BUSINESS TAX WORKING GROUP DISCUSSION PAPER

EXECUTIVE SUMMARY

The mining and minerals processing industry is Australia’s principal export earner and most globalised industry. It has been a major driver of growth, investment and higher living standards in Australia over the last decade.

The minerals industry accounted for more than 50% of Australia’s export income in 2011-12. Industry investment has been strong, but future investment is at risk due to weaker global conditions, sharply lower commodity prices, a high dollar and escalating costs. This competitive reality is not reflected in the Business Tax Working Group (BTWG) discussion paper.

The contribution from the minerals industry to government revenues in Australia has risen markedly over the last decade, even before the introduction from 1 July 2012 of the Minerals Resource Rent Tax (MRRT) and the Carbon Tax. Research by Deloitte Access Economics shows a high and stable industry tax ratio (calculated as Federal company tax and State royalties over taxable income before royalties) averaging 41.3% over the period from 1999-00 to 2011-12.

Securing the benefits of Australia’s comparative advantage in mineral resources requires stable and globally competitive tax arrangements that encourage investment. With the minerals resources industry among the highest taxed industries in Australia, further instability in taxation arrangements carries the risk of making Australia a less attractive destination for minerals resources investment.

High levels of capital investment and long lead times before the generation of sales income and production-dependent cash flows are key characteristics of the mining industry. The amount of funding required – and the limitations on funding capacity of domestic financial institutions – means Australian mineral resources companies are heavily reliant on highly mobile, global capital for investment.

The investment economics of projects are assessed based on the overall tax burden such that it is the combination of all business tax rates and measures (not just the corporate rate or any other single tax measure) that is used to assess project viability. As well as the overall burden of taxation, predictability of fiscal regimes is a critical factor influencing commercial decision-making.

The Business Tax Working Group Process

The minerals industry considers the BTWG process, as constituted, to be marked by critical flaws when measured against criteria for genuine tax reform – strong principles, compelling empirical evidence and good process. In light of industry tax reform principles and analysis of specific options, the industry does not support an ad hoc “package trade-off” to deliver a (marginal) reduction in the company tax rate.
Key concerns relate to:

  • The narrow Terms of Reference set for the BTWG which constrain markedly the scope for meaningful taxation reform
  • The risk that piecemeal change (under the guise of addressing the “patchwork economy”) will actually worsen the fiscal regime in Australia, decreasing international competitiveness and adding to sovereign risk at a time when future minerals industry investment is highly uncertain
  • The absence of a compelling case for changing those provisions identified as base broadening options
  • The unbalanced nature of the savings options under consideration which seemingly impact disproportionately on capital intensive industries, in particular the resources sector.

There is a non-trivial risk that the BTWG process could leave the business tax system more complex than it found it. There is no basis for concluding this would yield a net benefit to the Australian economy.

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