Long-term security of investment essential

IT has been a particularly busy six months for the chamber – and it’s fair to say one of the dominating issues has been the federal push for a resource rent tax.

I distinctly remember the day the federal government announced the Resource Super Profits Tax. It was Sunday May 2, and while most of Western Australia was watching the western derby, we were in the office, poring over the proposal and its implications for our members and the wider economy.

What became apparent very early on was that the key objective of the Henry Tax Review – to deliver a more streamlined, efficient taxation system – had been largely ignored.

Of more than 130 recommendations, just a handful was adopted, including the so-called RSPT – not that the word ‘super’ was part of the recommendations, this was a purely political construct. Not only did it pose a potential administration and compliance nightmare for resource companies, big and small, it soon became clear that a key assumption in the model used by the government – that the tax would somehow lead to sector growth – was fatally flawed.

The government’s model essentially assumed that capital was immobile. Unfortunately. Australia does not have a monopoly on any of the world’s major minerals; investors can easily shift their attention to the provinces – whether Africa, Canada or Brazil – where they can get the best return.

Take our most significant mineral export, iron ore, which provides more than $2 billion dollars in state royalties annually, accounting for $33 billion in export value and 48 per cent of total commodity sales for WA. Yet despite these massive numbers, WA supplies just 18 per cent of world demand. We are clearly in a very competitive international market, where an assumption of immobile capital has no place in modelling for a significant new tax.

In time, this crucial flaw was exposed by economic commentators and analysts, including Ernst & Young’s Thomas Neubig – a former chief economist with the US Department of Treasury’s Office of Tax Analysis, who had been commissioned by CME and member company Xstrata to examine the assumptions underpinning the tax.

However, we now know the market reaction was more immediate, with the value of Australian resource stocks adversely affected in the days and weeks that followed the announcement of the RSPT.

Suddenly, Australia – known across the globe for its stable government and sound investment profile – was being touted as a sovereign risk. Our international reputation as a good place to do business was suffering, thanks to a theory-based policy, implemented without consultation or consideration of the real-world consequences. Coming out of the GFC, it was another layer of uncertainty we didn’t need, and definitely did not ask for.

Thankfully, the RSPT was eventually withdrawn. Now we are confronted by the Minerals Resource Rent Tax (MRRT) and a government commitment to better consult with industry.

There’s no doubt it is an improvement on the original proposal, with a raft of commodities now excluded. However, concerns remain about many aspects – particularly among our small to mid-tier members. Most of these concerns relate to the ability of Australian projects to attract capital at a reasonable rate, and the increased threat to our overall international competitiveness.

Our industry is heavily driven by foreign investment in the exploration, development and production stages; and it’s increasing. The Foreign Investment Review Board’s 2009 annual report showed more than $90 billion worth of approvals for proposed mineral exploration and development in Australia, a $26 billion rise on the previous year. It’s vital these investment dollars continue to flow.

Some of the issues CME recently raised with the MRRT Policy Transition Group include:

• the stage of the mineral extraction process at which the tax will apply;

• the resource valuation;

• the threshold at which the MRRT kicks in;

• uplift rate;

• deductibility of financing costs;

• how project losses and transferred losses are treated;

• administration and compliance costs; and

• crediting of royalties.

I’ll just touch on a couple of these concerns.

Firstly, the taxing point. This has particular relevance for WA’s emerging magnetite sector. There must be recognition that magnetite ore, for example, is a very low-value product, which requires extensive processing before it becomes a saleable product for export.

With the federal government committed to magnetite’s inclusion, we are pushing for the commodity to be taxed as close to the mine gate as possible.

Secondly, the MRRT threshold. This is a significant issue. Right now, there’s some confusion about how this will be applied. There’s growing concern that, once a project reaches the MRRT threshold of $50 million profit (say, $51 million), the tax will not apply to the additional $1 million, but the entire $51 million. If this is the case, not only will there be major compliance and administration issues, but small to mid-tier members will find themselves disadvantaged. On this basis, there is a strong case to either increase the threshold, or adjust its application.

Finally, crediting of royalties. It’s clear that the federal government’s intention of not crediting future increases in state royalties creates an almost inevitable scenario of a double-taxation whammy for the industry. The constitutional question over federal taxation of state mineral wealth aside, we believe this is a direct attack on the revenue-base of the government of WA and other states and territories.

It seems clear the federal government is determined to push ahead with a resource rent tax. We have a good relationship with the federal resources minister [Martin Ferguson] and CME will work with the Policy Transition Group to minimise the impact on the WA industry’s ability to compete on the international stage.

But never forget that CME and our members, responsible for 90 per cent of mining and energy production in this state, strongly support the retention of a state-based regime.

It’s vital we work with government to get the policy settings right, and protecting our international competitiveness will continue to be crucial.

• This article is from an address by Chamber of Minerals & Energy chief executive Reg Howard-Smith to the Australian Tax Institute National Resources Conference 2010 last week.