Mining the easy target

25 May 2010

The government’s long awaited response to the Henry tax review could not of been more timid. Of the 43 recommendations, just 3 have been taken up, with the mining industry and youth being the obvious losers. For those who have lived in a cave for the past couple of weeks, the federal government is effectively nationalizing 40% of both current and future mining operations. The 40% tax will only kick in once the cost of capital for an operation has been paid off and when profits are above the bond rate. The benefits of the plan is that exploration will now attract far more favorable taxation terms (something the industry has desperately needed and pushed for decades) and that projects which collapse, will be able to attract a taxation credit worth 40% of the total loses. The plan may be well in theory is seriously flawed in practice.

Firstly and most importantly, this policy may well be deemed illegal under the Australian constitution. After federation the states came together, but effectively each Australian state is its own country under the constitution - WA is not even mentioned in the constitution because at the time of federation WA was looking to break away. Resources are owned by the states not by ‘the Australian people’ as our PM contends and this legislation would be open to a high court challenge from the states.

Secondly the legislation takes no account of commercial realities. The arrangements for exploration are welcome, however they mean little if the orebody which is eventually developed, is so heavily taxed. Mining is a high risk business, much can go wrong and our nation’s corporate history is littered with disasters within the mining industry. Consequently the reward needs to match the risk. Now sure we can write of 40% of a lose making project, but who wants to invest in lose making projects in the first place? The government is assuming that these tax credits will be viewed by financers as the equivalent of cash, but you could imagine the political pressure on a government handing out huge sums of money to a foreign company or even foreign government in the middle of a severe downturn  as a rebate on loses on a mineral project. Investors are not stupid and this will therefore affect more marginal projects as a higher rate of return will be required to operate in Australia.

Thirdly and most importantly what about other industries? The mining industry is not the only one to use up resources, indeed the largest user of resources is the housing sector. With property developers now eyeing the Hawkesbury valley out of Sydney where most of Sydney’s market gardens are and last year Australia becoming a net importer of food, we are losing our most fertile land to feed the nation’s property obsession. One of the key planks of China’s growth is to build up (ie high rise buildings) not out (urban sprawl) because of the value they place on agricultural land. With agriculture being the nation’s second biggest industry and food security a vital issue for any nation’s wellbeing, the same tax needs to apply retrospectively to housing if we are to follow the government’s logic. Once developed for housing, agricultural land can never be utilised again, however a completed mining project when it is fully rehabilitated can be used for other commercial persuits, so again following this logic, mining should actually attract less taxation than the housing sector.

The most disappointing aspect of the whole review and its reaction is to not review the GST (which should be increased as it is easily the most stable and flexible and fairest tax) and not implement any changes to housing tax arrangements. The review states that “Australia's uniquely generous treatment of negative gearing is also a major contributor to our unenviable leadership of the world in unaffordable housing and household debt. . . limitless exemptions from capital gains tax, land tax and the pension assets test which are enjoyed by owner-occupied housing provide a huge tax shelter for wealthy people and their heirs” Reforming this corrupt system involves genuine political pain, something this government seems to avoid at all costs. It also needs to be remembered that the property lobby is a huge contributor to the labor party which must also count for something.

The idea of increased payments in royalties in exchange for exploration write offs is sensible, yet a blatent tax grab is quiet rude. This blog is firmly of the opinion that the resources industry needs more power in Canberra and needs to be far more active in promoting itself. The response ensures young people continue to be Australia’s most marginalized people, as our governments of all persuasions continue to trash our future through encouraging Australians to continue to buy into the property myth instead of sustainable industries.