Economic Insights

Economics
May 17 2010

New resource tax: Questions, answers, impact

Economic & financial issues
  The Government has released a 46-page Announcement Paper and has started talking to interested and
affected parties. An Issues Paper will be issued in July 2010. A Final Design Paper will be issued in late
2010 and legislation will be introduced into Parliament in “late 2011”.
  The Government is effectively “selling” the resource super profits tax (RSPT). So there is not a balanced
discussion of pros and cons. Rather the new tax is represented as “world leading” and a major positive
for the economy with no stated downside risks.
  To extract windfall gains, the Government could have chosen to invest in the resource sector. But that
would have required capital to be invested over time, so the taxation route was chosen instead.
  If the RSPT ends up having a negative impact on mining, there will be multiplier effects across the
economy. A 2007 Queensland government study found that the direct and indirect contribution of mining
to employment could be four times the direct contribution of the sector.

What is being proposed?

Example:
• The Government is proposing a 40 per cent tax on profits made Project starts in Year 1 with capital $100m
from Australia’s non-renewable resources – the Resource Super The project has depreciation of $60m in
Profit Tax (RSPT). Year 1 and thus a loss of $60m

Any change to other taxes on the sector? Year 2

• The crude oil excise will cease, but State and Territories will still Revenue 150
continue with royalty schemes. The royalty schemes apply to Expenses (depreciation) 40
extraction/production rather than profits. There is a Petroleum RSPT allowance* 6
Resource Rent Tax (PRRT) applied on offshore oil and gas Carried forward loss 60
Net RSPT 44
resources. Companies can choose to remain under the PRRT
Taxable RSPT 44
scheme or move to the RSPT regime.
Tax at 40 per cent 18

Why is it being imposed? * 6pct of $100m capital base

• The expectation is that China, India and other Asian countries will Source: "The Resource Super Profits Tax
- a fair return to the nation
continue to grow strongly in coming years, leading to
increased demands on Australian iron ore, coal, energy
and base metal resources. The Government is seeking
to obtain a bigger share of the expected windfall gains
that will be achieved by resource companies.

How will it apply?

• Profits obtained from resource projects will be taxed at a
rate of 40 per cent. But companies will get a tax credit
from any State/Territory royalties paid. A company can
also deduct costs on a project from the project’s RSPT
income as well as “from income of another project
owned by the entity or owned by another entity of the
same wholly owned company group.”

Craig James – Chief Economist (Author)

(02) 9312 0265 (work), 0419 695 082 (mobile), | craig.james@cba.com.au

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Economic Insights New resource tax: Question, answers, impact

• The RSPT applies to the profit or net income from a project. A project’s revenue is basically defined as receipts
from the sale of resources. The main deduction is the cost of extracting the resources. Expenses exclude interest
or financing costs, income tax or GST, permit or license fees. But receipts and expenditures will be more clearly
defined after industry consultation. Exploration expenditure will be immediately deductible from the RSPT.
• The way that capital expenditure is handled is through depreciation. Investment by way of building or plant and
investment isn’t taken away from the projects revenue, rather it occurs via depreciation.
• So there is a RSPT capital account. This includes any undepreciated capital equipment and unutilised losses.
• The balance of the capital account is multiplied by the allowance rate to work out the RSPT allowance and this
allowance is added to the deductible expenditure.
• Most companies would probably expect that the RSPT allowance rate would be calculated as the cost of capital
but Treasury believes that this is not appropriate so it will be set annually as the 10-year government bond rate.

What about existing projects?

• There are transition arrangements for existing resource projects. Previous investment will be depreciated at
accelerated rates.
• To transition existing projects into the RSPT, the Government will allow companies a RSPT starting base.
Effectively this will be the book value of the project.
• The starting base will provide a credit that reduces the RSPT liability.
• Some companies could face a marked increase in tax liability when the RSPT is introduced. So there will be
transitional arrangements to assist with cash flow. The Government will allow the RSPT starting base to be written
off over five years. In the first year 36 per cent can be written off followed by 24 per cent (year 2), 15 per cent
(year 3 and 4) and then 10 per cent.

What is the Government going to do with the tax revenue?

• The Government expects to raise $12 billion over four years from the RSPT – starting with $3 billion in 2012/13
and $9 billion in 2013/14.
• The Government plans to set up a new infrastructure fund and intends to contribute $5.6 billion over the next
decade starting with $700 million in 2012/13. The RSPT revenues will also pay for a reduction in the company tax
rate from 30 per cent to 28 per cent.
• The Government also plans to use proceeds of the RSPT to fund changes to the superannuation system such as
an “additional superannuation contribution of up to $500 per year for low-income earners, provide higher
superannuation contribution caps for those nearing retirement, and raise the superannuation guarantee age limit.”

What does the Government estimate the

impact on the economy? GROSS PROFIT RATIO
2007/08
• The Government says, “In the long run, the
Resource Super Profits Tax (RSPT) is All Profitable
expected to lead to an increase in resource Broad industry and business status Companies Companies

sector investment, with the crediting of Health Care and Social Assistance 0.79 0.80
royalties effectively removing the Education and Training 0.77 0.79
distortionary effect they have had on Arts and Recreation Services 0.77 0.78
investment and production.” Agriculture, forestry & fishing 0.75 0.76
Rental, Hiring and Real Estate Services 0.70 0.73
• The Government quotes modeling from Public Administration and Safety 0.68 0.69
KPMG Econtech that “suggests that under Professional, Scientific and Technical Services 0.67 0.68
an RSPT scheme, mining investment will Other Services 0.65 0.65
rise by 4.5 per cent, jobs by 7 per cent and Information Media and Telecommunications 0.64 0.68
mining production by 5.5 per cent in the Accommodation and Food Services 0.63 0.65
long run.” Mining 0.62 0.66
ALL COMPANIES 0.58 na
• But the Government also notes “benefits
Transport, Postal and Warehousing 0.58 0.58
could be muted in the transition phase.”
Administrative and Support Services 0.58 0.57
Construction 0.58 0.59
Is the Government over-estimating the Electricity, Gas, Water and Waste Services 0.58 0.61
benefits of the RSPT? Manufacturing 0.54 0.55
Financial and Insurance Services 0.40 0.51
• The Government admits there won’t be
Retail Trade 0.38 0.38
huge benefits in the short-term. There is Wholesale Trade 0.36 0.36
also the question of increased Source: Australian Tax Office, CommSec
administration costs at company and

May 17 2010 2
Economic Insights New resource tax: Question, answers, impact

government level including monitoring and

administration by Treasury and the Australian EMPLOYMENT AT LGA LEVEL
Taxation office. 2006 Census
• What about profitability in the mining sector – is State LGA Mining* Employment
the industry currently reaping super-normal WA Ashburton (S) 51.25% 1633
profits? The evidence to date suggests that it isn’t. SA Roxby Downs (M) 49.50% 1158
The Australian Taxation Office has recently WA Coolgardie (S) 45.23% 762
released its TaxStats for 2007/08. TaxStats data WA Wiluna (S) 44.71% 176
on the Gross Profit ratio shows that Mining ranked QLD Broadsound (S) 44.53% 1473
11th of 19 industry sectors in 2007/08. WA East Pilbara (S) 42.57% 1336
• Further, over the past five years, the trend for the WA Laverton (S) 42.34% 180
Mining gross profit ratio is not indifferent from WA Leonora (S) 39.85% 326
other sectors. In fact returns in the Agriculture and QLD Belyando (S) 38.48% 2165
Health Care sectors consistently out-perform NT Jabiru (T) 37.35% 189
those from Mining. QLD Peak Downs (S) 36.21% 592
WA Sandstone (S) 35.29% 18
• As would be expected, Western Australia and
QLD Duaringa (S) 33.51% 1204
Queensland mining communities are most
QLD Nebo (S) 33.06% 416
exposed in terms of any employment impact. At a
NSW Cobar (A) 31.47% 706
local government area level, Western Australia
has seven of the 15 most dependent regions to Source: Bureau of Industry, Transport & Regional Economics, CommSec
mining with Queensland next highest with five. * Mining as share of total employment

• In terms of total employees affected, again

Western Australia and Queensland are most
affected followed by NSW with regions such as
Singleton, Wollongong, Lake Macquarie, MINING SECTOR EMPLOYMENT
Cessnock, Maitland and Muswellbrook most LGA level, 2006 Census
exposed. State LGA Employment
QLD Mackay (C) 3350
Multiplier effects QLD Brisbane (C) 3274
• If resource companies decide to scale back WA Kalgoorlie/Boulder (C) 3130
investment in response to the RSPT there will be WA Stirling (C) 2653
broader effects on the economy. But the multiplier QLD Mount Isa (C) 2522
effects will vary from region to region. WA Joondalup (C) 2458
• In 2007 the Queensland Department of Mines QLD Belyando (S) 2165
completed a study on the economic importance of NSW Singleton (A) 2110
the mining sector using analysis undertaken by WA Roebourne (S) 1957
ACIL Tasman. The study found that the direct and NSW Wollongong (C) 1693
indirect contribution of mining to the Queensland WA Ashburton (S) 1633
economy was $32.2 billion while the direct benefits WA Melville (C) 1528
were $15.4 billion. And the direct and indirect NSW Lake Macquarie (C) 1496
impact on employment was four times the direct QLD Broadsound (S) 1473
impact. WA Wanneroo (C) 1467
• Clearly if Treasury is wrong in its assessment of Source: Bureau of Industry, Transport & Regional Economics, CommSec
the impact of the RSPT – that is if the tax is * Mining as share of total employment
detrimental to the economy, the impact will
certainly not just be confined to mining.

Short-term effects
• Whether the RSPT has negative effects on the
broader economy remain to be seen. It’s important
to remember that the RSPT is still in the discussion
stage and legislation on the tax is not expected until
“late 2011” at the earliest. In the meantime an
election will be held and the Opposition has vowed
to vote against the RSPT.
• The problem for the mining industry and investors is
uncertainty. Mining companies need to decide
whether to advance or expand projects, weighing

May 17 2010 3
Economic Insights New resource tax: Question, answers, impact

up the tax regimes overseas as well as resource

prices and extraction costs.
• Investors certainly have reacted coolly to the proposed
new tax. Since recent highs in mid April, market
capitalisation of the ASX 300 Resources has
contracted by almost $40 billion. No doubt there have
been other influences affecting markets over the same
time such as the European Debt Crisis, oil spill in the
Gulf of Mexico, the volcanic ash cloud across Europe
and investigations into Goldman Sachs. The broader
All Ordinaries has lost $104 billion over the same
period.
• While the negative global influences should have had
the greatest impact on European markets, the
Australian sharemarket has actually under-performed
since recent highs in mid April. The Australian
sharemarket has slid 9 per cent from the highs on
April 15 while the US Dow Jones has lost 4.7 per cent,
the German Dax has fallen 3.7 per cent and the
Japanese Nikkei has lost 7.2 per cent. The UK FTSE
has fallen 9.7 per cent since mid April but investors
have also had to contend with political uncertainty.
• So far the main casualties of the proposed RSPT have
been investors – not just those with direct share
holdings but also employees with their superannuation
assets. The Future Fund had $8.1 billion in Australian
equities at the end of March and those holdings have
likely fallen by around $500 million in the period since.

Implications for investors

• At face value investors appear to have over-reacted to
the proposed resource super-profits tax. The proposal
is in its early days and legislation may not be submitted
for another 18 months. But as always it is uncertainty
that is the key issue. Investors understandably don’t
want to increase exposure to resources until the
uncertainty is resolved. And other investors probably
believe that now is an opportune time to reduce
exposure to the sector.
• The longer-term fundamentals for the mining and energy sectors are very positive given that Chinese
industrialisation is in its infancy. And India hasn’t fully started down the industrialisation pathway. “Chindia” –
China + India – is expected to surpass the US in terms of economic size in 2012.
• But the other consideration for investors is the potential harm the RSPT has done to Australia’s reputation as an
attractive destination. International reaction from quality media has been very negative. At this stage it is
uncertain whether the impact will wash out, but it is
certainly worth monitoring.
• As previously indicated, if domestic and foreign mining
companies scale back investment, the impact will have
multiplier effects across the economy, especially in
Western Australia and Queensland. Construction,
transport, manufacturing and some service sectors are
also exposed to any scale back or shelving of
investment in the mining sector.

Craig James, Chief Economist, CommSec

Work: (02) 9312 0265;
Home: (02) 9525 2739;
Mobile: 0419 695 082

May 17 2010 4