MRRT – Too taxing

It used to be said that Australia rode on the sheep’s back, but these days it’s far more accurate to say Australia rides on the miner’s earth mover, Shadow Resources Minister Ian Macfarlane writes for Australian Mining.


 The mining industry is now one of the most significant contributors to the Australian economy. 

Yes, the benefits are felt to different extents around the country, with Queensland and Western Australia experiencing the greatest gains.  But discussion of a multi-speed economy aside, the statistics show that the resources industry is indispensable to Australia’s economic prosperity.

According to the Bureau of Resources and Energy Economics, resources and energy exports will be worth $215 billion to the Australian economy this year.

The mining industry also employs tens of thousands of Australians – not only in direct jobs, but via the regional industries and small businesses it supports.

Yet, the Gillard Government is pushing ahead with its Minerals Resource Rent Tax (MRRT), a poorly designed and economically destructive policy that looks no further than papering over the black holes in the Government’s budget.

There are two fundamental problems with the philosophy behind the MRRT – the first is that it assumes that the Australian resources industry is an indestructible cash cow that can be hit again and again because the Government can’t maintain budget discipline.

The second is that it is based on the politics of envy and gives the misleading impression that mining companies that operate in Australia are somehow avoiding their tax obligations.

Neither of these assertions are true.

Contrary to the Gillard Government’s suggestions, the mining industry pays a fair share of tax through company and payroll tax and state-based royalties.

Australia’s mineral resources belong to the people of each state.  Therefore it is the right and responsibility of the State Governments to determine what value they place on those resources and at what rate miners should pay for access and extraction rights.

This system has worked well for more than 100 years and has in-built flexibility that allows the State Governments to reassess royalties as they see fit. 

In Queensland in 2008 the Bligh Government increased coal royalties from 7 to 10 per cent to reflect what it considered to be a fair share for the state.  Similarly, the Barnett Government in Western Australia has recently announced a 5 per cent royalty on magnetite iron and uranium.

When it comes to the flaws in the design of the tax, the problems are even more numerous.

The MRRT was hastily slapped together by Prime Minister Julia Gillard and Treasurer Wayne Swan in a desperate pre-election quick fix to get Kevin Rudd’s even more disastrous Resources Super Profits Tax off the table and out of the headlines.

They sidelined the Resources Minister and as a result ended up with a dud deal that gave the big three mining companies – BHP Billiton, Rio Tinto and Xstrata – the upper hand, and unfairly penalised small and mid-sized miners.

The quick fix also entrenched a fundamental weakness into the MRRT, which was the promise that all future increases in state royalties would be fully creditable against the tax.

This means every time State Governments decide to reassess royalty rates, as is their constitutional prerogative, the Federal budget bottom line will take a hit.

The most troubling part of the MRRT is that it runs the risk of building a structural deficit into the budget.

Anyone with even a passing understanding of the resources industry knows that commodity prices are volatile.  Recently there has been a sharp drop in the price of iron ore – which, along with coal is one of the two commodities the MRRT will target – based on expectations about a slowdown in China.

But there has been no explanation from the Government as to how it

will respond to these inevitable price fluctuations.

In the time since the MRRT deal was done there have been multiple revisions to Treasury figures about the anticipated revenue from the tax.

At the moment it stands $11.1 billion over the forward estimates, but how will those revenue projections be changed yet again in upcoming budget revisions?

If the Government was genuine about its motives for proposing a resources tax, it could have established a sovereign wealth fund. The Howard Government had already done so for other revenue by setting up the Future Fund.

Instead, the Gillard Government intends to use the still hypothetical proceeds of its MRRT to boost the budget bottom line.

Coupled with the Government’s backflip on the carbon tax, the sudden implementation of the tax with very little industry consultation has also caused damage to Australia’s sovereign risk profile.

While Australia has vast mineral wealth, we are not the only nation with these resources and if the Government persists in imposing new levels of taxation and red tape on the industry, investors will simply look elsewhere for their next projects.

Already Anglo American has stated that it is reassessing more than $15 billion worth of investments in the Australian coal sector.

What’s more there are no guarantees the current version of the MRRT is the one the industry will have to deal with, given the round of horse trading that is going on with the Independent members of Parliament and the Greens. The latter have stated clearly that they want to extend the base of the tax to other commodities such as gold.

The Coalition does not support any version of the mining tax, nor do we accept that there are grounds for the Commonwealth adding a new layer of taxation for mining companies.

The MRRT is a political policy driven by political motives – not by any concern for the long-term future of the energy and resources sector.

It is a deeply flawed tax that will have a destructive impact on the sector. The Coalition is opposed to it in Opposition and would rescind it in Government.

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