01/07/2010 - 00:00

GST a foundation for mining tax solution

01/07/2010 - 00:00

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A new prime minister presents miners with a final chance to control their destiny when it comes to tax.

THE ascension of Julia Gillard to prime minister might have allowed miners to breathe easier after a tense two months, but they ought to be wary of the negotiation on offer.

While Ms Gillard is likely to agree to many industry demands about the key parameters of the unpopular tax, the resources sector needs to think hard about what it agrees to as it basks in the glory of a presumed win. This may be the one and only chance it has to control its own destiny, especially when it comes to future rates of tax.

No matter what deal is done now to get the miners off her back before an election, the prime minister won’t be able to promise that the rates agreed – be they the headline rate or the discount rate – are set in stone.

Whenever they need more money, governments in the future, perhaps even one led by Wayne Swan, a strong supporter of the resources rent tax, will be able to tweak up the rates, slowly squeezing the industry.

It seems to me there are only two obvious ways around this.

One is to establish project-by-project pseudo state agreements, which limit the federal government’s ability to stray from any deal it has inked. From what I’ve seen, the federal government was already going down this path to some degree before Kevin Rudd’s blood was spilled.

Deals with coal seam gas players are potential examples. While that was also a political move to split the industry, it showed that the miners were right – different rates need to be applied for each commodity as the states already do.

But to get a political deal via these individual deals, the federal government would have to agree to keep the tax rates constant in the future. That is just like the existing state agreements, whose inherent inflexibility was the root cause claimed by the federal government for the need for a resources rent tax.

The states, via these agreements, locked in royalty rates from the beginning of the project, in many cases decades ago.

At the time, that seemed enough to get investment in mining started, jobs created and build a prodigious globally competitive industry. Now that the industry is successful, Canberra has got greedy and wants some of the action.

In my view, the Canberra state agreement model is fraught with danger and as much inflexibility as the current much-maligned royalty regime. Canberra will pick off vulnerable sectors, such as coal seam gas, and most heavily tax the real drivers of the economy. That is a recipe for disaster.

An alternative is a method modelled on the negotiations for the 10 per cent Goods and Services Tax, which in so many ways is the appropriate way of dealing with this issue – if indeed change has to be made.

The GST, although proven to be imperfect, worked because the states gave up taxing powers in lieu of a share of the GST revenue. Even though the formula used was flawed in the distribution (given WA’s actual share is much lower than what it should be if done on a per capita basis), and the exclusion of food weakened the tax, the process was right.

Most importantly, the ability to increase the GST required the agreement of all the states. Given the multiple jurisdictions and different electoral cycles, such a change is unlikely unless it really is in the nation’s best interest.

Contrast this to Britain where the GST-equivalent Value Added Tax has just been lifted to 20 per cent from 17.5 per cent. The origins of the VAT are a bit of a mystery but from what I understand it was around 8 per cent on basic goods (and 12.5 per cent on luxury items) until 1979 when it was raised to 15 per cent across the board in conjunction with tax cuts. In 1991, it was increased again to 17.5 per cent, a level that has remained for almost two decades.

Clearly, Britons have to wear the fact that the VAT was brought in without any checks and slowly jacked up as governments have kept spending. Australia’s federation allows a restriction on governments helping themselves to these takings, which is no doubt why Labor wants a mining tax, not to mention the possibility of future taxes on other profitable industries.

Instead of riding over the top of the states by demanding a takeover of health and then simply creating a new resources tax, federal Labor now run by Ms Gillard should try remembering it is part of a federation.

The miners ought to be demanding that any new tax be created in the same way that the GST was; that the states give up their royalties for a prescribed share of the resulting revenue, irrespective of other sources such as the GST or local revenue streams.

No change to the resources tax parameters ought to be allowed without the agreement of all states, a slightly less stringent safeguard than with the GST because only a handful of states have a real interest in the production side of the equation.

A GST-style negotiation, in which the states have a direct say and clear stake, is more likely to come up with the right formula to deliver the balance between tax and industry growth.

Of course, I only proffer this as a lesser of the available evils.

I remain convinced that miners pay plenty of tax, as they exposed when the federal Treasury’s numbers were found to be poorly researched.

If, as is the case, they pay a variety of royalties, a 30 per cent corporate tax rate, most of their dividends into the hands of Australian nationals and are predominantly owned by Australians then Labor’s tax grab is just redistribution based on jealousy.

The only caveat I have is if a national profits-based tax could replace state royalties in a way that everyone won – miners and the governments involved – by ultimately increasing both taxes and profits. Not in theory, as Treasury provided, but in reality.

If we have to have reform – and I am not convinced we do – then a GST-style negotiation is the only credible way of delivering an outcome beneficial to all, not just more revenue for Canberra.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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