The Labor government has simultaneously ticked the box on getting the Minerals Resource Rent Tax through the Lower House and left a trail of debris and budgetary uncertainty.
There was a lot riding on raising $11 billion in revenue from this tax over three years, even before the Independents successfully lobbied the government to tinker with it.
As a result of deals over the past couple of days, the receipts will come up shy and the government has been forced to find a way to fill the hole.
The answer has been to hit foreign financial organisations, which were meant to get some relief on withholding tax. This will now be phased in on a longer-term timetable.
The MRRT was earmarked to fund increased superannuation and some broader corporate tax cuts. Yesterday we learned it was also supposed to fund a couple of other initiatives. The trouble is the tax now appears to raise less than the cost of the initiatives it was designed to cover.
One report suggested the MRRT would fund only a third of the superannuation spending it was meant to cover. Separately, nothing has been built into the government's costings to cover concessions to the mining companies for any of the increases in state royalty payments.
The West Australian and NSW governments have moved or proposed increases to state-based mining royalties.
If Labor's Anna Bligh loses control of Queensland, a conservative government there would be next in line to increase state royalties.
As part of the MRRT package, the federal government agreed to reimburse mining companies for state royalty payments.
The increasingly large revenue hole makes a mockery of the tax, which experts are now describing as a dog's breakfast.
And all this assumes that Treasury estimates for the $11 billion were realistic to start with. They have never been measurable because the government maintained that a breakdown of where the revenue is coming from falls under the banner of commercial in confidence.
There are plenty of tax experts and academics suggesting the architecture of the tax, which shields companies based on the value of their resource at the point of extraction, will mean the large companies in particular will escape having to pay most of the tax.
In other words companies will receive, in effect, a tax credit on the value of the minerals under the ground and the licences to mine them. In the case of the big iron ore miners, BHP and Rio Tinto, this value is in the tens of billions.
These companies maintain that the MRRT will still cost them money but none, other than Andrew Forrest's Fortescue, are prepared to go near answering how much.
Forrest announced via newspaper ads last week that in the first three years of operations Fortescue would pay between zero and $20 million of this new tax - an amount he refers to as a rounding error.
Given Fortescue is the third most profitable iron ore producer in the country after BHP and Rio, there must be a large question over the $11 billion tax windfall the government has built into its budget.
Perhaps Treasury is counting on a big boost in the price of iron ore and coal, a fall in the Australian dollar or massive growth in volumes.
But while the additional capital being poured into coal and iron ore development sets the scene for large growth in profits, it also serves to fortify the tax shield as the value of the assets increases.
There is nothing wrong with the ideology behind asking the booming minerals industry to share the spoils with the wider community. This was the intention of the MRRT's predecessor, the super profits tax, which was abandoned after resistance from the mining lobby threatened to undermine the government.
The MRRT that replaced it was hastily cobbled together behind closed doors by the government and three miners - BHP, Rio and Xstrata.
One can only assume that if it all turns to custard in a few years, and Julia Gillard remains in power, there will need to be some far more serious tinkering to this tax.
Tony Abbott's plan is to abandon the tax completely and fund the various superannuation and corporate tax presents in another, yet unspecified, way. That sounds even more implausible.
Frequently Asked Questions about this Article…
What is the Minerals Resource Rent Tax (MRRT) and why should everyday investors care?
The MRRT is a federal tax on profits from certain mining operations that the Labor government pushed through to raise about $11 billion over three years. It was designed to help fund higher superannuation spending and some corporate tax changes, so its success (or failure) affects government budgets, taxation policy and the outlook for listed miners — all issues relevant to investors.
Why is the MRRT creating a revenue shortfall in the budget?
The article says deals and concessions struck during passage of the MRRT have reduced expected receipts, leaving a hole under the original $11 billion estimate. The government has had to find ways to plug that gap, including delaying withholding tax relief for foreign financial organisations to preserve revenue.
How might the MRRT affect major miners like BHP, Rio Tinto, Fortescue and Xstrata?
Tax experts in the article argue the MRRT’s structure — which values resources at the point of extraction and effectively gives companies a credit for the value of minerals and mining licences — could shield large miners from much of the tax. Fortescue publicly said it would pay between zero and $20 million in the first three years, while other big miners have been reluctant to disclose likely MRRT bills.
What role do state royalties play and who bears the cost?
Western Australia and NSW have moved or proposed increases to state mining royalties. As part of the MRRT package, the federal government agreed to reimburse mining companies for state royalty payments, which adds another layer of budget complexity and risk for the expected MRRT revenue stream.
Are the Treasury’s MRRT revenue estimates reliable?
The article points out skepticism: Treasury’s $11 billion figure can’t be broken down publicly because the government says the details are commercial in confidence, and tax experts question whether the architecture of the MRRT and recent concessions make that target realistic.
What concessions were made for foreign investors and how were they changed?
Foreign financial organisations had been due to receive withholding tax relief as part of the package, but to make up for lost MRRT revenue the government has decided to phase that relief in over a longer timetable, effectively postponing some benefits to foreign investors.
Will the MRRT still fully fund the superannuation and corporate tax measures it was meant to pay for?
No — the article reports the MRRT now looks likely to raise less than the cost of the initiatives it was slated to cover. One report suggested the MRRT might fund only about a third of the superannuation spending it was meant to support, leaving a shortfall in the budget.
What should everyday investors watch as the MRRT unfolds?
Investors should monitor commodity prices (especially iron ore and coal), movements in the Australian dollar, production volumes, state royalty changes, and political developments (including calls to abolish or further amend the MRRT). These factors will influence MRRT receipts, miners’ profits and wider fiscal policy risks highlighted in the article.
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