HEARD ON THE STREET: Gillard Stops Digging Mining Tax Hole

2nd Jul 2010 08:51

By Andrew Peaple and David Fickling A DOW JONES COLUMN Australia's new prime minister, Julia Gillard, has stopped her government from sinking into a hole of its own making. Reaching a compromise on how to tax mining profits will allow Gillard to call an election with a troublesome issue resolved. With big mining companies keen to invest again in Australia, tax revenues from their future profits should eventually start swelling the Treasury's coffers, if the reworked mining resources rent tax becomes law. Still, that benefit to the Treasury has been pushed out. New mining projects, for example, won't be liable for the tax until the cost of their investment is covered. Moreover, the cut in the effective tax rate is actually bigger than the nominal reduction of the rate to 30% from 40%. An "extraction allowance" of 25% on all mining projects reduces the effective rate to 22.5%. On top of other technical changes made--the tax can now be based on the market value, rather than book value, of projects--this raises a question over whether Canberra is now being over optimistic about the hit tax revenues will take. The government now forecasts the revamped tax will cost it only $1.3 billion in potential revenue over the next four years. For sure, the government has made some clawbacks as a result of the compromise. Mike Elliott, a tax partner at Ernst & Young, points out, for example, that the Treasury will no longer provide miners with a rebate for resource exploration costs. But if tax revenues fall short in the years ahead, further political problems could surface. Gillard stressed Friday that it is still a priority to bring the fiscal budget into surplus by 2013: Already, a planned lowering of corporate taxes has had to be curtailed as a result of the concession to miners. Despite the government's climbdown, the compromise with the miners is an immediate political gain for Gillard. But if Australia's other taxpayers end up taking even more of a hit for the miners in the near to medium term, the fruits of peace could start to go off. (Andrew Peaple, a Columnist on Dow Jones' Heard on the Street team, has been a financial journalist since 2003. Currently based in Beijing he has also covered the U.K. economy and financial services, and is a U.K.-qualified chartered accountant. He can be reached on +86-10-8400-7705, or by email on [email protected]) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires July 02, 2010 03:51 ET (07:51 GMT)