HENRY TAX REVIEW: Squeezing miners: Kohler

The so-called tax reform package announced today by Treasurer Wayne Swan is really just a new resources rent tax, plus a few destinations for the money that will be raised from it.

Whether this required a two-year review of the tax system is debatable, but the proposed Resource Super Profits Tax (RSPT) is definitely a huge change, and challenge, for Australia’s resource industries.? ?

It is described as turning the government into a 40% equity partner in all of Australia’s major resources projects. Under the plan, the government will guarantee to contribute 40% of the investment cost of a resource project through the tax system, including cash refunds in some cases, and take 40% of the profits.? ?

It sounds nice and simple when you say it like that, but in fact it will be neither nice nor simple for Australia’s resource sector. It will impose a whole new accounting system and compliance burden on resources companies and will collect a great deal of extra money.? ?

How much is not estimated, except that it will be used to create an infrastructure fund starting with $700 million in capital in 2012-13 and growing to $5.6 billion over ten years, plus pay for a cut in the general company tax rate to 28% by 2014-15, as well as extra benefits for small business, and a tax break for more super contributions.? ?

The Henry Review says the new tax should be applied to petroleum, uranium, black coal, iron ore, base metals, diamonds and minerals sands, although that list did not make it into the Treasurer’s statement. ? ?

Existing state royalties will continue to be collected by the states but the federal government will provide a “refundable credit” to resources companies for royalties they have paid. But what royalty rates will be credited has not yet been determined because some are in nominal dollars and some are applied mine by mine.? ?

What’s more the new scheme tries to put a cap on state governments simply increasing their RSPT-deductible royalties as a sneaky means of transferring cash from federal coffers. Today’s statement says the refundable credit will be available “up to the amount of royalties imposed at the time of announcement [today], including scheduled increases and appropriate indexation factors”.? ?

Royalties to private land owners, including indigenous communities, will still have to be paid, but the statement says: “it will be important to ensure that the super profits from the resource are not transferred to private parties”.? ?

Also deductible for RSPT purposes will be exploration expenditure, plus “the cost of extracting resources and getting them to the taxing point”. NOT deductible will be interest and all financing costs, payments to buy permits, leases and licences, payments for project subject to RSPT, income tax and GST. RSPT will be deductible for income tax purposes.? ?

As for the tax itself, it’s to be calculated by taking assessable revenue minus deductible expenditure, including depreciation, minus an RSPT capital allowance (more on this later), minus prior year losses, times 40 per cent.? ?The capital account allowance rate will be set annually at the 10-year bond rate. The capital account balance is equal to the “undepreciated value of tangible capital, plus any unutilised losses made in previous years”.? ?

A tax on super profits is undoubtedly better than state royalties on production, since it will only apply to projects that are making money. Royalties penalise start-up mines and push out their break-even point.? ?

But dealing with a new rent tax will be a huge challenge for Australia’s mining and energy producers, and their accountants had better get their minds around the new system in a hurry.? ?

The Government says it will treat any new investment from today on as it would under the new system – “to avoid any distortions to investment during the interim period”.? ?

That means all acquisitions of either capital or exploration expenditure from now on will be included in the RSPT capital account valued at historical cost and indexed, from the time of purchase, at the RSPT allowance rate (the bond rate). However they can’t be depreciated during the interim period.

This article first appeared on Business Spectator.