The premier factors undermining the MRRT

The mining tax is working as intended, it's just that royalty rates and mining economics have been working against it. Only a sector uptick and the restoration of state relations can put federal revenues back on track.

What Rob Oakeshott and the Greens regard as loopholes in the Minerals Resource Rent Tax are nothing of the sort. They were deliberate design features.

In the tension-packed negotiations with the big end of the mining industry in the lead-up to the last federal election after Julia Gillard had deposed Kevin Rudd as prime minister with a platform that, among other things, included ending the ferocious mining industry campaign against the Resources Super Profits Tax it was quite clear that there were some non-negotiables on the mining side.

One of them was that the government abandon the RSPT’s base for calculations of super profitability of existing mines – historic, depreciated value – and give the miners the option of using market value.

That was a critical issue for the big miners, as the retrospective nature of the RSPT effectively meant that the government would have expropriated 40 per cent of the value they had invested in and created over decades under very different taxation regimes.

The other, confirmed by the post-election policy transition group appointed by the government, was that ‘’all current and future state and territories’ royalties’’ should be credited against the MRRT.

Subsequently, of course, despite Wayne Swan threatening (but not delivering) punitive action against states that lifted their royalty rates (which, because they are credited against MRRT liabilities and unused credits can be ‘’uplifted’’ at the long term bond rate plus 7 per cent per annum, reduce the amount of tax the federal government can receive) the states have raised their royalty rates.

That is and always was a matter of federal-state relations, not a loophole in the MRRT itself.

The fact that the MRRT has raised an embarrassingly small amount of revenue – $126 million – in its first six months isn’t a failure of the tax itself. It was designed as a tax on super profits.

While the headline rate of the tax was 30 per cent, the ability to immediately write-off capital investment and an "extraction allowance" to reflect the value added to the resources by the miners reduced the effective rate to 22.5 per cent on profits, which represent returns on the base value (generally, for big established mines, the market value) above the long term bond rate plus 7 per cent – or about 10.5 per cent today.

The combination of lower iron ore and coal prices, higher costs and increased state royalties means that the billions of dollars of new tax that Swan envisaged – and which he locked into recurrent spending in anticipation of a deluge of revenue – haven’t materialised.

It has always been the case, however, that the MRRT was a tax on ‘’super’’ profits, not a surcharge on normal profitability. Given that the tax was devised when iron ore and coal prices were at record, stratospheric levels, and that they have now fallen very substantially – and before some of the states raised their royalty rates – the mines aren’t super profitable and therefore it is quite logical that the MRRT will raise far less than Swan anticipated.

It should be noted, however, that the miners are actually handing over more of their revenues to governments, albeit in the form of increased royalties to state governments rather than MRRT to the federal government. With the shift in commodity markets from price to volume, the largely volume-based streams of royalty income for the resource states will continue to swell.

The "problem" with the MRRT isn’t that an inherently volatile tax in theory has proven volatile in practice but that Swan spent very large amounts of revenue that hasn’t materialised.

The fact that the Gillard government has been unable to convince the states – the actual owners of the resources concerned – to freeze royalty rates has exacerbated the impact on federal revenues.

It is a deal with the states – and the government can try to use the distribution of GST and other revenues as either a carrot or stick to convince them to play ball – that the government, Oakeshott and the Greens need to pursue, not changes to the MRRT itself.

Amending the MRRT to remove the credits for state royalties or alter the base for calculating the tax would be a gross breach of faith with the miners – and lead to them reigniting their advertising campaign against super-profits taxes that proved so destabilising and destructive for Labor in 2010.

The MRRT is, in concept, a far fairer and more efficient tax on profits from resources than the volume-based royalties, which are imposed regardless of the profitability of a mine.

Unhappily for the government and its ability to fund its existing policies, however, the resources do belong to the states and those states with large resource bases are quite hostile to the notion that they should give up their revenue and autonomy in response to either threats or promises from Canberra. Closing that ‘’loophole,’’ if it were possible, would take some ingenuity.

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