My "Objective" as possible take on the Mining 'Super Profits' Tax

This one's for Auvik, who asked for an objective analysis of the tax widely known as the mining superprofits tax in Australia.

For those who are not aware this tax is proposed in a tax reform report known as the Henry Report. The report itself was scripted to the Treasurer in Dec 2009, but it only appeared in the media earlier this month after a roadshow from the government at the Budget.

In order to remain reasonably objective I have just looked in detail at the report itself rather than reading the news available. You can read it yourself here (in all its 1,000 + page glory) .



Of course the report itself covers much more than the resource rent tax - also delving into personal income, dividend imputation and other topics. It is actually an interesting an in depth report that reads like a textbook and is reasonably simple to understand.

To me no matter how you cut the cookie, there is a fundamental argument or decision here on whether to consume or to save (remember the old curve from Microeconomics). In this case the choice to spend or save is not money / savings etc but future income from a resource that is considered to be an 'economic rent' or item essentially on loan from Australia to the mining companies for a fee.  

Essentially without stepping into any further arguments about price / negotiations / tension surrounding the tax the question is whether or not mining companies should be forced to regulate supply by shifting the regulatory barriers and competitive environment around each company.

In simple terms - should the Government (and thus We Aussies) be entitled to more share of 'profit' from the mining companies. Essentially the Henry report argues that from a stakeholder perspective the government should be entitled to a stable and predictable share of the profit from the entities it taxes. The case study it highlights is the Petroleum rent tax which has been consistently stable at between 30-40 % of the profit of the industry over the last 10 years. This is opposed to our mining companies where the profit has reduced from 50% to around 10% of the profit of the industry over the last 10 years.

If you hit pause here and think from a business perspective this makes little sense. Companies are separate legal entities and have not entered into any partnership with the Government. The fact that these companies have performed exceedingly well (off the back of China and India) is actually nothing to do with the government - as the purpose of the company is to maximise profit and current share price.

To raise an analogy - the proposal of this tax is very similar to NASA being told to use less fuel to get its rocket to the moon. The goals of NASA are to deliver the rocket and achieve the mission, this is another roadblock from their perspective.

Having watched Marius Kloppers (CEO of BHP) and Andrew Forrest (CEO of Fortescue) you can understand also the outcry. The mining industry is one industry that has multi-year projects spanning 10-30 years. Changes in variables like tax rates have massive implications to models but most of all much like the smokers who woke up 25% poorer (due to higher cigarette costs) the change will not happen over night whereas the cost has.

The Henry report was clearly written for the Government's benefit in this area of tax. For instance, various items such as exploration support - that are economically sound - have been advised against in order to save the government money as well as to increase the life of the asset.

I actually believe the current conjecture on the details of the tax are well summarised in this report - but are less key to the decision on whether or not the tax is founded. The report basically shows that the new scheme seeks to encourage required rates of return of under 10% as it gives a tax benefit to these projects, but it charges more for projects with a return of above this.

So to step back again this is clearly a hung debate. The government will always want to secure more funds for the people of Australia - as it should. The companies will always want to secure more profits for its companies as it should. There is no right or wrong from a political / company perspective.

The only issue is that the world is dynamic and Australia is just an island that contributes 2% of world GDP. That means that it relies on foreign investment for profitability and also for taxes and international competitiveness is also at stake. The Henry report does not consider the loss of tax revenue from lost business. It is largely a domestic report.

To bring this closer to home - what would you do if you found two restaurants with the same level of food - but one which was 100 dollars and the other for 50 dollars. In the restaurant business you would laugh at the one charging 50 dollars and say it was mad... but then again that restaurant will never go broke or be empty.

The real question for Australia and the Government is really can you still open shop for business tomorrow if you raise your prices - and how many customers are you going to lose. Jury is still out in this turbulent time as to whether the conservationist or the spender will prevail.

What's Up Jono? http://whatsupjono.blogspot.com