2.1
This chapter considers the extent to which design features of the MRRT,
as opposed to other factors such as commodity prices, are responsible for the failure
of the MRRT to raise the revenue the government predicted in budget update
after budget update.
2.2
During this inquiry and previous Senate Estimates hearings, the Prime
Minister's and the Treasurer's assertion that the MRRT revenue shortfall in
2012/13 compared to the most recent $2 billion revenue estimate is supposedly a
consequence of low commodity prices, a high dollar and international economic
conditions was challenged not just by a broad range of observers, but by
Treasury itself. Many observers pointed to specific design features in the MRRT
as the reason for the shortfall, whereas Treasury Secretary, Dr Martin
Parkinson, made clear again and again that changes in commodity prices,
production volumes, exchanges rates and state royalty arrangements had already
been factored into the much reduced $2 billion MRRT revenue estimate. For a
range of reasons, Treasury had not been able to properly assess the fiscal
implications of design features such as the market value based depreciation and
the net back arrangements.
2.3
Much of the discussion in this inquiry regarding the integrity and
reliability of the Treasurer's MRRT revenue estimates centred on the fact that,
unlike the proposed RSPT, the MRRT provided mining companies with the option of
calculating their depreciable starting base asset by market value as at 1 May
2010, as an alternative to the book value method (that is, the 'most recent
audited accounting value of those assets at 1 May 2010').
2.4
The objective of the deliberate MRRT design feature providing for market
value based depreciation arrangements is well understood. It helps ensure
existing projects are not subject to retrospective taxation. However, it is
clear that either intentionally (because it was convenient at the time helping
to mask the fiscal impact of the mining tax deal), or out of pure incompetence,
the Treasurer did not properly cost and assess the fiscal implications of this
key MRRT design feature.
2.5
The complexity of the MRRT's netback arrangements – that is, the need
for mining companies to determine the value of a commodity in the condition
they were in just after extraction (the 'valuation point'), on a
project-by-project basis – was also raised by a number of witnesses as a likely
explanation for the difference between Treasury's projections and the actual
revenue raised to date. Treasury conceded both during this inquiry and
previously during Senate Estimates in February 2013 that they had struggled to
assess the fiscal implications of the netback arrangements.
2.6
Some witnesses pointed out the obvious, that the amount of revenue raised
was impacted by the fact that the MRRT only applied to iron ore and coal, the effective
22.5 per cent MRRT rate compared to the 40 per cent RSPT rate, the full
crediting of all state royalty payments against any MRRT liability and the
level of the uplift rate in relation to both losses and royalty credits,.
2.7
All of these factors are considered below. This chapter also considers
whether the RSPT, had it been implemented as announced in May 2010, would have
led to a substantially different revenue outcome.
2.8
In the 2010-11 Budget, which was released on 11 May 2010, nine days
after the announcement of the RSPT, it was projected that the RSPT would raise
$3.0 billion in 2012-13 and $9.0 billion in 2013-14.[1]
2.9
When the MRRT was announced on 2 July 2010, the government asserted that
despite significant concessions in relation to rate and base of the MRRT
compared to the RSPT and more generous deductions, that the revised
arrangements would raise just $1.5 billion less over the forward estimates than
the RSPT over its first two years (2012-13 and 2013-14).[2] Specifically, whereas the
RSPT was estimated to raise $3 billion in 2012-13, the Treasurer asserted the
MRRT would raise $4 billion and for 2013-14 the MRRT was said to raise $6.5
billion instead of the $9 billion for the RSPT.
2.10
However, following persistent scrutiny by the Senate Fuel and Energy
Committee about the reasons for this rather small fiscal impact, the Treasurer
was forced to concede in his July 2010 pre-election Economic Statement that the
fiscal impact of the mining tax deal would have been a much more significant $7.5 billion
if the government had not also made significant upward revisions to its commodity
price assumptions underpinning its MRRT revenue estimates.'[3] These upward commodity
price adjustments thus increased the forecast revenue over the forward
estimates (again, effectively meaning 2012-13 and 2013-14 in the context of the
MRRT) by $6 billion.
2.11
Despite repeated requests at the time by the Senate Fuel and Energy
Committee and subsequently by the Senate in successive Orders for the
Production of Documents, the Gillard government steadfastly refused to release
the commodity price assumptions it had used to estimate its predicted MRRT
revenue.
2.12
The Gillard government's secrecy around its MRRT revenue assumptions,
such as the commodity price assumptions used, was in stark contrast with the
transparent release of such information by State governments of all persuasions
in states like Western Australia and Queensland.
2.13
Given that the higher forecast commodity prices used to forecast MRRT
revenue in July 2010 were never applied to the Rudd government's forecasts of
RSPT revenue, the $1.5 billion difference in projected revenue for 2012-13 and
2013-14 provides an inadequate basis for comparing the revenue estimates for
those taxes, both initiated and developed by the Treasurer Wayne Swan.
2.14
With this caveat in mind, Treasury documents released under Freedom of
Information (FOI) on 11 March 2011 suggested that the RSPT, over a nine year
period from 2012-13 to 2020-21, would have raised $99.0 billion (using the
parameter variables used in the 2010-11 budget costing) whereas the government
predicted at that time that the MRRT would raise a much lower $38.5 billion
over the same period (despite the much upgraded commodity price assumptions).[4] Over the four
years from 2012-13 to 2015-16, the same FOI document predicted the RSPT would
raise $37 billion, against MRRT revenue estimates for the same period of $22.5
billion (see Table 1, below).
2.15
MYEFO 2010-11 reported that the 'strong appreciation of the Australian
dollar' since the Pre-Election Economic and Fiscal Outlook (PEFO) 2010 (which
was released on 23 July 2010 and did not update the MRRT forecast in the
Economic Statement)[5],
was 'having a damping effect on receipts from taxes on profits through
reductions in the incomes of businesses in export-oriented and import-competing
industries'. The net impact on the MRRT had resulted in a decline in projected
receipts from $4 billion to $3.3 billion in 2012-13 and $6.5 billion to $4.1
billion in 2013-14, for a total decline of $3.1 billion in revenue across
the two financial years. MYEFO stated that this was almost entirely due to
appreciation of the Australian dollar, 'with US dollar commodity prices broadly
the same at the end of the projection period as at PEFO.'[6]
2.16
In the Budget 2011-12, released on 10 May 2011, it was
projected that the MRRT would raise $3.7 billion in 2012-13, $4.0 billion in
2013-14 and $3.4 billion in 2014-15.[7]
These figures were unchanged in the Explanatory Memorandum for the MRRT
package, which was introduced into the Parliament on 2 November 2011.[8]
2.17
MYEFO 2011-12 saw a further downward revision in MRRT revenue estimates over
the forward estimates of $500 million, with the decline spread across the years
2013-14 and 2014-15. Changes to the low profit offset exemption accounted for
$60 million of the decline in revenue across the forward estimates.[9]
2.18
On 8 May 2012, less than two months after the passage of the Bills,
revenue projections from the MRRT were again revised down in the 2012-13 Budget
to $3.0 billion for 2012-13 (down $700 million), $3.5 billion in 2013-14 (down
$300 million) and $3.2 billion in 2014-15 (up $100 million). $3.7 billion in
MRRT revenue was projected for 2015-16.[10]
2.19
In MYEFO 2012-13, released on 22 October 2012, the government massively revised
MRRT revenue down by $4.3 billion over the forward estimates, which included a
downward revision of 2012-13 revenue from $3.0 billion to $2.0 billion (see
Table 1).
2.20
Even those much reduced MRRT revenue estimates were not achieved, with
the actual comparable net MRRT revenue of $88 million collected for 2012-13 so
far coming in more than 90 per cent below the Treasurer's much reduced $2
billion MRRT revenue forecast.
2.21
Appearing before the committee, Dr Parkinson provided a summary of the
reasons for these fluctuations, starting with MYEFO 2010-11:
In MYEFO 2010-11 the primary driver of the downward revision
was the increase in the value of the Australian dollar against the US dollar
which obviously impacts on the profitability of the firms, everything else
being equal. In the budget for 2011-12, there was a further increase in the
Australian dollar offset by an increase in the US dollar price for iron ore and
met coal—metallurgical coal. In MYEFO 2011-12 the exchange rate was offset by
some falling prices and an increase in WA iron ore royalties. Budget 2012-13
was driven by further increases in the exchange rate. MYEFO 2012-13, which is
where you said we get to the $2 billion, is really reflecting significant falls
we were seeing at the time in the price for iron ore and metallurgical coal.[11]
2.22
Importantly, in a previous Senate Estimates hearing in February 2013,
Dr Parkinson had made very clear that contrary to the Treasurer's assertions
that changes in commodity prices, exchange rates and state royalties were to
blame for the lower MRRT revenue collections, those changes had in fact already
been factored in and that specific design features in the MRRT Heads of
Agreement were in fact to blame. Specifically he said:
We
have adjusted those estimates for the things that we can see that have changed
in the interim. What we have not done is adjust the estimates for things that
we cannot see. It is obviously very difficult for us to get a handle on some of
these things, and now we have to go through a process of trying to work out
what has actually been behind the moves. Just to be clear, there are five
factors that determine the extent of revenue collections. The first is
commodity prices and volumes; we can see the commodity prices—subject to the
fact that we cannot see long-term contracts, but we can get a reasonable
estimate—and the spot prices in real-time and we can get very quick estimates
of movements in volume. The second thing that we can see in real-time is the
exchange rate, and the third thing we can see in real-time is state royalty rates.
What we cannot see is the starting cost base that the firms are able to pick,
nor can we see the netback arrangements—that is how the price at the shipping
gate compares to the valuation put on it at the mine.
CHAIR: What was
the fifth point, sorry?
Dr
Parkinson
: There is
an initial starting cost base, and then there is a netback arrangement which
basically says that we can envisage a price at the docks, ready to go on the
ship, but we do not know how much of that price is actually attributed to the
various points in the production chain. The point that is relevant for the MRRT
is close to the mine—that is, when it comes out of the ground. It is very
difficult for us to actually get a handle on those. What we will do—and we did
this at MYEFO—is use the best available information. We use the best available
information on commodity prices, we use our exchange rate forecasts and we
update that for actuals—we use the things that we can see. The things that we
cannot see, we have actually got to try and get to the bottom of, and the
Treasurer has been very explicit in saying that the Treasury and the tax
office, in the normal course of events, will unpick this and try to understand
what is going on.[12]
[]
Table
1: Changes in RSPT/MRRT revenue projections, $ billion[13]
|
|
|
2012-13
|
2013-14
|
2014-15
|
2015-16
|
Total
|
|
2 May 2010
|
RSPT announced
|
|
|
|
|
|
|
11 May 2010
|
Budget 2010-11
|
3.0
|
9.0
|
12.5*
|
12.5*
|
37
|
|
2 July 2010
|
MRRT announced
|
|
|
|
|
|
|
14 July 2010
|
Economic Statement
|
4.0
|
6.5
|
6.5*
|
5.5*
|
22.5
|
|
9 November 2010
|
MYEFO 2010-11
|
3.3
|
4.1
|
6.5*
|
5.5*
|
19.4
|
|
10 May 2011
|
Budget 2011-12
|
3.7
|
4.0
|
3.4
|
5.5*
|
16.6
|
|
2 November 2011
|
MRRT Bills introduced into Parliament
|
3.7
|
4.0
|
3.4
|
5.5*
|
16.6
|
|
29
November 2011
|
MYEFO
2011-12
|
3.7
|
3.8
|
3.1
|
5.5*
|
16.1
|
|
8
May 2012
|
Budget
2012-13
|
3.0
|
3.5
|
3.2
|
3.7
|
13.4
|
|
22
October 2012
|
MYEFO
2012-13
|
2.0
|
2.4
|
2.1
|
2.6
|
9.1
|
*
RSPT revenue projections for 2014-15 and 2015-16, and MRRT revenue projections
for the same years, as projected at the time of the 2010-11 Budget and the 2010
Economic Statement respectively, were contained in Treasury modelling that was
released under Freedom of Information in early 2011. Treasury document, 'MRRT
Model – delinked.xls,' FOI release No. 1962, 14 February 2011, http://archive.treasury.gov.au/documents/1962/PDF/MRRT_Model.pdf.
Revenue raised to date
2.23
As noted in chapter one, the MRRT has raised $126 million in the first
two instalment quarters of 2012-13. Two points should be noted in this respect:
first, the $126 million represents gross revenue, whereas the government's MRRT
revenue estimates in the Budget were net revenue estimates. That is, the MRRT
revenue estimates in the government's various budgets and budget updates took
reduced company tax revenue as a result of MRRT payments being a tax deduction
for company tax purposes into account – which means the company tax adjusted
and budget estimate comparable MRRT revenue figure is in fact $88 million, not
$126 million. Secondly, as this is the first financial year in which the MRRT
applies, there are only three MRRT collection quarters in 2012-13.
2.24
The $88 million net MRRT revenue collected does also not take into
account the costs to the government of administering the new tax. According to
answers by the ATO provided to various Senate estimates committees, the cost of
implementation and administration of the MRRT just for the ATO is more than $53 million
to date.[14]
Treasury Secretary, Dr Parkinson, indicated to this inquiry that he was not
prepared to deploy the resources required to assess how much taxpayers money
has been spent by Treasury to develop and implement the RSPT and MRRT fiascos.
2.25
During the inquiry, AMEC indicated that smaller miners had been forced
to spend about $20 million so far to comply with the MRRT just to prove that
they did not have to pay any MRRT, whereas the larger miners BHP Billiton, Rio
Tinto and Xstrata all indicated that they had spent several million dollars to
comply with and administer the MRRT so far.
2.26
During the inquiry, Rio Tinto and BHP Billiton both told the committee
that they had made an MRRT instalment payment in the third and final quarterly
assessment period for 2012-13, but were not in a position to disclose the
amount of their respective payments. Xstrata, meanwhile, confirmed that it had
not made any MRRT payments in any of the instalment quarters of 2012-13.[15]
2.27
Notwithstanding any additional amounts of tax paid in the third and
final instalment period for 2012-13, no one disputes that MRRT revenue in 2012-13
will fall well short even of the much reduced $2 billion MRRT revenue estimate
contained in the Treasurer's 2012-13 MYEFO released on 22 October 2012.
2.28
It is worth noting that the instalments are, as the ATO explained to the
committee, a pre-payment based on a taxpayers estimate of their annual
liability. In this sense, the MRRT instalments are basically a pay-as-you-go
income tax payments. They are therefore not assessed on a quarterly basis by
the ATO, and are subject to subsequent adjustment.[16]
2.29
The ATO indicated that they will not know for certain until June 2014
what the actual MRRT liability will have been, which means that even some of
the low instalments made so far may have to be refunded to the mining companies
who have made them.
2.30
The government's explanation for the shortfall in MRRT revenue was that
'revenue from resource rent taxes have taken a massive hit from the impact of
continued global instability, commodity price volatility and a high dollar.'
The government further noted that revenues across the board were down
substantially, emphasising that the 'MRRT is a profits-based tax that raises
more revenue when profits are higher and less when they are lower.'[17]
2.31
But of course the Secretary of Treasury, Dr Parkinson, comprehensively
discredited that assertion by the Treasurer. Various profit announcements by
relevant mining companies in recent months are also inconsistent with the
Treasurer's already discredited assertions.
2.32
The government has long maintained that resource rent taxes are, as it
was put in the 2011-12 Budget Paper No. 1, 'a highly variable source of
revenue as they are heavily influenced by commodity prices and exchange rate
levels.'[18]
2.33
Dr Parkinson indicated to this committee that Treasury would not be in a
position to properly 'get to grips' with what was driving MRRT revenue levels
until the ATO had received tax returns from mining companies following the end
of the financial year, and had a chance to quality assure those returns,
aggregate the data and share it with Treasury.[19]
2.34
Asked when the government would know definitively know how much MRRT revenue
had been raised in 2012-13, the ATO indicated that that it would not know this
until it had received all returns from 2012-13, which are due by 1 June
2014.
2.35
The three big miners, Rio Tinto, BHP Billiton and Xstrata, all explained
the low amounts of MRRT paid to date (relative to Treasury's projections) by
reference to market conditions.
2.36
Rio Tinto noted that it had not paid MRRT in the period to 31 December
2012 primarily because of the significant decline in iron ore and coal pricing
in the second half of 2012, together with the continued strength of the
Australian dollar despite these price falls.[20]
2.37
Similarly, Xstrata maintained that while it may be the case that the
coal industry in Australia had not to date generated much if any MRRT revenue,
this ‘unfortunately reflects the reality of the current parlous state of the
Australian export coal industry.’ Like Rio Tinto, Xstrata also noted the
ongoing strength of the Australian dollar as a factor, along with increasing
cost pressures in Australia such as labour, consumables, the carbon tax and
increased royalties.[21]
2.38
Appearing before the committee alongside representatives of the three
big miners, Mr Mitchell Hooke, Chief Executive Officer of the Minerals Council
of Australia (MCA), also underlined the decline in relative profitability in
the mining industry in recent years. He told the committee that:
...according to ABS data, the mining industry's gross operating
profit as a proportion of sales has deteriorated to the point today where it is
comparable to and indeed less than what it was at the start of the boom in
2003-04.[22]
2.39
The three big miners also stressed that the MRRT's volatility was a
design feature, not a design flaw, and it was entirely appropriate that it
collected less revenue at a time when profits were down. As BHP Billiton put
it, the MRRT is, by design, a ‘top-up tax’, in that it was applied ‘on top of’
existing royalties and corporate tax. As such, the MRRT is:
...inherently volatile, susceptible as it is to commodity
price and exchange rate movements and cost pressures. It is not, and was never
expected to be, a form of stable taxation revenue – that is a role better left
to Australia’s corporate income tax regime and royalties. [23]
2.40
Mr Hooke stated that it appeared that while the government had
'repeatedly and correctly stated that MRRT revenues would be volatile,' it did
not appear that the extent of this variability had been properly figured into
Treasury's revenue projections:
The only feasible explanation for [the] disparity in the
estimate figures and the reality of the current situation is that Treasury
expected that with the imposition of, firstly, the RSPT and now the MRRT, that
it would be mining boom business as usual: that investment would continue
unabated, that the exchange rate would return to the characteristics of a
commodity's nominated currency and revert to somewhere in the order of 75c to
80c to the US dollar, as it had through the first phase of the boom to the GFC;
that commodity prices would not downside correct or closer approximation to the
long-run equilibrium of marginal costs of production; that operating costs
would not have nearly doubled since 2006; that multi-factor productivity would
not have deteriorated by a third over that period; and that capital expenditure
intensity would not be at unprecedented levels. Clearly this would not have
been, nor is, the case. Both industries have entered a period and a phase of
heightened uncertainty and volatility in the last 12 to 18 months with a marked
deterioration in conditions in the coal sector in particular.[24]
2.41
Directly challenging the Gillard government’s attribution of the revenue
shortfall to the decline in commodity prices, Western Australia Treasury told
the committee:
The Commonwealth's mining tax revenue estimate for 2012-13
has fallen by 33 per cent between its 2012-13 budget projections and MYEFO.
There has been significant volatility in the iron ore price throughout 2012-13
commencing in the September quarter. While the fall in iron ore prices would
have played some part in that decline in the Commonwealth's MRRT revenues,
Western Australia's iron ore royalties were influenced by the exact same price
factors. However, Western Australia's iron ore royalties estimate for 2012-13
fell by only 11 per cent between our 2012-13 budget and our midyear review. So
something else is going on. For there to be a threefold decline relative to
ours means something else is going on in those estimates other than price.[25]
2.42
Although approaching the issue from a different perspective, Professor
Garnaut also noted that while commodity prices had fallen from their record
highs, they nonetheless remained very high by historical standards.[26]
2.43
Western Australia Treasury and Professor Garnaut, like the overwhelming
majority of witnesses appearing before this committee, suggested that the lower
than expected MRRT revenues were attributable to specific design features of
the tax, rather than simply a corollary of lower commodity prices. These design
features are considered below.
The starting base allowance
2.44
As noted in chapter one, one of the allowances under the MRRT is the
starting base allowance. Starting base allowances recognise investments in
assets (starting base assets) relating to upstream mining activities of a
mining project that existed before the announcement of the government's
intention to introduce a rent-based resource tax on 2 May 2010. The starting
base arrangements also recognise certain expenditure on such assets made by a
miner between 2 May 2010 and 1 July 2010.
2.45
Whereas the RSPT would only have allowed miners to value their starting
base assets using the 'book value method' – that is, using the most recent
audited accounting value of those assets as at 1 May 2010 – the MRRT also
provides miners with the option of using a 'market value method' – that is,
where the miner uses the market value of the asset (including the mining right)
as at 1 May 2010.[27]
2.46
A major focus of this inquiry was the revenue impact (and, as discussed
in chapter six, equity impact) of allowing miners to use the market value
method to determine their depreciable starting base.
The market valuation method as a
tax shield
2.47
At the time the MRRT legislation was before the Parliament, other
commentators also suggested that allowing the depreciation of assets based on
market valuation could prove costly in terms of revenue raised. For instance,
in an article in The Age (16 February 2012), Professors of Accounting
Peter Carey (Deakin University) and Neil Fargher (ANU) noted that:
...under division 75, miners can choose between the 'book
value' and 'market value' of an asset, which will be allocated against revenue
over the productive lift of a mine in order to calculate MRRT liability.
Depreciating assets based on market valuation is not generally accepted
accounting practice, yet it is allowed in the legislation. In simple terms, a
mining asset that cost $100 million to bring to production might today be worth
$350 million if sold on the open market. A miner could use this higher
valuation to calculate depreciation, which would reduce the profit subject to
the tax.[28]
2.48
Professor Fargher revisited these points when he appeared before the
committee, and again reiterated that the market valuation method was unusual
accounting practice. Asked to comment on the MCA's argument (noted below) that
using a market valuation method for existing assets was a well-established
principle for easing the transition to a new tax regime, Professor Fargher
explained that it:
...it is difficult to argue that if the information is not in
the public domain prior to the tax being written on the market value. If you
are writing a tax on the market value of something that is known and
observable, their statement seems reasonable. If you have market value of
assets that you do not have a value for, writing the tax on unobservable market
values does not seem reasonable—or at least seems dangerous.[29]
2.49
Dr Denniss of the Australia Institute explained to the committee that it
appeared:
...unusual and counterproductive to have allowed the market
valuation of the asset to be used, and allow me to try to explain why. If I
spend $100 million building a mine, that is the capital that I have
invested—that is what I am risking. I presumably spend that $100 million
because I think at commodity prices today, or the commodity prices I expect, I
will be able to make a decent return on that $100 million. By definition, I
would not have built it or convinced someone to give me the money if that was
not the case. Now, if commodity prices double after I build the mine my profits
will obviously go up substantially—probably more than double—and in turn, if I
were to sell that mine I would obviously be able to get a lot more for it than
I spent on it because I am not selling what I built, I am selling the flow of
profits. So when we allow the mining companies to value their investment at the
new market price rather than the depreciated actual expenditure, we have
already wiped out, for the taxpayer, most of the super profit because the super
profit is now built into this new market price. So if the purpose of the
superprofits tax is to collect windfall revenue for the owners of the
resource—you and I—then to let the miner use today's valuation of their mine,
rather than what they actually spent on the mine, as the base is an incredibly
generous gift from us, the owner to them, the miner. So yes, I can't understand
why they did it. If they understood what they were doing, I don't know why they
did it, and if they did not understand what they were doing, they should not
have done it.[30]
2.50
Professor Pincus, speaking to his joint submission with Professor Ergas,
explained to the committee why the market valuation method, together with the
uplift rate, would mean that MRRT revenue would depend on the extent to which
profits exceeded market expectations as at 1 May 2010. Professors Pincus and
Ergas started from the economic proposition that:
...that expected profits will be fully capitalised in the
market price of an asset. The value of an asset in the market should be equal
to the present value of the cash flows anticipated from the asset, discounted
at a rate that takes account of risk. The discount rate is the weighted average
cost of capital, or WACC, which is what the market requires to invest in the
company and its projects. So it follows that the market value of excess returns
is zero, in that all such returns have been capitalised into the market value.
What the MRRT does is tax profits above a lift-up rate, or
what we have called the 'allowable rate'. To the extent that that rate is lower
than the WACC, the tax falls on profits that have been capitalised into
sharemarket prices already. The amount of the MRRT revenue depends on the
extent to which profits succeed market expectations at the MRRT valuation date.[31]
2.51
Like a number of other witnesses (in particular, AMEC, FMG and Professor
Guj) Professors Pincus and Ergas also held that the market value starting base
arrangements lacked equity, in that they favoured established projects with
relatively low risk. This issue is explored further in chapter six.
2.52
Professor Pietro Guj explained that the very high market values of
established mining projects as at 1 May 2010 would provide these projects with
a significant depreciable starting base for capital deduction, meaning
established projects could potentially pay no MRRT following its initial
introduction:
It is worth nothing that the MRRT was devised at a time of rapidly
rising commodity prices and that initial revenue forecasts of market valuation
were high, reflecting an expectation of an ongoing ... mineral boom. Recent
drops in iron ore and, particularly, coal prices and a sustained high exchange
rate will have no effect on MRRT collection from projects where the starting
base capital deduction was high enough to reduce the MRRT liability to zero.
Other than increasing the magnitude of the losses with the carry-forward for
future deduction, MRRT collection would have only been reduced by drops in
commodity prices and high exchange rates relative to earlier expectations for
projects with the lower level of deductions and so liable to pay MRRT in the
first year of its enforcement. At least in the case of iron ore, where more
than 90 per cent of production is attributable to three companies with high
market value or high book values it was logical to expect that initial MRRT
collections would be low.[32]
2.53
Professor Garnaut told the committee:
If you genuinely were allowing for a deduction for the market
value of an asset, the current market value of those assets includes the value
of the untaxed rent. If you are genuinely deducting the market value, almost by
definition you are giving away the revenue from established projects. [...]
That is a reason you cannot expect early revenue from established projects, and
from new projects. The structure of the resource rent tax is such that a new
project is not meant to pay resource rent tax until it has recouped its
investment with a reasonable rate of return. If the market-value deduction has
shielded all past investments then, almost by definition, you do not expect
early revenue.[33]
2.54
FMG told the committee that while FMG itself had access to a sizeable
tax shelter in the starting base allowance that made it unlikely it would have
to pay any MRRT in the foreseeable future, the tax shelter would be even larger
still for the miners that had negotiated the MRRT Heads of Agreement with the
government:
Because we were a reasonably recent company, it was more
likely that our accounting values were closer to the market values. Because
other companies have been around for a lot longer and would have written down
the accounting values of their infrastructure and mine operations, it is likely
that there would have been a greater gap between the accounting values and the
market value.[34]
2.55
Professor Fargher told the committee that it was his expectation that
all large companies would use the market valuation method to calculate their
starting bases. He added that while some smaller companies that will not hit
the MRRT profits threshold might take the book value approach, these companies
would not be paying any tax anyway.[35]
Is recognition of prior investments
at market value appropriate?
2.56
It is important to note that witnesses critical of the MRRT or the
government’s failure to properly anticipate the potential impact of the
starting base depreciation arrangements (or indeed both), were not necessarily
critical of the concept of recognising prior investment, or even providing
miners with the choice of using market value for the depreciable assets.
2.57
Professors Ergas and Pincus explained that while the market valuation
method of starting base assets created issues, including in terms of reducing
revenue raised going forward, it did not necessarily follow that the government
would be justified in only allowing mining companies to value their assets at
book value. Indeed, if mining companies were required to use the depreciated
book value of their assets this would likely result in:
... extremely high effective tax rates because—in some cases,
at least—these are very long lived assets that were built many years ago at
times when the price level was much lower than it is today. As a result of
that, you would be identifying as superprofits returns that from any reasonable
economic perspective were not superprofits in any sense that we might normally
imagine.
So, from that moment, what would have happened if you had
done that is that you would effectively have expropriated a very large share of
the value of investors' claims over those resources. That, it seems to me,
would have created enormous sovereign risk problems going forward.[36]
2.58
FMG, while emphasising its strident opposition to the MRRT, nonetheless agreed
that it was appropriate to recognise prior investment in a new tax regime:
The tax does need to realise some degree of treatment for
capital that has been expended in the past. That was always one of the
contentious points in the design of the RSPT and then the MRRT—how do you do
that? How do you give someone credit for money that they have spent in the
past? Is it book value? Obviously I was surprised that market value was the
outcome. But you do need to give people some recognition of past expenditure.[37]
2.59
Professor Garnaut, meanwhile, both suggested that recognising prior
expenditure in transitional arrangements was a complex business and implied
that the government had not struck the right balance in its attempt to address
this complexity:
Transitional arrangements for past expenditures and what
became profitable projects are always matters of complexity requiring deft
judgement about the relative importance of a number of considerations. The
transitional arrangements for the MRRT are extreme in their generosity to
highly profitable established mines.[38]
2.60
For its part, the MCA argued that allowing market valuation of existing
assets was a 'well-established principle for easing the transition to new tax
arrangements.' In this respect, the MCA stressed its view that the MRRT had
lessened (though not removed) the punitive and retrospective manner in which
the RSPT recognised prior investments.[39]
2.61
In its recently released report, Taxes paid in 2012 (March 2013;
attached to Rio Tinto’s written submission to this inquiry), Rio Tinto
indicated that had made no MRRT payments in 2012. It explained how both the
royalty credit allowance (discussed further below) and the starting base allowance
related to its non-payment of MRRT in 2012, but also why these were important
design features of the tax:
Where a mining company like Rio Tinto has existing
investments that become subject to the MRRT a separation of old investments not
subject to the MRRT from new investments in the same mine, which will be
subject to the MRRT, would be impractical. Instead the tax was designed to
allow a mining company to claim a deduction (the starting base allowance) in
each tax year for the May 2010 market value of the investments over the shorter
of the life of the mine or 25 years. The royalty credit and the starting base
allowance are deliberate design features of the MRRT that respectively ensure
there is no double taxation of the same income, and that the MRRT is not levied
retrospectively on existing investments.[40]
2.62
In its submission, Xstrata argued that a fundamental flaw with the RSPT
was that it would have applied to existing projects and mine investments. ‘The
MRRT provided a workable alternative on the issue of prospectivity by
recognising the value of existing investments through a deductible starting
base.’[41]
Treasury view on the impact of
starting base arrangements
2.63
Treasury told the committee that because mining companies were not
required to submit their returns until the end of the financial year, it was
not yet possible to determine what impact the starting base arrangements were
having on revenue.[42]
2.64
Having established that Treasury’s revenue projections were based on
estimates of the starting base of MRRT liable mining projects of approximately
$360 billion depreciated over approximately 19 years (Treasury’s estimate of
the average effective life of a mine), Dr Parkinson emphasised that until the
ATO and Treasury had been given a chance to review tax returns it was not
possible to compare these assumptions with what had actually taken place:
[Individual] taxpayers do not have to declare their starting
base until they put in their tax return, and that is the only time when we will
actually know what the effective life is that they have used. As Mr Heferen
said, that is perfectly legitimate under any self-assessment system, but then
the tax office comes into play and is able to engage with the taxpayer and say:
'Is this really the actual life? Is this really the actual starting base?'[43]
2.65
The ATO expanded on this point for committee, stating that because the
MRRT instalments received to date were not subject to a quarterly assessment,
and were basically pay-as-you-go instalments, the ATO was not in a good position
to assess the impact of the starting base arrangements on revenue. While the
ATO had gained 'some insights of a general nature' from speaking to miners, the
fact remained that mining companies:
...do not have an obligation to give [us specific information
about how they have determined their liability] until they lodge their returns.
It is not until that point where they actually have to exercise their statutory
choice, whether they do a book value or market value.
We have had some insights and some feedback of a general
nature from them about what has been occurring. That is where it sits at the
moment until we get to their lodgements.[44]
2.66
Asked by the committee to explain why miners were given the choice
between using the market value method or the book value method to value their
starting base assets, Treasury responded that it was 'not uncommon for
taxpayers to be provided choices around a range of things in other areas of tax
to facilitate reduction compliance costs to take account of specific circumstances
the taxpayers may be in.'[45]
However, when pressed to explain what the public benefit of allowing taxpayers
this choice was, the committee was told 'that goes to a policy question about
the public benefit of the tax. I do not think that, as public servants, we can
provide assistance there.'[46]
2.67
The committee heard from a number of witnesses that the complexity of
the netback arrangements, and in particular the need for mining companies to
determine commodity revenue at an artificial 'valuation point' that does not
coincide with any actual commercial event, added to the uncertainty regarding
Treasury's projections.
2.68
As noted in chapter one, the MRRT Act does not require a particular
method to be used in determining revenue attributable to the valuation point,
except to require that the method used:
...must produce the most appropriate and reliable measure of
the amount, having regard to, amongst other things, the functions performed,
assets employed and risks assumed by the miner across its value chain and the
information that is available.[47]
2.69
Asked about the potential in the MRRT design for mining companies to
reduce their MRRT liability by inappropriately allocating costs across their
projects or across their value chain, Professor Fargher explained that the ATO:
...has the ability to disallow something that they would rule
as—let us call it—clearly inappropriate. The mining companies have a choice of
at least half a dozen methods that could be considered appropriate. To make it
clear, we have got an observable market price somewhere down the value chain.
We are estimating costs to get back to the tax point. The more that we can
include in that further down the vertically integrated chain, the less tax base
we are going to have. In accounting, wherever that problem occurs, it generally
eventually results in problems between the tax office and the taxpayer.
Basically, joint costs have to be somewhat arbitrarily allocated at the end of
the day. Therefore, because there is an arbitrary allocation there, the taxing
authority might consider reducing the choices available to the taxpayer to one
or two that seem reasonable rather than giving them the option to take five or
six, working out the best one from their perspective and then using that.[48]
2.70
Talking about the complexity of the MRRT generally, Mr Pearce (FMG)
touched on the specific complexity of the netback arrangements, suggesting
that:
...to try to artificially calculate a revenue point that does
not actually exist and to artificially allow deductions that do not naturally
exist and have to be calculated is a very, very complex thing.[49]
Treasury view
2.71
Treasury conceded that it was possible that its lack of visibility of
how miners had worked through the netback arrangements added to the uncertainty
of its revenue projections. For instance, an official from Treasury's Revenue
Group told the committee that some of the difficulties surrounding the impact
of the starting base on revenue ‘also arise for the netback arrangements. To
try to get the value at the point of extraction could differ from company to
company and no doubt between iron ore and coal.’[50]
2.72
In discussing the starting base and netback arrangements, Professor
Fargher explained to the committee his view that the MRRT provided, as he has
previously put it, 'incentives and opportunities for creative avoidance' by
taxpayers.[51]
2.73
Professor Fargher originally outlined these concerns in an article
published with Professor Carey in The Age on February 2012. In that
article, Professors Fargher and Carey noted that the MRRT was not based on
audited company profits, but rather on a portion of profits from particular
mining activities. It further requested mining companies to determine the
amount of proceeds and costs that relate to these activities. The design of the
MRRT and the reliance on the miners themselves to determine the appropriate
proceeds and costs therefore provided mining companies with 'incentives and
opportunities for creative avoidance [that] appear even greater than those
applying to company tax.'
At numerous points, opportunities exist to reduce revenue
estimates and increase costs so as to minimise the taxable profit reported.
Volatility in commodity prices could also allow strategic timing of the
recognition of revenue and expenses.[52]
2.74
Professor Fargher made the same points in his opening remarks to the
committee, adding that while the estimates of revenue and costs were subject to
ATO review, 'the taxpayer still has significant choice within the legal
precedent and accepted market valuation principles.' Professor Fargher further
noted that this aspect of the MRRT may not have been adequately considered in
the government's revenue projections.[53]
2.75
Asked whether some auditing of the claimed MRRT revenues and costs
should be required, Professor Fargher responded:
Yes. As the filings are made, particularly on the starting
base, I believe they will have to be reviewed by the Australian tax office, and
I would expect that the Australian tax office will effectively audit some of
those filings. I guess the word 'audit' has a technical meaning in this
sentence. I am using it more in the sense of a tax audit rather than a
financial statement audit. But, for example, it would be interesting for, say,
the policy unit in tax to know when a taxpayer has increased their
depreciation, reducing the net book value for company tax purposes but
increasing the depreciation in order to get a bigger saving under the MRRT.
That would seem to be an inconsistent approach that might be picked up of an
audit of the filings.[54]
2.76
Pressed on why it was noteworthy for a taxpayer to want to organise
their affairs in the most tax efficient manner, Professor Fargher explained
that while this was not itself remarkable, what was surprising was:
...how many choices and estimates were involved in the MRRT. It
is taken for granted that taxpayers will choose their methods, within
reasonable allowances, to minimise their taxes. In designing a good tax policy,
some of these choices are sometimes eliminated to get to an effective tax.[55]
Limiting the MRRT to iron ore and
coal
2.77
A key difference between the RSPT and the MRRT is that the former would
have applied to all mineral resources, while the latter only applies to coal
and iron ore.[56]
2.78
Some critics of the MRRT suggested that there was no sound economic
reason for the tax to only apply to iron ore and coal. For example, Dr Denniss
suggested that it was 'excessively narrow' to only apply the MRRT to these two
commodities, and there was no good economic reason it should not be applied to
all resources.
The economic argument for why you would have tax on iron ore
and coal is exactly the same argument that applies to those other resources. It
is more efficient and equitable to have a broader tax base.[57]
2.79
Similarly, Professor Quiggin told the committee that there was no 'obvious
justification' for limiting the MRRT's application to iron ore and coal.
Therefore:
...whatever the political feasibility of it, it would certainly
be the obvious route in terms of horizontal equity within the mining industry.
The rationale that is applied to coal and iron ore applies equally well to a
number of other high-value minerals.[58]
2.80
During his appearance before the committee, Professor Garnaut made much
the same point:
In the context of doing this properly and permanently—doing
for hard minerals what we did for offshore petroleum so it does not have to
keep on being changed—you would not be continuing a distinction between coal
and iron ore and gas on the one hand and other minerals on the other. A very
profitable goldmine or copper mine or uranium mine generates resource rents in
exactly the same way as a very profitable coal or iron ore or gas project.[59]
2.81
In contrast, the MCA explained to the committee that there was, in fact,
a strong rationale for limiting the MRRT to bulk commodities. Specifically, a
key principle of the MRRT, according to the MCA, was that a resource-based tax
should be limited to the value of the resource, and not reach into the value
added from infrastructure and other activities such as processing and smelting.
If this principle was properly applied (and MCA argued it was not in the case
of the RSPT), then commodities such as uranium and gold simply would collect
very little tax revenue:
The valuation point is run-of-mine. There is not much value
in a gram of gold and a tonne of ore at run-of-mine. If you want to move it
downstream then you are actually getting into normal profits and then you are
getting into the company tax run again. We have been through this previously a
number of times. It actually goes to the inherent value of the rent. You have
got two buckets of value coming up out of the mine: one is the inherent value
of the resource; the other is the entrepreneurial expertise added by the miner.
The problem with the RSPT is that it was using superprofits as a pretty
ordinary mechanical proxy for a rent tax. That was what we essentially fixed in
terms of the design of the MRRT.[60]
Treasury view
2.82
Under questioning, Treasury declined to offer an economic rationale for
the decision to limit the MRRT to iron ore and coal. Instead, Treasury simply
stated that it was a 'policy decision' of the government, and therefore it
would be inappropriate for it to make an argument regarding the reasons for
restricting the MRRT to iron ore and coal.[61]
2.83
As outlined in chapter one, losses incurred by a mining project can be
uplifted and carried forward for use as deduction against profit in future
years. The uplift rate – that is, an annual interest allowance on losses
provided to compensate for risk – for the MRRT is set at the long-term bond
rate (LTBR) plus 7 per cent.
2.84
Some witnesses questioned whether the MRRT's definition of 'rent' (or
'superprofit') was too high to collect meaningful revenue. Dr Denniss explained
to the committee that in his view:
...the way this scheme has been defined and the definition of
superprofit is such that while commodity prices are down slightly on their
historic highs they are still well above the long-term average, and the fact
that the mining tax is collecting so little revenue at this point in the
commodity cycle suggests to me that the definition of a rent has been set
excessively high.[62]
2.85
Addressing the uplift rate specifically, Dr Denniss told the committee
that he believed it was:
...very generous, and again, if the purpose of the scheme is to
collect the super profit component then I would like to see the economic or
other evidence that was used to generate why they choose seven per cent. ... I
just have not been convinced that that number was anything other than
politically acceptable rather than economically justified.[63]
2.86
Asked if an after-tax bond rate of two or three per cent would be more
appropriate as an uplift rate, Dr Dennis responded:
Yes—and I do not want to suggest there is certainty around
this; plenty of my colleagues could have a good long argument about exactly
which bond rate, how it should be adjusted and which definition of inflation
should be used. I think that, without suggesting it would be simple and clear
that everyone could agree on it, a number more like 2 to 3 per cent would at
least have some economic justification based on those bond yields rather than,
again, the seven per cent for which I have seen pretty flimsy justification.[64]
2.87
Professor Fargher was less definitive in his assessment of the
appropriateness of the uplift rate, suggesting that there was:
...some basis for coming up with that seven per cent uplift
rate and the risk-free rate over a longer period of time. In the world we are
in today it seems very high. In the world we were in 20 years ago, it may have
seemed quite reasonable. So, going forward, it comes down to your guess as to
where we are going to be. There is certainly a distinct chance that as of today
we may not get significant super profits that will exceed this hurdle which
will result in significant tax being paid.[65]
2.88
In Professor Fargher's view, the uplift rate should correspond to the
kind of profits that the tax is meant to capture. Since definitions of 'super
profits' will vary over time according to the expectations that are related to
underlying economic conditions, if the MRRT was to be redesigned:
...the uplift rate should be considered in regard to the
underlying economics of what is trying to be captured there. Locking in a
particular rate of seven per cent seems quite arbitrary. I would have thought
some clever economists in Treasury could come up with something which varies
with the health of the economy and the extended health in this industry.[66]
2.89
In putting his views on the matter before the committee, Professor Garnaut
compared the high uplift rate in the MRRT with the PRRT uplift rate of the LTBR
plus 5 per cent. Professor Garnaut told the committee that in his view there
was no good reason why the MRRT uplift rate should be higher than the PRRT
uplift rate. At the same time, Professor Garnaut suggested that the an uplift
rate of the LTBR plus 2 or 3 per cent might not properly allow for the risk
typical of MRRT liable projects:
You have to recognise that this is a project based tax and
therefore there is more risk. You do not get complete economic offset for
losses. There is a provision for transferring exploration costs from failed
projects to projects generating assessable income, but that is not done
immediately. Why you would look at something like five per cent rather than two
or three per cent is in recognition that there will be failed projects where
investors will not recoup their losses. My assessment is that a five per cent
margin above the long-term bond rate would not introduce an incentive to
overinvestment. These are risky investments, not like the transmission and
distribution of electricity, where we allow, I think, in today's terms, a
return well in excess of George Fane's suggested rate of return, for a
completely riskless investment. These investments are not riskless investments.[67]
Treasury view
2.90
When asked about the economic rationale and fiscal impact of the uplift
rate, Treasury declined to provide the committee with information, suggesting
the settings were 'policy issues', and as such it would be inappropriate for
Treasury to comment on.[68]
2.91
In discussing why the MRRT had raised so little revenue, if not
necessarily why it had fallen short of Treasury projections, some witnesses
suggested that there was no apparent reason for setting the MRRT rate (22.5 per
cent, including the extraction allowance) lower than the PRRT rate (40 per
cent).
2.92
For instance, Professor Garnaut told the committee that 'it is not
obvious why the tax rate is lower and the uplift rate higher than for the
PRRT.'[69]
While emphasising that he thought the issue should be properly revisited in the
context of broader discussions about federal financial relations, Professor
Garnaut also told the committee that he did not believe 40 per cent was too
high a rate.[70]
2.93
In response to arguments such as that put by Professor Garnaut, the MCA
told the committee that there was, in fact, a strong economic argument for the
difference between the PRRT rate and the MRRT rate:
Firstly, the economic argument centres around internationally
competitive tax rates. Secondly, there is an economic argument about the
flatter capital and return profile of minerals resources as distinct from
petroleum. Thirdly, petroleum is offshore, so it only has one set of resource
rent in addition to company tax. We have a third dimension, which is royalties.
So we have got the company tax, the royalties and, of course, now the MRRT,
which you are making a lot of headwind out of, when in fact it is a top-up tax
to the other two principal taxes which we have spoken about.
So, yes, there is an economic argument and it centres around
whether you are going to impose tax rates that put this country's minerals resources
into an uncompetitive position, way over what our competitors are facing in
those emerging resource rich countries which I referred to earlier. That then
is the fundamental economic argument. Treasury itself argues that the 40 per
cent under the RSPT was an arbitrary figure plucked from the air. There is a
very strong case to be made for a differentiation in resource rent taxes.[71]
Treasury view
2.94
Treasury declined to answer committee questions as to the economic
rationale of having an MRRT rate of 22.5 per cent (that is, 30 per cent less
the extraction allowance) when the PRRT rate is 40 per cent, except to say that
it was 'policy decision' of the government.[72]
2.95
The MRRT provides for the full crediting of State royalties paid by
mining companies, which can then be used as an allowance to reduce mining
profit subject to the MRRT.
2.96
Under the proposed RSPT, resource entities would have received a
refundable credit for state royalties paid, 'at least up to the amount of
royalties imposed at the time of announcement, including scheduled increases
and appropriate indexation factors.'[73]
2.97
In the MRRT Heads of Agreement, the Prime Minister, Treasurer and
Minister for Resources and Energy made an emphatic commitment to credit 'all'
royalties against any MRRT liability.
2.98
While the Gillard government tried to walk away from that commitment
after the 2010 election by suggesting that 'all' did not mean 'all', that is,
that 'all' did not include 'future increases' in royalties, the government's
resistance on this point was very short lived. Indeed, the PTG was emphatic in
its view 'that there be full crediting of all current and future State and
Territory royalties under the MRRT so as to provide certainty about the overall
tax impost on the coal and iron ore mining industries.'[74]
2.99
The question of the crediting of state royalties against MRRT
liabilities has been the matter of much recent debate, and indeed the subject
of a Private Senator’s Bill introduced by Senator Milne on 12 September 2012
and subsequent inquiry into that Bill by the Senate Economics Legislation
Committee.[75]
2.100
In its dissenting report for that inquiry, the Greens noted that they
had obtained Parliamentary Budget Office costings that indicated that limiting
the royalties that could be credited to those in place at 1 July 2011 would
mean the MRRT would raise an additional $200 million in 2012-13, $500 million
in 2013-14, $700 million in 2014-15 and $800 million in 2015-16, a total of
$2.2 billion over the forward estimates.[76]
2.101
In the current inquiry, the committee heard from witnesses who objected
to the full crediting of state royalty and witnesses, such as the MCA, who
argued that the full crediting of royalties 'is a key design feature of the
MRRT imparting a measure of stability to the overall tax burden on coal and iron
ore projects and so as to avoid double taxation on the mining profit.'[77]
2.102
It is clear that the Gillard government's commitment to credit all
royalties against any MRRT liability provided a direct incentive to State and
Territory governments to increase their royalties on iron ore or coal, which
five out of six State governments have done since the MRRT Heads of Agreement
was signed on 1 July 2010.
2.103
Indeed, the fact that state royalties are creditable against any MRRT
liability means that State and Territory governments no longer have the same
incentive to offer lower royalty rates in the context of competitive
federalism, as the benefit of such lower rates would flow to the federal
government in Canberra and not to the industries individual states may wish to
attract.
2.104
The general consensus from witnesses during this inquiry as during the
most recent Senate Estimates hearing, was that, whatever its impact on revenue
overall, the difference between the revenue projections as at MYEFO and the
announcement of the revenue raised in the first two collection quarters could
not be attributed to the full crediting of royalties, as the government has
long been aware of state intentions regarding royalty rates.
2.105
As Western Australia Treasury explained to the committee:
...there has been a perception—indeed, a misperception—that
the crediting of state royalties and increases in state royalties in some
jurisdictions have in some way contributed to the lower than forecast MRRT
collections. This is, as I said, a misperception, as the scheduled royalty
increases across most states in terms of their own royalty regimes were
generally well known at the time of the Commonwealth's 2012-13 budget and
therefore could and should have been factored into any revenue estimates under
MRRT. So the amount that they should have expected to be credited against MRRT
revenues was known prior to the formulation of those estimates. For example, in
the case of Western Australia, there was an increase in Western Australia's
iron ore fines rate from 5.625 per cent to 6.5 per cent effective from 1 July
2012 and then further on to 7.5 per cent from 1 July 2013. Both of those
increases were announced in May 2011. So those issues were fully known prior to
the locking down of the Commonwealth's estimates. I understand the Commonwealth
Treasurer and Commonwealth Treasury have publicly advised that Western
Australia's changes to its own royalty regime were factored into the
Commonwealth's 2011-12 MYEFO estimates.[78]
Treasury view
2.106
Whatever the impact of the full crediting of state royalties on the
amount of revenue collected, Treasury confirmed to the committee this had
already been factored in to the $2 billion revenue projected for 2012-13
in MYEFO.[79]
2.107
Discussing the disappointing level of revenue raised to date by the MRRT
despite a period of what remained relatively high profits, Professor Quiggin
told the committee that his preference would be for the government to go back
to the Henry Review and the original RSPT design as a starting point.[80]
2.108
In its submission, BHP Billiton pointed out that the government would be
refunding mining companies for losses, given current economic circumstances,
had the RSPT been enacted.’[81]
2.109
The MCA similarly pointed to Deloitte Access Economics estimates that
the RSPT would have generated a negative net revenue of approximately $900
million in the first two quarters of 2012-13 when applied to iron ore and coal,
as:
...the design of the original RSPT the government was to refund
royalties paid when there was no super tax liability offset. Quite simply,
under the RSPT the government would have been writing cheques to mining
companies at the time of fiscal weakness—clearly not a sustainable proposition.[82]
Committee View
2.110
The overwhelming evidence received by this inquiry confirms that the
Prime Minister and the Treasurer have only got themselves to blame for the mining
tax fiasco in general and the massive budget black hole from the MRRT in
particular.
2.111
Back in June 2010, the MRRT was negotiated by a desperate government
under pressure in the lead-up to a difficult election.
2.112
The government made significant concessions as part of its negotiations
with BHP Billiton, Rio Tinto and Xstrata and failed to properly assess and cost
the fiscal implications of those concessions.
2.113
Given the Gillard government's long track record of incompetence, the
immediate suspicion is that this is another case of mere government
incompetence.
2.114
The truth however is likely to be much more sinister.
2.115
It is the considered view of this committee that the Gillard government
was well aware that it had overestimated MRRT revenue and underestimated the
fiscal impact of the concessions it made in its mining tax deal.
2.116
In the lead-up to the 2010 election the Prime Minister and the Treasurer
had two main objectives. They wanted to get the 'mining industry' off their
back and they didn't want any costly concessions in any deal to undermine its
pre-election narrative of an 'early return to surplus'.
2.117
As such, it was very convenient for the Treasurer that he was able to
rely on significant and to this day secret increases in commodity price
assumptions, while turning a blind eye to the true fiscal cost of various key
design features of the MRRT Heads of Agreement.
2.118
Why, for example, was the Treasurer so desperate to keep commodity price
assumptions used to estimate MRRT revenue back in June 2010 secret?
2.119
It is also clear from the evidence to this committee, including evidence
from Treasury itself, that the three miners who participated in the
negotiations provided the government with their estimate of the likely combined
market value to be used for the purposes of market value based depreciation
arrangements.
2.120
Yet Treasury also indicates that the government was effectively flying
blind on the fiscal implications of that key feature of the MRRT Heads of
Agreement.
2.121
Incompetence or deliberate and convenient ignorance?
2.122
The committee does not even question the merit of the concessions made.
What the committee does question is why the Gillard government did not properly
cost the fiscal implications of those concessions before signing on the dotted
line.
2.123
It is clear from the overwhelming weight of evidence, including from
Treasury itself, that changes in commodity prices, production volumes, exchange
rates and state royalties had already been factored into the progressively
downgraded MRRT revenue estimates – all the way to the $2 billion MRRT revenue
estimate for 2012/13 which was 50 per cent down on the original Swan MRRT
forecast.
2.124
As such, the Prime Minister's and the Treasurer's repeated assertions
that those factors were mainly to blame for revenue collections more than 90
per cent below the Treasurer's official MRRT revenue estimates have been comprehensively
discredited as the sort of dishonest spin that sadly we have come to expect
from this Treasurer.
2.125
Any Chief Financial Officer of a publicly listed company would have long
lost his or her job if they had come in more than 90 per cent below forecast on
a key revenue item like this.
2.126
It is clear that the specific design features of the MRRT agreed to by a
government in its negotiations with the three biggest miners in Australia are
mainly to blame for the massive revenue shortfall compared to the Treasurer's
budget estimates.
2.127
The committee does not support any moves to limit the full crediting of
state royalties or any changes to depreciation or netback arrangements.
2.128
Any such changes would make a bad tax worse. It would also again create
further unnecessary uncertainty for one of Australia's most important
industries.
2.129
The Gillard government's MRRT is a complex, distorting, inefficient,
costly to administer, costly to comply with and unnecessary tax. Incredibly, it
has not raised any meaningful revenue when the government has already spent all
the money they thought it would raise and more.
2.130
Because of its complexity, inefficiency and increased cost of
compliance, the MRRT is bad for investment in the mining industry and as such
is bad for our economy. It is now abundantly clear that it is also bad for the
federal budget, exposing it to unnecessary structural risks.
2.131
The inefficient and complex MRRT is unnecessary, because the mining
industry already pays its fair share of tax. Indeed, the mining industry
already pays more than $20 billion a year in federal and state taxes. It is not
in our national interest for this important industry to be weighed down by a
complex, inefficient and distorting tax which doesn’t even raise any meaningful
revenue.
2.132
To the contrary, it is in our national interest to encourage increased
investment in mining through competitive taxation and regulatory arrangements
so mining remains strong and can continue to make a significant contribution to
both our national prosperity and government revenue.
2.133
For all these reasons (and other reasons outlined in subsequent
chapters), it is the committee's very strong view that the Minerals Resource
Rent Tax should be abolished immediately.
2.134
In fact, confronted with the obvious failure of the MRRT, any federal
government committed to our national interest would long have taken action to
remove this bad tax.
Recommendation 1
The committee recommends that, in the national interest, the
Minerals
Resource Rent Tax be abolished at the earliest opportunity.
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