AUSTRALIA'S biggest miners have slammed the federal government's 40 per cent Resource Super Profits Tax saying it will have significant impact on their Australian operations, potentially cost thousands of local jobs and "impact the future wealth and standard of living of all Australians."
However, while some believe the changes, which come into effect in July 2012, will hit investment in the Australian resources sector, equity analysts aren't predicting a wide-scale dumping of resource stocks when the market opens today.
As the federal government yesterday released the long-awaited Henry review, it wasted no time announcing it would adopt a recommendation to introduce a new tax on mining profits, expected to raise $3 billion in its first year of operation and $9 billion in 2013-14.
Prepared for a fierce lobbying campaign from the resources sector, which it promises to consult on the finer details of the tax, the federal government has included a number of sweeteners to try and alleviate some of the pain.
A new Resource Exploration Rebate, which will take effect from July 1 2011 and cost $1.1 billion in the first two years, will allow companies to claim a rebate for exploration expenditure. Resources Minister Martin Ferguson said it would provide a "huge boost" for companies, particularly those in geothermal prospecting.
The government will also cut the company tax rate from 30 per cent to 29 per cent from mid 2013 and to 28 per cent by mid 2014, and will provide a credit for state-based royalties, heading off a stoush with the resource-rich states.
In fact, of the one-third of revenue from the Resource Super Profits Tax to be channelled into a new infrastructure fund, Prime Minister Kevin Rudd has given a guarantee that resource-related infrastructure will be prioritised, meaning Western Australia and Queensland will receive the bulk of the spoils.
BHP Billiton chief executive Marius Kloppers said the policy would mean the tax take on BHP's profits from its Australian operations would rise from about 43 per cent currently to around 57 per cent in 2013.
"If implemented, these proposals seriously threaten Australia's competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians," he said.
"The Government has not defined all aspects of the design, implementation and application of the new tax, and until they are clarified, we cannot be certain what the full implications for the industry will be. However, this significant new tax will have the effect of making investments in Australia much less attractive."
Mitch Hooke, chief executive of the Minerals Council of Australia, labelled the tax package a "revenue grab" and "an unprecedented double-tax."
"The real work on the proposed reforms starts when the government sits down with industry and gets a real-world understanding of the high-risk cyclical nature of the mining industry and the full impact of what they have announced," he said. "We will work with the government to get the design and rate of a resource rent tax right."
Business Council of Australia chief executive Katie Lahey said the Resource Super Profits Tax would be "extremely complex" and that the government's consultation with industry would be fundamental.
"The BCA would like to see the Productivity Commission undertake a review on the resource tax arrangements to run concurrently with the consultations outlined by the government," she said.
A spokesman for Andrew Forrest's Fortescue Metals Group said the company was still assessing the details of the tax package and its impact on the business.
George Boubouras, head of investment strategy at UBS, said the tax changes will undoubtedly be felt through dollars invested in Australia's resources sector.
"From a sharemarket perspective I think we saw some of the concerns play out in Friday's sharemarket which underperformed Wall Street so I don't think the resources stocks are going to be hit in a big way when the market opens. However from a long term investment point of view, investors will no doubt be asking 'do I look to reinvest here in Australia or do I look offshore?"' he said.
David Flanagan, managing director of iron ore producer Atlas Iron, said some of the smaller mining companies could be worse off under the new tax. "If you have a really large capital project you get a lot of shelter from that capital. A company like Atlas, which doesn't have a lot of capex, doesn't get that shelter," he said.
"But let's remember that it isn't just companies that will be hurt. If you take Atlas for example, 85 per cent of our company is owned by superannuation funds and the rest is sprayed across 21,000 shareholders who own a few thousand shares. These aren't high rollers. Any money you take off us, you take off them."
Scott Haslem, chief economist at UBS, said the government's approach to redistribute the wealth over the entire economy was "a seemingly sensible approach" and would not impede growth over time.
"I don't believe that given the returns companies are making that this tax increase will kill the goose [that laid the golden egg]. Is it a negative at the margin for some companies? Clearly it is," he said.
Frequently Asked Questions about this Article…
What is the Resource Super Profits Tax (RSPT) and when does it take effect?
The federal government has adopted the Henry review recommendation to introduce a 40% Resource Super Profits Tax on mining profits. The changes are scheduled to take effect in July 2012, with the tax expected to raise around $3 billion in its first year and about $9 billion in 2013–14.
How could the RSPT affect large miners such as BHP Billiton?
Major miners have warned the RSPT will significantly increase their Australian tax burden. BHP Billiton’s CEO Marius Kloppers said the tax take on BHP’s Australian profits could rise from about 43% currently to around 57% in 2013, potentially affecting competitiveness and future investment decisions.
Will the new mining tax cause a big sell-off of resource stocks when the market reopens?
Equity analysts in the article did not predict a widespread dumping of resource stocks on market open. UBS noted some concerns were already reflected in sharemarket underperformance, but said resource stocks were unlikely to be hit hard immediately; the bigger question for investors is whether to reinvest in Australia or look offshore over the longer term.
What concessions has the government offered to ease the impact of the mining tax?
The government included several sweeteners: a Resource Exploration Rebate effective from July 1, 2011 (costing about $1.1 billion in the first two years) that allows rebates for exploration expenditure; staged company tax cuts from 30% to 29% by mid-2013 and 28% by mid-2014; and a credit for state-based royalties. It also plans to channel one-third of RSPT revenue into a new infrastructure fund, prioritising resource-related projects.
How will the RSPT money be used and which regions will benefit?
One-third of revenue from the Resource Super Profits Tax is to be directed into a new infrastructure fund. Prime Minister Kevin Rudd has guaranteed that resource-related infrastructure will be prioritised, meaning resource-rich states such as Western Australia and Queensland are expected to receive much of the funding.
Could smaller mining companies and everyday shareholders be worse off under the new tax?
Yes, smaller miners may feel the impact more. Atlas Iron’s managing director David Flanagan said companies with smaller capital expenditure profiles get less shelter from capital allowances, so they could be worse off. He also pointed out that many ordinary investors and superannuation funds own these companies, so higher taxes on miners can reduce returns for everyday shareholders.
What are industry groups saying about the complexity and consultation on the RSPT?
Industry groups have criticised the package. The Minerals Council called it a 'revenue grab' and an 'unprecedented double-tax,' while the Business Council of Australia described the RSPT as 'extremely complex' and said thorough consultation is fundamental. The BCA has suggested a Productivity Commission review run alongside government consultations.
How do economists and analysts view the likely long-term effects of the mining tax on investment?
Analysts offer mixed views: UBS’s George Boubouras said the tax will be felt in investment dollars flowing into Australia’s resources sector and could influence long-term reinvestment decisions, while UBS economist Scott Haslem argued that redistributing resource wealth across the economy is sensible and should not impede growth over time, though it may be negative at the margin for some companies.
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