Thursday, February 21, 2013

So low are miner's profits, under Swan's first tax he'd be handing them money

The government would be their ATM, by design

So badly have collapsing commodity prices hit BHP and Rio that if the government had stuck with the original version of its mining tax it would be up for billions.

BHP’s profit has more than halved. Rio Tinto has lost $3 billion. Under either version of the super profits tax they would owe the government nothing.

But under the tax originally proposed by Kevin Rudd and Wayne Swan they and other mining companies would also be entitled to a refund of the royalties they had already paid state governments.

In Western Australia alone iron ore royalty payments amount to $4 billion per year.

This would have been paid to the companies whether or not they owed any super profits tax, meaning they would have received a cheque from the government.

"Would the government have been worse off in the past six months with the original resource super profits tax? Yes. That's a big fat yes," said Chris Richardson a former Treasury economist now at Deloitte Access who has advised the minerals industry.

The original tax was revised after Kevin Rudd lost the prime ministership in a Cabinet room negotiation between the heads of the three big mining companies and prime minister Gillard, treasurer Wayne Swan and resources minister Martin Ferguson.

“People are screaming that the revised tax is a disaster because it has hardly raised any money. But they would have been screaming more if we had the original tax - it would have cost the government money,” Mr Richardson said.

“Much of the bad press about the revised tax has been overdone. Yes, it was a hurried compromise, but any super profits tax would be struggling to make money at the moment because the miners aren’t making super profits"..

Mr Richardson is quick to point out that the unconditional refund of state royalties wasn’t a design fault of the original tax, it was a design feature. The original tax was intended to make things easier for miners in bad times and to grab more of their cream when times turned good.

It was announced at a time when they had plenty of cream. In May 2010 the iron ore price was $US160 per tonne. By September last year it had slipped to $US86 a tonne.

"It wasn't just that prices collapsed, it was that the dollar held up as well," says Mr Richardson. "Miners were hit both ways.”

“But since then prices have climbed back. We are about to enter a phase where the original tax probably would have raised the government more money than the redesigned one. I am not quite sure that we are there yet, but we are getting there.”

The minerals resource rent tax raised just $126 million in its first six months and is not expected to make anywhere near the $2 billion the government forecast, but Mr Richardson said the upturn in the iron ore price meant the government should make more in the second half of the financial year bringing the total earnings to around $700 million.

“Over the long term the original tax would have raised more than the redesigned one, there’s no doubt about that. For one thing it had a higher rate,” said Mr Richardson.

“But the revenue would have been more variable. Right now the government would have been helping miners out.”

In today's Sydney Morning Herald

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