Mining Tax Grab - How will it pan out?

[todster]

Should pan out alright for Tony Sage and his team as there not actually making a profit,but still heading to Africa because of the tax,well on Monday they were anyway

 

[It's Snake Pliskin]

In taking a pragmatic view, it's logical to expect some social and economic reform sway a bit the opposite way with Labor in after a long stint of Libs.

While trying not to get ones b@lls in a knot over what I can't change, the next best thing is to estimate the most likely development re change and position myself better for what eventually transpires.

In our acceptance of the TAX grab and destruction it causes what do we expect is next? Books? Internet providers? Fast food? Stopping this rot is in the nation's best interest.

 

[Whiskers]

In our acceptance of the TAX grab and destruction it causes what do we expect is next? Books? Internet providers? Fast food? Stopping this rot is in the nation's best interest.

Not accepting the tax grab will eventuate to anything like the current fear.

Simple reason is Labour doesn't controll the Senate and almost certainly won't after the election, even assuming they win the House of Reps. So they will have to substantially water down any Tax Reform to get it past the Senate by winning over some of the minor parties.

They may be able to negotiate something re a national standard for mining royalties with the states at next COAG, but that's a big maybe too.

At the end of the day, I think Rudd is hanging it out there early in the campaign to gauge feelings before coming up with too much detail. It all could still go the way of the ETS for example.

 

[It's Snake Pliskin]

Not accepting the tax grab will eventuate to anything like the current fear.

Simple reason is Labour doesn't controll the Senate and almost certainly won't after the election, even assuming they win the House of Reps. So they will have to substantially water down any Tax Reform to get it past the Senate by winning over some of the minor parties.

They may be able to negotiate something re a national standard for mining royalties with the states at next COAG, but that's a big maybe too.

At the end of the day, I think Rudd is hanging it out there early in the campaign to gauge feelings before coming up with too much detail. It all could still go the way of the ETS for example.

Point taken, but we shouldn't have the line of thought that gets the senate to vote on ridiculous policies such as TAX GRABS.

 

[So_Cynical]

Not accepting the tax grab will eventuate to anything like the current fear.

Simple reason is Labour doesn't control the Senate and almost certainly won't after the election, even assuming they win the House of Reps. So they will have to substantially water down any Tax Reform to get it past the Senate by winning over some of the minor parties.

Greens are on target to control the senate after the election as they should end up with at least 6 seats and the Coalition should loose 2 or 3 to Labor.

 

[Julia]

Not accepting the tax grab will eventuate to anything like the current fear.

Whiskers, this sentence just doesn't make sense to me. Can you express whatever you were trying to say more clearly?

Snake, I agree with your sentiments. Australian voters are way too passive and allow politicians to get away with far too much.

 

[Whiskers]

Whiskers, this sentence just doesn't make sense to me. Can you express whatever you were trying to say more clearly?

I don't believe the proposed new tax will eventuate to anything like the amount or impact that is currently feared... mainly because Labor doesn't control the senate and will have to almost certainly negotiate it down or see it shelved like the ETS.

I'm also curious about the real net cost impact, ie after the increased exploration and development deductions/rebates, whether it's really as bad as some in the mining industry like Palmer are portraying.

It would certainly cause delays from a project planning and budgeting perspective, cos it will certainly mean a substantial recalculation to easertain revised cash flows, profitability, tax deductions/rebates and liabilities, but not necessairly cancellation.

I'm also real curious about that so called misleading historic tax/royalty to profit ratio that Rudd/Swan quoted and what the non-misleading number is.

Maybe the opposition will produce something when parliament sits next.

I hope so, cos that ratio will be a compelling arguement for many, that Labor will exploit in the election, especially unless it is soundly refuted economically before then.

 

[drsmith]

Some interesting commentary in the AFR on this today.

The Petroleum Resource Rent Tax (PRRT) while levied at 40% does not kick in until 5% above the 10 year bond rate. Henry thought this was too generous and so proposed no premium to the 10 year bond rate on the RRT. There was also mention of a compromise at the 10yr commercial rate (~8%).

I would have thought that in all fairness, both should be the same and that's what the government (and Henry) should have be aiming for as a tax reform objective.

 

[Julia]

Some interesting commentary in the AFR on this today.

The Petroleum Resource Rent Tax (PRRT) while levied at 40% does not kick in until 5% above the 10 year bond rate. Henry thought this was too generous and so proposed no premium to the 10 year bond rate on the RRT. There was also mention of a compromise at the 10yr commercial rate (~8%).

I would have thought that in all fairness, both should be the same and that's what the government (and Henry) should have be aiming for as a tax reform objective.

This might be what Rudd is holding back for the negotiation process.
Remember with the COAG Health proposition, at first he presented what was supposed to be the finished offer. Then out came another billion when the States demurred, then more argument, so out came a bit more etc etc.

No reason to think the mining supertax will be any different, and he'll find the miners a lot more troublesome to deal with than the pansy State leaders who all caved in with minimal resistance.

He's going to be walking a very fine line between getting some sort of deal done with the industry and being seen to be yet again backing down.
Should be fun to watch.

 

[medicowallet]

No reason to think the mining supertax will be any different, and he'll find the miners a lot more troublesome to deal with than the pansy State leaders who all caved in with minimal resistance.

Exactly, the premiers needed the money for votes. Gutless wonders who need money handouts to buy votes for the next election. Exactly as Kevin Rudd finds $5 billion here, $8 billion there to fund popular vote buying politically driven "reforms"

The mining industry is liable to "spend" their efforts in taking Kevin Rudd down. There is no knowing what is happening behind closed doors.

 

[pixel]

This might be what Rudd is holding back for the negotiation process.
Remember with the COAG Health proposition, at first he presented what was supposed to be the finished offer. Then out came another billion when the States demurred, then more argument, so out came a bit more etc etc.

No reason to think the mining supertax will be any different, and he'll find the miners a lot more troublesome to deal with than the pansy State leaders who all caved in with minimal resistance.

He's going to be walking a very fine line between getting some sort of deal done with the industry and being seen to be yet again backing down.
Should be fun to watch.

Good point, Julia;

...and by the time he plans to put it to a vote, he may have to try from the Opposition Benches.

On a lighter note, my alter ego penned a little fairy tale (or "ancient fable") a couple of nights ago, blogged on my website under the title: "The Prime Minister And The Guru"

 

[todster]

Exactly, the premiers needed the money for votes. Gutless wonders who need money handouts to buy votes for the next election. Exactly as Kevin Rudd finds $5 billion here, $8 billion there to fund popular vote buying politically driven "reforms"

The mining industry is liable to "spend" their efforts in taking Kevin Rudd down. There is no knowing what is happening behind closed doors.

LOL John Howard had a very large pork barrel rolling around before the last federal election

 

[drsmith]

http://www.theaustralian.com.au/bus...uper-profits-tax/story-e6frg8zx-1225863823631

The miners obviously have their own barrow to push but it's still an interesting read. No one takes kindly to nasty suprises if that is indeed what happened as described in that article

I suspect the rate of return at which the proposed RRT kicks in will be compromised before the 40% tax rate as it's not as obvious to the public.

 

[drsmith]

LOL John Howard had a very large pork barrel rolling around before the last federal election

The Howard Government at least managed to avoid rolling the pork barrel into the fire.

 

[drsmith]

Interesting interview on ABC's Inside Business program this morning with BHP's Marcus Kloppers.

He seemed more interested in different RRT rates depending on commodity than he did changing the return at which it kicks in. What would be his basis for this ?

He was also highly critical that the RRT would be levied on existing projects as the original investment decisions were based on the existing tax regime. When the PRRT was first introduced, did it only apply to now projects ?

In all, one is left with the impression that the government did not engage sufficiently with the minimg industry prior to it's announcement last Sunday and inparticular, did not consider "transitional arrangements" as suggested by Henry.

 

[Julia]

On a lighter note, my alter ego penned a little fairy tale (or "ancient fable") a couple of nights ago, blogged on my website under the title: "The Prime Minister And The Guru"

Pixel, that's just gorgeous. If you wrote it yourself, congratulations.

Interesting interview on ABC's Inside Business program this morning with BHP's Marcus Kloppers.

He seemed more interested in different RRT rates depending on commodity than he did changing the return at which it kicks in. What would be his basis for this ?

He was also highly critical that the RRT would be levied on existing projects as the original investment decisions were based on the existing tax regime.

That seems a perfectly valid objection.

In all, one is left with the impression that the government did not engage sufficiently with the minimg industry prior to it's announcement last Sunday and inparticular, did not consider "transitional arrangements" as suggested by Henry.

But he did indicate that there had been 'general discussions' with the government for some time. That's in contrast to someone from one of the other miners (sorry, forget who it was) saying there had been no consultation at all.
I thought Mr Kloppers was very mild mannered in this interview. He gave the impression of being a pretty reasonable person, willing to negotiate.

 

[Julia]

Comment from Ian Huntley:

News
Why we all lose on mining Super Tax
Ian Huntley | 07 May 2010

Page 1 of 1

In just one year, Prime Minister Kevin Rudd has knocked at least $30 billion off the value of three major stocks – BHP Billiton (BHP), RIO Tinto (RIO), and Telstra (TLS), three of the most widely owned stocks by Australians individually and through their superannuation funds.

A prime minister claiming to act on behalf of working families is severely damaging their compulsory superannuation portfolios. And more, he is damaging the major competitive advantages of what previously was regarded a financially responsible nation.

On our calculations – see The Six Wives of Henry Special Report in this issue – the proposed Resource Super Profits Tax would cut BHP's fiscal 2009 dividend by 20 to 25 per cent based on Australian earnings -- 15 per cent allowing for lower taxed offshore earnings. The massive additional tax slashes profit, but DOES NOT generate offsetting franking credits, instead being treated as "rent." The diminished dividend would otherwise – if it was simply a corporate tax hike – be 100 per cent franked at a 57 per cent tax rate. So shareholders are doubly taxed. Ditto for RIO and the rest of the resource operators. This all about the State getting more, and spending it for you! More batts! More bureaucracy. But there is a lot to happen yet before this tax matter is settled.

I believe Rudd can be accused of major incompetence in (A) his managing of a major taxation issue (B) damaging respect for Australia's sovereign integrity towards foreign investment and (C) proposing an unconscionable tax that breaks intimations that (1) franking levels would be upheld and (2) that corporate tax would be reduced.

He dresses it up with continuing inane spin to the annoyance of not only myself but also my lefty friends, though for different reasons. The unctuous spin and what he actually does are a zillion miles apart. In this case, he states he believes the government bond rate is a reasonable return on private capital – and it is a taped comment, no journo misquoted him. That is amazingly naïve. He quips that our major shares have been going up and down for months, implying: So what's the fuss! A conservative hurdle rate for investment in resources is at least 15 per cent, appropriate given the massive risks and up front investment entailed.

In words I have not heard from a senior politician in 40 years, he very deliberately spells out that "foreign" shareholders are getting the "super" profits. Rudd said: "And remember these companies – BHP and RIO – BHP is 40 per cent foreign owned, RIO is more than 70 per cent foreign owned, that means these massively increased profits, the $80 billion I referred to before, built on Australian resources, are mostly, in fact, going overseas." That takes me back to Gough Whitlam and Rex Connor.

No they're not mostly going overseas! Dividends are a very small slice of the pie. Most profit is re-invested generating well-paid Australian jobs.

And this from a prime minister who recently had to guarantee Australian bank deposits to ensure we had continued access to offshore wholesale money that forms at least 40 per cent of our bank funding. Australia cannot develop its vast resources without access to foreign capital, with RIO one of the major, best and early investors. It also appears he was not able to correctly add up the amount BHP et al pay in tax. He missed the point that Chinalco, a major Chinese group, owns around 10 per cent of RIO and is working with it to develop offshore mining deposits which, at one stroke, Mr Rudd renders that much more attractive. As our major trading partners, Japan and China both invest in and consume our resources, providing finance and equity and we need it.

Resources investment heads overseas

Canada's Finance Minister Jim Flaherty commented: "Australia's proposed new mining tax could prove advantageous for Canada by attracting investors seeking lower tax jurisdictions. If it is what it appears to be, a significant tax increase, that's another competitive advantage for Canada. We're reducing our corporate taxes."

RIO has swiftly proved Mr Flaherty correct, announcing overnight a US$400 million ($846 million) expansion of its joint venture iron ore mine in Canada.

Just to go through my points:

(A) The actual statement says consultation will follow, but Mr Rudd presents the RSPT as a fait accompli with that extraordinary spin. He and Treasury – if Treasury had anything to do with it – showed supreme arrogance and stupidity in not undertaking prior consultation. He's caused massive losses on the sharemarket at the very least due to the "all-guns-blazing" delivery. He might simply have said the proposed new tax was subject to adequate consultation, as it may prove to be.

(B) Australia is in the throes of a major long-term resource investment boom where foreign money is critical. There are number of multi-billion dollar projects and takeovers in advanced stages. Yet this "new super tax," and especially the way the prime minister has delivered it, threatens to derail progress. The nature of the tax and its delivery are more symptomatic of a third-world potentate.

(C) The miners make up a major proportion of our corporate sector, so any suggestion this government is reducing corporate tax is a joke! Note last week I said I didn't expect it. I haven't attempted the sums but I'm sure the increased potential take from the RSPT easily offsets the minor proposed cut in corporate tax. I have already outlined the implications for BHP's dividend and that simply follows as night follows day, as the increased tax slams profit and thus dividends.

Kevin Rudd in one fell swoop has created a mistrust of Australia as a trustworthy destination for foreign investment that will last for many years, until he and his party leave office.



EBIT or EBITDA?

Treasurer Wayne Swan, could not even answer the question whether the example of the proposed tax kicked off with earnings before interest (EBIT) or earnings before interest, tax, depreciation and amortisation (EBITDA) – it is actually EBIT, that is, after depreciation is taken out under rules the government is yet to formulate. As we describe inside, the simpler way of looking at the tax is to assume $100 EBIT, take out 40 per cent "rent" – leaves $60, then apply corporate tax at 28 per cent – leaves $43.20 after an approximate 57 per cent tax take.

The 40 per cent is levied on earnings BEFORE interest is taken out. The interest line is then taken out in the lesser profit after RSPT. This is a further negative, as it punishes the debt finance necessary to help fund these enterprises.

If Treasury Secretary Ken Henry agrees with this treatment of The Henry Review, I am saddened and amazed. His resignation would not surprise me though treasury secretaries are known to be well versed in putting up with their masters' follies. But with his name on the report?

 

[Whiskers]

Comment from Ian Huntley:

I'm curious about the following referred to calculation. Obviously, there would be a lead time of a year or two before any new major tax changes start... so for me to do the sums on last years operations is misleading to say the least and pretty useless, because certainly different operational and financial management decisions would apply to accomodate any future changes. It's also unclear how he has treated, if at all, any increased deductions/rebates.

He says:

the proposed Resource Super Profits Tax would cut BHP's fiscal 2009 dividend by 20 to 25 per cent based on Australian earnings -- 15 per cent allowing for lower taxed offshore earnings.​

So, is Huntley saying he calcs the dividend would be cut by 15%?

I'm wondering what the relevance of the "20 to 25 per cent based on Australian earnings" is, since BHP is a multinational company and the dividend applies regardless of where the earnings came from.

I'm just curious about his reporting, economic and financial accuracy. Is he recommending to short the big miners?

On our calculations – see The Six Wives of Henry Special Report in this issue – the proposed Resource Super Profits Tax would cut BHP's fiscal 2009 dividend by 20 to 25 per cent based on Australian earnings -- 15 per cent allowing for lower taxed offshore earnings. The massive additional tax slashes profit, but DOES NOT generate offsetting franking credits, instead being treated as "rent." The diminished dividend would otherwise – if it was simply a corporate tax hike – be 100 per cent franked at a 57 per cent tax rate. So shareholders are doubly taxed.

Julia, could you post the calculations from his 'The Six Wives of Henry Special Report', please?

No they're not mostly going overseas! Dividends are a very small slice of the pie. Most profit is re-invested generating well-paid Australian jobs.

I'm also curious about:

Most profit is re-invested generating well-paid Australian job​

...whether he is saying most of the profit is re-invested in Australian jobs, or whether most of the profit is re-invested... and the Australian jobs are well paid.

I'm not a close follower of BHP, but from a cursory look at the 2009 brief report there seems to be a lot of exploration expenditure overseas in the last nine months, but so far I haven't found the detail about where the numbers of jobs and re-investment Dollars are by country.

PS: I'm just cautious of newsletters etc ramping for a self fulfilling prophecy.

 

[todster]

So will we have a skilled labour shortage or are the miners full of hot air

 

[Julia]

Julia, could you post the calculations from his 'The Six Wives of Henry Special Report', please?

I've now deleted the email. Will try to find this for you on their website.

PS: I'm just cautious of newsletters etc ramping for a self fulfilling prophecy.

Fair enough. Mr Huntley makes no secret of his dislike of the government.
I don't know whether this is an inbuilt antipathy of long duration toward Labor, or a reaction to their profligate spending since the Rudd government came to power. (I've only been getting the newsletters for a couple of months.)

He does, however, make appropriate criticisms of Mr Abbott and the Liberal Party, so I'm reasonably inclined to view him as having some level of objectivity.