As someone who has worked as an accountant or financial analyst for most of the last couple of decades, including in the mining sector, I have been watching the debate about the mining resources super profit tax with some bemusement. People like me understand tax and why businesses make – or don’t make – investment decisions. It is becoming disturbingly apparent that ordinary punters are not getting the information they need to make a reasonable assessment about the merits of this proposal.
Frankly, there is a lot of nonsense being talked at present.
Firstly, you can discount almost everything that has been written by journalists, since virtually none of them seem to know anything about business or economics. Most appear to be simply regurgitating other people’s words. I put most business and economics writers into this category, by the way.
Secondly, put a big red line through everything said by any economist, and I include Ken Henry here. Economists operate in a world dictated to by assumptions, most of which don’t actually exist in the real world. People in commerce don’t have that luxury, much to their annoyance.
Thirdly, the Government should be ignored entirely. It wants more tax revenue and to actually achieve something before the election. Moreover, it doesn’t seem to me like many people in the Labor Party have much experience in business, so they are more likely to trust the opinions of the economists in the Treasury rather than be able to use their own knowledge and experience (see point 2).
Finally, the big cheeses in the mining industry probably do understand the tax and its effects and certainly understand how to make business investments. However, those making the most noise in the mining companies are the CEOs and Board Chairs of the major mining companies. That is, your average neo-conservative with a visceral and rather irrational hatred of Government and, most particularly, taxation, which they equate to Marxism (refer Twiggy Forrest and Clive Palmer). These miners, therefore, aren’t ignorant, but are quite deliberately obfuscating and misleading the public for their own ends in a massively well funded public spin campaign.
Let’s start with the miners and their spin. The most absurd piece came the other day from Terry Burgess, the head of Oz Minerals, who gave a press conference in which he bemoaned the complexity of the tax. He said “...there would be at least another set of books needed to [account for the] resource tax on top of the tax accounting and the financial accounting [books] we [currently] do”.
I had a vision of a crusty old accountant hauling a green coloured ledger book from the bottom cupboard and blowing the dust off it when I heard this. Back in reality, the mining tax is not that complicated, and certainly not when it’s compared with the capital gains and fringe benefits taxes, amongst others. Yes, it will be an added complication, but the Australia tax system is all about complexity and, frankly, bosses like Burgess couldn’t give a damn about accountants when they structure their opaque and massively sophisticated transactions and market manoeuvres, so why should it matter to them now?
In reality, the resources tax has been discussed for as long as I have I have been doing accounting, so it would not have come as a surprise to anyone in the profession. It is a no-brainer that miners should be paying a fair share back to the owners – i.e. us – for the profits they are making from digging up and selling these non-renewable resources. The problem the Government has is that the tax was designed by an economist, Ken Henry, who doesn’t seem to understand how business makes investment decisions.
When the miners say that making 6% the level when the tax should kick in is too low, they are dead right. No company that I have ever worked for, and certainly no mining company – where the risks and rewards are greater – would contemplate a project where the return on investment (ROI) was as low as 6%. Every major company these days does extensive financial modelling and if that model showed that an investment is likely to only return 6% it would never get off, or rather out of, the ground. In mining, the minimum ROI would need to be 10%, and more likely 12% to be worth the considerable risks miners incur.
Thus, to qualify as “super” profits, a much higher ROI would need to be specified for it not to be a disincentive. It is no accident that the petroleum resources rent tax is set at 11%.
The Government says that these risks are ameliorated under the operation of the tax through another feature of it, where those projects that return less than 6% see the Government handing back 40% of the costs. The first point to make here is that anything that encourages a business to fail or under-perform is poor policy. It is an active disincentive to strive. No businessman goes into business to fail, or underperform, and would look at this element of the tax with utter disdain.
It is, in a sense, protectionism, like a tariff barrier, and goes abruptly counter to accepted modern free market principles. Moreover, as an accountant, this sort of scheme has a big red “tax loophole” flag all over it. It is the sort of thing that would inevitably be used and abused by sharp accountants to minimise tax, one way or another.
Another area where the Government and the Treasury seemed to show a lack of understanding was in not realising, or acknowledging, the way the tax would impact on cash-flow and have downstream effects therefrom, especially their ability to raise debt capital and satisfy existing debt covenants. Cash flow is very important in business. Even though many mining companies are incredibly profitable at the moment, they don’t just put their money in the bank and use that to fund future projects. What they do is set their cash-flow against existing debt and use any increases in their expected cash flows to fund more debt and greater expansion.
Banks look closely at cash flow to determine whether to stump up debt capital and in working out what interest rate they will charge for it. Things like the resources tax impact cash flow, making it more difficult and expensive to raise and service debt capital. In the case of border-line projects, lower cash to debt ratios can cause companies to breach their debt covenants, which can be very nasty indeed.
On the other hand, the tax is not going to come in until 2012, so that gives the mining companies plenty of time to adjust their debt servicing commitments and renegotiate with banks. It might mean that a few projects don’t go ahead, but they would only be risky ventures anyway, so on balance probably wouldn’t have much noticeable effect on the economy. Nevertheless, it would have been tactful and sensible for the Government to recognize that this cash-flow aspect would have some impact upon the industry.
One thing that business has been honest about is that until the final details of the tax are confirmed much investment in mining will be delayed, because the financial models the miners use to analyse investments will be incomplete and therefore of little value. All talk of scrapping projects, however, is nonsense.
In summary, the tax was poorly designed from the outset, though the basic idea of miners paying a reasonable amount for the resources they dig up is sound and, indeed, should be implemented. The mining companies have some valid concerns, but they have muddied the waters by disingenuously launching the mother of all scare campaigns that has oversold the impact upon themselves and the economy.
The Government has shown scant understanding of business concerns and has shown that they are, like Gerry Harvey says, “bloody amateurs” when it comes to dealing with business. Unless the Government shows some common sense soon, and corrects the poor features of the tax, it may be voted out at the next election, meaning we may never see a resources tax in Australia, which would be a shame.
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