Australia’s new Resource Super Profit Tax ?
Posted on 03 May 2010
The clammy paw of government grabs the pick handle
Our politicians are taking over. Whether for good or ill, governments are closing their fists around the private sector. And they don’t need a debt crisis to feel emboldened to make the leap. Consider Australia’s newly announced Resource Super Profit Tax – which according to our government is “world class” and “sets a new benchmark for resource taxation”:
The RSPT will apply a 40 per cent tax to profits from resource projects after allowing for extraction costs and recouping capital investment. Companies will not pay RSPT until after they provide shareholders with a normal return on capital investments.
The rationale for the tax is pretty clearly that the government thinks we have been missing out on our share of the resource boom:
Sure the headline grabbing number is 40% – but on reading what detail there is, it seems like mining companies will be well compensated for their troubles. The government has said that we (Australian taxpayers) will take 40% of the capital risk of mining projects. The 40% RSPT on profits is just a return on our investment.
How does this work? The government will provide a guaranteed tax credit for 40% of the costs associated with getting the project up. In the worst case scenario, the project closes and the tax credits can’t be used elsewhere (they are transferrable), taxpayers will give the miner a refund to that value. Miners will even be compensated for time value in getting the 40% up-front investment back (indexed at the 10 yr govt bond rate).
So what to make of the RSPT?
Is it a Super Profits tax? Not sure there is anything super about it. It ostensibly is a tax on all profits – regardless of whether they have a ranking in the pecking order.
But even more than that, it really is borderline as to whether it can be called a tax at all – in the traditional sense that a man with black gloves and a scar on his cheek, takes your goods and chattels and threatens to marry your daughter. Existing state royalties are clearly taxes as miners must simply pay the sum for the privilege of operating in that state. The RSPT looks more like the government has compulsory equity participation in mining projects undertaken in Australia.
That’s not necessarily a bad thing. Just it’s not a tax (and gets even more confusing when the Commonwealth will offer tax credits for state royalties paid and the RSPT will be deductible for income tax purposes.) Maybe it’s called a tax because it uses the tax system to pay for the equity interest?
For the negative – there are all the risks that arise when the sovereign puts its chubby fingers into the mix. Bureaucracy is rarely a match for the self interested individual. The structure of the RSPT, if I have understood it correctly, raises questions about the alignment of interests between management, investors and government. For example, while the taxpayer might be stumping up 40% of the equity, not sure that the government is asking for a seat on the Board. On the flipside, by introducing a ‘profit’ based tax – the incentives for miners to optimise their expenses and their capital bases will be heightened. Beware the bureaucratic cobweb that follows this one.
Conclusion – broadly good in concept, but not sold on the implementation. As it stands, looks like taxpayers are sharing the risks but not proportionately in the rewards.
Also see:
- A worked example of the RSPT (here)
- Final verdict – RSPT a deeply flawed tax (here)
- The ATO’s “The Resource Super Profit Tax” at their website here
3 responses to Australia’s new Resource Super Profit Tax ?
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The last thing anyone needs now is higher taxes of any kind. These govts are all convinced that they need to increase tax revenues somehow (well, Europe sure does, but that’s VERY different from Aus).
This is the sort of stuff we’re afraid of in the states. Obama and the gang are starting the “deficit cutting” chatter. That would surely kill any recovery….
It’s a brave new world out there – or is it back to 1984 (in an Orwellian sense)?
Funny thing is after trying to decipher the mechanics of this tax, I don’t think it is as punitive to investors as the headlines would suggest. For new projects, it does take away some of the upside – investors lose leverage relative to existing tax arrangements – but equally, if commodity prices come off, investors are better off. Presumably, existing projects will be compensated as if they were new – to do otherwise would open up a legal stoush of epic proportions. So all-in-all, this tax in isolation doesn’t seem to be a game breaker.
The thing I really don’t like about this trend is that governments are unpredictable at the best of times – they are poorly equipped to manage the micro-economy and tend to act by reflex rather than commercially when things don’t go according to plan. So agree – the rise of sovereign risk is a choke around the recovery. It’s going to take years for this cycle to play out and needs to be priced into the bond, currency and equity markets accordingly.
[...] on 05 May 2010 After a couple of days ruminating on the new Resource Super Profits Tax (here and here), I’ve come to the conclusion that it is a deeply flawed structure. It is simply [...]