Radical Reform Changes Game

The Australian Financial Review

By Katie Lahey

Chief Executive, Business Council of Australia

As the dust settles from the release of the government’s response to the Henry review, a clearer picture is emerging of what is a truly radical approach to “taxing” our resources sector. This is not a simple tax measure. The government has announced that it will in effect become a 40 per cent joint-venture partner in every major resource project in Australia.

Under the resource super profits tax (RSPT), taxpayers will share in both the risks and returns of Australian resource projects. In the government’s own words: “Under the RSPT, the commonwealth will guarantee to contribute 40 per cent of the investment cost of a resource project.” In return it will receive 40 per cent of the profits.

A complex set of transitional arrangements has been outlined, but the RSPT substantially changes the rules of the game for existing investments and investors. As evidenced by declining mining company share prices, others are yet to be convinced of the government’s view that this is a positive development for the sector.

Some might conclude that the government is muscling in to take a stake in existing projects potentially at a price below the market rate. This typifies what many people understand as sovereign risk.

It is not good enough for the government to say that investors do or should factor such potential changes into their investment decisions. Creating an increased perception of sovereign risk associated with investing in Australia will harm our international standing, reduce investment and impede our growth prospects.

Before the Henry review was released, the Business Council of Australia outlined a set of high-level principles for tax reform. These principles included that the tax system should support investment and growth; enhance Australia’s competitiveness; be characterised by stability and predictability (with any changes made prospective so as not to affect existing investments or create perceptions of sovereign risk); be transparent and simple; and raise revenue through taxes which are less exposed to volatility.

The rebating of resource royalty payments and the move to a lower corporate tax rate will reduce taxes on business and support investment and growth.

The RSPT, however, does not rate particularly well against the BCA’s principles. In theory, it could be a plus for some new projects, but it raises significant, complex and contentious issues. It may be comforting to believe, as the government does, that the “commodity boom mark II is here”, but history indicates there can be no guarantees.

The Henry review notes the RSPT is likely to result in greater variability in revenue collection. Should commodity prices fall, not only will revenue decline from profits-based taxes, but under the proposed arrangements taxpayers will have to foot the bill for their share of failed resource projects. In effect, the budget will receive a double blow. The government needs to better explain the extent to which the budget will be exposed to the risks of commodity price swings.

Companies will be responsible for raising the full capital costs for projects and effectively providing a loan to government to cover its 40 per cent share of the costs. The loan would be repaid via a new mechanism called the allowance for corporate capital that sets the interest rate at the long-term bond rate. It is not clear how businesses will reconcile their borrowing costs and the government’s loan “repayments” at the lower rate.

It is unfortunate that the government has tried to portray the resources sector as not having paid its way and has raised a question mark over foreign participation in the sector. This is not conducive to constructive debate.

The RSPT is truly radical, and raises issues which need to addressed by the government in collaboration with business to ensure it is genuinely in Australia’s long-term interests. The BCA looks forward to working with the government to achieve this.