One of the more perverse aspects of the resource super profits tax is the way that it is being characterised as a kind of class struggle, with the champions of the proletariat (aka Kevin Rudd) set in an unfair battle against the mining plutocrats (Andrew Forrest, Clive Palmer and Gina Rinehart).
That is an easy caricature to draw, given the visibility of Forrest and Palmer in particular in the debate, and the incongruous sight of Rinehart shouting “axe the tax” in Perth last week.
The reality of the tax is somewhat different. While the RSPT undermines Fortescue Mining’s financing model – and indeed, if implemented, would spell the end of the project financing model used by most emerging miners – the most affected by the tax are the big long-established mines.
BHP Billiton and Rio Tinto will pay a high proportion of the tax because of their very profitable operations in the Pilbara and the coalfields of Queensland. BHP’s effective tax rate is estimated at 55% if the tax is introduced.
While the government and its supporters have tried to demonise the big miners, referring to them as greedy foreigners, corporate entities are just vehicles for collective investment. The owners of the miners are either individuals, local and foreign, or institutions investing on behalf of individuals, local and foreign. A majority of BHP’s shareholders are Australian, as would be the case for most of the smaller mining hopefuls.
The concept of the dividend imputation system was that corporate earnings would effectively be taxed once, in the hands of shareholders. With the top tax rate and the corporate tax rate misaligned, of course, that’s not entirely the case.
Across the sector, however, the underlying truth is that the RSPT ultimately impacts individuals and their savings and the industry, as opposed to a couple of billionaires, is trying to protect those savings and their future growth rather than the bank accounts of a few rich individuals.
The $9 billion a year (probably more and certainly more if China is able to continue growing at the rate it has) comes out of the savings of shareholders, directly or indirectly through their superannuation fund.
Over time, as the RSPT impacts investment decisions and brings competing investment decisions into play, it will push investment and jobs offshore.
The more immediate effect, however, is to diminish the savings and income of existing shareholders. If the RSPT were introduced as it is now constituted, the net present value of many existing mines would be ravaged and sharemarket prices would adjust to reflect that.
Australian shareholders would lose both capital (as a consequence of that one-of adjustment) and the income flowing from it.
BHP has said that its effective tax rate in Australia under the RSPT would be about 55% and Wayne Swan has conceded that some mines would pay the theoretical maximum of 58%.
That is the position of the company. For the local shareholders, to the extent that BHP’s earnings (and those of other tax-paying companies like Rio) are distributed, they receive a rebate at the corporate tax rate under the imputation system.
There will be no credits or rebates for the RSPT, which means that the effective tax rate for individuals on resource company income, particularly for those on the top marginal rate, will be significantly higher that the effective tax rate levied on the companies. The effect on personal incomes will be even greater if and when the corporate tax rate is lowered to 28% in 2014-15.
If you impose a tax as substantial as the 40% RSPT on a sector the impact is obvious. It is less profitable, it invests less in the high tax jurisdiction and it is less attractive as an investment destination. Not just for billionaires but for individuals and the institutions investing on their behalf.
If there is class warfare inherent in the debate between the miners and the government, then it is not the clichéd and anachronistic war of the rich on the poor but, given our compulsory superannuation system and the level of participation of individuals in the market, something far more akin to a civil war.
*This piece was first published on Business Spectator
So Business Spectator has again provided a doom and gloom analysis of the RSPT.
I would very much like to read Wayne Swan’s response.
However, just one thought for now.
If BHP-B and others have been recipients of surprisingly large prices, and hence, profits, from coal and iron ore, where is this represented in this analysis? The author appears to forget or intentionally ignore the simple fact that commodity prices have risen to the sky whilst royalties have remained static. I contend that this is an iniquitable sharing of the spoils from the marketplace, and that, over time, it must not be permitted to continue without rebalancing royalties versus price.
Now, the federal government does not set royalties – that is for the states. Refer to the Constitution of Australia.
So, the government has proposed to use the corporate taxation system to determine when and by how much super profits have been made by one-time extractors of resources. Note that I do not necessarily agree with either the point at which such a tax commences, or the rate of the tax, only that such a tax is one rational way to proceed.
Clearly, the principle of taxing those who are most able to afford it is one of the planks of all progressive taxation systems, so why not apply this principle to this situation?
It is neither retrospective nor regressive.
All that remains to be done is to determine the correct settings.
That is precisely what the government is trying to do.
A final comment: Nobody seems to be saying the the government is not entitled to budget to reduce the tax on business generally by 2%. There is no argument about that at all. Why, then, is there such an outrage about the notion that this same government may budget to collect more tax from only the most profitable businesses in a sector which is enjoying super profits due to a quirk of the marketplace?
Or, would Australians prefer to see this money head overseas and for our country to slide towards Greek, UK and USA defecits of about 100% of GDP? To run our government (read: social services and defence forces) tax must be raised somewhere. Don’t just complain. Suggest a better method of balancing the books or just get used to it.
To John Bennetts
I would like correct some of the miss understandings in you comments:
1. Royalties are conculated on the invoice value (less some deductibles) of the sales. Please see below the calculation base used by the WA Government
“An ad valorem or value-based royalty is calculated as a proportion of the ‘royalty value’ of the mineral. The royalty value is defined as:
“in relation to a mineral other than gold, means the gross invoice value of the mineral less any allowable deductions for the mineral”.
Therefore, it is incorrect to say that “royalties have remained static”, the rate may not have changed, but the royalty levied has increased as the metal prices have increased.
2. The tax is retrospective, in that it is taxing projects that have been mining for decades and investment has been made over those years to make the projects what they are today. Of cource, without retrospectivity, the tax will not work for the current Australian government as they would not be able to theoretically balance their books over the forward projections.
3. The Government is not able to legitimetly negotiate / consult of the tax, as it has already spent the money in the forward projections and those forward projections are the basis of its so called conservative fiscal management.
4. If, as you suggest, the tax is going to be on those that can afford it, then why not also propose a similar structured tax on the banks, after all, they may not consume the companies mineral wealth, but the do not create anything either. They recycle our money and make billion dollar profits from doing so.
“BHP Billiton and Rio Tinto will pay a high proportion of the tax because of their very profitable operations in the Pilbara and the coalfields of Queensland. BHP’s effective tax rate is estimated at 55% if the tax is introduced.
…
A majority of BHP’s shareholders are Australian, as would be the case for most of the smaller mining hopefuls.”
Did you see what Mr Bartholomeusz did there? First he mentions BHP and Rio in one sentence. Then he cleverly drops Rio out of the equation entirely. A more accurate picture would be to say 60% of BHP shareholders are Australian (which means that 40% are not), and 70% of Rio Tinto shareholders are foreigners. He doesn’t mention those poor 70% of foreign Rio Tinto shareholders who will miss out on the rent that is going to pay the Australians who actually own the minerals.
“Wayne Swan has conceded that some mines would pay the theoretical maximum of 58%.”
This is a good example of the power of words. Mr Swan said that some super profitable mines *could* pay up to 58 percent. Sounds quite different from what Mr Bartholomeusz said he would say. Another thing he fails to mention is that they will only pay this rate if they achieve a return on investment of over 50% (the tax rates kicks in at 6%). As one commentator put it ‘the only way you would get a 50% return on investment is if you fell over a mine with high quality minerals, that was next to a port, with road and rail facilities already built’.
Whats the point in even trying to point out the flaws in work by Sophist hacks like this guy? People like that are generally blessed with personality disorders, the majority of us are not blessed with, that enables them to sleep well at night, whilst at the same time peddling transparently biased fluff like the above. Arguing is like squashing a bowl of porridge; Both impossible and messy. BTW can we get an introduction to Miss Understandings?
The majority of BHP shareholders may be Australians as David Byrnes says, but are the majority of Australians shareholders in mining companies? Certainly they aren’t if they choose ethical investments and I’m not sure they would be if they chose safe investments–witness BP. The more miners muck around with the environment the more their shareholders are going to start to have to pay for it. eg BP.