Take two on resources tax
It was a proposal designed to save Rudd from political death and appease the mining lobby whose anti-government campaign had reached a damaging fever pitch.
While the prime minister and Forrest were busy polishing the proposal in preparation for an announcement, Rudd's party colleagues led by Julia Gillard and Wayne Swan were busy on their own deal with another group of miners, BHP Billiton, Xstrata and Rio Tinto. Gillard/Swan won the battle for power and the minerals resource rent tax (MRRT) was born.
Forrest, the renegade of the mining industry, and Rudd have remained friends and doubtless Rudd, who has declared that he wants to repair the government's relationship with business, will need to tread delicately.
While the major mining companies that devised the MRRT in conjunction with the government have been happy with the outcome, the lack of revenue raised from the tax has been a major embarrassment for Swan and Gillard.
The three large minerals houses contributed next to nothing to the tax last year and there are expectations that the structure of the tax, combined with the fact prices for iron ore and coal are under pressure, will mean the MRRT will not raise much more over the next couple of years - at least.
There is nothing to stop Forrest revisiting his alternative mining tax proposal with Rudd. The fundamental difference between the two was that the Rudd-Forrest model provided tax deductibility for capital spent on infrastructure and the MRRT provides deductibility for the resources in the ground.
Meanwhile, Rudd owes no favours to the group of three mining companies that cut a deal with Gillard. There would be no point in Rudd moving back towards the universally hated resources super profits tax - which bizarrely would have resulted in the industry paying no tax with commodities trading at their present levels.
The best outcome for the industry would be to see the Liberals win power, given they have promised to dump the MRRT - which would suit Forrest's Fortescue Metals and its larger rivals.
But if Labor looks at all like it could retain power, the game will be on to take a fresh look at the industry tax structure.
In an interview with Fairfax Media on Saturday, Rudd said that before the election he wanted to take a look at and possibly make changes to some policy areas including the mining tax.
If so, it's highly likely he would seek to discuss his plans with Forrest - who, thanks to the falling commodity price and some balance sheet strain, is looking to sell a large minority stake in Fortescue's infrastructure assets.
If Rudd decides to revisit the proposal he nutted out with Forrest, the part-sale of these infrastructure assets will lose some of its financial appeal.
Already Fortescue has pushed back the timing of the deal from June 30 to the end of September.
Forrest, who rallied smaller iron ore miners to campaign hard against the resources tax, may have decided it is too difficult to unscramble the tax, which has cost Fortescue almost nothing.
From Rudd's perspective, he now sits on a flawed tax that raises almost no revenue and faces a troika of big miners that will fight any changes that could increase (or create) a tax impost.
Moving away from a fixed cost to a tradeable carbon tax model - which Rudd has indicated he would pursue - has provided them with a gift that investment bank UBS estimates will increase BHP and Rio earnings by about 3 per cent.
Frequently Asked Questions about this Article…
The MRRT was the minerals resource rent tax introduced after negotiations between government and major miners. The article says it mattered because its structure and the fact that big miners contributed little revenue left it raising almost no money — an embarrassing outcome for the government — and it changed tax dynamics across the mining sector, which is important for investors in resources stocks.
According to the article, the key difference was deductibility: the Rudd–Forrest model would have allowed tax deductibility for capital spent on infrastructure, while the MRRT provides deductibility for the resources in the ground. That structural difference changes how mining projects and infrastructure investments are treated for tax purposes.
The article notes that Fortescue — led by Andrew Forrest, who had campaigned against the earlier resources tax — was largely unaffected by the MRRT (it cost Fortescue almost nothing). Forrest has considered revisiting his alternative tax model with Kevin Rudd, and Fortescue has delayed a planned part-sale of infrastructure assets, a move the article links to commodity price pressure and balance-sheet strain.
The article explains that the way the MRRT was structured, combined with iron ore and coal prices being under pressure, meant the three large minerals houses contributed next to nothing. That combination limited the tax’s revenue‑raising capacity over the following years.
Yes. The article reports Rudd said he wanted to review and possibly change some policies, including the mining tax, before the election. For investors that could mean renewed negotiations with industry figures like Andrew Forrest, possible shifts in deductibility rules, and implications for asset sales and company profitability depending on the outcome.
The article says that moving away from a fixed‑cost approach to a tradeable carbon tax model — something Rudd indicated he might pursue — has been estimated by UBS to boost BHP’s and Rio Tinto’s earnings by about 3 per cent, effectively a small earnings upside for those large miners.
The article outlines two clear scenarios: a Liberal win, since the Liberals promised to dump the MRRT (an outcome the industry would welcome), or Labor retaining power, which could prompt a fresh look at the tax structure. Political negotiations and leadership moves (including Rudd’s relationships with industry figures) are central to any change.
Investors should monitor government statements about revisiting mining tax policy, any talks between politicians and mining leaders (for example Rudd and Forrest), promises by the opposition about dumping the MRRT, and commodity price trends (iron ore and coal) because the article highlights that weak prices and tax structure were key reasons the MRRT raised little revenue and influenced company strategies.
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