February 12, 2013 / 4:41 AM / 6 years ago

COLUMN-Australia mining tax working, despite teeth-gnashing: Clyde Russell

—Clyde Russell is a Reuters market analyst. The views expressed are his own.—

By Clyde Russell

LAUNCESTON, Australia, Feb 12 (Reuters) - The increasingly strident calls by some Australian politicians to either tighten or scrap the country’s controversial mining profits tax ignore that the measure is working as it is supposed to.

The response to the Labor Party government’s somewhat sheepish announcement that the tax raised just A$126 million ($129 million) in its first six months, nowhere near the budgeted A$2 billion, has been predictable and unimaginative.

The government has engaged in shifting the blame to volatile commodity prices and the strong Australian dollar to cover its embarrassment that the budget surplus it promised on the back of the mining tax has evaporated.

The left-of-centre Australian Greens, which along with three independents, support the Labor-led minority government, want to change the law so that it raises more revenue.

Meanwhile, the main opposition Liberal-National coalition, which was never in favour of the tax and is leading the opinion polls ahead of the federal election scheduled for September, wants it scrapped.

All of this fails to take into account that the Mineral Resource Rent Tax (MRRT) was designed to extract more money from the big coal and iron ore miners when they were making significant profits.

While the design of the tax is by no means perfect, it was never meant to be a gouge, or an unfair burden, on resource companies.

Rather, as they made more money from selling iron ore and coal, mainly to China, the miners would have to hand over some of the additional proceeds to the government, in addition to normal corporate taxes and mining royalties.

The MRRT was set at 30 percent of assessable profit of coal and iron ore miners once profits reached A$75 million, and it came into being on July 1, 2012.

Companies are allowed to deduct an MRRT allowance of the long-term government bond rate plus 7 percent and there is also an extraction allowance, but the main concession is that royalties imposed by state governments are also deductible.

The tax had a controversial birth, having originally been mooted as the Resource Super Profit Tax in 2010, and it was to be levied at a 40 percent rate and apply to all minerals.

After a concerted campaign by mining companies and the Liberal opposition, the Labor Party dismissed former prime minister Kevin Rudd from his post and replaced him with current leader Julia Gillard, who appeased the mining lobby by negotiating the watered-down MRRT.

Whether this was good politics or not is open to debate, but the Labor government’s mistake appears to have been to assume that the commodity price boom was an ongoing story that would deliver a revenue stream they could use to fund their social-spending programme.

However, it didn’t quite pan out that way, and the tax’s introduction coincided with a slowing of growth in China, Australia’s biggest customer for mineral exports, as well as renewed recession in Europe and concern in the United States about the looming “fiscal cliff”.

Asian spot iron ore prices .IO62=CNI-SI fell to a three-year low of $86.90 by Sept. 4 from around $134 a tonne at the end of June, before recovering to reach $144.90 by the end of the year.

Regional benchmark coal prices at Newcastle port dropped to $80.82 a tonne in mid-October from $97.31 a tonne at the end of June, before recovering to $92.25 by year-end.

Both have improved further in 2013, with iron ore reaching $155.10 by Feb. 11 and coal $96.09 by Feb. 8, meaning the tax should raise more in the first half of 2013.

But what the pricing shows is that there was a significant drop in both iron ore and coal in the second half of last year, and that would have all but eliminated the excess profits the MRRT was supposed to capture.

It’s also worth noting that the MRRT was being put together in 2010, with iron ore above $180 a tonne in April of that year, while coal hit $136 a tonne in January 2011.

Clearly the Labor government expected those sorts of prices to continue, or thought that if they did decline, it wouldn’t be to the extent that they actually did.

The government wasn’t alone in expecting the boom prices to continue, but the error has severely dented their credibility in an election year and should be a warning to politicians not to spend money they don’t actually have.

But the MRRT is not at fault, in fact, it would be more problematic if it was currently extracting more revenue from the mining sector, given the pressure on companies to contain costs in the face of lower commodity prices.

The MRRT is meant to be a “good times” tax, not a permanent revenue collector such as a resource rent-type impost, which levies a charge on each tonne of ore mined regardless of what the producer can actually sell it for.

Such a tax would have accelerated job losses, mine closures and a much bigger scaling back of investment plans than the MRRT has done.

Fiddling with the MRRT to ensure it raises more money, even in bad times, would be a silly and self-defeating mistake for any government, while scrapping it altogether means forgoing revenue in good times.

The risk for Australia is the seemingly never-ending adjusting of the tax system undertaken by both major parties, mainly based on ideology rather than good public policy.

If the Liberal coalition does triumph in September’s vote, expect another bruising and counterproductive fight over tax policy, which can only serve to make Australia a less attractive place to do business.

Editing by Joseph Radford

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