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Tax suggests we need a change of government.

22 May 2010 1,878 views 2 Comments

THE Rudd government’s resource super-profits tax is causing considerable consternation across the world, with global capital markets in utter disbelief.

It is generally recognised that a key responsibility for any national leader is to safeguard the country’s reputation abroad.

For an Australian prime minister this is not only vital for our trade and export relations, but also for our standing as an attractive destination for international capital markets.

Kevin Rudd seemed to recognise this imperative during a visit to Beijing in April 2008 when he observed: “Australia is an open market when it comes to foreign investment. And if you look at Australia, we have had a history of relying upon internationally sourced capital to fund the country’s long-term development. In the great state of Western Australia, it’s like that.

“I mean, you have a relatively small population, a huge land mass and therefore foreign investment has been necessary.”

This sentiment stands in stark contrast to his recent extraordinary attack on several large mining companies as foreign-owned, which he claimed were sending “massively increased profits” overseas denying the Australian people their “fair share”.

Acting in concert with the Prime Minister’s xenophobic stance against foreign companies, the Australian Workers’ Union has launched a disturbing media campaign in support of the government’s deceptively named resource super-profits tax. A couple of foreign-born executives of big mining companies have been pictured, named, singled out as rich mining executives and accused of not giving anything back to this country.

Exactly what message are Rudd, Labor and the union movement sending to international investors?

Dragging Australia’s international reputation through the mud for domestic political point-scoring cannot be excused. It has serious long-term implications not only for the mining sector but also for the broader Australian economy.

There was no hint of Rudd’s antipathy to foreign investors and the mining sector before the 2007 federal election. Then he was the champion of foreign investment, claiming it had fuelled the mining boom: “We have enjoyed great prosperity and have benefited from a time of unparalleled world economic growth. And to cap this off, we have prospered from the rise of China, the rise of India and the global resources boom. The benefits of this are washing through the economy, creating jobs, generating new businesses and boosting government revenues to an all-time high.”

Little wonder there is deep confusion within the global capital markets over the open hostility now shown by Rudd and Labor to foreign investment.

Australia has been regarded as a low sovereign risk with a stable and predictable regulatory regime, but there is now the very real prospect of a downgrade in Australia’s sovereign risk rating.

The retrospective nature of the new tax means projects developed under the existing royalties and company tax regime now face being hit with an unexpected 40 per cent tax, bringing into question the long-term viability of the cost structures underpinning them.

Any increase in sovereign risk can add significant cost to the high-risk business of resource exploration and extraction.

International ratings agency Moody’s has warned in recent days that the tax could drive mining companies offshore, as it could reduce earnings by nearly one-third.

Moody’s referred to the recent experience in Zambia, where the government removed a similar tax in 2008 due to a large reduction in exploration activity that threatened the nation’s long-term prosperity.

The uncertainty is not confined to the mining sector.

After all, if Rudd is prepared to launch an assault on one set of international investors what is to stop him directing his venom at other sectors?

The mining industry rightly has been alarmed by the unexpected severity of the proposed tax in terms of its retrospective application to existing projects.

In the words of BHP-Billiton chairman Jac Nasser in a letter to its 500,000 shareholders this week, it “fundamentally, abruptly and unfairly changed the rules of the game”.

Another legitimate concern is the government’s failure to engage in any prior consultation with the industry.

Industry elders well remember that the Hawke Labor government undertook two years of consultation before it implemented its petroleum resource rent tax in the 1980s.

That new tax applied only to new developments at a much higher threshold and existing developments were exempt.

The Rudd government’s mining tax will not only apply to existing developments but there is also uncertainty as to whether assets such as in the Northwest Shelf, which were exempt from the Hawke government’s tax, could come within its scope.

Lack of consultation and personal attacks on opponents of its policies has become the hallmark of the Rudd government.

The new tax has disturbing parallels with the government’s drive to introduce an emissions trading scheme, also with the Orwellian title of the Carbon Pollution Reduction Scheme.

Rudd famously declared climate change to be the greatest moral, environmental and economic challenge of our age. Those who dared question any aspect of the CPRS were derided as climate change deniers and were told repeatedly to get out of the way, for the “cost of inaction was greater than the cost of action”.

Rudd savagely suppressed debate or any legitimate scrutiny of the effect and operation of the CPRS in an attempt to bully into submission those who dared to question him.

He used emotional blackmail by claiming opponents of his legislation were putting at risk the Great Barrier Reef, which would be destroyed if immediate action were not taken on climate change.

In November last year he declared that any failure to pass the legislation to enact the CPRS represented “absolute political cowardice” and “absolute failure of leadership”.

It is impossible to reconcile his conduct and statements about climate change with his decision to delay indefinitely the introduction of the CPRS.

Similarly, those opposed to the mining tax are also pilloried as siding with the greedy mining companies, while Saint Kevin stands shoulder to shoulder with the working families whom, in reality, he abandoned on November 25, 2007.

There should be a lengthy and serious debate about the resource super-profits tax.

Questions are being asked about the legality of a brand new tax that is taking the federal government into uncharted waters in relation to the taxation treatment of onshore resources.

Under the Australian Constitution, mineral resources are owned by the Crown and state governments are entitled to charge mining companies a royalty in return for access to those minerals.

Mining companies operate under state agreements ratified by acts of parliament that detail the royalty regime.

The proposed RSPT appears to undermine the security provided by these agreements, cutting directly across these ratified acts of parliament, and High Court challenges appear more likely than not.

The key to understanding Rudd’s behaviour over this mining tax is to consider the bonanza in revenues the CPRS would have delivered to his government. Embittered by his failure to achieve its passage and faced with a resurgent opposition led by Tony Abbott, Rudd has seen his political salvation in the mining tax.

Rudd’s desperation for revenues to plug the holes in his budget is revealed by his willingness to damage international perceptions of sovereign risk associated with investing in this nation.

It is one of the most damaging acts of short-term populism in our nation’s history and not befitting the holder of the office of prime minister.

With no one in Labor’s ranks of the stature of former Hawke ministers Peter Walsh, Paul Keating or John Button, it would appear the only way to restore certainty for our key resource developments is a change of government.

ROSS FITZGERALD, The Weekend Australian, May 22-23, 2010

2 Comments »

  • Terry said:

    Ross –finally I see the correct words in print viz. — this imposition of the RSPT is —“not befitting the holder of the office of the prime minister”

  • James Gifford said:

    Ross,

    I agree with you that there should be a lengthy and serious debate about the resource super-profits tax.

    One serious point of confusion in the public debate centres around whether the proposed RSPT will affect the viability of the Australian mining industry.

    On one hand, critics of the proposal suggest that the viability of both existing and future mining projects could be adversely affected by a 40% RSPT. On the other hand, supporters of resource rent taxation claim that its distinguishing design feature is that it does not affect the viability of existing or future mining projects. For example, Ross Garnaut wrote recently (The Australian, May 21):

    “The modified Brown tax (ie, the RSPT) will not … have an effect in inhibiting investment in exploration, in new mine development or in brownfields expansion of established mines…, so long as investors have full confidence that the tax credits with interest will be recouped, and that investors really can obtain finance for the delayed tax credits at the Government’s borrowing rate.”

    In your article you state a position which is at odds with Professor Garnaut’s:

    “The retrospective nature of the new tax means projects developed under the existing royalties and company tax regime now face being hit with an unexpected 40 per cent tax, bringing into question the long-term viability of the cost structures underpinning them.”

    Both you and Professor Garnaut are distinguished members of Australia’s intellectual community and (I assume) are serious contributors to this debate. Since you have stated a position incompatible with Professor Garnaut’s, I think it would help enormously to clarify the discrepancy if you could give an example of a (hypothetical) project cost structure where the retrospective introduction of the RSPT would bring into question its long-term viability.