mining tax...

[top_dog]

Are you at Cannington smeck?

EHM is still happening on a small scale. They are going to do a small trucking mine with the decline that is built so far.

190 less positions though.

 

[scblack]

Effective Mining Tax Rate 77%

Here is an article by Michael Pascoe on how the effective tax rate for the Mining Tax is 77%. That 77% is not created by spin - it has been calculated by PriceWaterHouseCoopers.

Mining Kev's 77% effective tax rate

SMH
June 17, 2010

Never mind the 40 per cent super tax rate the Prime Minister and Treasurer have nailed themselves to, declaring it ''our fair share'' – what about the 77 per cent tax rate that would result for some projects?
The government is relying on the voting public getting bored with the resources tax argument and bought off with the idea that the tax boils down to taking a bit more money from rich foreigners and giving it to more deserving us. Unfortunately it's a little too important to let them get away with such a trick.
While the miners apply their own spin, the government's campaign is considerably more dishonest in the way it wilfully misleads with the idea of a 40 per cent tax rate just on ''super'' profits. It results in the odd letter to the editor from the gullible backing the proposed tax with the line that individuals pay more than 40 per cent, so there's really no problem.

The reality about this complex, messy and decidedly inelegant tax is that it can result in a massive effective tax rate that can indeed make an otherwise rich resources projects unviable so that everyone does end up missing out.
PricewaterhouseCoopers has released the slide partner Wayne Huf used to demonstrate some of the reality of the RS profit tax at the Association of Mining and Exploration Companies conference in Perth. It's worth the effort of walking through the steps of the example to see just how woolly Wayne Swan's proposal is.
PwC is careful to warn that their example is illustrative only, as the impact of the present proposal will vary markedly depending on the characteristics of a particular resource project. This really is a case-by-case tax. It's still a telling illustration.
Let's say Swan's Hole (my suggested name, not PwC's) has earnings before royalties, tax, interest, depreciation and amortisation of $100 and then consider what happens under the present system, then under the RS profit tax as painted by the government and, finally, what the RS profit tax would really do.
(THE PRESENT SYSTEM)
Swan's Hole presently pays state royalties of say, $5. It's depreciation of plant and equipment is $25 – digging rocks is very hard on picks and shovels. Depreciation of tenement cost (it bought the project from Ken Henry's Dream NL) is $20 and the interest expense on the money it borrowed to going mining is $15.
Under the present system, you take away all those costs and Swan's Hole is left with $35 net profit before tax. At the 30 per cent company tax rate, the ATO then collects $10.50, leaving Swan's Hole shareholders with net profit after tax of $24.50.
The total tax paid (company tax plus royalties) is $15.50. The total effective tax rate is total tax as a percentage of net profit before tax and royalties - $15.50 as a percentage of $40 = 38.8 per cent.
The way the government is spinning the story, applying the RS profit tax regime to Swan's Hole would result in a 55 per cent effective tax rate, which would be ''fairer''. It's important though to look at how that 55 per cent figure is obtained.
(WAYNE'S WORLD SYSTEM)
The Wayne's World version starts with the same $100 EBITDA, but the $5 of state royalties are effectively wiped out. There's still $25 in plant and equipment depreciation but the depreciation of tenement cost and the interest expense disappears as it's not deductible and, hey presto, net profit before tax is $75.
Before applying the RS profit tax, the RSPT allowance is applied at the long term bond rate. Let's say that's $8, reducing the super profit to $67. The RS profit tax takes 40 per cent of that - $26.80.
Income tax at 30 per cent is then applied to the net profit figure before tax ($75) minus the RS profit tax ($26.80) = $14.50 in company tax.
According to the government spin, that leaves Swan's Hole shareholders with $33.70 after paying total taxes of $41.30 – an effective tax rate of 55 per cent.
(WAYNE'S NIGHTMARE)
But that's only what the government is spinning, not what would really happen under the existing proposal. While the RS profit tax ignores interest expense and tenement depreciation, company tax and the real world don't.
With no royalties but with interest expense and tenement depreciation, net profit before tax is actually $40. The RS profit tax still takes $26.80 from that $40. Company income tax is reduced to just $4, meaning total tax paid is actually $30.80, leaving $9.20 for the Swan's Hole shareholders – an effective tax rate of 77 per cent.
Looking at this PwC example, it's reasonable to wonder if Wayne Swan actually knows anything about his tax or simply prefers to tell fibs about it.
There are a host of other factors at play. Some mines and minerals are enjoying windfall profits from very high prices. Some state royalties don't adequately charge a reasonable price for the minerals that are dug up and sold at those higher prices. And the bottom line remains that the government wants to collect more tax revenue from someone and the resources industry happens to be making more profits and doesn't represent nearly as many votes as consumers, home owners and beneficiaries of estates – all classes the government isn't game to be honest with or challenge.
Ross Gittins yesterday wrote of Kevin Rudd's failure of leadership on climate change and how that had politically bitten him. There is a similar case of leadership-by-opinion-poll when it comes to tax reform.
Instead of using the Henry tax review as a means of encouraging debate and knowledge of the revenue challenges facing the nation, Rudd and Swan immediately ruled out what they thought was the hard stuff i.e. nearly all of it. Their perhaps understandable lack of faith in their own leadership abilities meant they weren't game to take on an even less principled opposition.
Instead, the Wayne and Kevin cherry-picked from Henry the one major revenue gain they thought they could achieve without losing many votes – and then botched it.
As I've written before, the Henry review did not recommend the $1.1 billion exploration refund scheme Wayne's invented as a sop to smaller miners. In any event, the small miners and explorers don't want it, much preferring the Canadian flow-through-shares system that their modelling suggests would only cost $130 million. Martin Ferguson understands that well, but Wayne and Kevin weren't interested in what Martin knew.
Michael Pascoe is a BusinessDay contributing editor.

SMH - http://www.smh.com.au/business/mining-kevs-77-effective-tax-rate-20100617-yhw2.htmlhttp://www.smh.com.au/business/mining-kevs-77-effective-tax-rate-20100617-yhw2.html

 

[smeck]

How many of the mining companies are off shore owned?

Most of them depending on your definition. Just about every Mining Company is publically listed, the definition of 'foreign owned' is often merely a reflection of which stock exchange they are listed on. A few are dual listed, BHP and Rio are dual Australian and English. A few smaller Miners are now about 20% Chinese (the limit the FIRB imposed on Foreign ownership without approval), like Kagara Zinc. Other's like Perilya and OZ Minerals lost most or all of their operations to O/S companies. When it costs $45mil a month to keep digging and you already have $1bil in debt it's not long before the Banks stop writing cheques and you have to shut down. Most had to choose to sell all or part of the business.

It's the reason most mines try to insulate from cash flow and invest from capital reserves, it gives them a little breathing space against price fluctuations. Many operations (gold in particular) used to hedge their product to stabilise their income, but you lose as often as you win on an indexed market. So it you can't borrow because your earnings are prone to fluctuation and now you can't stockpile cash for a rainy day because profits are evil, what do you have left?

Top Dog, you after a gig?

 

[Ivan]

It is wrong to consider royalties as a tax. It is more appropriate to consider them a cost of the raw material owned by the state.

Because royalties effectively no longer exist (paid and refunded) under the RSPT, it isn't accurate to just add up the value paid in RSPT and call it "tax", because it is actually the cost of raw materials. The company tax rate will be 28%.

I work in an Industrial Process Industry. The cost of the raw material to this company is well over 60% of total revenue. If I want to work out the tax rate for my company, I don't add the cost of the raw material to my profit tax.

 

[scblack]

It is wrong to consider royalties as a tax. It is more appropriate to consider them a cost of the raw material owned by the state.

Because royalties effectively no longer exist (paid and refunded) under the RSPT, it isn't accurate to just add up the value paid in RSPT and call it "tax", because it is actually the cost of raw materials. The company tax rate will be 28%.

I work in an Industrial Process Industry. The cost of the raw material to this company is well over 60% of total revenue. If I want to work out the tax rate for my company, I don't add the cost of the raw material to my profit tax.

It is a Tax.

You can call it a cost of materials all you like. That is just semantics. As Smeck has highlighted, royalties are levied on the VALUE, not a per tonne basis. If it was a per tonne basis your argument would have some credence. But it is based on value, so its not a cost of materials, its a government income on the revenue earned. Thats a Tax.

It is an impost on companies by the government, that is a Tax. Just because Income Tax will be 28%, does not exclude consideration of royalties as a Tax.

 

[Ivan]

Semantics is important. Not all raw materials are paid for solely on a per tonne basis either.

If I added the cost of raw materials to the company tax for the business that I work for, and called it all "tax", you would see an effective tax rate of 67%.

 

[Tomas]

Another KRUDD policy communication failure IMO. With the CPRS/ETS, people knew about it, but no one knew what it entailed or how it would affect them. Same with this, no one (government included) has any idea about the definitive ramifications (or how much tax companies will pay).

What a complete abortion of a term in Government.

 

[Ivan]

http://blogs.crikey.com.au/pollytics/2010/06/15/how-profitable-is-mining/

 

[smeck]

It is wrong to consider royalties as a tax.......................

The paper/article linked referred to 'royalties and tax' so there was no insinuation from that author saying royalties is a tax. Call it rent, call it a tax, call it a business expense, it is irrelevant provided you are aware it's revenue based, not volume. However since royalties are to be refunded in the RSPT yet still paid, they are being replaced by a tax, hence royalties will become a tax. Interestingly enough I wonder if the State Governments can retrospectively increase royalty rates and take a bigger slice of the RSPT pie, giving the States in question a bigger share of the resources they own? Since Rudd will refund said 'royalties' there is no extra paid by the Miners, just less to Rudd.

While it is semantics and while it is a cost it's hard to see what your argument is achieving. I understand your point completely with ETRs but the comparison is more complicated. Your raw materials costs are a paid pre tax, as are royalites, the difference is your costs are based on what you can buy your materials for and the quantity you need, a valid comparison would be if you paid for your raw materials at 2.75% of your revenue, regardless of the difference between the cost of production and the sale price. Atleast a manufacturer can set his sale price above his cost, or go to a cheaper supplier or a different material to reduce his costs, a miner is locked in by the index, the cost of producing ore from orebody he is mining, and the amount of capital invested to produce a saleable product. A miner also can't slice 50kg's of a tonne to improve his margin quite as easily as Mars sliced 10g of a 70g Mars bar and kept the price the same.

Edit: I just read that Crikey link, reading Possum Comitatus makes me feel like the Principal in Billy Madison listening to Adam Sandler lecture on the Industrial Revolution. Something along the lines of "at no point during that incessant rambling does it ever come close to having a valid point, everyone on this forum is dumber for having clicked that link". I'm most likely wrong, but I think this sums up the basis for that article. The issue with Mining is the boom and bust cycle, super profits are generally followed by super capital works and sometimes super losses. There are a few reports floating around at the moment that have the cyclical profit margins of the Mining Industry running closer to 15%, a whisker higher than the all industries profit margins around 14%. Paul Howes has made a giant ass of himself through this process saying the employees support the RSPT, our Union Rep (AWU just like Paul) hasn't shown his face on site yet, curious given we apparently agree with them yet haven't spoken to them.