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Mining tax design is responsible for revenue shortfall

Why hasn’t the Minerals Resources Rent Tax (MRRT) produced significant revenue? The answer lies in a combination of basic features of the MRRT design, and the recent fluctuation in prices of iron ore and…

The abolition of royalties, as well as fluctuations in iron ore and coal prices, have had an effect on the mining tax’s capacity to generate revenue. AAP

Why hasn’t the Minerals Resources Rent Tax (MRRT) produced significant revenue?

The answer lies in a combination of basic features of the MRRT design, and the recent fluctuation in prices of iron ore and coal.

Until the imposition of the MRRT, the miners paid the usual taxes, including company tax in massive amounts. The MRRT is a tax on “super profits”, as was the Resource Super Profits Tax (RSPT). The MRRT taxes iron ore and coal miners on any excess of their profits over the long-term bond rate, plus 7% of allowable capital. The first design feature is that established miners will only pay significant MRRT when ore and coal prices are high in relation to market expectations. This is because established companies can use the market value of the company as the asset base on which excess profits are calculated, and established companies have high market values, reflecting market expectations of profits. No great surprise: the MRRT was negotiated between the government and the major, established companies.

The second design feature is that royalties are creditable against MRRT liabilities. Ken Henry and his review proposed the abolition of royalties and their replacement by a new Commonwealth tax — the advice fell on eager ears. A Labor government running large deficits had an urgent need for more revenue and wanted to grab some from the states as well as from the miners. Therefore, the Labor government did not offer a deal to the states, whereby the states abolished royalties in return for a guaranteed share of the new tax. Instead, Ms Gillard and Mr Swan threatened not to “credit” royalties as an offset against a MRRT liability: the Commonwealth wanted to invade the fiscal fields of the States and, preferably, drive the States to abolish royalties or, at least, to keep them low. Faced with resistance, however, the Commonwealth blinked.

Ironically, the advent of the MRRT encourages the states to increase royalties on companies with a sufficient MRRT liability — and raise them, they have. From the miners' point of view, it does not matter to whom a payment is made. But it does matter to the governments concerned.

Royalties are not taxes, but contractual prices negotiated with the miners by the states, as owners of the resources. However, royalties do have some tax-like effects. The Henry tax review wanted royalties abolished on grounds of economic efficiency, because the review was convinced — wrongly, in my judgement — that royalties are amazingly damaging to the economy.

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7 Comments sorted by

  1. Michael Shand

    Software Tester

    Amazing, thank you for posting

    Great analysis on this issue, why other authors that have posted on this topic have failed so badly to inform the reader as to why the projected revenue and actual revenue differed is beyond me but you have done a great job.

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    1. Robert McDougall

      Small Business Owner

      In reply to Michael Shand

      cue Barnett and Newman having a gripe about their reduced GST distribution.

      Politicians playing political games does not a Commonwealth make.

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  2. Spiro Vlachos

    AL

    Good article.

    It is very surprising that the govt does not have any advisers that could have told them that as commodity prices increase, so too do market values of mining companies, which you have said is "the asset base on which excess profits are calculated".

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  3. Steve Hindle

    logged in via email @bigpond.com

    . As I understand it, the "loop hole" of State royalties having first pick at collecting money from the miners is effectively protected by the constitution. In other words the States would have to agree to give it up. If the Federal government withheld other payments such as infrastructure payments to cancel out the benefit from royalties then the Labor vote in the effected States would decimated by the inevitable political campaign in the effected States.
    The MRRT needed careful negotiation between the 3 main stakeholders (Fed, States and mining companies) to have any chance of success as all 3 have similar effective levels of power. This reality seemed to be beyond Wayne Swan when he tried to introduce the tax.

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  4. John C Smith

    Auditor

    Half century old story.
    Father takes his son for a drive in his new acquisition, an Australian (?) car. A sunny evening, with sun rays falling on the inner suburban roofs (no solar pans) with a golden hue. Father says “look at the beautiful tin roofs”. After few thoughts son says “Dad if you burn rust with carbon and a bit of lime you get iron”. After few turns father says, “You know all these tin came as ballast all the way from England”. “Mmm.., dad how did the ships go back?” Father replies…

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  5. Garry Baker

    researcher

    From the outset this tax was never going to work - insofar as it was culled into shape by the miners, who soon narrowed it down to only two commodities, Also it was reliant on sky high prices, as if the dream would go on forever.

    However, with the citizenry now getting $129 out of their promise of a $2000 reward, the current round of media publicity may serve to illustrate two things - # The incumbents are hopeless country managers, with yet another proof coming to hand - # Matched with an…

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  6. Jeremy Tager

    Extispicist

    There are several other features of the MRRT that indicated it was never going to be a great revenue raiser. The instant write off of new mines coupled with carryover and uplift provisions means that a company with multiple mines can both demonstrate no super profits early in a new mine's life and any excess loss is not only carried over (from any of the company's mines) but uplifted at the long term bond rate plus 7%. That can equal an annual windfall on contrived losses of around 14% (usually it will be closer to 10%).

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