SA Mines and Energy Journal : June-July 2010
JUNE/JULY 2010 SA MINES & ENERGY JOURNAL 4 CEO'S REPORT GOOD REFORM GONE BAD A word from the Chief Executive Jason Kuchel At the time of writing, the resources industry is still trying to come to grips with the Federal Government's announcement of its tax reform package. Based on Ken Henry's review of Australia's taxation system, the key reform is a resources super profits tax (RSPT) on non-renewable resources of a whopping 40 per cent. You can read more about the package and responses to it on page 10. As I spoke to members attending the South Australian Resources Energy Investment Conference (SAREIC) the day following the release of the Henry Tax Review and the Federal Government's response, reactions ranged from incredulity to exasperation. Consistently, members tell me they consider it outrageous that the Federal Government would propose such a substantial new tax on resources without even consulting the industry on the implications. Don't get me wrong: The industry nationally has been calling for tax reform to replace the complicated, and some would say outdated, royalties systems that vary from state to state. Indeed, SACOME believes we should have a profits based system rather than output based royalties. (See page 10 for our position on this.) However, the proposed reforms do not replace state-imposed royalties, but instead provide a rebate based on today's rates, leaving industry with an additional compliance burden and delayed refund at best. Furthermore, advice suggests that constitutionally, royalties cannot be rebated until the RSPT kicks in. It seems clear the proposed reforms will reduce, not enhance the level of activity in our sector. Ultimately, that will cost potential jobs and encourage investors to invest overseas - and from the Government's perspective -- may not deliver the billions of dollars of additional tax revenue. The SA Government appears to have arrived at a similar view and is assessing the impacts on SA. This work, and our own, reveals that over half of all projects in SA are at risk of not proceeding, meaning over 25,000 projected jobs are in doubt. Robert Gottliebsen, speaking at our annual gala dinner just days after the reforms were announced, described the sovereign risk implications of government announcing such a plan with virtually no consultation with industry. Foreign investment has already diminished in the wake of the announcement and new mining investment is on hold. The SA Treasurer has foreshadowed a likely increase in state royalties. For a new iron ore project in SA, this could be more than four times the current rate! In his defence, it seems likely the new rate will be treated as the existing rate by the Federal Government - and therefore covered by the rebate -- and SA was not the only state to hurriedly declare higher royalty rates. Nonetheless, the industry felt the slap of insult on top of injury. Timing of any rebate to royalties, combined with increases could offset the proposed benefit. The industry is also disappointed a flow-through shares scheme is not in the reforms. Such a scheme would provide an exploration tax credit to investors and give investors the much needed incentive to invest in these inherently higher risk projects during tight economic circumstances. Canada has enjoyed a flow through shares scheme for a number of years now and it is widely credited with boosting their exploration activity, leading to more mineral discoveries and ultimately more mines. Instead, we are to get a slightly more expensive resources exploration rebate (RER). This won't provide the level of incentive to invest in mineral exploration that the industry has been waiting for. Furthermore, the complexities in the reform package will make it difficult for government to implement and for companies to comply, meaning the supposed benefits are quite uncertain. It seems clear to the industry and to non-treasury economists across the country that in spite of the comprehensive review of the tax system by Henry, the reforms for the mining sector demonstrate a lack of understanding about how our industry operates and the global competition for resource investment dollars. What we need now is legitimate and meaningful dialogue with government to bring about tax reform that encourages rather than disparages our industry. An industry that has seen Australia through the toughest of global economic times. SACOME will not rest until saner heads prevail. The reforms for the mining sector demonstrate a lack of understanding about how our industry operates and the global competition for resources investment dollars How is your business affected? SACOME is keeping members up to date with developments in special bulletins as we work to bring about constructive tax reform. Your input is vital to our lobbying success and I would encourage you to let us know your views and how you expect the proposed reforms to affect your business. Contact Jason Kuchel or Jonathan Forbes by email: firstname.lastname@example.org or by phone; 08 8202 9999.