Dryblower on the great tax mess

DOES a 40% profit share also mean sharing in 40% of the losses? That is one issue which has been nagging Dryblower since the Australian government announced its new super tax regime.
Dryblower on the great tax mess Dryblower on the great tax mess Dryblower on the great tax mess Dryblower on the great tax mess Dryblower on the great tax mess


Tim Treadgold

Another was trying to understand how the Australian mining industry was caught so flat-footed, and a third was to watch with amazement at the ham-fisted reaction of the industry when confronted with a crisis.

First question first, the sharing of losses. Obviously the answer is no. Governments do not share in losses. They impose higher taxes to paper over the mess they routinely make in running an economy.

But what that question addresses is the nature of royalties, which have always been the mechanism for a government to extract “rent” on behalf of the owners of minerals, or the state, or the people, if you prefer the socialist term.

A royalty system is the safest method of governments to be paid rent by a mining venture because royalties have to be paid before the risky side of the commercial process – selling to customers and hoping that prices are high enough for the miner to make a profit.

What seems to be happening in Australia is that the national government, perhaps with the aid of a crystal ball or its modern replacement – a computer model, has decided that mineral prices will rise in perpetuity because of a never-ending boom.

Oh dear, how wrong that will prove to be because if there is one thing Dryblower has learned over the years it is that mineral prices rise and fall with the economic cycle.

Two years ago we were in a boom. Commodity prices soared. Then we went into a bust. Commodity prices crashed.

Today we have Europe teetering on the brink of a disastrous economic meltdown, China getting a touch of the wobbles, and commodity prices looking decidedly peaky.

This is not an attempt to rain on anyone’s parade. It is simply Dryblower pointing out the obvious. Commodity prices rise and fall, just as that famous Scottish economist Adam Smith explained about 200 years ago.

If anyone in Canberra is reading this, the phenomenon is called supply meets demand. It’s in the category of night follows day, and anyone who says “this time it’s different” is a bigger fool than he looks.

Which seems to mean that what is happening today is a case of Adam Smith meets Ken Henry, the boss of the Australian Treasury who has his fingerprint all over the new 40% super tax (which we all know isn’t really a super tax, but that’s a theme for another day).

No prize for guessing that Adam will eventually win. He always does, and then how will a so-called super tax on profits look when the profits shrink?

If the tax issue goes to the heart of government incompetence being matched by its own greed, then the other questions about the mining industry having flat feet and ham fists goes to the competence of some very highly paid company executives.

For months the Australian government had been sending signals about its plans to raise revenue from the mining sector to help pay for its post-global financial crisis stimulus spending.

Even Dryblower heard the tune, faintly because he’s on the fringe, but it was there for anyone listening – and the bosses of BHP Billiton and Rio Tinto (and their high-paid advisers) obviously were not.

The same charge can be laid at the feet of the people behind the Minerals Council of Australia and state chambers of minerals. What on earth were they doing over the past 12 months as the Henry review was being formulated?

As for the industry reaction – well, so far we’ve seen tantrums, chest-beating and everything except threats to take the bat and ball home. Oh, sorry, we’ve seen that too.

In Rio Tinto’s case there were “bat and ball” threats, later withdrawn, followed by an announcement to expand a Canadian iron ore business as some sort of shot across the Australian government’s bows.

Unfortunately, the Canadian shot was followed by Kambalda nickel miner Mincor announcing its own mine redevelopment in Australia and the creation of 100 jobs.

Oops. Flat feet meet ham fists because Mincor’s reopening of the Miitel mine, if it proceeds given the slide in the nickel price, has cut an awful lot of ground from under the more hysterical miners who claimed the higher tax regime would cause the sky to fall in.

Tax is a cost. In this case it is a tax on profits, which is much better than a royalty that has to be paid, with or without a profit being earned.

Dryblower’s view of the past week is that everyone needs to have an aspirin and a good lie down.

Ken Henry and his hand-puppet boss, Prime Minister Kevin Rudd, need to learn the lessons of Adam Smith about supply and demand, and a second lesson about not setting tax hurdles so high that they damage the competitors. And the leaders of the mining industry need to sharpen up and start singing from the same hymn sheet.

Most read Archive



Most read Archive