The transfer of the Petroleum Resources Rent Tax model to the Australian minerals sector can provide advantages to the mining industry, but without adaptation it risks future investment, according to an article by BDO tax director Russell Garvey published in the Australian Journal of Mining.
He said a shift to a Resources Rent Tax (RRT) for the mining sector would be ground breaking, but would require careful implementation so it didn’t price Australia out of the international market.
“The imposition of a cash-flow tax, like the Petroleum RRT, on the minerals sector would be unprecedented almost anywhere in the world,” Garvey said.
“However, the energy and mining industries have very different economic decision models. The operating and capital requirements are very different, as are the risk and return profiles of each industry.
“Any proposal that taxes mining at the same rate as oil and gas would represent a significant tax increase, making Australian mining projects among the most highly taxed in the world, to the detriment of their global competitiveness. The Federal Government must take this into account when deciding on its response to the Henry Taxation Review.”
The imposition of a Federal RRT on the mining sector to replace the existing State-based royalty scheme has been widely reported as one of the recommendations of the Henry Taxation Review, with most reports indicating that it is almost identical to the Petroleum Resources Rent Tax with a 40% tax on profits on a project basis, after all exploration and development costs have been recouped.The Federal Government is considering its response to the Review.
Garvey said the Petroleum RRT contained some attractive features for the mining sector, largely through a variety of transferability rules, the immediate deductibility of eligible costs, carry forward provisions and the taxing unit being assessed on a project basis.
“The Petroleum RRT has the basic design features of an economic tax rather than an accounting tax or simple excise and royalty systems,” he said.
“This has considerable benefits for miners. It would allow also existing mining companies to write off spending on new projects against profits from existing projects, and it also gives royalty relief to new miners as they start-up operations.”
Plus, Garvey said, the current state-based mineral royalty system was not perfect. Royalty rates and calculation methodologies differ across the States, creating inconsistencies, distorting investment decisions and providing unnecessary and unwanted bureaucratic and accounting imposts, he said.
State-based royalty charges are also based on production, not profit, and can be readily changed, as evidenced by the current debate of whether the Western Australian state government should increase royalty rates on some minerals.
“The resources industry needs a stable and predicable royalty charge that encourages ongoing investment into the sector,” Garvey said.
“A well-designed tax should never distort investment decisions. If a project is economically feasible pre-tax, then it should remain so.”
It also remains unclear whether the RRT calculation will be based on the primary resource value or a value-added amount.
“The rate of tax and the resource value to be used in the calculation will be the deal breakers for the mining industry,” he said.
The mining industry wants any changes to apply only to future investments.
“How the Government handles the transition issues that come with a new RRT could materially impact investment decisions across the board,” Garvey said.
“The resources industry is worried that the RRT will make Australian projects the highest taxed in the world. Industry understands the need for tax reform but it won’t accept a tax grab from Government.”
It is likely that when releasing its Henry Review response, the Federal Government will immediately accept some recommendations, rule out others and defer a number for further review. Garvey said he expected the implementation of the RRT would be fast tracked, particularly if the Government wanted to cut the 30% company tax rate.
Every 1% cut from the company tax rate costs A$2.3 billion, therefore reducing the company tax rate from 30% to 25% would cost the Treasury A$11.5 billion a year – which must be funded from alternative taxation.
“It is not a question of if we will have a new Federal RRT, it is just question of when and how,” Garvey said. “The rate at which the RRT is struck at is important to achieving a reasonable balance between the community getting a fair return, versus making sure that Australia retains a viable and profitable mining industry.
“It is essential for government to consider the adverse impacts that any changes will have on producer returns, project certainty, future investment decisions and the perceptions of sovereign risk.”