Citi has revised its calculation of the cost to the mining community of the Resource Rental Tax and the table is below. There are a few offsets that their original calculations left out, so they’ve run a 10 year model after consultation with the tax department.
Citi 10 year model of the Resource Rental Tax
The summary statistics that you need to know from this and the rest of their document is:
- Under the royalty system the mine would have paid $32.50 per $100 invested over the life of the mine, and under the new system $77 – a 137% uplift
- Taking offsets into account total tax paid under the new will be $119.70 per $100 invested versus $87 under the old system, a 37% increase.
- The NPV of the project becomes $8 rather than the $24 it would have been under the existing regime.
It still puts Australia at the top of the cost curve and provides a return that is insufficient to justify further development.
The Treasurer has put out a note today that according to Twits on Twitter “nail[s] most of this week’s ‘arguments’ as pure drivel”. It’s a good attempt at spin, but it’s not solid analysis.
There’s an attempt to justify 6% as the threshold for the definition of a super profit because the system allows offsets against loss making mines, thus the Commonwealth is said to be “sharing the risk”, therefore the risk free premium is justified. But that’s the way income tax normally works and I’ve never heard anyone suggest that the government is sharing the risk with you when they take income tax from you. Sharing the risk means that you might actually lose something you have, not something you might have.
The document also reveals that any mine earning more than about 11% return will be worse off.
There’s a legion of questions the document doesn’t answer.
For example:
- How does making Australia the highest-cost producer from a tax point of view help new mining prospects?
- If you’re concerned about profits going overseas to multi-nationals, why didn’t you just implement a withholding tax?
- How does it make sense to fund on-going costs via income leveraged to volatile commodity prices? What are you going to do when the price comes down?
- What are your price assumptions for commodities going forward?
- Why didn’t you grandfather the change from existing mines?
- How is increasing political risk going to lead to higher investment in Australia?
Feel free to add your own questions below.
Note: the table above is taken from a report by Citi dated 5th May, 2010
Thanks for that Graham. A damming review I think. Spin will not crush the opposition to this cash grab. We need a REAL sell job with REAL figures that address the reasons that mining companies would maintain their interests in Australia over the lower taxing countries with this tax.
Comment by Frank Holland — May 9, 2010 @ 9:26 pm
Some commentators writing about Rudd’s 40% Resource Rent Tax, are saying that he is the greatest social reformer since Whitlam.
Gough’s social reform taught people that they did not have to pay for their education and health services. It has taken the Labor Party 35 years to produce a worse Prime Minister than he was.
Ken Henry is a trained interventionist. State interventionism in all forms destroys the impartial co-ordinating ability of the market and turns what may have been profitable investments into malinvestments.
Xtrata has made $44 billion in Australian revenue since 2002. Of that, $27bn was paid to employees, to suppliers, the stake holders in communities and towns and to the states and commonwealth tax offices.
The remaining $17bn, and another $1bn outside the country, has been invested in Australia to develop or acquire new mines and infrastructure. That is a fair share for Australians.
There is no such thing as a windfall profit. Huge profits indicate that a producer is serving its customers well. Profits have a social function:
* Profits induce competitive producers to enter production.
* Profits generate new capital.
* New capital generates exploration activity.
* Exploration activity generates new discoveries.
* New discoveries generate production and jobs for the entire spectrum of society’s workers.
The Rudd government’s RRT is a capital destroying exercise and as such becomes a production and job destroying activity.
It also leaves countless millions of tonnes of otherwise profitable ore in the ground. Low grade producers are wiped out completely.
Comment by Ronald Kitching — May 10, 2010 @ 5:11 am
Give us all a break! I know neo-liberal fundamentalists have had a hard time lately given that we saw what their greed did to give us the Global Financial Crisis, but this current effort to defend the indefensible gred of the companies involved in mining Australian resources is just too big a stretch.
Clearly we need to manage our minerals and commodities a damn side better than we have to date. At a time when there has been unprecedented demand from the world’s emerging super economies for what we have, our mining magnates have actually performed very poorly indeed from where I sit as an ordinary citizen. They have somehow managed to ensure that over 80% of the profits made by the mining sector are exported, along with our resources, to the wealth management accounts of foreign investors. Way to go boys! But how in god’s name is this good management? These guys need to get serious and show a broader set of management skills than they have to date. And maybe ultra conservatives like Abbott and Hockey need to think some fresh thoughts beyond the extreme economic rationalist rut that is their clearly their comfort zone, particularly if they aspire to take over the helm in all our lives.
But why should the mining magnates do a better job for Australia? After all they don’t work for the Australian community? We’re not the ones paying them. Even BHP is now majority foreign owned. And god bless them . . . Rio couldn’t even hold its recently scheduled Australian AGM because its Chair and Directors couldn’t get out of London, where they are headquartered, because of the recent grounding of European air flights.
So should we just let them do what they want and continue making uber profits while they can . . . while we still have something on which we can offer them open slather. Shouldn’t we be grateful for at least getting a relatively small part of the windfall. A radical and long overdue thought is that it might just be possible for us to get a better deal than the one we’re currently getting? Rio may well mine in Canada and anywhere else that they’re allowed to dig a hole, but if you really think they would seriously consider abandoning the extraordinary resources they have access to in Australia, giving their competitors a leg up, just because we have started to claw back some more realistic share of the value of the profits they make that fall into that class that the whole world recognize as super profits, you’ve got rocks in your head. Maybe they’ll step aside and allow the Chinese or Indian businesses to come in to do the job if it’s getting all too hard for them to manage.
How much longer will we go on kidding ourselves that if wealth creation happens through the exploitation of Australia’s natural resources then we must happily be the principal beneficiaries of it. Not even close!! This kind of delusional thinking has to ease off soon or we’ll have nothing left to exploit.
Many of our resources are finite and we have a responsibility to take a longer and broader view of their worth than the narrow one expressed this past week by Abbott and Costello and their mining sector financers.
Sorry to harp on the bleeding obvious, but this concocted outrage at a Resources Tax reminds me of the kind of extreme “free market” rhetoric we can still see on our televisions by CEO’s and other high flyers stuck in the neo-liberal haze of the last thirty years, as they sheepishly admit to the US FCIC what they believed they were entitled to be “earn” [Was there ever a more abused word?!] for a hard day at the lap top playing roulette with the financial sector and the value of rest of our lives.
We now know that QANTAS, Telstra, and anything else that could be sold is pretty much sold. Given a chance, that self aggrandising humbug Hockey will sell of the few remaining family jewels – Medibank Private, what’s left of Australia Post if they diversify any further into profitable banking [which in real speak means they’re gone too] and anything else that might once have been vested in all of us – in the common wealth if you like. Does he think we weren’t in the room when the stock markets crashed and the greed and malfeasnace that surfaced from one side of the free market to the other became crystal clear to anyone who didn’t have their head in a dark, damp, noiseless place??
What possible comfort does anyone derive from any of our our assets now being owned and thoroughly controlled by shareholders whose bottom line, both morally and economically, rests soley on the imperative of immediate profit . . . in line with Milton Friedman’s socially repugnant dictum that maximising share value is finally the overriding moral rule to be applied by the corporation. What a shameless self serving croc of a principle!
Australian governments of just about all shades have gone beserk, even selling off government instrumentalities with guarantees that we’d subsidise losses or buy them back if ever any real risk should eventuate. And if anyone hadn’t realised that advanced economies like Australia had evolved to a peculiar form of socialism for the well off [and bugger off for just about everyone else], the recent obscentiy of baleouts and guarantees for our teetering and failed corporations [while ordinary people lost jobs, home, lives] should have clarified things a lot more starkly than seems to have been the case.
Sure we need venture capital, and we need investors, and we most definitely need very well paid and highly skilled management, skilled miners, engineers, and the rest of it, but only people still wandering around trying to make sense of the world through the myopic blur of hard line economic rationalism could still even attempt to spruke the nonsense currently coming from the mining industry. It is truly unsettling to see these people close up like this, talking such drivel.
What . . . they can’t manage? You’re telling me! The fact that anyone is taking them seriously is perhaps as dispiriting as anything else and tells us how deperately so many people can cling to an ideology once they done well from it. And as for that Palmer fellow going on the TV and personally attacking the PM and the Treasurer as though they were clueless obstacles that he would have removed by putting his money into buying a more compliant Abbott puppet government . . . well it should have been headlined in the papers the following day. Abbott should have made it clear he is not in the back pocket of any party backer – no matter how large his cheques and media influence might be.
But Abbott just grinned that jackall grin of his and he knew, we all know, that the kind of reporting that should have followed this egregious challenge to a fair electoral process is just not going to happen!
Of course shareholders want, and have a right to expect, a decent profit on their investments, but when this reaches a sense of “entitlement” that is simply obscene in terms of social irresponsibility, we surely must realise that we have reached a point where someone has to step up to the plate and assert that unexamined greed, and the arrogant grab of our country’s remaining assets and resources by people with seemingly no shame, has to ease off.
To paraphrase Malcolm Fraser . . . How much further to the right do we need to go . . . before realising that the farm has been sold and along with it our common hopes and aspirations for any kind of a decent shared future for the people left living here.
Comment by Russell Pollard — May 10, 2010 @ 5:57 pm
What a long diatribe Russell. No time to answer all, or even most, of it. But you seem to have missed a few principles in running an economy and making wealth. One of these is that a deal is a deal, and you don’t change it half-way through. Whatever the merits of an RRT, changing the regime on existing mines is unacceptable, irrespective of the profits they are making. In any event, these profits are not super-profits, just reasonable on the capital invested at the moment. A decade ago profits were much lower, but your “analysis” takes no account of that.
The other lesson that you miss is that the Australian economy has actually prospered by adopting the policies that you condemn. Go back to the 70s and look at where we were on the wealth table, given our position now. From memory we ranked around number 17 back in the 70s and early 80s and it is now number 7. All credit to the “neo-liberalism” of Hawke, Keating, Howard and Costello.
Comment by Graham — May 10, 2010 @ 11:52 pm
When Whitlam and his Minister for Minerals and Energy Rex Connor attacked the exploration and mining industry, exploration closed down. $13 billion to be invested in new projects disappeared like drops of water on a hot plate.
Geologists I then knew who could get jobs, were working at:
* Painting 44 gallon drums in a Mobil oil depot.
* A labourer at Taronga park Zoo.
* Independent gold prospecting.
* A cowboy on a cattle station.
* Bought as corner shop and abandoned geology altogether.
And dozens went overseas. And dozens more were simply unemployed.
This is not to mention hundreds of unemployed field hands and drillers, and many others related to the services of those industries.
Comment by Ronald Kitching — May 11, 2010 @ 12:07 am
It seems we only jump up and down when our personal assets like super are threatened.We seemed to have given up all hope of stopping the enormous waste of Govt.
It took the schools debacle of the Education Revolution for ordinary people to realise that building projects were costing 4 times what they should.Now this is just the way Govt functions normally.We all could be getting 4 times the value out of our tax dollar if we held the blow torch of accountability to the belly of Govt waste and duplication. Kevin would not then need his new super profits tax on resources/energy.
Comment by Arjay — May 11, 2010 @ 11:37 am
Not having any training in economics, accounting, business management etc, I am having considerable difficulty in understanding the impacts of the resource rent tax. Your table is virtually incomprehensible to me. What is it modelling? What are the units for all the figures in the table? What are EBITDA and EBIT?
I accessed your analysis while desparately trying to understand some fundamentals. My, probably naive, understanding is that profits from mining projects which exceed the ten year bond rate (circa 6 percent)of the capital invested in the project are to be subject to a tax of 40 percent. How does this relate to company tax? Is the 40 percent on all the profit, or only on the “super profit”? If only on the super profit, is it on top of the company tax (ie 70%) or is the actual super profit tax rate actually 10 percent (40% less 30% company tax rate? Actually, I realise that this is probably not a sensible way to approach it, since, as I understand it, company tax isn’t affected by the level of capital investment and the “super profits” tax is. Also I’ve read that the “super profits” tax is tax deductible, implying that it is imposed before before company tax is calculated.
Can someone explain all this in the simplest possible terms?
Comment by Don Nicholson — June 28, 2010 @ 6:56 am
Hi Don, some good questions there. First the easy part. EBIT is earnings before interest and tax. EBITDA is earnings before interest, tax, depreciation and amortisation. It’s common practice to use these rather than after tax profits to measure the worth of a company because a lot of things can impact on profitability depending on a company’s situation or financial structure. Stripping out interest and tax makes the measure more independent of individual circumstances.
The “super profits” tax is 40% of the earnings before allowing for tax. Tax is then paid on the 60% that is left to the company. Which is how you get to an effective rate of 58%. This is done by taking 40% that goes to the government, plus the 30% company tax of the 60% that is left. But it doesn’t take account of royalties which are rebated to the states and would have been paid anyway.
Does that make sense?
Comment by Graham — June 28, 2010 @ 1:36 pm