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Minerals Resource Rent Tax

Tuesday, March 20, 2012

Australia is experiencing an unprecedented boom in our resources sector which has delivered record profits to mining companies year after year. Mining profits have jumped 262% in the last decade. Along with the resource, a large share of profits is shipped off overseas. All Australians should benefit from the resource rents arising from extraction of these resources.

Add to this, Tasmanians are all too aware that the mining industry is crowding out investment and pushing up labour costs across the economy. While this is great news for those that are investing in mining companies or have been lucky enough to secure employment with a mining company, for the rest of the population it means that the cost of finance is higher, the cost of employing staff is higher and therefore profits are lower. That is why the Gillard Labor Government will:

  • Boost the superannuation savings of low income Australians by up to $500 per year by removing the tax on super for people earning up to $37,000;
  • Cut company tax to 29% for small businesses in 2012-13 and for all businesses in 2013-14 and increase the small business instant asset right off from $1,000 to $6,500;
  • Lift compulsory superannuation to 12% in small increments, which businesses have plenty of time to adjust to, over the next eight years; and
  • Invest in critical infrastructure upgrades to make sure our roads and bridges can get all Australians’ wares to market.

What is a resource rent?

A resource rent, or super profit, is the profit (revenue minus costs) that is over and above a normal return on invested capital. In competitive markets like iron ore, coal and coal seam gas, the cause for this super profit is normally a combination of the rents that arise from: a mining companies skill in extracting minerals; that some minerals are close to the surface and cheap to mine; and the high prices that arise when there are only few suppliers of high demand commodities. The first is due to the skill of the miner, the second and third are not. The 30% tax has therefore been reduced by 25% to 22.5% to account for the miner’s specialised skills. This is a fair approach.

What is wrong with royalties?

Currently, production based royalties are used by most states and territories (Tasmania uses a hybrid system with royalties and rent taxes). Royalties do not take production costs into account. As such, mining companies are less likely to invest in marginal mines and the returns to the community do not keep pace with the super profits from highly profitable mines. Royalties as a percentage of mining profits decreased from around 40% in 2000 to about 15% in 2009. That is about $35 billion dollars that could have been invested for the benefit of all Australians.

How does the tax work?

Very simply, the mining company calculates the profit (mining revenue minus mining expenditure and allowances) for each mining project at the extraction point. Miners receive allowances for state government royalties (to ensure there is no double dipping) and for times when the mine has run at a loss.

If the miner’s total mining profit from all its projects is above $75 million they will be subject to the 22.5% MRRT (with a concession for profits between $75 and $125 million.

What is the extraction point? Why tax profits there?

The extraction point is the point between upstream (the mining) and downstream (the refining/smelting) processes. Profits for the purpose of the MRRT are calculated at this point to ensure that only the extraction of minerals is taxed through the MRRT and not any improved value of the resources.

 

Minerals Resource Rent Tax 15-3-12 Second Reading

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