Australia dumps mining tax

2010-07-02 07:30

Canberra - Australia ended a damaging dispute with global miners on Friday by dumping its "super profits" tax for a lower resources rent tax backed by big miners, clearing a major hurdle to call an early election.

The deal looks positive for miners and the government.

Although miners will pay more tax, the total will be less than under the "super profits" tax -- A$1.5 by government estimates -- and the government still gets extra revenue to fullfil pre-election promises to woo voters.

"We were determined to get a fairer share of the mineral wealth in our ground for all Australians," Prime Minister Julia Gillard said in announcing the new profit-based tax.

The Australian dollar jumped nearly half a US cent on the news, while shares rose 1 percent early with BHP Billiton and Rio Tinto up around 2%, before turning flat on global economic worries.

But the tax deal must still be passed by the next parliament, following elections expected within months, with opposition parties vowing to oppose the tax and scrap it if they win office.

Gillard has resurrected the Labour government's flagging popularity with voters since her appointment last week. She is now on track for a narrow victory in polls, which may be called for August, according to the latest Reuters Poll Trend.

"The government wants a new tax, the coalition doesn't, it's as simple as that, said Tony Abbott, leader of the Liberal-National conservative coalition.

"You are going to have to change the government to dump the tax, if Australia's prosperity is to be preserved."

Miners welcome deal

Global miners BHP Billiton, Rio Tinto and Xstrata welcomed the new tax, but not all miners were happy, saying the deal still threatened Australia's resources sector and overseas investment.

"New taxes of any scale don't help create jobs or stimulate overseas investment in Australia's resource sector. We still have an issue of sovereign risk," said mining magnate Clive Palmer.

The new Minerals Resource Rent Tax will apply only to iron ore and coal projects, while a Petroleum Resource Rent Tax, currently applicable to offshore oil and gas projects, will be extended to onshore oil and gas projects, Gillard said.

The resource rent tax will be at a rate of 30 percent, down from the previous "super profits" tax rate of 40 percent, and the trigger point for the tax will be higher, at the 10-year bond rate plus 7 percent, currently at around 12 percent.

The petroleum tax rate will be unchanged at 40 percent.

The new resources rent tax will apply from July 1 2012, as earlier proposed for the "super profits" tax.

Coal and iron ore account for more than a quarter of last year's A$250bn export revenues. Their share is likely to rise this year as commodity prices soar and export volumes rise.

The earlier mining super profits tax had threatened more than $20bn in investment, according to mining companies, but no major project has yet been scrapped and several have actually been advanced since the tax was unveiled on May 2.

In an immediate response, Xstrata Ltd said it was reinstating about A$600m ($508m) in copper mining and exploration at its Ernest Henry mine in Queensland.

"I think the Australian government has just won themselves an election on the back of this," said Chris Weston, institutional dealer at IG Markets. "You can't have the government at war with its biggest industry, which is what was happening."

Miners had until recently run a multi-million dollar anti-tax advertising campaign. They now pledged to work constructively with the government to keep the industry competitive.

"The companies agree that the proposal presented by the government represents very significant progress towards a minerals taxation regime that satisfies the industry's core principles," BHP, Rio and Xstrata said in a joint statement.

Voters still to decide

Bookmakers shortened the odds on Gillard's Labor winning a second term -- to $1.33 from $1.35 -- making her clear favourite.

"The way the money is coming I don't think the current price will be on offer much longer," said Sportingbet Australia chief Michael Sullivan.

But some voter reaction to the deal was critical.

"They did this trying to get elected, but the voters are not fools. Bring on the election now," Susie of Penrith wrote on Sydney's The Daily Telegraph website.

"Strike up another one for big corporations. Judas Gillard has caved in to billionaires," wrote Kev on The Australian newspaper website.

The government had originally counted on raising around A$12bn under the "super profits" tax it had first proposed. Gillard said there would still be enough revenue to fulfill promises to bring in a budget surplus by 2013, lower the company tax rate to 29 percent by 2013-14 and raise compulsory pension contributions from nine to 12 percent by 2020.

"More than 8 million Australians will benefit from a boost to their superannuation (pension) guarantee," she said. "For business to flourish competitive tax rates are essential."

"It will deliver sustained investment in infrastructure."

The Minerals Council of Australia, one of the harshest critics of the "super profit" tax, also praised the new deal and said it broadly met the industry's criteria for tax reform.

- AP