20/05/2010 - 00:00

Tax debate is not so complex

20/05/2010 - 00:00

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The planned resources super profits tax is highly complex but the underlying issues are simple.

Tax debate is not so complex

SOON after the Rudd government announced plans for its super profits tax, former senator and now company director Ian Campbell sent an email to his business associates suggesting one of his old ideas should be revived.

That idea was to move the Treasury out of Canberra and open offices in other cities, to bring the bureaucrats closer to the wider community.

The merit of that idea has grown on me, as I have observed the wide disconnect between the government’s advocacy of its new tax and the mining industry’s response.

Treasurer Wayne Swan, Treasury Secretary Ken Henry, whose review committee devised the new tax, and many others have claimed repeatedly that the tax will not have an adverse impact.

In fact, they insist it will have a positive effect, citing independent research by consulting firm KPMG Econtech.

Most of us question the value of independent experts’ reports that are rolled out during takeover battles, so I’ll say no more on that topic.

This argument is based on the premise that the government will subsidise 40 per cent of the losses on failed mining projects, as well as taxing 40 per cent of the ‘super’ profits on successful projects.

One financial commentator, writing in a national newspaper, took this point further.

“The RSPT works not as a tax on profits beyond a certain hurdle rate, but rather as a way to force mining companies to effectively take on the federal government as a 40 per cent equity partner.”

The commentator, who supports the tax, went on to say “the RSPT has the added advantage of making more marginal projects viable, which is why Treasury reckons it could actually boost, rather than restrict, mining investment.”

So much for the theory, what about the real world?

Fortescue Metals Group executive Julian Tapp raised a salient point when Mr Swan spoke at a business lunch in Perth this week.

He questioned whether this government backing would, in fact, help project developers obtain finance, and asked whether Treasury had actually spoken to any lenders to test this proposition.

Mr Swan’s response, as it was for nearly all questions, was that Mr Tapp should speak to the recently established consultative committee.

More fundamentally, business executives have asked themselves: who goes into a project planning for failure? Nobody.

Mining investors put their money into projects because they are attracted by the potential for high returns. Similarly, banks put their money into projects they are confident will succeed.

Will lending managers go to their credit committee and say, ‘this project is looking marginal, but that’s okay because the government will pick up 40 per cent of the losses?’

Of course not, yet that seems to be the thinking in Canberra.

Well, part of the thinking. Treasury boffins have estimated the tax will raise $3 billion in 2012-13 rising rapidly to $9 billion in 2013-14.

Those numbers suggest, not surprisingly, the government will be taxing many more profitable projects than subsidising failed projects.

The continuing anger over the proposed tax also stems from the spurious nature of many other arguments put forward.

These include the use of selective numbers to back the claim the mining industry has not been paying its fair share of taxes.

The government quoted only royalty payments relative to profits, and ignored growth in tax payments over the past decade.

It also selected a low point in industry profits as the base for its analysis, rather than picking a normal period for analysing royalty payments relative to profits earned.

Added to that was the dubious claim that the petroleum resources rent tax had operated successfully for 15 years without disrupting growth of the oil and gas sector.

The reality is that the North West Shelf venture, which has dominated growth in oil and gas production in Australia over this period, is not subject to the PRRT.

Let’s hope that mining executives jetting to Canberra to put their case to the Treasury officials get a good return on their investment.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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