24/06/2010 - 00:00

Two tax plans, two outcomes

24/06/2010 - 00:00

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The premier’s relatively smooth tax reform process presents a sharp contrast with Prime Minister Kevin Rudd’s attempt.

Federal government ministers have become fond of saying that tax reform is a bruising process that pits brave governments against determined opponents.

It’s hard to argue with that proposition, but what is more telling is that some governments find it much harder than others.

Premier Colin Barnett announced this week that he had done a deal with iron ore miners BHP Billiton and Rio Tinto over state royalties, one of WA’s major revenue sources.

Initially the miners vigorously opposed the change, which will cost them about $1 billion over the next four years.

This fight goes back to when Alan Carpenter was in office; he proposed the concessional royalty rate paid by the two mining giants should be brought into line with the rates paid by new producers.

Mr Barnett took up the cause after winning office and, after protracted but civil negotiations, he prevailed.

The result is that BHP and Rio have agreed to pay royalties at a higher rate for both their new mines and their existing operations.

In addition, they will make a one off $350 million payment to the state after they negotiated changes to the state agreements governing their Pilbara mining and export operations.

Therein lies part of the explanation as to why Mr Barnett was able to win support for the higher tax rate.

The answer is that BHP and Rio need something even bigger from the state. They need to secure amendments to their state agreements so they can implement operational changes that will make their iron ore production and shipping more efficient.

If they win approval from competition regulators in Australia and Europe, they plan to fully integrate their Pilbara operations, sharing rail and port infrastructure and blending ore from each other’s mines.

These changes will deliver estimated savings of $10 billion, transforming the economics of their Pilbara iron ore operations.

Against this backdrop, Mr Barnett’s push to reform royalties was both smart politics and commercially realistic.

The same cannot be said of the federal government’s planned resource super profits tax.

The relationship between Canberra and the mining industry has become poisonous, with treasurer Wayne Swan using terms like the mining “rip off” to prosecute the case for change.

He stepped up the rhetoric this week, saying “a small number of companies are using strong arm tactics to silence other companies”.

Mr Swan also sought to defend the government’s consultation process, releasing data on the large number of meetings held with industry.

However, his comments failed to address the main criticism: that the consultation process has been so narrow as to be meaningless.

Nonetheless, there is a growing expectation that the government will come up with some compromise proposals.

Queensland’s emerging coal seam gas industry is likely to be subject to the more generous provisions of the existing petroleum resource rent tax.

More generous depreciation write-offs are likely for other miners and the quarrying industry will probably be exempted.

The 40 per cent tax credit for failed mining projects, which was a critical aspect of the RSPT’s design but was dismissed as worthless by mining companies, is also likely to be dropped.

Another aspect that needs to be clarified is the point at which the tax is levied: when the minerals are extracted from the ground, or after they have been subject to initial processing?

This is particularly important for the emerging group of miners extracting magnetite iron ore, which goes through a beneficiation process.

None of these changes will do much for industry heavyweights such as BHP, Rio or Xstrata, which are likely to bear the brunt of the RSPT, amended or not.

Nor should they get their hopes up, for one very important reason. The federal government’s fiscal credibility hangs on the RSPT, which will bring in an estimated $9 billion per year once up and running.

Take away the $9 billion and you take away Mr Swan’s fiscal strategy, which is designed to bring the federal government’s budget back to surplus.

That is non-negotiable, which does not augur well for miners hoping to see fundamental change or scrapping of the RSPT.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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