Mining Tax Grab - How will it pan out?

[Whiskers]

A friend sent me that one, too. Here's my stupidly long answer:

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Hey hey! Welcome to the output of my meal break… Food is for the weak!


I’m not saying it’ll be the death of mining, or even that "Tax is Bad" (personally, I think income tax needs to go back up a little - instead of bribing voters with money, bribe them with hospitals, I say) just that it’s a silly way to do what they say they’re trying to do. Look at it this way (3 points):

Yeah, it's all still a little murky, and looking at it all on a lineal view (assuming the miners and state gov's continue the same management decisions) that may be the case.

But, the reality is they are lateral thinkers and will change their management decision making according to new rules (dynamics) that happen from time to time. In total, I expect the big multinational conglomerates who have an enormous economies of scale will be affected most.

But I'm thinking with the added deductions/rebates smaller producers may find it easier to get into profitability faster from the effective tax take being a decending scale which favors the conglomerates, changing to an ascending scale where the tax take starts from a lower base and increases as profitability increases.

However, Mr Barnett has shot himself in the foot opposing the fed tax by now acknowledging that:

At the moment BHP and Rio pay a concessional royalty rate of 3.75 per cent on the value of their smaller-particle "fines", but Mr Barnett wants this rate raised to the industry standard of 5.625 per cent by July. More than 70 per cent of Rio and BHP's Pilbara iron ore output in Western Australia is fines, increasingly preferred on the global market.
http://www.perthnow.com.au/business...mining-royalties/story-e6frg2qu-1225865897334

All confirms my earlier point about corruption and or special favors, especially in WA and Qld, for some Miners.

Certainly not a level playing field and certinly not for smaller companies, whom I expect will be the big winners if the new tax gets through.

Depending how the it all pans out it may go some way to standardising mineral royalties across Australia.

The other aspect is that while states make special cheap deals to woo miners and subsequent development and population growth to their states, they then try to claw back those cheap deals by arguing a bigger tax take from the commonwealth at COAG for the increased population.

The states are using low royalties against each other as well as the commonwealth, trying to rort the revenue pool.

 

[SmellyTerror]

But I'm thinking with the added deductions/rebates smaller producers may find it easier to get into profitability faster from the effective tax take being a decending scale which favors the conglomerates, changing to an ascending scale where the tax take starts from a lower base and increases as profitability increases.

True that it's not clear cut - though from where I'm sitting it seems more likely bad than good, and in any case a pretty half-arsed way to achieve an objective. Happy to be wrong.

But re: small miners / explorers: aren't they kinda famous for falling on their faces anyway? I mean, if they get to profit and actually get to pay tax, well, they're in the minority and hurray for them. But any tax on profit, high or low, means that most - the failures - won't be effected at all. Instead, there's less incentive to take a punt on smaller operations, less return on risk for exploration, because people aren't looking for a piddling 10% from exploration. They're all huntng for a "windfall". Small profits are, essentially, failures by another name. Taxing them less is a consolation prize.

Who the hell puts money into something in the hopes of a consolation prize?

So maybe the failures will fail slower. Doesn't seem worth making the successes less attractive to investment.

 

[Sir Osisofliver]

tee hee

http://qanda.abc.net.au/_Robin-Rudd/VIDEO/1048099/30560.html

Cheers

Sir O

 

[drsmith]

What is Henry on about here ?

The Treasury department said it will set the capital allowance rate, above which the super tax will kick in, at the 10-year government bond yield.

Mr Henry said offering companies a rate above this, as some opponents of the tax have suggested, would over-compensate them.

"An uplift rate in excess of the bond rate would be the equivalent of the government paying a new debt instrument, only paying a higher rate of interest," Mr Henry said.

He said a higher rate would generate "a significant subsidy for investment in the mining sector" and might provide mining companies with an incentive to delay projects.

http://www.theaustralian.com.au/bus...uper-profits-tax/story-e6frg9df-1225868256595

On what basis does Henry regard a RRT kicking in above the 10 year government bond rate a subsidy ?
This is after all an additional tax over and above company tax to start off with.

 

[Whiskers]

What is Henry on about here ?



http://www.theaustralian.com.au/bus...uper-profits-tax/story-e6frg9df-1225868256595

On what basis does Henry regard a RRT kicking in above the 10 year government bond rate a subsidy ?
This is after all an additional tax over and above company tax to start off with.

What he is saying there is... a higher (uplift) rate would generate "a significant subsidy for investment in the mining sector"

The emphasis on 'uplift', in other words, losses carried forward will be compensated with an uplift allowance at the 10 year bond rate to compensate for the delay in accessing these tax credits.

Essentially what Henry is saying is that if the 'uplift rate' is higher than the bond rate, the gov would be paying extra as uplift and some miners may delay projects to earn the bond rate plus the extra on their carried foreward losses.

The super tax would only kick in on assessable profits (revenue minus deductible expenses including capital allowance and state royalties) above the bond rate, at 40%.

So if the bond rate was 6% the first six percent of net profit would not be taxed, but all profit above that would be taxed at 40%.

 

[GumbyLearner]

Don't you just love it that the Government gets a risk-free reward ratio of 40% to fund a whole bunch of public servant government-employed "social engineers" to tell you how to live your life with the taxation proceeds?
As an Australian taxpayer-owner of such natural resources, you should realize they have your best interests at heart? :holysheep:

say no more say no more

 

[drsmith]

Essentially what Henry is saying is that if the 'uplift rate' is higher than the bond rate, the gov would be paying extra as uplift and some miners may delay projects to earn the bond rate plus the extra on their carried foreward losses.

The following article sheds more light including comparison with the RRPT.

http://www.smh.com.au/business/fede...ds-mining-super-profit-tax-20100518-vbwo.html

Dr Henry said that despite comparisons to the long-established petroleum resources rent tax (PRRT), the proposed super profits tax on miners would give investors a better deal.

Under the RSPT, the investors are entitled to a government guaranteed tax credit with a present value of 40 per cent of the initial investment.

But the tax credit under a PRRT evaporates if the expenditure earns insufficient income, Dr Henry said.

This was why the allowance for carrying expenditure forward to deduct against future income was higher under a PRRT than the proposed resource super profits tax.

Under the RSPT, the uplift rate was the long-term government bond rate.However, the long-established PRRT had a five per cent loading on top of the bond rate for most capital expenditure.

This was ''to compensate investors for the risk they may not be able to utilise their tax credits'', Dr Henry said.

Two broad questions come to mind.

1) With existing mines, would their be an allowance for expenditure previously used to build the mine ?
If not, is this what miners are screaming about in relation to the application of the RRT to existing mines ?

2) Would no allowance for carrying expenditure and a higher profit threshold for the RRT be a better alternative ?

 

[Whiskers]

The following article sheds more light including comparison with the RRPT.

http://www.smh.com.au/business/fede...ds-mining-super-profit-tax-20100518-vbwo.html


Two broad questions come to mind.

1) With existing mines, would their be an allowance for expenditure previously used to build the mine ?
If not, is this what miners are screaming about in relation to the application of the RRT to existing mines ?

It's all a bit complicated, but I think any carried forward losses and capital allowances on the books would be merged into the new scheme... but no allowance for expenses already claimed.

I think some mines that have used up there carry forward losses and no have low carrying expenses are going to be caught badly with the new tax, unless they do some urgent new resource expansion exploration or development.

Also the RSPT will be calculated separately for each project interest and I think the criteria for this tax is a bit different to what is allowable for company tax, so it's not as simple as adding 40 to the 28% company tax rate. The effective rate as illustrated in the earlier table is less, especially for smaller operators with a considerable amount of carried forward losses.

2) Would no allowance for carrying expenditure and a higher profit threshold for the RRT be a better alternative ?

Probably, but I think the higher carrying expense provisions is what Henry suggests is effectively a bit extra subsidy to boost more exploration and new project development.

 

[drsmith]

Also the RSPT will be calculated separately for each project interest and I think the criteria for this tax is a bit different to what is allowable for company tax, so it's not as simple as adding 40 to the 28% company tax rate. The effective rate as illustrated in the earlier table is less, especially for smaller operators with a considerable amount of carried forward losses.

In terms of the total tax take but the marginal rate is still effectively 57% for profit above the threshold.

With a marginal tax rate that high, one wonders how that might impact on investment decisions (urgent new resource expansion exploration or development). Could this lead to investment decisions being based more on tax than on investment merit in the same way that higher income earners negatively gear to reduce tax ?

Perhaps the simplest solution is to apply a flat rate RRT on profit after tax. In therms of total tax as a percentage of profit, this would fit between the current royalty structure and the current proposed RRT structure as per that table. It would also be simple.

If the government wants to target a net tax take of, say, 45% from resource company profits then a 23.6% RRT would apply with 28% company tax and 26.7% RRT with 25% company tax.

 

[Bushman]

Fortescue's take on the RSPT:

'Fortescue said the planned development of its 160 million tonnes per annum (Mtpa) Solomon Hub project was one of the projects to be placed on hold.

This is estimated to be a $US9 billion ($A10.57 billion) investment, employing 6,000 people in operations and 15,000 through construction.'

Uncertainty kills investment, always will. Those WA marginal seats must be worrying the Cynic-in-Chief. Also how long now the budget surplus?

http://www.theage.com.au/business/fortescue-puts-projects-on-hold-over-tax-20100519-vdgv.html

PS: i should add that at least this will kill inflation/interest rates/AUD rises dead by 'solving' the skills shortage and wage pressures. Go rust-belt manufacturing in the Eastern States (automobiles, clothing etc).

 

[Mofra]

From: http://www.news.com.au/business/bre...-hold-blames-tax/story-e6frfkur-1225868590011

Fortescue said this tax guarantee had "no lending value by project financiers".

"Therefore the financial modeling of any future development must account for the 40 per cent cash flow leakage without any compensatory benefit under the RSPT," the miner said.

Interesting there has been no comment by Henry/Government on the finance (credit) issue. This is another concern which may be abated in time but in the short term looks problematic.

 

[trainspotter]

Off topic a bit, BUT I don't know if you've noticed decent rises in base metals in the last few hours, about 4% rise in copper, not to mention the FTSE and Europe up 5%, US futures up and good, lower loan default news in the US etc.

This'll be one hell of a dead cat bounce.

Somehow I'm thinking our mining industry will purrrrr on nicely, without missing a beat. :

OOOHHHHHHHHHHHH the irony of it all !

 

[newbie trader]

Not sure about it all but Henry I saw on the news last night said the smaller miners would be better of and that the large ones wouldnt be harmed at all (be in the same position?).

 

[JimBob]

Not sure about it all but Henry I saw on the news last night said the smaller miners would be better of and that the large ones wouldnt be harmed at all (be in the same position?).

The big miners will be paying billions of dollars in extra taxes, surely that means they will be worse off?

 

[Whiskers]

In terms of the total tax take but the marginal rate is still effectively 57% for profit above the threshold.

With a marginal tax rate that high, one wonders how that might impact on investment decisions (urgent new resource expansion exploration or development). Could this lead to investment decisions being based more on tax than on investment merit in the same way that higher income earners negatively gear to reduce tax ?

I wouldn't say it was comparable to negative gearing in the sense that these losses, as I understand it, can't be set off against other profit. The carry forward losses and capital allowance, have to be set off against profit from the same project.

Perhaps the simplest solution is to apply a flat rate RRT on profit after tax. In therms of total tax as a percentage of profit, this would fit between the current royalty structure and the current proposed RRT structure as per that table. It would also be simple.

The problem with that idea is that you cannot use the tax profit figure to calculate the RSPT, because the RSPT profit calc does not include among other things finance costs.

If the resource tax was set on the same criteria as the tax profit, it could lead to unhealthy borrowing levels to minimise tax, which leads to Fortescue's problem.

From: http://www.news.com.au/business/bre...-hold-blames-tax/story-e6frfkur-1225868590011


Interesting there has been no comment by Henry/Government on the finance (credit) issue. This is another concern which may be abated in time but in the short term looks problematic.

Reading the full article the following section seems telling.

"A key focus within the review process is the funding implications of a proposed retrospective imposition of a cash drain on projects that were financed prior to the RSPT.

Also, the implications for financing new projects within Fortescue's project pipeline will be reviewed and in particular clarification sought as to the Government's tax guarantee for 40 per cent of project losses in the event of bankruptcy."

Fortescue said this tax guarantee had "no lending value by project financiers".

"Therefore the financial modeling of any future development must account for the 40 per cent cash flow leakage without any compensatory benefit under the RSPT," the miner said.​

I'm not sure how he will have a cash drain on projects funded previously, unless he has an unhealthy level of debt to service. Those debt costs won't be able to be carried forward with the uplift like exploration and development costs under the new proposal.

I'm thinking Twiggy may have a high debt problem, or maybe a higher debt ratio than most, with interest rates rising.

This is further evidenced by 'clarification sought as to the Government's tax guarantee for 40 per cent of project losses in the event of bankruptcy'.

What does he want, the tax and royalty office to refund his money if he goes belly up?

 

[Whiskers]

The big miners will be paying billions of dollars in extra taxes, surely that means they will be worse off?

Yes, I expect the international conglomerates will probably pay a bit more tax/royalty in total at least for a short period until they adjust to the new criteria.

I can see the total tax take increasing, but not all out of the profit of existing operations. The proposal gives a good incentive to get new projects up sooner, so I think there will be a bigger tax take from more production.

PS: Further to Twiggy's Fortescue debt problem with the effective net tax scale reversed he will be staring down the face of increased tax as the project becomes more profitable, whereas under the old system it was biased to pay less net tax as profitably increased... hence, (I think) his future cash flow problem.

 

[newbie trader]

Yes, I expect the international conglomerates will probably pay a bit more tax/royalty in total at least for a short period until they adjust to the new criteria.

I can see the total tax take increasing, but not all out of the profit of existing operations. The proposal gives a good incentive to get new projects up sooner, so I think there will be a bigger tax take from more production.

PS: Further to Twiggy's Fortescue debt problem with the effective net tax scale reversed he will be staring down the face of increased tax as the project becomes more profitable, whereas under the old system it was biased to pay less net tax as profitably increased... hence, (I think) his future cash flow problem.

What's Henrys reasoning behind saying that the smaller miners will be better off and the bigger miners will be in the same position then?

 

[Whiskers]

What's Henrys reasoning behind saying that the smaller miners will be better off and the bigger miners will be in the same position then?

I didn't see the interview, so I can only speculate.

I think generally smaller miners are Aus owned and based, whereas many of the bigger ones are based overseas or have substantial overseas operations and there are some tax consession rules that relate to things like 'Foreign Income Tax Offset' and 'Exempt Foreign Investment Income' etc.

It can get pretty complicated for small fry like me to work it all through, but I have a rough idea of the sort of things that apply. So depending on how big the company is, it's stage of operations, level of debt and profitability, it could get concessions for tax already paid on profit in another country and vice-versa.

 

[Bushman]

I didn't see the interview, so I can only speculate.

I think generally smaller miners are Aus owned and based, whereas many of the bigger ones are based overseas or have substantial overseas operations and there are some tax consession rules that relate to things like 'Foreign Income Tax Offset' and 'Exempt Foreign Investment Income' etc.

It can get pretty complicated for small fry like me to work it all through, but I have a rough idea of the sort of things that apply. So depending on how big the company is, it's stage of operations, level of debt and profitability, it could get concessions for tax already paid on profit in another country and vice-versa.

Also small miner of marginal projects will be better off under the RSPT as they will pay tax later than under a price/volume roylaties system.

 

[pacestick]

Under the proposed tax the smaller miners will pay less as per the below schedule

Just how cleverly was shown in a table produced in a note by the Treasurer recently (and reproduced below) showing estimates of the effective tax rates applying to projects. What it shows is the very deliberate design of an RSPT to lighten the tax burden on less profitable projects, encouraging investment in the projects that might otherwise have stayed on the drawing board. Higher return projects face a higher effective tax rate under profits taxation compared to royalties.


rate of return% tax rate royalties & 30%company tax tax rate rspt @28%



6 45.4 28
10 40.9 39
15 38.7 45.3
20 37.6 48.2
25 36.9 49.9
50 35.5 53.3