Chapter 6

Chapter 6

The impact of the MRRT

6.1        Although the inquiry was concerned primarily with the development of the MRRT and its failure to raise the revenue the government had projected, in the course of the inquiry a number of witnesses argued that the MRRT was hurting the Australian mining industry and damaging Australia's reputation as a good place to invest.

The MRRT's discrimination against smaller, less established miners

6.2        A number of experts appearing before the committee explained how the MRRT, and in particular the ability for established miners to apply the market value method to their depreciable starting base assets, put smaller and less established miners at a comparative disadvantage to the large, established miners, particularly those miners that had negotiated the MRRT Heads of Agreement with the government. 

6.3        For instance, Professor Ergas explained that for larger mining companies with diverse portfolios of well-established mining projects, the discount applied by the market to take account for risk in determining asset value would be lower, and therefore the required rate of return on projects would be lower. As such, for established projects, the market price would generally be higher in relation to expected profits than for smaller, less established miners. The end result of this is that large, established miners have access to a tax shelter that is not available to smaller, less established miners that are operating riskier projects with higher required rates of return. Professor Ergas further added, under questioning, that large, established mining projects such as those in the Pilbara had generally started out as risky undertakings. He concluded, 'If we deter similar risky undertakings going forward, then we will not have the next generation of large mining projects to underwrite future prosperity.'[1]

6.4        Similarly, Professor Guj explained to the committee that his analysis had shown that, because of the capacity of established mining projects to use market valuation of the mine as at 1 May 2010 as a depreciable starting base for capital deduction, there was a 4.3 per cent total taxation bias in favour of projects that pre-existed the 2 May 2010 announcement of a resource rent tax. [2]

6.5        FMG told the committee that, as a now larger more established miner, it had access to a significant tax shelter which ensured it was unlikely to pay any MRRT in the foreseeable future. However, it also indicated that it did not think it would exist today had the MRRT been around when FMG was getting started back in 2003:

We are in the very fortunate position of being an existing miner and an existing project at the time that the tax was introduced, unlike many of the smaller exploration companies that Mr Bennison and AMEC represent. We have run, if you like, the MRRT across models that we had from when Fortescue was first established, and we do not believe Fortescue would exist today if the tax had been in existence at the time the company first was trying to get the project up and funded.[3]

6.6        On the same subject, AMEC told the committee:

In AMEC's view the tax is unfair and discriminatory to small emerging mining companies, which generally have higher risk profiles, have limited access to working capital, have lower economies of scale and consequently a higher unit cost production in comparison to large mature miners. This will make it more difficult for them to compete with large mature miners in domestic and global markets. The design of the proposed MRRT or the actual implemented MRRT provides mature miners with significant tax shields through the starting base allowance and additional financial advantages to large mature multinational conglomerates that are not available to emerging miners in the same proportion. Such a situation ultimately distorts the unit cost of production and investment decisions.

[...]

...modelling shows that under the MRRT regime a small emerging miner could be paying an additional effective tax rate of 60 per cent compared to large mature miner, who could be paying an extra two per cent. This differential is caused by the large tax shield provided to mature miners who are able to claim a significant deduction for the market value of their starting base assets, and it allows them to reduce the MRRT liability for the remaining life of the mine or 25 years, whichever is less. Small emerging miners are not able to claim such extensive tax shields and therefore the unit cost of production and ultimate effective tax rate are detrimentally affected. This is a significant issue with respect to competitive neutrality and equality, and it is fundamental to AMEC'S continued opposition to the design of the MRRT.[4]

6.7        AMEC further stated that while the government had tried to provide some concessions to smaller miners, 'these are of no value and do not address the discrimination factor.'[5]

6.8        Asked about the costs imposed on mining companies by the complexity of the MRRT, Professor Fargher responded:

There [are] a range of costs. At some end there is the administrative cost, which might be relatively trivial, of just administering the tax. Go beyond that and I would expect these large companies would be taking significant tax advice, and once they start trying to strategically reduce their tax payable then I would worry that there would be distortions from the tax that were not foreseen. I believe the complexity is in unforeseen ramifications of the tax and that is the most dangerous outcome that can come from not seeing the complexity.[6]

6.9        While emphasising that the possible distortions introduced by the MRRT were not yet apparent, Professor Ergas suggested that:

...it is certainly possible that uncertainty associated with this tax and the general impression that the Australian government may in future try to tax resources even more heavily, has contributed to the deferral or the slowing of many major resource projects that we have experienced in recent months.[7]

Administrative costs imposed by the MRRT

6.10      Mining companies, mining peak bodies and independent experts appearing before this committee pointed to the significant administrative burden associated with the MRRT.

6.11      The committee heard evidence that indicated that, even for companies that are unlikely to pay MRRT at any time in the foreseeable future, the compliance burden was still considerable. This was particularly true for smaller companies that lack the economies of scale of the larger, more established miners. The evidence given by Golden West Resources is particularly illustrative in this respect:

In addition to the demands placed on companies to determine their starting base, we have also had to grapple with the compliance demands of MRRT instalments and instalment liability notices, notwithstanding that we have no mining activity and no revenue from mining. Given the stage of development of our project, the bulk of our iron ore resources are covered by granted mining leases rather than by exploration licences. As a consequence, we did not meet the definition of 'explorer' as provided by the commissioner for nil rate determinations that would have automatically entitled us to exemption from the requirements to report and lodge instalment notices. Ultimately, after making submissions to the ATO, we were successful in obtaining an exemption from lodging instalment notices for the current year. This exercise in futility would appear to be required to ensure that we are not fined or sanctioned in some way for failing to pay MRRT instalments on our non-existent mining profits. No doubt our staff—that is me and my financial controller—will be made to jump through the same hoops again next year. [8]

6.12      Similarly, FMG told the committee that although FMG did not anticipate paying the MRRT at any point in the foreseeable future, it had taken FMG:

...close to two years to be prepared for the introduction of the MRRT and it has cost us some $3 million to $5 million. There has been a large amount of consulting cost and use of internal resources to be prepared for the tax. It should be noted that that amount of money is many times what it costs us to meet our obligations with respect to the primary taxes: income tax and royalties. This year, Fortescue will pay in excess of $1 billion in income tax and state government royalties. We do not expect to pay any MRRT for this financial year or for the years ahead.[9]

6.13      Pressed by the committee to explain the nature of the burden on FMG,
Mr Pearce related this burden back to the sheer complexity of the tax, and difficulties involved in determining revenue at an artificial valuation point and the starting base allowance.[10] This complexity was further explained in FMG's written submission:

[The MRRT] has introduced a new layer of administrative complexity into an already highly regulated industry Taxing at a ‘project’ level rather than a corporate level has further complicated matters and is significantly increasing the cost of overall taxation compliance. Implementing the MRRT regime, in terms of systems modification requirements, technical consultancies and legal interpretation, within Fortescue alone has cost many millions of dollars. The MRRT imposes an additional layer of taxation on top of the existing State and Territory based royalty systems and the Federal income tax regime in a manner that does not simply taxation, nor make the taxation process more efficient. In fact, since it is an entirely new tax impost all it has done is to increase the complexity of the compliance burden and necessarily acts as an investment deterrent to the extent that it reduces forecast project returns.[11]

6.14      Addressing the administrative costs imposed by the MRRT, AMEC told the committee:

AMEC has also consistently expressed concern that there will be inefficient and higher levels of administration and compliance costs to industry and government associated with the new regime. Late last year AMEC conservatively estimated that the minimum accumulated total set-up cost for all small iron ore and coal miners and junior exploration companies, excluding the large miners, is estimated to be over $25 million in the first year and the ongoing annual administration and compliance costs will be in excess of around $2 million to $3 million.[12]

6.15      AMEC also explained that in the process of surveying its membership about the administrative cost of the MRRT, it had received feedback that these costs:

... revolved around the valuation of the project [and] developing charts of account, bearing in mind they had to revise the charts of account so they could classify the data in accordance with the way the tax is designed. There is also forms design. There are policy and procedure manuals. There are IT systems. They had to rejig their accounting processes. There is staff training. That in itself is a major issue. There are individual staff costs. There is audit, professional advice, consultants—legal, accounting—to make sure that they are complying, so that when the ATO comes and knocks on their door they have got all the information that is required. Then, on an ongoing basis, IT continues to be an issue, and staffing, in terms of data collection—the input, the reconciliations, the appropriate reporting. Even if they have nil returns, they still have to fill in the return on a quarterly basis.[13]

6.16      Professor Guj noted that while the MRRT offered the option of a simplified accounting approach for companies under the $75 million threshold, the fact that small mining companies would aspire to one day rise above that threshold meant few were likely to avail themselves of this option. Under the simplified accounting approach, mining companies theoretically:

...would not have to keep their accounts in a manner that would allow them to comply with the MRRT, if required. However, there is a very big price in terms of forgoing a range of benefit that would be denied to them if at one stage for any reason whatsoever the volumes of the revenues and the cost would be such that they actually crossed that particular threshold. So there are certain problems.

I do not remember the details, but when we were discussing this with the ATO during some of the consulting process while drafting the legislation, I could hear some of the people saying that no-one will take advantage of this simplified system. I would not touch it with a hundred-foot pole. In fact we actually asked that question: why did you put that condition in? You would have to be resigned to always be a very small miner if you want to go down that track.[14]

6.17      The MCA touched on the same issue, telling the committee that:

...there are a lot of small to mid caps out there who are having to make a decision about whether ... they take advantage of the de minimus provision of $50 million cut-off phasing up to $100 million, or whether they in fact invest a fair amount of compliance cost upfront today with the prospect that they might grow in the future.[15]

6.18      Rio Tinto, BHP Billiton and Xstrata, meanwhile, estimated that the costs involved for them in determining their MRRT liability was probably in the order of 'several million dollars.'[16]

Australia's reputation as an investment destination

6.19      AMEC told the committee that it was concerned that the threat to Australia's ability to attract mining investment, related in part to the MRRT, was a 'serious predicament' that was little understood in the Australian political system. In particular, there was a threat to the 'greenfield minerals exploration, which is where the mines of tomorrow are going to come from.'[17]

6.20      Mr Craig Ferrier, Executive General Manager of Golden West Resources, suggested that not only did the MRRT impose a substantial administrative burden on small miners, but also made it harder to raise the necessary investment capital to grow and develop:

As an advanced exploration project that had defined a significant iron ore resource at the time of the announcement of the proposed resource super profits tax in May 2010, like other iron ore companies we have had to deal with the uncertainty and perceptions of increased risk and cost within capital markets created by a tax that was fundamentally flawed in its concept, design and implementation. This has had the effect of reducing the capital available for projects within the iron ore sector and arguably has reduced the number of new projects that have been developed and advanced to commence mining operations.[18]

6.21      Further to this was the issue, raised at various points during the inquiry, about the impact the MRRT had had on perceptions of sovereign risk in Australia, and by extension the effect on Australia's reputation as an investment destination. 

6.22      Professor Fargher suggested that sovereign risk was relative to the frequency and retrospectivity of taxation changes:

Certainly if there are too many retrospective changes it is generally regarded that that can increase your sovereign risk. If there are periodic changes which have been carefully thought through, that change in sovereign risk should be relatively small.

[...]

... Say the petroleum resource tax is changed two or three times over a period—I hate to be quoted—of maybe 10 or 15 years, the industry seems to be able to work with that. If you are changing tax law frequently, particularly with regard to retrospective items, that certainly becomes a difficulty for a miner who wants to make a long-term investment.[19]

6.23      Mr Ferrier of Golden West resources told the committee that both the RSPT and MRRT had had a negative impact on international perceptions of Australia as a destination for capital.

As the CFO of other iron ore explorers and producers in previous roles, and now as CEO of Golden West, I can attest to the fact that I have been frequently reminded by investors that Australia is not considered as attractive for foreign capital as it once was. This is typically contrasted against other jurisdictions, most notably Africa. As a proud Australian I inherently take exception to this point of view and highlight the risks associated with investment and the challenges of operating offshore. However, our actions perhaps are the best example of this perception of increased risk and costs. Following the fall in the price of iron ore in the second half of 2012, Golden West assessed the number of investment opportunities associated with projects in the Mid West and Yilgarn regions of Western Australia. Ultimately, our board chose to invest in a company whose focus was exploring for DSO iron ore in Liberia, West Africa. Whilst there can be debate as to the extent to which decisions such as these are directly attributable to the additional costs and risks imposed by the MRRT, it would be naive to believe that such considerations did not form part of the decision-making process.[20]

6.24      Similarly, in its submission, the Queensland Government argued that the MRRT ‘has undoubtedly damaged Australia’s international reputation in the mining industry without raising significant revenue for the people of Australia.’[21]

6.25      AMEC told the committee that it was not only the MRRT as it currently existed that was creating uncertainty, both also the persistent perceived threat that the tax would be broadened to apply to other commodities:

This uncertainty and lack of predictability point to the fact that Australia's reputation and credibility as a safe place in which to invest have been put in doubt. Action should be taken to reverse those trends by promoting investment, growth and productivity in the industry, not by penalising it.[22]

6.26      Asked about the impact of the MRRT on investment of smaller and junior miners in the exploration space, Mr Bennison also told the committee:

For us, a lot of this is about death by a thousand cuts, of which the MRRT is a very significant cut. Independent research, like that of the Fraser Institute, clearly demonstrates that Australia as an investment destination in the mining and exploration sector is clearly out of favour. We have dropped down the list dramatically. I think it is indicative of the lack of investment in IPOs in recent years. Probably in 2013 and 2014 we will see one of the lowest level of IPO listings on record. I think that is further indication of how the policy environment, particularly in the tax area, has been seen as a massive risk in Australia.

[...]

[We] cannot endure these sort of taxes and this sort of ad hoc policy arrangement, particularly on the smaller producing and emerging companies and also obviously in the exploration sector, where risk is a significant issue.[23]

6.27      During its appearance before the committee, the MCA made a distinction between taxes that add costs, and taxes that destroy value. It placed the MRRT is the latter category, and suggested this had a bearing on Australia's international competitiveness:

A lot of people think that taxes add to costs. Royalties do, carbon tax does but the MRRT actually destroys value in the after-tax adjusted returns that companies can expect. That is what goes to the disincentive to invest. Anything that puts us at a disadvantage in international competitiveness is what is the lead in our saddlebags. If that cannot be justified in terms of efficiency dividends, environmental dividends, social dividends and economic dividends then we are really cutting off our nose to spite our face.[24]

The MRRT's impact on communities

6.28      The Isaac Regional Council confirmed in its submission that communities in its council area affected by mining were not formally consulted prior about the MRRT.[25]

6.29      In this respect, the Isaac Regional Council noted that while it supports the ongoing development and growth of the mining industry, it has serious concerns regarding the sustainability of regional communities who are subject to current industry workforce models, such as the 'fly-in, fly-out' model, and the need for a coordinated Commonwealth, state and local government approach to mitigating such impacts.[26]

6.30      Sustaining our Sustainability, a community not-for-profit group, also expressed doubts over whether MRRT revenues would cover the social and environmental costs that it claimed mining activity imposed on rural communities.[27]


Committee View

6.31      The committee notes with concern the overwhelming evidence presented during this inquiry which suggests that, despite raising no meaningful revenue, the MRRT has increased costs and destroyed value in the resources sector, particularly for the smaller, less established mining companies.

6.32      It is the committee's considered view that the complex, distorting and inefficient MRRT is bad for Australia and must be abolished at the earliest opportunity.

6.33      The committee agrees with evidence presented during this inquiry that the design of the MRRT, and specifically the starting base arrangements that the government agreed during its secret negotiations with the three large miners, discriminates against smaller, less established miners, making it harder for them to become Australia's economic success stories of tomorrow.

6.34      The bigger miners of today started off as smaller miners in the past.

6.35      The smaller miners of today aspire to become bigger miners in the years ahead.

6.36      It is in our national interest that as many of them as possible are successful in that endeavour. Our taxation and regulatory policy settings should provide the sort of globally competitive environment that will help them achieve that instead of imposing unnecessary and unproductive additional cost for no government revenue upside.

6.37      The additional compliance burden imposed on smaller miners for example just so they can prove that they do not in fact have to pay any MRRT, but to preserve protection from future MRRT liabilities is just so counterproductive and counter to our national interest.

6.38      The committee considers that the MRRT has damaged Australia's reputation as an investment destination and made it harder for mining companies to raise the funds they need to get underway and grow.

6.39      Finally, the committee notes that no evidence was provided during this inquiry that suggested that the government had given much if any consideration to those issues or indeed to the views of communities affected or potentially affected by the implications of this tax for the iron ore and coal mining industry.

6.40      It should be obvious to any reasonable observer and policy decision maker that this failed Minerals Resource Rent Tax must be abolished at the earliest possible opportunity.

 

Senator David Bushby
Chair

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