Oakeshott overshoots on a mining tax reality

Rob Oakeshott has now joined the push by the Greens to close the ‘'loophole'' in the Minerals Resource Rent Tax that flows from the interaction between the tax and state royalties. Why isn't that more surprising?

Milne has foreshadowed a private members bill in the Senate that would prevent miners from using state royalty payments to offset their MRRT liabilities while Oakeshott has described the tax as unsustainable and says the tax should be returned to parliament and amended.

In the 2010 negotiations between Wayne Swan and the major miners that designed the MRRT as a replacement for Kevin Rudd's controversial Resources Super Profits Tax, the ability to offset MRRT liabilities with state royalty credits was a key element of the tax that was agreed.

Unhappily for Swan and the government, which was budgeting for about $2 billion of MRRT-generated revenue this year, when the first quarterly payment fell due for the September quarter not a cent was handed over by the larger iron ore and coal miners the tax targets.

With the credits for state royalty payments inflating by a compound interest rate of 10 per cent, and Queensland having increased the royalty rates on coal in September, the likelihood is that no MRRT will be paid this year.

While the MRRT might be embarrassing for Swan and the government, and galling for the anti-mining Greens, the fact that the MRRT isn't generating any revenue – and may never generate any meaningful revenue – doesn't mean the miners are exploiting a loophole. Indeed, by definition, given that the credits for royalties were specifically negotiated, there is no loophole.

There are some unintended consequences that the MRRT has produced, the most obvious of which is that it provides the states with an apparent free kick. They can – or at least believe they can – increase state royalty rates without having a net negative impact on their miners because the miners can offset those increases against their MRRT liabilities.

That appears to have been the thinking in Queensland, although Swan has been threatening to withhold GST revenue from states that increase their royalty rates to try to deter them from doing so.

The basic flaw in the position of Oakeshott and the Greens, however, relates to a misunderstanding, deliberate or otherwise, of the nature of the tax.

Like the RSPT it displaced, the MRRT is designed to capture a share of resource industry super profits. It is inherently linked to the profitability of the miners.

When the tax was negotiated, iron ore and coal prices were at record levels and the miners appeared to be heading into an era of super-profitability.

Subsequently, of course, iron ore prices have fallen more than 30 per cent and coal prices even more. Plus there has been the well-publicised and continuing explosion in resource sector costs.

Today's reality is that within the framework of the MRRT the iron ore and coal miners simply aren't super-profitable. Indeed, thermal coal mines have been closing, new projects have been deferred and much of the sector is now barely profitable. While Rio Tinto and BHP Billiton continue to expand their iron ore production (although BHP has shelved the Outer Harbour expansion), Fortescue has cut back on its expansion plans and a raft of smaller producers are under real pressure.

If the MRRT is a tax on "super profits" but miners aren't super-profitable, why should anyone be surprised that the tax isn't raising any revenue?

There's no loophole, just the tax working the way it was supposed to, although Swan obviously didn't expect the extraordinary price levels prevailing at the time the tax was legislated to evaporate quite so abruptly.

Despite the controversies that raged around the mining industry's campaign against the original RSPT, which was a contributing factor in Rudd's downfall, it is probable that it, too, wouldn't have raised any meaningful revenue in the current environment.

The fact that royalties are volume-driven taxes rather than profits-driven means that the states, which ultimately are the legal owners of the resources, will benefit from the tertiary phase of the resource investment boom that's still occurring, which will see volumes continue to surge despite the precipitous falls in prices.

That is, of course, of little consolation to a cash-strapped federal treasurer stuck with the repeated guarantee of a budget surplus and an election year looming, but no-one should have taken for granted a continuation of the brief but perfect mix of prices and volumes that is now a receding memory given the volatility of the sector and its profits.

As for the Greens and Oakeshott, someone needs to explain to them that the super-profitable first phase of the resources boom has ended and therefore there aren't any super profits to tax – indeed the thermal coal sector is in trouble and is confronted by structural changes in its markets that will probably ensure it can't be super-profitable – and that the royalty offset isn't a loophole but a government commitment.