Miners' pitch on more taxing issues
This week they started an advertising campaign aimed at convincing the public that what is bad for the mining industry is bad for Australia. The mining industry - like the government - has been polling the public. The industry feedback is that the public understands mining carries the Australian economy.
They may have been asking the same questions, but Prime Minister Julia Gillard's perspective is probably different. She has a budget revenue hole to fill and is aware that her government is seen by the public as having allowed the mining industry to get away with paying little or no additional tax on super profits from the imposition of the minerals resource rent tax.
It's a risky strategy by the government, given the mining industry was largely responsible for toppling Kevin Rudd back in 2010 in response to his attempt to impose a super mining tax.
At this stage, however, the prospect of extracting more money from the mining industry is considered likely and attempts by the Minerals Council of Australia to gain any guidance from the government on the issue have been near-futile.
But the industry is less worried about changes to the MRRT and more concerned the government will find new ways to tax the industry, such as changes to the diesel rebate and deductibility of exploration expenditure.
The $126 million the tax yielded for the first six months of the MRRT's operation last year was a paltry shadow of the $2 billion it was forecast to raise over a year and it has been a source of serious political embarrassment for the government.
The Senate inquiry into the MRRT that began in Canberra on Wednesday will only serve to heighten public awareness of the tax's pitfalls, giving even more oxygen to the Greens and various independents who agreed to the tax when it was created but who now believe they were duped.
The trouble for Gillard is that a deal is a deal and it will be near-impossible for the government to go back on the MRRT.
It works for the large mining companies because it has built-in mitigating design features to avoid the tax being retrospective, the most important of which is to enable mining companies to revalue their existing assets to create a new, higher starting base against which they can deduct costs such as depreciation.
The deferred tax asset to which these give rise, and which can be used to offset future MRRT, is very large for the big mining companies. In the case of Rio Tinto, for example, the unrecognised deferred tax assets include $US12.6 billion ($12 billion) in respect of temporary differences that are deductible for the purposes of the MRRT.
Rio did not pay any MRRT in the six months to December last year but it might pay something in the current six months. BHP paid a small amount, while Fortescue paid nothing. It has been reported that the Tax Office is scrutinising the appropriateness of the approaches miners have taken in determining their MRRT payments.
The other issue with the tax is that it is highly leveraged to the profit paid in any period. In the six months to December, those that mined iron ore and coal suffered profit falls as these commodities experienced particularly soft prices during that period.
The mining industry that argues it already pays plenty of income tax is not overly concerned about Gillard re-engineering the MRRT. Between BHP Billiton and Rio, they pay 25¢ in the dollar of all corporate tax paid in Australia.
The mining industry's new advertising campaign is seen as a shot across the government's bow. It features a bloke in an Akubra hat telling us the election is looming and promises will be flying everywhere and suggesting there is already noise that they will be paid for by the mining industry.
It is not yet taking a serious direct swipe at the Gillard government, but that might change.
Frequently Asked Questions about this Article…
The MRRT (Minerals Resource Rent Tax) is a federal tax on super profits from mining. In its first six months of operation it yielded about $126 million, well below the roughly $2 billion that was forecast to be raised over a year.
Mining companies are concerned the government may look for other revenue sources beyond the MRRT, such as changes to the diesel rebate or reducing the deductibility of exploration expenditure. Industry groups like the Minerals Council of Australia have found government guidance on potential changes limited.
The MRRT allows miners to revalue existing assets to establish a higher starting base for deductions like depreciation. Those revaluations can create large deferred tax assets that offset future MRRT payments. For example, Rio Tinto reported unrecognised deferred tax assets of about US$12.6 billion in respect of temporary differences relevant to the MRRT.
According to the article, Rio Tinto did not pay any MRRT in the six months to December but might pay in the following six months. BHP paid a small amount, while Fortescue paid nothing in that period. The Tax Office is reportedly scrutinising miners' MRRT calculations.
The MRRT is highly leveraged to profits in any reporting period, so when commodity prices fall—particularly for iron ore and coal—profit declines reduce MRRT payments. The six months to December saw soft prices for those commodities, which contributed to lower mining profits and MRRT receipts.
The MRRT has been politically sensitive: the low initial yield has been embarrassing for the government and a Senate inquiry into the tax began to highlight its pitfalls. The article also notes the political risk for a government attempting to rework mining tax settings, given the industry’s past influence on federal politics.
The industry launched an advertising campaign aimed at convincing the public that actions harming mining would hurt Australia. The ads include a speaker wearing an Akubra hat warning that election promises could be funded by the mining industry, signalling industry pushback against further tax measures.
Everyday investors should be aware that MRRT receipts have been lower than expected, large miners can use revaluations and deferred tax assets to reduce payments, and potential changes (like tweaks to diesel rebates or exploration deductibility) could affect profits. Commodity price swings and ongoing government scrutiny or Senate inquiries add extra uncertainty for mining share performance.
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