How does the resources profit tax brawl affect SMEs? A SmartCompany Q&A

Since the release of the Government’s response to the Henry Review in early May, debate about the Government’s Resources Super Profits Tax has dominated the business and political landscape like few other issues.

But while the brawl has Australia’s top politicians and our richest miners at each other’s throats, entrepreneurs and the owners of small and mediums businesses are justified in wondering whether the fight will have any impact on them.

So is this a fight for rich miners and giant resources companies? Or is it an issue that will have wider ramifications?

Time for a SmartCompany Q&A.

Look, I’m not even sure exactly what this Resources Super Profits tax actually is. Can we start at the beginning?

Great idea. The tax was announced as part of the Government’s response to the Henry Tax Review and is designed to make sure that Australia’s wealthy mining companies are paying fair compensation for taking the nation’s prized resources out of the ground.

Under the proposal, profits generated on Australian mining projects would be subject to a super profits tax of 40%, although the miners would be allowed to recoup a special allowance (set at 6% of earnings) to account for their capital expenditure, and also recoup depreciation.

Once the tax on super profits is taken out, the miners are then subject to the ordinary corporate tax rate, which will fall from 30% to 28% under the Government’s plan.

The new tax comes into effect from July 1, 2012.

So the miners get taxed twice? I can see why they are angry.

Yes, it does look pretty rough, although there are a few sweeteners. Firstly, the RSPT will replace the existing system of state royalties that miners must pay on the minerals they take out of the ground. Secondly, where a mining project is unprofitable, the miner can carry forward losses and transfer them to profitable projects, or claim a 40% refund if there are no such profitable projects. As a final sweetener, the Government will create a 30% tax break for exploration and development undertaken by smaller miners.

But from what I have seen, the miners aren’t impressed with these carrots?

Ah, no. They claim the tax will make the Australian mining sector one of the most highly taxed industries in the world. But the Government disagrees violently, and says miners are currently paying tiny amounts of tax. And that’s where this brawl has really kicked off.

Right, so take me through the tax rate element of this brawl.

On Sunday, Treasurer Wayne Swan released an economic note citing research from two American academics that showed the effective tax rate paid by Australian mining companies was 17%. After this data was questioned by the Opposition, Swan released a second paper on Monday evening, which was written by three tax advisors within Treasury. This paper also showed that miners pay an effective tax rate of 17%, about 12% lower than other industries.

However, there is one major problem with the research released by the Government in that it only looks at corporate tax and does not include state-based mining royalties and other taxes, such as payroll tax.

What happens when we include those other taxes?

The Government hasn’t released any official data on this. However, we do have some information from particular miners. Macarthur Coal says its effective tax rate including state mining royalties is 45%, while BHP Billiton says its effective tax rate is 43%.

What about when you add in the new Super Profits Tax?

BHP says this would increase its effective tax rate 57%.

And the Government disagrees, I take it. So are both sides willing to compromise on this?

The Government continues to consultative discussions with the sector about how the precise details of the tax might be worked out. It appears Wayne Swan won’t be budging on the 40% tax rate, but there could be room to move on the size of the special allowance the miners get before the tax kicks in. Given the tax doesn’t kick in for more than two years, they’ve got a bit of time to sort it all out.

So why are we all getting so steamed up about this right now?

For starters, the Opposition has made the RSPT an election issue by threatening to block or rescind the tax if it wins office.

Secondly, the miners are already claiming that the introduction of tax is having an immediate impact on their operations. Fortescue Metals has already shelved two expansion projects, citing concerns about its ability to attract funding from overseas. Meanwhile, Rio Tinto says it is currently reviewing all of its Australian operations determine the “worst case” scenario for these projects.

So where do SMEs fit into all of this?

If the RSPT doesn’t get through, SMEs will suffer more than anyone. The $12 billion the tax will raise over the next four years is supposed to pay for two initiatives for small business from July 1, 2011: a 2% cut in the corporate tax rate from 30% to 28%, and an immediate asset write-off for assets under $5,000, which applies to companies with less than $2 million in turnover.

So if the tax goes, those initiatives go. Any other impacts?

I think the uncertainty issue shouldn’t be underestimated. If Australia is seen as a place where sovereign risk levels are high – that is, where the Government is known to make sudden changes that can hurt business – then overseas investors will shun the country.

Yes, this will mainly have an impact on the ability of bigger companies to attract finance, but this will also trickle down to smaller businesses, which are already seen as very risky – the sovereign risk issue will only increase that risk profile.

Finally, any SMEs that enjoy flow-on benefits from the mining sector – such as mining services businesses or even SMEs in resources rich towns and regions – could suffer if projects are abandoned or wound back.

So where is all this going? Will the tax get through?

I think it probably will. The mining industry is running a big scare campaign, but deep down they probably realise they do need to pay more tax. However, the Government also needs to work on a compromise position to ensure that it doesn’t overly damage an industry on which that nation’s economic growth depends.