Coalition to axe mining tax, but petroleum will keep on giving

The Coalition will retain the Labor government’s onshore extension of the Petroleum Resource Rent Tax. AAP

Along with repealing the carbon tax, scrapping the mining tax is one of the Abbott government’s first orders of business. Deeming it damaging for jobs and investment, Prime Minister Tony Abbott promised to have the legislation before parliament within his first 100 days in office.

But is it really so controversial? Assuming Abbott manages to navigate the demands of the Senate to repeal the Minerals Resource Rent Tax on coal and iron ore, the Australian Treasury is still likely to collect a significant amount of revenue from the resources sector over the current term of government.

How? The Coalition will retain the Labor government’s onshore extension of the Petroleum Resource Rent Tax – the expanded petroleum tax – which was introduced on the same day in July 2012 as the mining tax.

Mining resources

Despite the mining tax negotiated by Gillard being friendlier to big miners than Kevin Rudd’s defeated Resource Super Profits Tax, Abbott and his coalition colleagues made much noise about how it has “fundamentally undermined confidence in Australia as an investment destination”.

Yet at the same time, the Coalition fully accepts the petroleum tax, even though it works on similar principles. In both cases, the tax kicks in if the revenue (or profitability) for a project (or company) reaches a certain threshold. It seems that not all resource taxes are baddies, nor investment-killing, after all.

While it’s true that mining investment has dried up, the Productivity Commission’s draft report into mineral and energy resource exploration notes other factors at play:

While existing reserves may last many years, they may be of lower grade, in more remote locations, deeper in the ground, mixed with greater impurities and require more difficult and costly exploration and extraction techniques.

As more “effort” is needed to produce each unit of output, downward pressure will be placed on productivity, thereby reducing the international competitiveness of Australian resource exploration and extraction.

Mining investment has dried up but a number of factors are at play. Image from shutterstock.com

It also highlights that many stakeholders are dissatisfied with current regulation: explorers claim long approval times and regulatory uncertainty, while community groups claim insufficient environmental protection and enforcement. Changes to demand patterns and investment strategies of multinational miners are also key to determining the investment pipeline.

The Coalition has proposed A$100m of tax credits for exploration in previously unexplored areas expected to kick start development of new resources. It is also supportive of a national minerals strategy and will commission a white paper to consider how to develop Australian mining and petroleum services as a world leader.

Petroleum resources

Additional resource tax revenues for Abbott and the Coalition will come when the seven liquefied natural gas (LNG) projects under construction come on line. At least four of these are expected to start production by the time of the next election in 2016 and, over time, will yield higher petroleum tax receipts.

When Labor introduced the mining tax on 1 July 2012, it also extended onshore the petroleum tax and imposed the tax on Australia’s largest gas exporting facility the North West Shelf (NWS) LNG project, operated by Woodside Petroleum. For most of its operating life, this project had benefited from the tax concessions provided by the previous coalition government.

By leaving the onshore extension of the petroleum tax, the Coalition will be collecting increased tax revenue from the three coal seam gas projects being developed in Queensland, which account for 41% of the new LNG capacity under construction.

Once all of the LNG projects under construction are completed and exporting at full capacity, which is expected by the end of the decade, it will be vying with iron ore as Australia’s largest single resource exporter by value and the biggest resource taxpayer. The LNG projects are spearheading the A$268 billion of investment in expanding export capacity of the country’s energy and minerals production.

The government’s commodity forecaster the Bureau of Resource and Energy Economics (BREE) estimates Australia’s LNG exports by value to reach A$60.95 billion in 2018/2019 compared with A$11.95 billion in 2011/12. In the process, the Canberra-based bureau estimates LNG earnings to surpass those of both thermal coal, used for power generation, and metallurgical coal, used for steel-making.

With new NLG projects coming on line, the Coalition can expect higher petroleum tax receipts. Image from shutterstock.com

State revenues

The states will also be enjoying higher resource receipts as iron ore and coal exports are set to continue to rise – mining tax or not.

In reaction to the mining tax, the Coalition-led state governments of Queensland and New South Wales raised their royalty rates on coal in an effort to reduce Canberra’s mining tax intake. Western Australia made a similar move on iron ore royalties.

None of these governments appear willing to roll back their higher royalties if the mining tax is dumped.

History repeating itself

Political debate about resource taxes have been raging for decades.

The concept of a resource rent tax – a profits-based tax, as opposed to the state-based royalty – emerged after Ross Garnaut and Anthony Clunies Ross published their resource rent tax theory in The Economic Journal in 1975. Their theory was in contrast to the norm: miners paid royalties to state governments based on production volume and, at times, the value of production, which both may not reflect the profitability of the underlying commodity.

Also from this era is the 1974 Fitzgerald Report on The contribution of the mineral industry to Australian welfare, which showed the Commonwealth making a net loss on mining, despite a boom in the late 1960s and 1970s, due to generous tax concessions.

Paul Keating was one of the first Labor politicians to advocate a profit-based resource tax when he was shadow energy and resources minister in 1976, and Labor adopted the resource rent tax policy at the ALP conference in Perth in July 1977.

Bob Hawke and Paul Keating introduced the petroleum legislation in 1987. AAP Image/National Archives of Australia

A month later, the then-federal treasurer Philip Lynch announced the Fraser government would consider a resource rent tax for the petroleum and uranium sectors. But Lynch never got to pursue this policy much further as allegations over land deals led to Lynch’s political demise. John Howard took over as treasurer and announced in July 1978 that the government had shelved plans for a resource tax.

This may sound like history repeating itself for Abbott, following his mentor by going gentle on the resource sector and looking elsewhere to raise revenue to fund election promises – such as Abbott’s pledge for longer paid parental leave.

Labor carried out its pledge for a resource rent tax when the offshore petroleum legislation passed in 1987 under Bob Hawke and Keating.

Even if the mining tax is repealed, the need for a broader national debate about a fair return to society from exploiting Australia’s natural endowment remains.

Help combat alt-facts and fake news and donate to independent journalism. Tax deductible.