18/02/2010 - 00:00

Buswell’s royalty call may deliver tax bonus

18/02/2010 - 00:00

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THE Goose That Laid the Golden Egg is a fable attributed to ancient Greek storyteller Aesop, which is regularly used (and abused) as an analogy in modern political life.

THE Goose That Laid the Golden Egg is a fable attributed to ancient Greek storyteller Aesop, which is regularly used (and abused) as an analogy in modern political life.

Rarely, though, is the metaphor as apt as when talking about Australia’s resources industry.

Once seen as cyclically problematic, dwindling in importance and simply out of fashion, the resources sector has this century stretched its enormous wingspan to the full and started depositing its wealth at a rate that was unexpected even a decade ago.

In political terms, the golden egg is the royalty payments that governments receive for allowing private companies to extract state-owned resources from underground or under the sea.

And, in the past few weeks, the value and administration of those royalties has emerged as a major political battleground as the centralising forces of Canberra and cash-strapped government of Western Australia have a verbal joust on the subject with both themselves and the industry.

Arguably, the latest stoush started in June, when BHP Billiton and Rio Tinto heralded their breakthrough agreement to create an iron joint venture in the Pilbara.

To work efficiently, such a deal would require the consolidation of dozens of state agreements into a single deal with the WA government. Those agreements, many made well before either BHP or Rio Tinto controlled the mines, have numerous restrictions on activity, which would need to be eased if a joint venture was to extract its full production synergies.

The agreements also stipulate royalty rates. In many cases, these rates reflect the market at the time of the deal, such as low rates for iron ore fines that were then difficult to market but which now represent the majority of the Pilbara’s exports by volume.

WA premier, Colin Barnett, saw the opportunity to improve the state’s own position if agreements were rewritten, demanding among other things that the joint venture pay a higher royalty rate on their production. Currently most fines production by the two major players attracts a 3.75 per cent royalty, compared to 5.625 per cent for more recent mining operations.

While behind the scenes that negotiation has been taking place all year, late last month federal Treasury secretary Ken Henry quietly dropped a bigger bombshell. Mr Henry has been in charge of a sweeping review of federal tax and, reportedly, believes a Commonwealth takeover of the minerals royalty regime might be a good idea.

Rather than the current state-based royalty as a low percentage of output by value, Mr Henry mooted a federal takeover that would apply a much greater percentage of operating profit – much like already exists in the offshore petroleum sector governed by the Commonwealth.

Not only would this remove current anomalies and increase the tax take but, it is understood, it would also benefit start-up mining operations, which currently pay royalties whether or not they are operationally profitable.

There was also talk of a federal environmental tax on mining companies, which found a supporter in the form of controversial University of WA academic, Jorg Imberger.

While many figured the leaked material from the Henry review was little more than the federal government sounding out the possibilities, there was a strong reaction.

The Chamber of Minerals and Energy of Western Australia chief executive Reg Howard-Smith said replacing state royalties with a new federal resources tax could mean WA missing out on its fair share of the income derived from resource projects in the state.

Responding to speculation that the federal government’s review of Australia’s tax system supports such a concept, Mr Howard-Smith said it was important that income collected as a result of the strength of the WA resource sector was returned to benefit communities in the state.

“The retention of revenue derived from the state is of primary concern, particularly the significant income collected as a result of the strength of the Western Australia resource sector,” he said in a statement.

“Royalties derived from resource projects are an essential part of state revenue and are required to deliver important services and infrastructure for all Western Australians.

“Suggestions that the federal government may impose a federal resources tax in place of or additional to, state royalties are of serious concern.

“Royalty rates are an important factor in making decisions about mining projects, including determining which states provide the best operating environment for new investments in resources projects.

“A federal resources tax could lead to a loss of state control of revenue levers, reduced flexibility and a lack of incentive for state development.”

Mr Howard-Smith said the federal government did not have responsibility for land management, and royalties for minerals, about $2.4 billion last financial year, were a rent for the use of resources in WA, not a tax.

While a “hands-off” response from WA Treasurer Troy Buswell was predictable, the sub-text was less so. In defending the state’s royalty base, Mr Buswell further alarmed the industry by suggesting that raising royalty rates should be debated.

Messrs Henry and Buswell have been damned by the industry for airing their views because such speculation raised the spectre of sovereign risk.

“While the (state) treasurer did avoid making any specific statement about the government’s plans to alter royalties, it doesn’t take a genius to join the dots that he left in full daylight,” Association of Mining and Exploration Companies chief executive Simon Bennison said.

“Given the industry that delivers the largest source of income to WA’s budget is just starting to emerge from a disastrous global financial crisis, this kind of speculation is very damaging.

“Investors are nervous. Speculation of a regime change creates further angst and will prompt some investors to put their money in the bank rather than backing projects that are very important for Australia’s financial future.

“This comment from the WA treasurer is unhelpful, particularly on the back of recent federal government speculation to introduce a new resource rent tax.

“We urge senior government officials to carefully consider their public remarks and bare in mind at all times that Australian resources companies are competing with many other attractive jurisdictions for investment and ultimately, jobs.”

While the injury to investor confidence is hard to determine, the battle over control of taxation is a little more transparent.

As much as WA would dearly love to control of its own financial destiny via the mining sector, the truth is that royalties are a blunt instrument in this respect.

The problem for WA, enunciated regularly by our state treasurers, is the allocation of GST revenue via the Commonwealth Grants Commission.

While WA enjoyed more than its fair share of this revenue during the lean periods for the resources sector, the state’s relative financial strength has come back to bite it due to the CGC’s mandate for equalisation.

The commission takes into account the ability to raise revenue through devices such as mining royalties when it decides on distribution to the states. Rising mining revenues have meant WA’s GST share has dropped from 9.4 per cent of the whole, relatively close to our population share of just over 10 per cent, to an anticipated 8.1 per cent this financial year. The state budget anticipates this will fall dramatically to 5.7 per cent in 2012-13.

The challenge for all state governments wanting to improve their GST allocations comes down to efforts to beat the commission’s formula. For each category of tax available to each state, the CGC calculates an average that is taken. Whether it is payroll tax or royalties, it simply assumes each state charges the average.

And that is where Mr Buswell’s comments make him an astute treasurer, if not a friend of the resources sector. Under the GST system, no state gains a grants advantage by having the lowest tax rates; in fact it is penalised. Only those that are above the average make any headway against their peers.

By raising royalties, WA can potentially fudge an increase in revenue that is greater than the average against which it is compared.

The question for all of us is the health of the golden goose. No-one would want to see its future jeopardised by a tug-of-war over financial destiny between the Commonwealth and the state, would they?

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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