Tax Incentives for Clean Coal Development in Australia Bill Butcher School of Business Law and Taxation, University of New South Wales, Sydney, Australia

The Henry Review Australia’s Future Tax System Report  138 recommendations  few recommendations adopted by government

Recommendation: “Resource Rent Tax” Additional tax to be imposed on mining windfall profits “rent” - a payment to a factor of production or input in excess of that which is needed to keep it employed in its current use.  rent tax not to be imposed on low value minerals, possibly including brown coal – raises environmental tax issue

Why Impose Additional Tax on Mining?  All minerals in the ground belong to the country  Miners are allowed to extract and sell minerals on payment of additional charge  Most countries charge royalties  Current Australian regime imposes royalties payable to the states, deductible for income tax purposes (effective transfer from Federal to states)

Comparison of coal royaltie State Royalty RateBasis of calculation Last review/change QLD 7% where the value of the coal produced does not exceed $100/tonne 10% on the value of the coal exceeding $100/tonne Ad valorem 2008 – Mines and Energy Legislation Amendment Regulation (No 2) 2008 NSW Open cut mining 8.2% Underground mining 7.2% Deep underground mining 6.2% Ad valorem 2008 – State Revenue and Other Legislation Amendment (Budget Measures) Act 2008 VIC Brown Coal $ per GJ, adjusted in accordance with the consumer price index Other than Brown Coal 2.75% Ad valorem with quantum rate for brown coal 2006 – Mineral Resources Development (Amendment) Regulations 2006 WA If exported 7.5% If not exported $1/tonne (adjusted each year at 30 June in accordance with comparative price increases) Ad valorem and quantum rate 2000 – Mining Amendment Regulations (No. 4) 2000 SA 3.5% Ad valorem 2005 – Mining (Royalty No 2) Amendment Act 2005

Grounds for Imposing Windfall Profits Tax on Mining  Economic distortion  Equity

Economic Distortion and the Problem with Royalties  Royalties are based on either the quantity or value of coal produced  No consideration of profit  Acts as a disincentive – but acts in some circumstances as an environmental tax, eg low-grade coal

Equity: Who Should Benefit from an Upsurge in Mineral Prices?  Government, Miners, or both?  The country owns the minerals  The miners provided the capital and took the risk

Solution  Resource rent tax: “levied at a constant percentage of positive net cash flow”

Government Response #1: Resource Super Profits Tax (RSPT)  Applies to all entities engaged in the exploitation of non-renewable resources and to all mining and petroleum products (not already covered by the Petroleum Resources Rent Tax (PRRT))  Brown coal probably included

RSPT Features  40% tax rate on assessable resource profits  Revenue less deductions with an allowance for capital expenditure  Tax imposed on profits above the ‘normal’ rate of return – 6% (government bonds)  Loss on abandoned project refunded at 40%  Government shares risk as well as profits  Cf PRRT – ‘normal’ rate is 11%, but no refund  RSPT deductible, with credit for royalties

RSPT Calculation [ 1] Assessable revenue Less deductible expenditure (including depreciation) Less RSPT allowance Less any prior year project losses RSPT opening balance x RSPT rate = RSPT project profit or loss + / - losses transferred in = RSPT net profit or loss Project losses can be transferred RSPT liability = 40 % of RSPT net profit If net loss, loss is carried forward Closing RSPT capital account = undepreciated value of tangible capital, plus any unutilised losses [1] Ib

Description Item Year 1Year 2 Revenue(1)0150 Less Expenses(2)6040 Less RSPT Allowance (6 per cent applied to RSPT capital base) (3)06 Less Unutilised losses carried forward from previous year (4)060 Net RSPT profit (item 1 less items 2, 3, 4)(5)-6044 Taxable RSPT profit (nil if item 5 is negative)(6) per cent(7)018 Initial investment (1 July in year 1)(8)100n/a Carry forward losses (item 5 if negative)(9)600 Undepreciated assets(10)400 RSPT capital base (items )(11)1000

Criticism of RSPT  Taxes profits, not “super profits”  Mining projects will be sent offshore  Potential effective tax rate of 54-57%  Greens – don’t “cave in” to mining lobby  Partial cave-in and a new Prime Minister

Government Response #2 Minerals Resource Rent Tax (MRRT)  Exposure draft expected June 2011  Draft legislation – late 2011  Passage of legislation

Application of MRRT  Applies to mining of iron ore and coal  Excludes ‘small’ miners – less than $50 million of MRRT assessable profits per annum

Key Features of MRRT  30% rate  Immediate write-off for new investment  Unutilised losses carried forward at long term government bond rate plus 7%  Full credit for state royalties  Unused credits for royalties at LTGBR + 7%  25% “extraction allowance”  Effective tax rate 42-45%

Year 1Year 2Year 3Year 4Year 5Year 6 Resource Charge$m Revenue Operating expenses Depreciation MRRT 13 per cent MRRT unutilised losses MRRT profit/loss per cent Extraction 25% MRRT after extraction allowance per cent Uplifted Royalty offset Net MRRT Total resource charge Company Tax Revenue Operating expenses Depreciation0200 Total resource charge Company taxable income Company 29 per cent Profit before tax Total tax

Constitutional Issues  Crediting royalties against MRRT discriminates between the states (MRRT is then higher in low-royalty states – different conditions prevailing?)  Under the Constitution, mineral resources belong to the state – Federal government has no right to tax them. Change of name enough? Or move to company tax surcharge?

Practical Issue  States could raise royalties, which are a credit against the MRRT  Would result in a transfer from Federal to states Responses:  States give up royalties in exchange for a share of MRRT  Limit tax credits to state royalties that were in place or "scheduled" when the original RSPT was announced

Why Persevere With Coal?  Uses

Conclusions  ‘Clean coal’  The role of taxation