Mining Super Tax

[Frank&Earnest]

Yes Damian, Ken Henry might have been flippantly arrogant (I can't cast the first stone ) but you can't say he was wrong. On what do you base your assessment?

m2c1, I do not think anybody is denying that, the point is what level of taxation gets more eggs without killing the goose. The argument that other countries would tax less is rather spurious IMO: would you like to live in a South American country where miners are taxed less because the local potentates get huge kickbacks and the populace goes hungry?

To lighten the matter, do you remember the joke about the pub dare where big blokes were trying to squeeze the most out of a lemon? A bespectacled weakling got the most out and revealed being a tax auditor. Then an even smaller man came forward, took the sqeezed lemon and wringed a last drop out of it. Gasps of astonishment. "And what are you?" "A divorce lawyer'.

[m2c1Iw]

m2c1, I do not think anybody is denying that, the point is what level of taxation gets more eggs without killing the goose. The argument that other countries would tax less is rather spurious IMO: would you like to live in a South American country where miners are taxed less because the local potentates get huge kickbacks and the populace goes hungry?

Well a Canadian pollie (OK conservative )was quick to announce that they would "cash in Australia's blunder".

What level of taxation? Well Ken Henry says the rate matters little (he can't be serious) according to this column by Terry McCrann and no I would not like to live in South America and I don't see the relevance unless adding weight to the argument that investment will go overseas (kickbacks cheaper than Super Profits Tax).

Mr. Rudd is quoted as saying this tax is to enable the government to reduce company tax (sometime in the future maybe) and assist small business (under $2m turnover, that is small) offsetting the increase in the super guarantee payments made for their employees. All very noble and vote winning.

IMO it was hastily plucked out of the Henry review to plug a hole in a very leaky budget.

[Sebastiaan56]

As a side note what happened to the 5.5billion from the bank deposit guarantee fees? see this article

A terrific question, BTW has anyone actually every seen a balance sheet or consolidated P&L for the Fed's? Should be published every year for all Govt's I reckon. It took me about 20 mins of work to get and digest the BHP document the other day. Why cant we do the same for the Govt's?

[artme]

As a side note what happened to the 5.5billion from the bank deposit guarantee fees? see this article

Went into a black hole????

Funded some of Seb's cynical conclusions.???

Helped to repay the advertising bill supporting the RRT???

[johnc]

Thus the commodity achieves a smaller return for the investor, exactly the point the miners are making and it follows the capital will be moved elsewhere.

Correct me if I'm wrong but I don't believe Australia has the only deposits of the many mineral/elements we mine.

As a side note what happened to the 5.5billion from the bank deposit guarantee fees? see this article

Both south and north America, Africa, eastern Europe and Asia, particularly around Mongolia have large mineral reserves. We are well placed because we have good infrastructure, stable government, no civilan unrest and developed mines. This is what sovereign risk is about, miners just don't go to countries that have a habit of nationalisation of mines or for that matter restrospective taxation habits. They want some certainty that Government has the integrity to stick to the rules and not shift the goal posts to far. The complaints aren't really about paying a price for the minerals as they already pay royalties, or even about more of a tax take. The complaint is that mines have been developed on the expectation that in this country we do not tax retrospectively and that not only is this tax retrospective as it taxes existing mines, but also the facts the government has used to support its argument are false, it has not consulted and the details it has released are very incomplete.

The miners want to talk with the government and be heard, its about consultation, its about policy made on real facts in which everything is considered and a balanced judgement made. This mining tax clearly has been hastily put together, and both Rudd and Swan are not interested in listening to anything but the sound of there own voices, and that is not the way we expect politicians to act in this country.

When Fraser brought in the high petroleum taxes it only applied to new fields not existing ones. There was a recognition that to do so was not in the countries interests if it wanted continued exploration. This view is lacking in the current debate, as is any attempt by either Rudd or Swan to actually listen to grievences about this tax, high handed behaviour only gets peoples backs up as does the use of false data and lies even if the lies are simply because you don't know what you are talking about.

I actually think an approach more like the Hawke years would actually see the country picking up a greater share of mining revenue than it is, without the vitriol. I expect our leaders to conduct themselves in a more contrite manner and not use spurious figures or purile sound bites in matters of national importance, this isn't a minor issue it could have a major impact on the country if we get it wrong. It has the potential to kill the one industry that has actually brought our balance of trade back into the black for the first time in a couple of decades and it's importance should not be under estimated nor the need to do more to correct our trade balance problems.

[m2c1Iw]

Eloquent indeed JohnC your observations are spot on.

[Frank&Earnest]

I agree with the logic, but not with the interpretation of retrospective. As I understand it, based on what Cultana said because I have not looked into it, and based on your description, the tax affects future income, not past means of production. Think about a change in the rate your personal income is taxed at: you might want to change the way you invest your money in the future, but you would not call it restrospective because it changes the profitability of your current investments.

[Big Shed]

Found this article relevant and interesting

Shallow discourse

[artme]

JohnC.


Just another little bit, perhaps not a big issue, but the miners are allowed to tap their water requirements at no cost. Others have to pay a licence fee.

[johnc]

I agree with the logic, but not with the interpretation of retrospective. As I understand it, based on what Cultana said because I have not looked into it, and based on your description, the tax affects future income, not past means of production. Think about a change in the rate your personal income is taxed at: you might want to change the way you invest your money in the future, but you would not call it restrospective because it changes the profitability of your current investments.

When a company looks at developing a mine it takes into account the development and exploration/proving costs of getting to the point of production. It calculates the amount of resource available estimated margins and the amount of production required to break even. Part of that analysis will include royalty and income taxes and their impact on cash flow. By greatly increasing the amount of tax to be paid on existing mines you extend out the time taken to recover cost and produce an acceptable rate of return. In some cases this will mean if companies had known what the tax was going to increase to the mine may well of been deemed uneconomic and never commenced. There may be some mines now that will not have sufficient recoverable reserves to make a profit. Don't forget current mineral prices will not stay at these levels, they will at some point turn down that is the nature of commodities.

This is retrospective taxation, because of the nature of mining and the fact that mines only have so much ore, its not like manufacturing where decisions are made on the life of machines and market factors including cost of materials. Mining is based on the life of the mine plus rehabilitation costs at the end, life of machinery and market instead of primary are almost secondary in the decision. This was acknowledged in Frasers time, but it is something that is being conveniently overlooked with this tax.

[artme]

An interesting read Fred and it goes part way to explaining some of my reluctance to go in to bat for the miners.

I remember John Elliot lobbing a similar threat some years ago. He said he was willing to take operations off shore where he would get a better deal. Should have locked him up and thrown the key away.

We should not bow to such pressure from any group!

It was interesting to hear what Clive Palmer had to say on a promo for Four Corners about this whole episode not being democratic. I must make sure to watch Four Corners.

I think one of the problems we have with governments of both persuasions in this country is the number of "gotchas' they land on us. While some things have to be done on the run - or as circumstances dictate - Major decisions like this are likely to lead to the sort of angst we are seeing now if the processes are not thought through properly and we have no prior warning of them.

This sort of decision making is unsound, unhelpful, divisive and even carries an element of danger.

Let's see some more intelligent articles and some better informed and reasoned debate than we are getting from most sources at the moment.

[m2c1Iw]

OK different tack the government needs $9bill PA to balance the books.

Commentators and academics alike are hand wringing about the need for government to be able to implement policy without influence/interference (I thought that was freedom of speech oh well)

So why did the gov ignore the Henry recommendations on negative gearing and capital gains tax. If both NG and CGT concessions were abolished the $9bill would be more than covered and I think the pain would be evenly spread across middle and upper income earners in Australia. Maybe your average working family with an investment property Mr Rudd drones on about would be none to pleased. Rather touch up those miners and their overseas investors after all the working families are bound to support higher super in the run up to the election and what working family would argue against getting a bigger share of the resource wealth.

The proposition that parties with self interest should not be allowed to voice their displeasure and influence government policy is bunk especially in the light of the monotonous populist policy both sides are dishing up lately.

Our democratic process certainly does dampen reform, look how long it took to get the GST up. I happen to think that is a good thing as it protects us from lunatic policy.

[Frank&Earnest]

When a company looks at developing a mine it takes into account the development and exploration/proving costs of getting to the point of production. It calculates the amount of resource available estimated margins and the amount of production required to break even. Part of that analysis will include royalty and income taxes and their impact on cash flow. By greatly increasing the amount of tax to be paid on existing mines you extend out the time taken to recover cost and produce an acceptable rate of return. In some cases this will mean if companies had known what the tax was going to increase to the mine may well of been deemed uneconomic and never commenced. There may be some mines now that will not have sufficient recoverable reserves to make a profit.

OK

Don't forget current mineral prices will not stay at these levels, they will at some point turn down that is the nature of commodities.

? they could also turn up, why not? Irrelevant for this discussion.

This is retrospective taxation, because of the nature of mining and the fact that mines only have so much ore, its not like manufacturing where decisions are made on the life of machines and market factors including cost of materials. Mining is based on the life of the mine plus rehabilitation costs at the end, life of machinery and market instead of primary are almost secondary in the decision. This was acknowledged in Frasers time, but it is something that is being conveniently overlooked with this tax.

And how is this different from changing the amortisation rate allowed for an asset?

[johnc]

And how is this different from changing the amortisation rate allowed for an asset?

It has nothing to do with it, amortisation is simply the rate you write your establishment and asset costs over time for book and tax purposes. It has nothing to do with return on investment which is a cash based calculation as opposed to a mere book entry. When assessing viability you eliminate amortisation from any calculations.

You also miss the point on a turn down in commodity prices. If they turn down enough we may well end up subsidising the mining industry out of our hard gouged tax dollars, something that doesn't appeal to me. Don't forget the Government is porposing cash rebates for certain mining expenditure.

[Frank&Earnest]

It has nothing to do with it, amortisation is simply the rate you write your establishment and asset costs over time for book and tax purposes. It has nothing to do with return on investment which is a cash based calculation as opposed to a mere book entry. When assessing viability you eliminate amortisation from any calculations.

OK, one liners are not enough. It seemed simple enough to me, the point was not what one or the other is, it was an example of something that works the same way and can not be deemed "retrospective". As for your understanding of financial analysis, it would be too long to discuss here, you might wish to refresh your knowledge. Simple ROI is a very crude measure, all the companies we are talking about would certainly consider compound interest variables in their analysis.

You also miss the point on a turn down in commodity prices. If they turn down enough we may well end up subsidising the mining industry out of our hard gouged tax dollars, something that doesn't appeal to me. Don't forget the Government is porposing cash rebates for certain mining expenditure.

Which should then be considered a reduction of risk to be valued positively in assessing viability. That's their purpose.