Highlights Of Resources Super Profit Tax Accounting Essay

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While the projections in Australian budget always indicated a surplus budget, the actual figures were a jolt to the government. For the year 2009-2010, there was a record deficit of $57 billion. For the year 2010/2011, the Federal Budget announced another deficit of $41 billion. There was a growing feeling that the deficits were because of the reckless spending by Government. There was imminent need for bringing a budget into surplus. The Government in its efforts to achieve this surplus, found a golden goose in Resources Super Profit Tax and proposed imposition of the same by 2012('The Resource Super Profit Tax: a fair return to the nation' 2010).

2. Highlights of the proposed RSPT

The Resource super Profits Tax is proposed to be introduced with effect from 1st July, 2012.The proposal was made on 2nd 2010 basing on the recommendation made by Henry Tax Review under the name 'Australia's Future Tax System Review'(Australia's Future Tax System Review 2010). The RSPT imposes a 40 percent tax on the super profits obtained from the exploitation of non- renewable resources like ores in mines (Australian Government, 2010). It will be a substitute for crude oil excise. Under the scheme, costs outlaid on a project can be deduced by an entity from RSPT income or income of another project belonging to entity. Any cost that may be remaining after such deduction will be carried forward as a loss against a future income. It is quite possible that such carried forward loss will be refunded at 40% rate on a reasonable basis, which is to be decided in consultation with stakeholders. Costs, which are not deducted, will be held in an RSPT Capital account. Such Capital account will earn an interest allowance, set on the basis of long-term bond rate of the Government. Recognition of past investment through RSPT starting base is allowed for entities with existing project falling under RSPT (Honey & Mok , 2010). This starting base is however not refundable or transferable to other projects and it operates only for the first five years of the RSPT. Deductions are allowed in RSPT to the extent of cost of extraction of resources and bringing them to the stage of taxations. But following types of expenditures are not eligible for such deductions ('The Resource Super Profit Tax: a fair return to the nation' 2010).

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Expenditure to secure lease and permit like a stake in existing exploration permit, lease for retention, lease for development, lease for production and lease for pipeline or authority of access.

Cost of acquisition of interest in projects already under the purview of RSPT.

Income TAX Payment or GST.

Interest and financing costs which include cost of insurance of shares, dividend payment and costs for financial hedging.

The new tax raised uproar from the mining managements (Messenger & O'Connor 2010). The Government however tried to allay their fears by contending that the drain on resources of the company is not very high because entities which are earning high profits will pay higher tax and projects under Net loss need not pay during any RSPT. However, many hazy areas remain regarding the scheme. In order to clear the air, the Government is prepared to enter into extensive consultation with the industry. There is a period greater than two years between the scheme's commencement and announcement; which allows for such extensive discussion. It is proposed that the technical design of the system as well as other important details of the system. The following points were expected to be the focus of the consultation (Cunningham 2010).

The need for exemptions from RSPT in case of micro businesses and low value minerals.

The basis for refund of the deductible costs for units existing the resource sector.

Arrangements for irrevocable shift of projects covered under PRRT to RSPT.

Design of transitional arrangements into RSPT.

Establishing methodology for establishing taxing point values.

A schedule has been fixed for these consultations. According to this schedule, July 2010 was fixed as the date for issues paper, in the late 2010, the final design paper was to be published and draft for exposure resolution is slated for release in May 2011.24th May, 2010 was fixed for start of the initial discussions on the basis of announcement paper and 11 June 2010 for end of the discussions ('The Resource Super Profit Tax: a fair return to the nation' 2010).

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To fully appreciate the pros and cons of the RSPT, it is necessary to understand the nuances of the existing taxation system for mining. The existing resource tax is comprised of excise duties levied by the Commonwealth Government and royalties administered by the State Governments. Both these are levied ad valorem, which means that the tax is levied on the basis of per unit output. The major flaw of this system is that even though the price of the resource goes up in the international market, tax amount does not increase since it is charged on per tonne basis. Tax, will increase only if the miner chooses the mine more ore (Swan 2010).

The proposed RSPT will replace the existing Commonwealth excise. But in order not to deny the states their income by way of royalties, it is arranged that the miners would continue to pay royalties to States, but the Commonwealth Government would introduce a refundable credit to the extent of the royalties. This is equivalent to Commonwealth Government paying the royalties to the States (Rudd & Swan 2010).

There is already in existence Petroleum Resource Rent Tax (PRRT) in Australia, which was imposed in 1980.RSPT and PRRT are similar to one another since both are profit based taxes levied at rate of 40 percent. However there are some key differences (Australia's Future Tax System Review 2010).

S.No,

Resources Super Profit Tax(RSPT)

Petroleum Resources Rent Tax(PRRT)

1

Capital expenditure is written off over sometime.

Capital expenditure is immediately written off.

2

Expenditure can be transferred to the other units of the entity

There is provision for limited transferability of exploration expenditure.

3

Unutilised expenditure is refunded.

Unutilised expenditure is not refunded.

4

There is a single allowance rate for entire capital expenditure

There are eight allowances for the capital expenditure.

An important lesson seems to have been learnt from PRRT, while formulating RSPT. It is regarding the taxing point and valuation methodology. A serious thought seems to have been given to these two factors.

There seems to be some criticism regarding retention of royalties while going for profit based tax ('Australia government should look to optimize the value of its finite resources' 2010). But there seems to be strong arguments as furnished hereunder for the retention of royalties along with profit based tax. According to the Henry Tax Review, the existing ad valorem duty lowers the recovery of Tax for the community from resources. Many countries, though shifting to profit based tax, still retain the royalty. While there are many reasons for this practice, the most important one is the issue of patrimony. In many countries, minerals are the property of the State. Whenever an entity extracts minerals from a mine in a State, it can naturally expect something in return for the mineral lost. Mining companies do not make profits always. If a tax is made totally profit oriented, then the State does not get any amount by tax while at the same time, it loses its precious minerals. It is there fore argued that a State should receive royalty for the ore mined in a State, irrespective of profit made by the entity, so that it is compensated in the mineral lost(Cunningham 2010).

Since it is a new proposal, the RSPT as usual received vociferous arguments both in appreciation and criticism. The appreciation is mainly from the Government. According to the Government, the expected advantages (Australia's Future Tax System Review 2010) are

Mining investment will rise by 4.5 percent.

There was an increase in the employment in the mining industry 7 percent.

Mining production will increase by 5.5 percent in the long run.

The important points of criticism (Australia's Future Tax System Review 2010) are that

It will apply to exiting projects rather than greenfields where as existing projects were excluded when the PRRT was introduced.

In case of RSPT, the profit threshold at Government bond arte was fixed at 6% where as for PRRT, it is the bond rate plus 5%, ending up with 11 percent.

RSPT applies uniform rates to all commodities instead of commodity specific tax rates.

2.1. Subsequent Developments

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The Government's proposal to levy RSPT did not go down well with Mining Sector. The mining Sector is a very influential lobby. The biggest mining company Rio Tinto's Chairman Jan de Plessis criticised it saying that not only the mining industry, but the whole of Australia's future economic prosperity was in jeopardy. He slammed the Government's proposal saying that it would penalize efficiency, decrease competitiveness and drastically affect investment and job growth. He further predicted that mining investments would move from Australia to more tax-friendly countries. In tune with his predictions over A$20 billion (US$16.3 billon) new resource investment proposed to be set up in Australia was put on hold due to RSPT ('RSPT draws flak from majors' 2010).

Prime Minister Rudd had to face flare from his own party for inefficient handing of the RSPT issue and had to resign making way for Julia Gilliard to become the new Prime Minister of Australia (O'Connor 2010).

3. Reasons for Proposal of Super Profit Tax as per the political cost hypothesis

It is quite obvious that the Australian Government was on the back foot because of two successive years of budget deficits, one of $57 million in 2009-2010 and another of $41 billons in 2010-2011. There was an impression in the minds of the Public and financial experts that budget deficits were more due to reckless spending on the part of the government. The government therefore wanted to for tax reforms and mobilise resources to bring the budget back into surplus. The huge deficit coverage could not be done except by mobilization of huge resources and the Government could find a fertile solution in taxing the Mining sector. There was scope for the government to tax it because of the shift from ad valorem basis to tax on profits (Messenger & O'Connor 2010).

The political cost hypothesis theory suggests that the mangers of an entity can juggle with accounting to shift profits from present to the future or from future to the present to facilitate least cost to the entity due to political moves (Panchapakesan & McKinnon 1992). In the present case, when the government proposes the basis of tax to be on profit basis, it is quite likely that the managers in mining entities use their accounting innovativeness to shift present profits to future to lessen tax(Australia's Future Tax System Review 2010).

4. Reactions of the Stake holders

The mining corporates were highly critical of the Australian Government for its proposal to introduce RSPT. Rio Tinto's chairman Jan De Plessis expressed serious concerns about the impact of RSPT not only on the mining industry but on the entire Australian Economy ('RSPT draws flak from majors' 2010). According to him, RSPT would penalize efficiency, curtail competitiveness, hurt investment and affect employment. HE said that with the RSPT Australia would become the most taxed country in the World and such an impression may result in investment shifts from Australia to other countries. He was critical of the application of the RSPT to the existing projects and hinted that the company's decisions regarding future investments would be put on hold because of the new tax. He did not mince words when he said that the RSPT proposals finalised without consultation with Industry's representatives has destabilized the investment climate. As a result, the perceived risk on the investment in Australia has increased in the investment circles and there is every likelihood that Australia may become less attractive for the investors ('RSPT draws flak from majors' 2010).

Another mining Major BHP Bilton's Chairman IAC Nasser was also very critical of the handing of the issue by the government. He said that inspite of the Industry's best efforts, there were no consultation on RSPT as also no acknowledgement of the significant flaws in the proposal or its adverse impact on the Industry ('RSPT draws flak from majors' 2010).

Clive Palmer, a mining billionaire criticised that the tax was reminiscent of tax regimes administered by communists and socialists. He even threatened to shift the operation to countries like Papua New Guinea, where taxes are low (Messenger &O'Connor 2010).

Fortescue Metals CEO Andrew Forest, the wealthiest man of Australia and staunch supporter of Prime Minister Rudd was of the view that the RSPT proposal would jeopardize the investment climate in Australia. He said that taxing industry's profits and subsiding exploration costs as virtual nationalisation of mining industry (Messenger &O'Connor 2010).

Julie Bishop, the deputy opposition leader criticised that Rudd is trying to emulate socialist leader Hugo Chavez of Venuzuela. Financial journalist, Gottliebsen commented that investments worth nearly $100 billion would be postponed till RSPT is drastically modified and totally abolished. The Economies of Western Australia Queensland and South Australia would be seriously affected (Messenger &O'Connor 2010).

While the Industry and opposition were thus critical of the RSPT, the labour Unions welcomes it. Tony Meher, the National President of CFMEU, Confederation of Employees' Association said that workers wanted that the profits of the mining industry should be shared fairly by the community (Way 2010).

The Government was taken aback by the virulent attack by the mining lobby, went on the defensive and expressed willingness to hold consultations with the industry and amend the proposals wherever needed (Messenger &O'Connor 2010).

5. Reaction of Capital Market to the Resources Super Profit Tax

The stock market did not react much to the proposal of RSPT, because the investors wanted to wait and see whether RSPT would make any serious dent in the profits of the mining companies. There was no marked fall in the share prices of the mining companies like BHP Bilton, Rio Tinto and Fortesave Metals which did not drop much even after the announcement of the proposal. Per haps the confidence of the investors that the lobbying power of the mining group is capable of whittling down impact of RSPT (Messenger &O'Connor 2010).

6. Opinion on Resources super Profit Tax

Every human has equal access and authority over natural resources. That is how nature intended them to be. Air, water, land and other natural resources, in the early history of mankind belonged to all. But once the concept of individual owning up replaced the concept of society ownership, the natural assets gradually slipped out of common ownership. It began with land and spread to water. Air did not fall prey to their human greed because of its float and fluidity.

Minerals hidden under Earth are the common property of the society. It should, infact, be the duty of the government, to mine them, sell the ore and spend the revenue for public good. Instead the politician chose the path of leasing them out for manipulated amounts which are abnormally low, in return for the kickbacks from the mine lease holders('Australia government should look to optimize the value of its finite resources' 2010).

The ones apart from being natural resources are not renewable. Once they are mixed, they are exhausted. Ores are formed inside the Earth due to known and unknown processes for millions of years and that is why they are non-renewable. Such precious ores being mixed by private individuals and being sold for their own benefit and profit is a gross injustice to the society as a whole ('Australia government should look to optimize the value of its finite resources' 2010).

The enormous profits that mining companies are churning out from their activities clearly shows that they have been awarded mining rights for peanuts. There was never an effort on the part of the State to price the leasing and mining rights factoring therein the prices of minerals as a result of which the ever-increasing returns from the mined ores are going to the private coffers('Australia government should look to optimize the value of its finite resources' 2010).

Taxation of mined ores is another flawed exercise by the Government. The government was taxing it ad valorem, getting tax on output. Inspite of witnessing the prices of ores soaring over a period, the Government continued charging tax on ad valorem basis. One cannot understand as to why this particular activity should be charged on ad valorem basis while most others are taxed on profit basis.

It is highly necessary that exploitation activity of non-renewable resources should contribute something to the community so that the future generations would get some relief for the loss incurred because of the draining of natural resources('Australia government should look to optimize the value of its finite resources' 2010).

Another merit in RSPT appears to be that it wants to tax only profit making companies. For loss making companies, there is no tax. Under the existing regime, on ad valorem basis, even the loss-making companies would be paying exercise duty, which can be avoided now under RSPT. RSPT, thus brings some relief to loss making mining companies ('The Resource Super Profit Tax: a fair return to the nation' 2010).

7. Conclusion

RSPT seems to be a progressive tax. Ores being non renewable resources, the income from mining of the same should partially go to the development of community. The Australian Government is justified in imposing the tax. But the electoral calculations made the Prime Minister retreat from the miners. The entire episode proved the might of the mining lobby (Messenger &O'Connor 2010).