Quiz time: What does the mining industry want, but can’t get, and the wine industry has, but wants to give back?
To anyone who said ‘a tax dodge’, Briefcase offers its congratulations, because tax is what lies at the heart of moans being heard from two of Western Australia’s most important industries.
Miners have been complaining loudly for years that they need a flow-through tax scheme to encourage investment in exploration companies, and have their fingers crossed that it will be delivered in next month’s federal budget.
Wine producers are complaining almost as loudly that tax deductions available through managed investment schemes (MIS) are too generous and ruining their industry by encouraging over-planting of vines.
Sitting in the middle is the federal treasurer, Peter Costello, who must be wondering whether it is actually possible to please everyone when it comes to tax. If he ever asks Briefcase for an opinion the answer will be a very loud ‘no’.
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First, the mining part of the puzzle. According to folklore among the mineral explorers, they are being hard done by because they cannot directly pass a tax benefit (write-off) to shareholders who invest in their companies, a process known as ‘flow through’, which is being used in Canada.
The central plank of the argument is that Canada kick-started its once moribund exploration industry by offering such a tax break.
Briefcase has been listening to this argument from the miners for the best part of a decade and acknowledges that it had some merit – about a decade ago.
Back then, when mineral prices were low, Australia’s exploration industry could have done with a helping hand. As events unfolded, commodity prices rose (and rose), thanks largely to Chinese demand, to a point where profit margins in mining today are sky high.
The problem now is selling the tax-break case for an industry that is enjoying the biggest boom in history. Quite simply, if you can’t make money in mining today then there is something desperately wrong with your business, and if you can’t raise exploration dollars in a climate of sky-high commodity prices then there is something desperately wrong with your sales pitch.
True believers in flow through argue that the cycle will turn again, and the day will come when exploration needs a helping hand; a spurious argument because it assumes this is a conventional commodity-price cycle and that we will revert to a low-price environment (a variation on the super-cycle debate).
May 9 is the day when the miners discover whether they are to get their tax break. That’s the day Mr Costello brings down his budget. A wise investor will not be betting on a win for the miners. •••
The wine industry, in a bizarre twist of the tax tale, is finding that having a tax break just ain’t what it’s cracked up to be – a lesson the miners ought to take note of.
Out in the paddocks around Margaret River and Mt Barker, they are desperate for the tax-driven investment scheme operators to disappear, because they have become one of the primary sources of the over-production that lies behind the problems of most grape growers and wine producers.
Briefcase, during a chat last week with wine industry consultant Guy Grant, gained a bit more of an insight into the problems being caused by the distorting effect of tax deductibility available to investors in managed schemes.
Whereas managed schemes were once seen as a way of attracting investment in an industry in need of more production (more grapes), these days the same schemes are encouraging a flood of unwanted product.
Many seasoned grape growers are bemused by the tax-driven problem they have inherited. To the average man on the land it is plainly stupid to continue planting more vines when the output of the existing vineyards cannot be sold – or is being sold at less than cost.
In an explanatory memo written for the benefit of politicians and grape growers Mr Grant set out the case for changes to the MIS system, which has made tax a very dirty word in the wine industry – for the oddest reason, there’s not enough of it.
Most of the current phase of vineyard development in the South West is MIS driven and carried out by funds management companies, Mr Grant said.
“Wine industry experts are all but unanimous in questioning the need for, or the financial logic behind, new vineyard plantings,” he wrote.
Or in simple terms: Many vine plantings have nothing to do with farming logic and everything to do with a tax dodge scheme gone feral.
“Typically, a MIS vineyard is the result of a tax-deduction-seeking-investor being persuaded by a commission-earning financial adviser to make a tax-effective investment in a vineyard managed by a fund manager who earns a lucrative management fee for doing so.
“The MIS structure virtually guarantees that all three parties, investor, adviser and manager, will achieve their primary objective before a single vine is planted. The vineyard development in a MIS is a means to an end rather than an end in itself.”
But the real sting is that a vine – whether planted for the noblest of reasons (to make plonk) or for the nefarious reason of generating a tax break – produces grapes, and those grapes have to go somewhere, generally into a bottle of something, which ensures a market glut.
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If worrying about tax deductions and distorted industries is too taxing for you then Briefcase has found the perfect job to blow you away from all that.
The Halo Trust, a British-based non-government organisation specialising in the removal of landmines, is looking for volunteers to lead clearance teams in places such as Afghanistan, Somalia and Sudan.
Application forms can be found at www.halotrust.org. The job promises to be more rewarding than chasing tax deductions, and somewhat more exciting.
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“There is one difference between a tax collector and a taxidermist – the taxidermist leaves the hide.”
– Mortimer Caplin