RSPT RIP – Long Live the MRRT

by zebra on 2 July 2010 · 16 comments

In the third in a series of guest posts on the subject of Australian mining tax, Zebra (James Glover) considers the changes to the proposed tax the new prime minister, Julia Gillard, has negotiated with miners.

The Govt has announced a replacement for the RSPT discussed in earlier posts to a Mineral Resources Rent Tax (MRRT). The principle differences are the tax rate – 30% and a change in the deduction. For established mines it is now based on market value depreciated over 25 years and the uplift rate is 12% not 5%. In addition there is a 25% deduction from earnings upfront which makes the base rate of tax 22.5% rather than 40%.

This post replaces an earlier one I put up about the MRRT in which I erroneously assumed that the opt-in about using the market value of assets applied in the way I proposed in my second post. The key statement here is:

“Miners may elect to use the book or market value as the starting base for project assets, with depreciation accelerated over 5 years when book value, excluding mining rights, is used; or effective life (up to 25 years) when market value at 1 May 2010, including mining rights, is used. All post 1 May 2010 capital expenditure will be added to the starting base.”

In the case where the mining company opts to use a market value approach I take it to mean the depreciation takes place before the MRRT is calculated. This means the formula is:

MRRT = 30% x (75% x Earnings – Price(2010)/25)

Currently the mining industry average for P/E (price to earnings ratio) is 14, though in the case of BHP-Billiton it is 19. For an average miner then Price(2010)/25 = Earnings x 14/25 = 56% Earnings so the actual MRRT is based on 19% of Earnings. However the Price is fixed at the May 1 2010 value so this will not increase over time even though earnings will. Should earnings continue to rise at the dramatic rate we have seen in the past decade then the MRRT will eventually look more like the 22.5% base rate.

It appears that the Govt and the mining industry’s compromise is to push the revenue from the tax windfall out from today to later years. In a sense the mining industry has also removed the contentious “retrospectivity” of the tax by using the current high price and choice of 25 years depreciation to ensure the current value of the MRRT is minimised but will rise at 22.5% of increased earnings going forward.

Thanks to an observant reader who pointed out my error. Mea culpa.

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{ 15 comments… read them below or add one }

1 Marco aka Cracticus July 2, 2010 at 12:30 pm

Jimbo

This analysis explains why I proposed the compromise I mentioned in the comments to your last post.

Mr. Rudd’s best chance would have been to offer a return to the status quo ante.

The truth of the matter is that any Government (whether Coalition or Labor) has as much or as little power as the plutocrats are willing to allow. And they were not particularly generous with Mr. Rudd.

I suppose, for most reformists (and among chartalists there are many, maybe you are one?) this may come out quite unexpectedly. But these events cast the biggest doubt on the effectiveness of any reform, no matter how well-meaning and theoretically justified.

2 Jimbo Jones July 2, 2010 at 12:53 pm

Thanks for the article.

Still digesting the details, but the full statement states that projects taken into the MRRT at market value will be not subject to the uplift factor and also deducted for MRRT purposes over the life of the project (or 25 years, whichever is the lesser).

Projects taken in at book value however are uplifted and depreciated over an accelerated period of 5 years.

So the deduction base for a market value project im presuming gives you only a cover from earnings for that year (assuming say life of 25 years) of 4%*Market Value. The way I read it and unless Im missing something this will mean that the market value methodology will still give rise to some significant revenue which is why forward estimates is still showing $11bil in revenue even taking into account the NW Shelf coming off excise and into the PRRT?

The biggest dissapointment for me was that once again Labor is playing the media cycle and failed to negotiate with the small cap miners. The droppng of the exploration rebate is a critical piece- sure the small cap miners wanted instead a flow through system of exploration losses that goes straight to the shareholder (thereby reducing the cost of capital) but to drop the rebate all together in order to appease the big miners smacks of policy inepitutide and political opportunism. Also, state royalties now are non-refundable. So, what does this do to the argument that the RSPT was going to help marginal projects and help start up companies? What good is a carry forward of state royalty credits for a start up miner. we should be encouraging the next Fortescue story. shame shame shame and I hope this isnt the end of this debacle.

3 Zebra July 2, 2010 at 1:38 pm

Jimbo – I’m not sure what the point of choosing to use market value and losing the deduction would be since any deduction is better than none and the choice of price/investment/capital only affects the deduction not the base tax of 30% of earnings. Aplogies if you mean something else. I havent read the released document so if anyone has a link please provide.

Marco – if you make it 30% Earnings less 12% Earnings deduction then you may as well just call it 18% Earnings. Clearly this wasnt ever intended or it would all be much simpler and just a straight out increase in tax rate for miners.

4 Jimbo Jones July 2, 2010 at 2:55 pm

Zebra
here is the link
http://www.news.com.au/business/statement-and-detail-of-minerals-resource-rent-tax/story-e6frfm1i-1225887018116#ixzz0sU5yYBn6

For BHP and Rio taking in their existing Pilbara iron ore assets at book value would be pretty much close to zero given they were established years ago (i.e. up to 30years) and therefore pretty much fully written off for book. So taking these projects into the MRRT at market value, then depreciated over 25 years, gives them a much larger depreciation base does it not then taking in at book value? Just the way im reading the still skinny details released so far.

5 JamesGlover July 2, 2010 at 3:43 pm

Jimbo
it seems you are right and my original post was wrong!!!

However if there is no uplift in the “market value” case then there is no deduction so I cant see how it matters how you depreciate it, or whether mining rights are included or not. It seems that (as you are saying) that for mines > 5yo there is no deduction and the tax is at 30% earnings.

It seems I am still missing something and will look at the original doc and will investigate further. Thanks.

6 Jimbo Jones July 2, 2010 at 4:21 pm

Zebra

MAy be missing something but i think the way it works is assume p/e is 15 for RIO. So to take your analysis assume for a $1 earning market value of assets is $15.
take a 4% on a mine life of 25 years is a deduction against that of 60cents.

so the MRRT burden assuming market value is chosen is 30%x ($1 of earnings*0.75 extraction allowance less 60cents depreciation base) gives you 15cents?

7 zebra July 2, 2010 at 4:48 pm

Jimbo – I’m sure you’ve noticed I’ve rewritten my post following your comment and some emails sent directly. Give or take a few % I think our analysis agrees. BHP-Billitons P/E is currently 19 so it looks like if the MRRT came in today they would pay zero. Of course it remains to be seen how the P/E for the shares of a global miner like them and Rio would be applied locally but I’m guessing it will go in the miners favour.

8 Marco aka Cracticus July 2, 2010 at 6:08 pm

james aka zebra,

Okay, judging now by the modified text, we have:

“For an average miner [that is, not BHP] then Price(2010)/25 = Earnings x 14/25 = 56% Earnings so the actual MRRT is based on 19% of Earnings”.

To this one applies 30% to get 5.70% Earnings (and, it appears, someone will not be paying this tax, lucky big boy).

This is the formula MRRT = 30%*(75% – P/E/25)*Earnings

Compare this with your previous (RSPT – A Fair Valuation Based on True Value of New and Existing Mines):

“So under a scheme based on a fair deduction for existing mining assets the tax should be:

RSPT = 40% x Earnings x (1 – 5.5% x 14) = 9% x Earnings.”

So, we have 5,7% * Earnings, vs 9% Earnings.

Now, the Govt changed the reduction in corporate income tax to 1%, which brings in a little saving. Will this be enough to compensate for the 3.3% difference?

To me, it looks likely that there may be a revenue shortfall that will have to come from somewhere; after all, the Govt must have incomes to finance their spending…

Not to mention the other cost Mr. Rudd had to pay.

Had Mr. Rudd decided to negotiate, he’ll still had lost face (a political price); but he might have gotten a better deal.

Of course, that’s all academic now.

9 zebra July 2, 2010 at 6:30 pm

Marco,
I always thought the miners underestimated the original RSPT deduction and with some creative accounting could have made it work in their favour. But this seems to be a lesson in the harsh realities of politics rather than taxation. When I asked a friend of mine who has worked with Gillard from student politics days, through Brumby’s opposition and now in Govt, to sum her up in one sentence said “she is always the smartest person in the room”. To borrow one of Mule’s favourite expressions: “Time will tell”.

10 Spinnifex July 3, 2010 at 3:13 am

Whichever way you calculate it, Australia just got screwed like a cheap whore.
Perhaps someone can explain why I should bother being a decent, tax-paying, law-abiding, voting, goods-consuming citizen? For the life of me I cannot see the point. I wonder if I am the only one reacting to this with a sense of total disengagement.

A pox on all their houses.

11 Mega July 5, 2010 at 11:25 am

The bigger picture about the RSPT and the MRRT is that the Australian industry groups (esp H Ridout et) were all pushing to get company tax down to King Henry’s reform of 25%. The Government promised company tax reduced from 30% to 28% so that it could get paid maternity leave and higher super through, without companies saying they couldnt afford it. so who pays? the taxpayer. and who pays for the MRRT windfall ? the end users. the taxpayer and the poor, in higher energy and other flow on costs. Why should Woollies, Coles, banks, etc all pay less company tax ? especially with a double dip recession looming and the central banks (BIS) now pushing for higher interests rates and an end to stimulus. Mega from http://megamoneybox.blogspot.com

12 Marco aka Cracticus July 5, 2010 at 5:28 pm

Spinnifex

I’m pissed off, too. And I’m worried as well.

13 Spinnifex July 6, 2010 at 2:30 pm

@Marco aka Cracticus
My son put it better. Australia is like a cheap whore without a pimp; she gets screwed and then the trick decides what to pay.

Yes, very, very worried.

14 Spinnifex July 6, 2010 at 2:30 pm

@Marco aka Cracticus
My son put it better. Australia is like a cheap whore without a pimp; she gets screwed and then the trick decides what to pay.

Yes, very, very worried.

15 Marco aka Cracticus July 8, 2010 at 2:51 pm

@Spinnifex

Matie, I believe you ain’t seen nothing yet.

Have a look at the Osborne budget in Pommieland:

Budget key points: At-a-glance
http://news.bbc.co.uk/2/hi/politics/10374475.stm

Or the longer, fuller, version:
The Budget, June 2010
http://news.bbc.co.uk/2/hi/in_depth/business/2010/emergency_budget/default.stm

But, maybe things will be be different here… Right?

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