Saturday, May 22, 2010

It's not a tax, it applies to more than super profits, so how did so many people get it so wrong?

Someone somewhere in the Treasurer's office must be deeply regretting ever calling it a Super Profits Tax. For one thing it applies to profits that are pretty ordinary. For another, it's not a tax...

As Ken Henry has tried to explain since and as the Minerals Council itself explained in its submission to the Henry Review the right way to think of developing minerals is as a "joint venture" between the citizens who own them and the company that extracts and sells them. Each has rights to the proceeds.

Until now state governments have sold those rights for a standard fee, varying from a low of 3.5 per cent of the value of uranium mined in South Australia to a high of 10 per cent of the coal mined in Queensland. As mineral prices have soared and profits with them the fees have began to look shabby.

The Minerals Council proposed and the Henry Review agreed that instead each partner should share in the profit.

The Treasury has taken the idea further and made each side genuine partners sharing in both the costs and profits. While the government chose to emphasise the 40 per cent profit share (perhaps to make it look as if it was standing up for Australia) the other equally important side of the equation is its commitment to stump of 40 per cent of the costs.

It will not only be a partner, but the best kind any business could want, a "silent partner" as Ken Henry put it this week - someone who will without a vote and without complaint put up 40 per cent of whatever the mine developer decides to spend and then come back for 40 per cent of the profit only when and if that venture is raking in rewards.

That several high profile mining executives and much of the public don't see it that way says something about Australia, something about the thinking of the government as it planned its sales pitch, and also something about a kink in the arrangement that has ensured that many in Henry's words, don't "get it"...

Queensland mining magnate Clive Palmer demonstrated a shaky hold on maths in the days after the policy's release. Not only did he add the 30 per cent company tax rate and the 40 per cent super profits rate together to tell tell Lateline it would tax him at 70 per cent (the most it could tax him is 57 per cent which is what you get when you apply a 40 per cent tax then the new company tax rate of 28 per cent tax to the rest) he forgot about the government's pretty substantial contribution to his costs.

It's the kink that made him forget and the kink that's causing much of the anguish. The government doesn't actually pay 40 per cent of the costs at the time they are incurred - that might break its budget. Instead it does something that mathematically amounts to the same thing. It guarantees to pay the costs in the future by deducting them from any eventual super profits tax payments. If the company winds up without ever paying the tax, it'll send it a cheque. To compensate companies for the delay it increases what it owes by the bond rate each year.

As Henry sees it that's as good as handing the firms money. The only risk, as he puts it, would be if the government folded. Many of the firms see it as pie-in-the-sky algebra. BGF Equities chairman Warwick Grigor fronted Henry Tuesday and said in the real world miners relied on intuition not academic analysis.

Henry said he did "not want to debate the relative merits of intuition over analysis,' but added "I obviously I have a rather marked sympathy for the later."

Miners say they won't be able to get loans if the government merely guarantees to come good with the month later. Henry says that's simply a matter of financial engineering. "The people we call call financial engineers can translate theory into practice at the speed of light," he said this week. A guarantee of payment from a AAA rated government such as Australia should be valuable asset anywhere in the world.

Henry's probably right, and much of the rest of the resource-rich world including India, Canada, Peru and Chile is already looking at following Australia's lead.

But right doesn't always win the day. When launching the tax review process in 2008 Henry was asked whether he would have another go at removing negative gearing as he tried to when advising Treasurer Paul Keating in 1985.

Henry said he still thought he was right but that he "still wares the scars" of the attempt.

Australians have long been been attached to the idea of mining in a that extends beyond its practical importance and most of their day to day experiences as city dwellers. Mining directly employs just 174,500 of Australia's 11 million workers. it accounts for 7 per cent of our GDP.

But its booms and slumps have a outsized effect on an otherwise fairly steady economy. And it's seen as our Saviour, in away that wool once was when Australia rode "on the sheep's back" and we enjoyed a wool boom.

A previous Labor government lost office in 1975 when it tried to borrow $4 billion to buy back mines from mining companies. This government is planning to use legislative muscle to buy in. Neither has proved popular.

Published in today's SMH

Related Posts

. Two views of the Resource Super Profits Tax

. Henry to miners: no compromise on where the tax kicks in

. So this idea of a super tax on mining profits... who raised it with the Henry Review?

. We'll still be mining