A Kinder, Gentler Mining Tax

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It’s a funny thing, the Gillard Government. According to most of the opinion polls, and much of the commentary, this government can’t take a trick. You’ve all heard the criticisms before. Gillard is unliked by ordinary Australians. She has a credibility problem. Her speeches are dull. Labor itself is increasingly on the nose. Voters oppose key policies. The Opposition would win an election held this weekend in a canter.

But when it comes to passing legislation, which is the thing that governments are supposed to do, you’d have to say this administration is pretty effective. Julia Gillard may not be the most popular prime minister in modern times — actually, she toppled the most popular prime minister of modern times — but she is certainly one of the most effective legislators.

Last night, Gillard and Labor, with the help of the Greens, passed another key measure in the government’s agenda: the Minerals Resource Rent Tax. The MRRT (or the mining tax, as it is universally known) is the second version of Labor’s attempt to tax the windfall profits of big mining companies. The first, known as the Resource Super-Profits Tax, or RSPT, was first announced by Wayne Swan in 2010 when Kevin Rudd was still prime minister. It triggered a savage public campaign from big resource companies. Many still believe that led directly to the downfall of Rudd himself.

On reaching the highest office in the land, Gillard made the mining tax controversy one of her top priorities. Ignoring smaller and mid-tier resource companies, she concentrated all her firepower on the big three multinationals of BHP Billiton, Rio Tinto and Xtrata, in an effort to cut a deal.

The eventual result of those negotiations was the MRRT that passed last night. It’s a kinder, gentler and altogether smaller version of the first mining tax.

Instead of the broad-based levy on non-renewable resources envisaged by the first tax, the MRRT will only cover iron ore, coal and coal seam gas. Instead of a 40 per cent tax kicking in at a level of profit 5 per cent above the long-term bond rate, the MRRT will levy at a rate of 22.5 per cent of the amount that equals mining revenue, minus expenses, plus an allowance that includes an allowance for royalties paid to state governments, as well as an "uplift" of 7 per cent above the long-term bond rate.

If it sounds fiendishly complicated, that’s because it is. This research note from Juli Tomaras of the Parliamentary Library is probably the best primer for those interested in the details. Spare a thought for the boffins at the Australian Tax Office, who will have to work out how to apply it to a range of huge mining operations.

The upshot of all this red tape is a new tax that will levy around $11 billion more from medium-to-large mining companies over the next three years. That’s not a huge extra impost in a time of historically high commodity prices. Indeed, as the Greens and many independent observers have pointed out, the revenue foregone by watering down the mining tax will add up to tens of billions of dollars over the next decade.

Despite all the noise and fury from the likes of Clive Palmer, who has threatened a High Court challenge against the constitutionality of the tax, you can get an idea of just how weak the mining tax is by having a look at what it doesn’t cover.

For starters: Australia’s biggest mine, Olympic Dam. The Olympic Dam development in South Australia will be one of the largest mines in the entire world. This astonishing feat of human ingenuity will see the excavation of a kilometre of rock, in order to mine an ore body with the literally fantastic value of $1 trillion. Just getting to the ore body will take four years of digging, and at its peak, the mine will consume more electricity than the city of Adelaide — in fact, it will eventual consume about 60 per cent of South Australia’s entire electricity supply.

But because BHP Billiton will mainly be digging up copper, gold and uranium, Olympic Dam won’t be covered by the new tax. This is despite the fact that gold prices are enjoying a historic bull run. Any way you look at it, the MRRT will only shave a fraction from the value of the treasure being excavated from Australia’s many mines.

Given the eventual haul is only about $3.5 billion a year, you’d think Labor would be keen to send all of it towards the budget bottom line, ensuring the cherished goal of a budget surplus for 2012-13. The Government has instead promised to spend much of the new revenue in new initiatives. Some of the money will be used to increase superannuation rates to 12 per cent over the next eight years, eventually raising the retirement savings of ordinary Australians. Most of the rest of the promised revenue is slated for a reduction in the company tax rate, from its current 30 per cent to 29 per cent.

Both measures are productivity-enhancing, at least in economic theory. But neither measure is particularly game changing. Superannuation, for instance, is far from the panacea that many believe it to be, especially given the modest returns of superannuation funds in recent years. As for a 1 per cent reduction in company tax, that will benefit only those companies making a profit in the first place, and even then only slightly.

One measure funded by the MRRT that is of real value to small business is the new depreciation rule. This will allow small businesses to immediately write off the purchase of assets up to a value of $6500. In the past, this hadn’t been allowed — businesses had to instead depreciate these assets, writing off a little each year. As Wayne Swan wrote in the Treasurer’s economic note yesterday, this means that "a hairdressing salon that purchases 15 hairdressing chairs worth $1500 each, a computer system worth $3000, and six hair-washing sinks for $1250 each, will be able to deduct the full cost of each item straight off its taxable income for that year."

Swan says the extra cash-flow adds up to more than $8000. This hasn’t been much talked about in the media, but will actually make a big difference to small traders and micro-businesses, especially by making bookkeeping easier. For the average sole trader, it will mean buying things like laptops and trade tools much more attractive.

On the economics, therefore, the MRRT is a typical example of the Gillard government’s modus operandi. A bit like the health reforms ushered in under Nicola Roxon, the MRRT is a modest, technically proficient reform that is none-the-less far smaller in scope than Labor makes it out to be. It’s not true big-picture stuff. But it is a step in the right direction, because it moves the tax burden away from enterprise and towards non-renewable resources.

On the politics, it’s closer to a wash. Labor backbenchers can certainly take heart from another example of the government’s continuing ability to push through its agenda. There may be some long-term advantage accruing to the fact that the government has been diligent in getting on with the job. The government is pushing a new website that will explain how much extra super ordinary workers will receive as the result of the new tax.

It can also gain a bit of short-term capital from the refusal of the Opposition to vote for the company tax cuts. But, partly because of this, Labor hasn’t been able to pass the company tax cuts yet. And the fact remains that a solid bloc of voters doesn’t seem to care about Labor’s agenda, while a possibly larger contingent of conservative voters tend to reflexively dislike everything this government does.

The ABC’s Sabra Lane pointed this out to the Prime Minister this morning, asking her whether the long battle to get the mining tax up had been worth it. "Of course it’s been worth it," Gillard replied. "Having the mining tax go through and become reality is exactly the right thing for our economy now and for fairness for Australians." But whether it’s a good thing for Labor — indeed, whether fairness is even a value that can win Labor an election — remains to be seen.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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