Aussie dollar leads to more tax uncertainty

THE impact of the strong Aussie dollar could ultimately force the Queensland government to increase coal royalties and upset the big three’s mining tax agreement with the federal government. Mine Life senior resources analyst Gavin Wendt discusses some of the pitfalls ahead.
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Mine Life senior resources analyst Gavin Wendt.

Blair Price

Treasurer Wayne Swan was busy defending the federal government’s economic performance yesterday, after mid-year Treasury forecasts anticipated an almost $10 billion loss in revenues due to a stronger Australian dollar versus the greenback.

Queensland Treasurer Andrew Fraser was more concerned that the state was expected to receive $1 billion less in GST payments from the federal government over the next four years.

“Decreasing GST payments, combined with the likelihood of lower than forecast mining royalties due to the high Australian dollar, means state budget revenues remain under pressure,” Fraser said yesterday.

“GST payments to the state generally make up almost a quarter of our total revenue and, like all revenues, GST fell dramatically during the global financial crisis.

“There is no doubt that the state must stick rigidly to its economic reform agenda, including exercising spending restraint to return the budget to surplus.”

But Wendt, a former Fat Prophets senior resources analyst before he went independent, believes that increasing coal mining royalties is one of the options ahead for the Bligh government.

“The Queensland government is flogging off QR National because they need cash, their budget is probably as bad as New South Wales,” he said.

“There are two things you can do to improve your finances: you can cut back on your spending, and they are losing a lot of votes – they are probably going to lose an election on the expenditure cutbacks they have made.

“The other thing you can do obviously is try to increase your revenue and one of the easiest ways to do that is to whack the mining industry.”

Such a move will not be welcomed by the likes of BHP Billiton, Rio Tinto and Xstrata.

The big three are already upset that the federal government does not plan to credit future state royalty hikes under the proposed Minerals Resource Rent Tax.

Wendt said the cracks were starting to appear in the tax.

On moves from the federal government to address revenue shortfalls, he suspects the MRRT could either be broadened from iron ore and coal to other commodities, or the tax rate could be increased.

But he does not expect the Aussie dollar to surge beyond parity with the greenback in the next few months.

“I think we are going to see waxing and waning in the value of the US dollar but I don’t think we are going to see a rally in the US dollar by any means,” he said.

“I think commodity prices are going to stay strong, which is certainly going to provide support for the Aussie dollar.

“But I would think that we are not going to see too much movement away from parity over the next three to six months.”

Even though miners face tighter margins because of the strong Aussie dollar, Wendt noted that a weak US dollar was great for demand.

“It just means that commodities are cheaper to buy in every other currency,” he said.

“So for every other currency the buying power goes further.”

He added that investors would also speculate more in commodities.