The seeds of failure for the federal government’s mining tax were sown in Treasurer Wayne Swan’s 2008 budget when he announced the ‘Australia’s Future Tax System’ Review led by then Treasury Secretary Ken Henry.
The Henry Tax Review, which was conceived at the ‘Australia 2020 Summit,’ was promoted by the Treasurer as a comprehensive ‘root and branch’ review of Australia’s tax system. But a remarkable aspect of the Henry Review was that the states were never properly engaged in the process, particularly when the 2008 Australian political landscape comprised Labor governments from coast-to-coast. What was less surprising was that the Henry Review found that the least efficient taxes were levied by the states, including mining royalties.
Mining royalties in Australia are typically based on the value of the minerals produced, based on a formula designed to calculate the price at the point of sale. State government revenues therefore benefit considerably from increases in both commodity prices and volumes.
The state and the Northern Territory budgets estimated that they would receive almost $10 billion between them in mining royalties in 2012-13. Over 95 per cent of total mining royalties will be raised in New South Wales, Queensland and Western Australia and almost 90 per cent will be raised through royalties on coal and iron ore.
Mining royalties are also indirectly redistributed through the deliberations of the Commonwealth Grants Commission, which takes account of 'own source revenue' raising capacity when determining the split of GST revenue between the states.
Regrettably, the Henry Review was largely reduced to an exercise in capturing a new source of revenue from the mining sector and the states through the introduction of the originally proposed resources super profits tax and the subsequent minerals resource rent tax.
A key feature of the MRRT is the uncapped credits for state mining royalties. The mining companies quite properly demanded full crediting of state royalties under the MRRT to avoid a situation where they were being double taxed. However this feature of MRRT has gifted state governments with the capacity to increase coal and iron ore mining royalties, safe in the knowledge that they are fully creditable against any MRRT liabilities.
Given these arrangements, it was unsurprising that state mining royalty rates have been increased for coal in New South Wales and Queensland and iron ore in Western Australia. Fiscal imperatives plus the attention given to mining royalties in the Henry Review may have also spurred some increases in mining royalty rates in the Northern Territory, South Australia and Tasmania.
The design of MRRT plus the increases in state mining royalties means that coal and iron ore prices will probably need to be at very high levels for sustained periods before any significant revenue is received by the federal government.
The real MRRT losers are the junior coal and iron ore producers that are below the MRRT threshold but still liable for higher coal or iron ore royalties, and need to maintain MRRT records that could be utilised in circumstances of either future growth or mergers and acquisitions.
The issue of whether mining tax revenues are collected by the federal government or state governments is probably irrelevant to most Australians. Rather than trying to fix the complex and highly compromised MRRT, the federal government might be better advised to scrap it and start engaging with the states for the reform of their mining royalty regimes along a more efficient profits-based approach.
The Northern Territory has a profits-based mining tax at a 20 per cent rate which could be a useful model for adoption by state governments. While it is difficult to compare output-based mining royalties with a profits-based mining tax, the Northern Territory government has contended that on a life-of-mine basis it is comparable to the mid-range of the output-based royalty rates imposed in the key mining states.
While the mining tax will almost certainly become a case study for future students of Australian politics, the key lesson clearly forgotten was former Prime Minister Paul Keating’s aphorism: "one place not to be in this system is between a premier and a bucket of money.”
Ian Farrow is Senior Manager, Public Policy with The Civic Group.
He is a chartered tax adviser with professional experience in resources taxation and was a former senior adviser to a former Federal Minister for Resources.