Ideas@TheCentre

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RSPT debate put on ice

Robert Carling | 28 May 2010
In the heat of debate about the emotively named ‘resource super profits tax’ (RSPT), it can be difficult to keep track of exactly what the argument is about. Is it the very concept of a resource rent tax (RRT) on which the RSPT is based, the particular design of the RSPT, the size of the tax burden being imposed on the industry, or some combination of all the above?

The mining companies that are being demonised by the government and some commentators have in fact advocated the replacement of state royalties by some kind of RRT in the past. If we, like the industry itself, accept the concept of an RRT for the sake of argument, then we can focus on design and size. Here, the industry has legitimate grounds for complaint. Three issues stand out: existing projects, the rate of tax, and the future of state royalties.

As far as existing projects are concerned, the loss offset mechanism built into the RSPT design (whether or not it is an efficient mechanism) is irrelevant. All the talk about retrospectivity and heightened sovereign risk are given a ring of legitimacy by the government’s outrageous proposal to subject existing projects to the same tax as new projects (which arguably could benefit from the loss offset mechanism).

Then there is the size of the tax. Even if one accepts the concept of the RRT and the design of the RSPT, what is to say that 40% is the correct rate? The government seems to have plucked this figure out of the air, but two points of reference suggest that 40% is far too high. One is the size of existing royalties, which are much smaller than the revenue from the RSPT. The other is a comparison with other countries that are rich in minerals. One commentator said that an RRT could be imposed at almost 100% without affecting risk-taking in mining. The absurdity of this statement is exposed by international comparisons, which show that the RSPT would put Australian tax on mining way above other comparable countries. The minerals are an immobile tax base, but the capital to develop them isn’t.

Both the treatment of existing projects and the size of the tax have more to do with the government’s craving for revenue than its attachment to sound principles of taxation.

The interaction with state royalties presents another risk to miners. In the government’s design, while existing royalties would be refunded to mining companies out of the RSPT revenue, there is nothing to stop states from increasing royalties in the future, and such increases would not be refunded. The Henry report recommended that royalties be abolished and replaced by the RRT. This is not what the government is doing.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.