June 12th 2010

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Articles from this issue:

COVER STORY: Financing of terrorism in Australia

EDITORIAL: BP scandal spreads beyond Gulf of Mexico

OPINION: Super-profits tax creates climate of uncertainty

FOREIGN AFFAIRS: Beijing thwarts sanctions against North Korea

CANBERRA OBSERVED: Rudd Government planned showdown with miners

FOREIGN TRADE: China slowdown spells trouble for Australia

PAID PARENTAL LEAVE: Rudd and Abbott overlook stay-at-home mothers

REPRODUCTIVE HEALTH: The chilling reality of late-term abortion

ILLICIT DRUGS: Labor and Greens defeat DLP bid to ban bongs

GLOBAL FINANCIAL CRISIS: Regulators crack down on speculation

OPINION: Time to reclaim Australian history

ENVIRONMENT: Al Gore's actions speak louder than words

GREAT BRITAIN: Who will rescue Britain from its present madness?

Economic illiteracy (letter)

Statistically insignificant (letter)

ALP branch-stacking (letter)

The truth and Kevin Rudd (letter)

AS THE WORLD TURNS: In praise of pessimism

BOOK REVIEW: THE WORLD TURNED UPSIDE DOWN: The Global Battle Over God, Truth, and Power, by Melanie Phillips

BOOK REVIEW: WHAT'S WRONG WITH ANZAC? The Militarisation of Australian History, by Marilyn Lake and Henry Reynolds

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Super-profits tax creates climate of uncertainty

by Jason Kuchel

News Weekly, June 12, 2010
It seems the whole country is talking about the proposed tax on mining. Miners and explorers have gone back to the drawing board to reassess their projects in light of the proposed reform. Investors and financiers are also trying to work out the implications for their expected returns.

The sound of wallets closing on Australian projects is almost audible. Because of the diverse nature of projects around the country, no two projects will be affected the same way if the reforms go ahead. But there is one thing that is absolutely clear: this is not good for the resources companies!

The key intent of the Henry tax review, on which the Rudd Government's reform package is based, was to replace the state royalty charges with a federal tax on so called "super profits".

In both scenarios, the taxes on mining companies are in addition to company tax and intended to deliver a return to the people of Australia who are the owners of the non-renewable resources that resource companies extract.

There are other measures in the reforms intended to encourage exploration and fund infrastructure, but they pale into insignificance against the resources super profits tax (RSPT) of a whopping 40 per cent.

Basically, the tax is levied on the profits remaining once certain expenses are deducted and a small profit (equivalent to the government bond rate) is taken into account.

This remaining profit is what the government is calling a "super profit". It seems to be more a "super tax on profits" than a "tax on super profits"!

The tax is intended to replace the impost of state royalties, but it still represents a massive windfall for government - if projects proceed as the government expects, that is.

And here's the rub: many projects have become less attractive to those investors willing to make the inherently high-risk investments for high potential returns. Such investors have other options internationally. This makes our small operators who need capital vulnerable. Our large companies have projects overseas in their portfolio, which may be looking more attractive than their Australian projects.

Don't get me wrong. The resources industry nationally has been calling for tax reform to replace the complicated, and some would say outdated, royalties systems. Indeed, the South Australian Chamber of Mines and Energy and its interstate counterparts believe we should have a profits-based system rather than output-based royalties.

However, the proposed reforms are quite flawed and demonstrate a lack of understanding about how this industry operates.

It seems clear the proposed reforms will slow the rate of growth in the resources industry. The mining boom South Australia has been anticipating might be just a mining rumble, and the thousands of new jobs that have been projected may not eventuate.

Much of SA's future prosperity is linked to BHP Billiton's Olympic Dam and it is not a foregone conclusion that the expansion, currently in the planning stages, will proceed. It is subject to many hurdles, and the RSPT may be the biggest of all. Furthermore, South Australia has many fledgling projects, which are vulnerable to changes in investment climate.

Mining companies with established Australian projects are objecting to the goal-posts being moved mid-game. Capital investment was made some time ago and investments made on accepted terms. A new tax imposition of this type changes perceptions of Australia as a stable political/regulatory environment in which to invest.

The stoush between the mining companies and government is heated and protracted. Had the government consulted more thoroughly with the industry before determining the size and shape of its mining tax, some of this drama could have been averted.

The uncertainty is no good for the industry, no good for investors, no good for the businesses that rely on the resources industry and no good for employees. While the accountants are re-assessing projects, project decisions are postponed and everyone waits in limbo.

What the industry seeks now is meaningful and legitimate dialogue with the Commonwealth Government to bring about tax reform that encourages rather than discourages the resources industry - and reinstates some certainty.

Jason Kuchel is chief executive officer of the South Australian Chamber of Mines and Energy.

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