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]
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]
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]
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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