PAUL CLEARY. How Australia wasted the mining boom.

The countries that have mastered the development of their resources, most notably Norway, worked out long ago that to truly prosper in the long run, the citizens who own these assets are entitled to share in the super profits derived from extracting their finite resource wealth.  

You know when public policy debate is in the doldrums when a resource rich country like Australia is having a dollars and cents debate about how to tax its vast iron ore riches.

The countries that have mastered the development of their resources, most notably Norway, worked out long ago that to truly prosper in the long run, the citizens who own these assets are entitled to share in the super profits derived from extracting their finite resource wealth.

But not in Australia, where our coal, iron ore and petroleum resources are subjected to modest mineral royalties that don’t return a share of super profits, while artful tax dodging by the big multinationals allows them to minimise corporate tax.

Unlike Norway, there’s no super profits tax on mineral production, while the offshore rent tax has proved to be a soft touch.

Just look at the tax rates paid by some of these businesses. Over the past 10 years, Rio Tinto has paid an average tax rate of 13 per cent tax rate despite earning super profits in many of those years, according to Commsec data. The Tax Office has shown how Rio booked $3.6bn in profits through Singapore marketing hubs, which are taxed at 2.5 per cent.

Chevron Australia, which is developing Gorgon, Australia’s single biggest resource project, has lowered its Australian tax by booking billions of dollars of interest expense to an overseas entity that pays no tax.

So you’d think that any attempt to claw back some of this lost revenue would be welcomed in the cash-strapped state of Western Australia, but a plan by Nationals leader Brendan Grylls to increase production leases charged to big miners is another example of this dollars and cents approach.

Grylls, whose seat is centred on the Pilbara region, has long been concerned about the way his region has been plundered by the miners and has proposed a steep increase in the rental leases imposed by the state when the mines were first developed. Someone in Treasury obviously overlooked the need to index the 25c per tonne charge when it was introduced in the 1960s, so it can be argued that an increase is long overdue. Grylls has proposed a $5 per tonne fee.

The really important point is that Grylls isn’t planning to use the revenue haul—$7.2 billion over four years—for an election cash splash. No, he wants to do some much-needed budget repair, which is something that former Treasury secretary Ken Henry highlighted last week as one of the pressing priorities for government in Australia.

Despite this worthy aim, Grylls has been either disowned or lambasted by just about everyone, including the Liberals, Labor and the CFMEU, which has previously supported the principal of a super profits tax on minerals. Most vicious of all has been the Financial Review which publishes endless gushing copy about mining executives and their digging.

And now, just like the Kevin Rudd episode of 2010, Grylls is the target of a very expensive advertising blitz funded by the mining companies that tells voters how the overdue increase will cost jobs and investment. Remember how the miners spent $22 million in 2010 to kill off a super profits tax that could have raised $100 billion over a decade, according to Treasury analysis. And they also killed off a prime minister, thanks in part to focus group research that was forward to the Labor powerbrokers who executed Rudd.

Grylls’s political career is hanging in the balance as the PR war has clearly spooked voters. It need not be the case if politicians would realise the importance of having an effective and efficient tax regime on our precious mineral resources. The existing regime is neither efficient not effective.

Minerals taxation in this country is a mess, and it’s a problem that we need to revisit, especially the inefficient royalties imposed by the states, and the absence of an effective super-profits tax.

As I explain in my new book on Norway, the country had a fairly weak fiscal regime in place when it discovered oil in 1969. The only additional tax was a 10 per cent royalty on production. In the wake of the first OPEC oil shock in 1973, Norway’s economic advisers quickly realised that this regime wouldn’t collect the super profits, or rents, earned from sky high oil prices.

So they proposed an additional profits tax which was initially set at 40 per cent, and then reduced to 25 per cent. When the tax came in, there was a notable absence of political infighting. The conservatives supported it.

Today, the rate sits at 28 per cent, on top of the 50 per cent corporate tax rate, and it still has the support of Norway’s new far-right party, and the conservatives. And note that from 1987 onwards, Norway phased out production royalties because it realised that it needed to grab a big share of profits rather than a small share of production.

This tax, together with earnings from state equity participation, have underpinned a phenomenal revenue flow over the past 21 years, thus creating Norway’s trillion dollar baby, a sovereign wealth fund worth around $US900 billion. It’s on track to hit the trillion dollar mark in 2020.

So Brendan Grylls should be commended for having a go. But one of the lessons from this episode is that dollars and cents simply won’t do it. Western Australia should be having a debate about a hybrid royalty on iron ore and gas which takes a cut of the above-normal profits earned by their miners and gas producers.

Profits based royalties apply in the Northern Territory, and one was in place in the original tax regime for Olympic Dam. A bybrid royalty would in fact be less painful than the $5 a tonne charge, but it could have the benefit of earning the state a much bigger revenue flow in the decades to come.

Paul Cleary is a senior journalist at The Australia, and the author of five books. His latest book, Trillion Dollar Baby—How Norway Beat the Oil Giants and Won a Lasting Fortune, is published by Black Inc. and Biteback (UK). It was recently shortlisted for the Ashurst prize for business literature. 

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5 Responses to PAUL CLEARY. How Australia wasted the mining boom.

  1. Albert Haran says:

    You learn nothing if you do not learn from your mistakes, and if the current fiasco in relation to LNG/LPG proves anything, it is that we have learned nothing.

    Or someone has learned and a good idea is to follow the money. (if you can)

    What is needed is Transparency and Accountability. (TA)

    In relation to the issue of LNG/LPG there are two questions those who negotiated the deals have to answer, being,

    Revenues in relation to royalties earned should have been going towards our social responsibilities like health, education and infrastructure and balancing the budget etc.
    At what stage (if at all) of the negotiations did this take place and what where the suggestions and outcomes, again who were the negotiators? (TA please)
    And if not WHY NOT?

    Then as gas is the transition energy on the way to base load renewable energy, why there was no holding of reserves for Australian consumption for the population (heating and air/con) and to assist Australian businesses during the transition?
    At what stage (if at all) of the negotiations did this take place and what where the suggestions and outcomes, again who were the negotiators? (TA please)
    And if not WHY NOT?

    My suggestion: Royal Commission NOW.

    If you can have one for pink batts and union accountability, then surely?
    THE WHO, WHAT AND WHERE in relation to why Australia has received little or no recompense in relation to its natural resources requires answers.

    The following is not a soccer score just Australian money going somewhere.
    In 2020
    Qatar $26B Australia $1B .

    Qatar builds stadiums in the desert.Australia goes deeper into debt.

    TRANSPARENCY and ACCOUNTABILITY NOW.
    Royal Commission NOW
    Then maybe there will be a lesson learned.

  2. derrida derider says:

    As someone who has had some involvement in various forms of tax reform over the years, one thing I’ve learned the hard way is that in tax the best is not merely the enemy of the good, it is the friend of the bad.

    Both the fairness and economic efficiency arguments for taxing natural resources as a rent, and therefore linked to profit rather than production, are overwhelming. No argument at all there. But Mr Grylls is finding out, like me, that the actual political choice is not between a good tax and a bad tax but between a simple, though bad, tax and no tax. If the proposed tax is not dead simple then it is ridiculously easy for vested interests to block it (MRRT? Carbon ETS?). And royalties (“$X a tonne”) are dead simple to understand, even if their practicalities and flow on effects are not.

    He should have just said “royalties are too low and we’ll jack them up”. Better yet, said nothing with the “tax” word in it until after the election and then jacked them up.

  3. Bruce says:

    Three of our last four Prime Ministers at one stage fell victim to the mining industry anti AGW debate, Malcolm Turnbull, when he was opposition leader, Kevin Rudd and Julia Gillard. It is overwhelmingly an industry foreign owned with making stupendous profits and virtually no taxation. It can bankroll whatever argument it likes. As pointed out elsewhere almost all of the $50 billion tax cut is going to overseas investors, it makes absolutely no difference to residents. Whitlam was kicked out for trying to buy back the mining industry.

  4. Dog's Breakfast says:

    Rex Connor is now looking like a visionary, trying to buy back the resources.

    Isn’t it true that the the MRRT, proposed by Treasury largely to pick off the super profits, was a spectacular failure, such that when it was dropped it made little difference to the budget.

    Derrida is right, if it isn’t dead simple, it is too easily avoided altogether. By simple rights, they are digging up our resources. They should pay first at that point, at a reasonable rate, and then as company tax on the basis of profits with safeguards ensuring they can’t send profits elsewhere and take all the interest payments as wirte-offs here.

    The professional economists of Treasury mucked it up. I can’t see that following that plan is going to bring success in the future. The north-west shelf will likely earn us nothing.

    And this doesn’t even go into the debacle of what Howard and Costello did with the once in a lifetime windfall of the 2000’s. Again, Treasury advice was wrong, this wasn’t an ongoing increase in revenues, it was a lottery win, and we mucked that up too. The tax decisions made at that time are directly relevant to today’s dire budget.

  5. David Brown says:

    what a shallow cringing lot of idiots we are…….

    pissanting around making poor people suffer even more while big overseas bastards are ripping us off on the promise that a few pollies will live in affluent retirement… corruption anyone?

    vote Liberals and the opportunistic parties last…

    put Labor and Greens first so we get some politicians elected that at least pretend to have some ethics and drive to work for the good of ALL Australians not only those that can pay them off!

    (If some of the elected Labor or Greens prove to be bad eggs then let the courts get rid of them.)

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