attempted to create a soft landing for existing projects in the mining sector, but Garvey said the best way to manage development projects in the pre-feasibility stage would need to be reassessed.

Deloitte resource sector tax experts Gordon Thring and Darren Lee said the changes raised significant uncertainties for the resources sector, particularly on investment and transition.

“Essentially the government’s response to the Henry review has been to use the resources sector’s profits to fund changes to Australian corporate tax rate and superannuation contributions rates, with greenfield projects benefiting under the resource exploration rebate,” Thring said.

According to Lee, the resource-rich states of Western Australia, Queensland and New South Wales, the states most affected by the change in tax, may benefit from the proposed new infrastructure fund of $700 million each year from 2012-13.

“Nonetheless, the move represents significant change to cash flow and feasibility models for the energy and resources sector in future,” Lee said.

Thring and Lee said there would be some debate about whether the RSPT allowance based on the 10-year government bond “risk-free rate” was appropriate.

Lee said another contentious issue for the industry was that the RSPT was calculated without allowing for intangible capital expenditure such as mineral rights. In addition, financing costs were not deductable under the new regime, which will increase the tax cost.

With the government set to begin formal consultation with companies and industry bodies shortly, in an effort to have draft legislation ready by mid-2011, industry groups have also called on government to do a better job of consultation than it did with the former emission tax proposals.

Queensland Resources Council chief executive Michael Roche called on the federal government to consult carefully.

He said that, in the aftermath of the “lip-service” paid to industry consultation over the ill-fated Carbon Pollution Reduction Scheme, there would be deep scepticism over the federal government’s latest commitment to industry consultation.

“There’s a strong perception among QRC members that the federal government believes the resources sector has a limitless ability to pay more and more tax, particularly after it was targeted to cross-subsidise handouts under the failed CPRS,” he said.

“If the federal government is serious about consulting with industry in the long-term interests of the Queensland and Australian economies, it has to road test what is a complex set of new arrangements with resource sector people – not just through a computer model in the Treasury building in Canberra.”

Flow-though shares

Junior exploration companies won’t see a flow-through shares scheme under a federal Labor government after the Henry Tax Review slapped down the idea, saying “there are no strong grounds to believe that exploration generates unusually large positive spillovers that would justify a subsidy”.

The review said that while current taxation arrangements would create a bias against smaller explorers, a flow-through share proposal would “over-correct the bias”, and recommended against the idea.

Instead the government opted to introduce a new resource exploration cash rebate within the company income tax system to help promote exploration.

Under the resource exploration rebate, companies will receive a refundable tax offset at the company tax rate for their exploration expenditure.