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Implications of Australia’s proposed super tax

By Christine Foster, Wendy Wells, Yuen Cheng Mok, Jonty Rushforth, Mike Cooper

May 25 - The Australian government's proposal to impose a 40% Resource Super Profits Tax (RSPT) from July 1, 2012 has provoked uproar in the country. (See related table: Australian super tax: Key points).

Mining, metals and hydrocarbons projects, both new and existing, would be significantly affected by the new tax, and industry sources have said it could hurt investment.

The country's opposition party, the Liberal party, has decried the tax and said it would rescind it if it wins the federal elections likely to be held in October of this year.

But a few voices have also given support to the tax, notably the head of the Organisation for Economic Cooperation and Development, Secretary-General Angel Gurria.

The federal government announced the new tax May 1. It is expected to raise an additional A$3 billion ($2.8 billion) in the 2012-2013 financial year and A$9 billion in 2013-2014.

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Resources minister Martin Ferguson said in a statement at the time that under the RSPT, the government would "provide a refundable credit to resource entities for state royalties and will guarantee to contribute 40% of the investment cost of a resource project."

Ferguson said a "significant proportion of funds raised from the RSPT will be returned to the resources industry through a new resource exploration rebate and investments in infrastructure." He added that the resources sector would also benefit from lower company tax, which is set to fall from 30% to 28% by 2014-2015.

The resource exploration rebate is to be introduced from July 1, 2011, and is expected to cost the government A$1.1 billion in the two years from the 2012-2013 financial year.

Under the rebate, companies can receive a refundable tax offset at the company tax rate for their exploration expenditure, which Ferguson said was a simpler and more effective way to promote investment in exploration than a flow-through shares scheme.

The government also announced plans to boost spending on roads, rail, ports, electricity and water supply infrastructure by A$700 million annually.

Australian Prime Minister Kevin Rudd provided his definition of the proposed resource super profits tax in a transcript of a radio interview in Perth on May 5.

"Normal profits basically equal the revenue of the mining venture, minus their expenses. Super profits are revenues, minus expenses, minus what we would describe as an ordinary rate of return on investment. That means what you would get if you were to invest it at broadly the long term government bond rate of about 6%," said Rudd.

He continued: "Profits on top of that [6%] - super profits, that is - mining companies get to retain 60% of those super profits. What we are talking about is that 40% now going to the Australian people, to build roads, rail, ports and to provide tax breaks for all companies by bringing down the company tax rate."

The government now plans to conduct a staged consultation process over the course of 2010 to work through the details of the new arrangements.

Analysts and consultants have said the tax would hit the local resource industry hard.

The tax "will clearly change mining company calculations on doing business in the country," Canadian consultancy Metals Economics Group said in a statement on May 13.

For the metals sector, Morgon Stanley said on May 21 that the country's iron ore industry will likely be the hardest hit. It expected the proposed tax would generate A$85 billion ($70.4 billion) in tax revenue for the government over 2010-2020, with iron ore mining giants BHP Billiton and Rio Tinto contributing 85% or A$71 billion of the total.

Average earnings for iron ore miners would fall 28% in the period if the tax were to be introduced in its current form, Morgan Stanley analysts Craig Campbell and Cameron Judd said in a report.

"The iron ore sector is most impacted by the proposed RSPT from 2013-2020," the analysts said. "For the same period, the average annual earnings decline for the coal and base metal miners under coverage is 21% and 17%, respectively. Least impacted is the gold sector, with an average annual earnings decline of 9% over the same period."

BHP Billiton and Rio Tinto were the two companies hardest hit by the proposal because their mature, low-cost base and high-profit iron ore assets in the Pilbara region of Western Australia required little capital expenditure that could be used to offset the profits tax, the analysts said.

In contrast, the high initial capital investment required by new operations allowed gold miners in particular to offset the initial impact of the proposed tax, they added.

The RSPT could lead to significant delays in the country's coal seam gas-based LNG projects, Craig McMahon, an analyst from energy consultants Wood Mackenzie, said May 18. (See related table: Projects that could be affected).

"Applying [the] RSPT won't negate the fundamental commercial viability of these [CSG-to-LNG] projects but it could impart significant delays and cause companies to reconsider their investment cases," McMahon said.

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