It has been nearly a month since the Federal Government unveiled its proposed Resource Super Profits Tax (RSPT) on Australia's mining sector. The Government claims it will be a more efficient mechanism for collecting a share of returns for the Australian public in respect of publicly owned non renewable resources. The mining sector has swiftly responded by attempting to demystify the "true" level of tax the mining industry is presently paying and attempting to illustrate the adverse impact the tax will have on the Australian economy.
After the initial rounds of cross-fire, it seems that unless the Government loses this year's federal election, the super profits tax looks set to stay. If so, the Government and the mining industry are likely to clash on three major issues. The 40 per cent tax rate, the treatment of existing projects and the measure of "super profits" earned by the mining industry.
The Government has adopted the Henry Review's recommended 40 per cent tax rate as reflecting the appropriate level of return from the use of Australia's non-renewable resources. Company tax is still payable by miners although the RSPT is an allowable deduction for company tax calculations. State royalties will still be payable with the Federal Government granting a credit against the RSPT for these.
The 40 per cent tax rate was recommended by the Henry Review in conjunction with a reduction in the company tax rate to 25 per cent. The Government is only proposing to reduce the company tax rate to 28 per cent. Despite the mining industry's criticism that the 40 per cent tax rate is excessive, the Government has steadfastly insisted that the rate is non-negotiable and appropriate given the Government will refund 40 per cent of the costs of failed projects in "reasonable circumstances".
Many mining companies have indicated they would not have undertaken significant investments in existing projects had they known the tax would apply retrospectively. Criticism has also been directed at the methodology for valuing existing projects at the start date for the new tax being 1 July 2012. That value will be used to offset revenues from the project to determine profits. There are similar concerns about the way profits will be calculated on new projects and what expenses will be taken into account to determine profits. Although the Government has estimated the revenue it anticipates will be raised by the new tax, it has not released the detail regarding the methodology for determining profits.
Since the late 1980's Australia has had a resource rent tax applicable to petroleum products. Under the scheme, profits in excess of the risk free rate (being the long term government bond rate) plus a 5 per cent premium are generally taxed. In contrast, under the RSPT regime, only the risk free profits will escape the tax. This implies that a super profit is derived by mining companies because their return is higher than the long term government bond rate (as a proxy for the risk free rate). The mining companies argue that this represents a fundamental misunderstanding of the reason mining investment occurs. That is, high risk for high returns. Miners that are subject to the existing Petroleum Resource Rent Tax will have the option of continuing with that tax or opting into the RSPT.
In the coming months, the mining sector will try to convince the Government to compromise on these issues. The Government has recently invoked special procedures to use taxpayer funds to justify the new tax through a series of advertisements. This fluid space will be keenly monitored as the federal election approaches.
The Norton Rose Australia tax group can assist with any queries relating to the proposed Resource Super Profits Tax.
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