Snap Analysis: Australia tax on miners easier said than done

CANBERRA (BestGrowthStock) – Australia’s government expects its new 40 percent mining profits tax to be fiercely contested by resource companies, but it could be a good recipe for an election this year.

Here are some issues the new tax raises:

* The scheme is likely to prove popular with voters in an election year, effectively using the new tax on miners to pay for a real national wage rise through a boost to pension savings. They also ruled out measures that could have scared swing voters away from the ruling Labor party in droves.

* Miners are bound to react badly and issue dire warnings about “killing the golden goose” but they will have an uphill battle to stop it. Few Australians will feel sorry for an industry that is amassing huge and growing profits. Even some industry analysts doubt that a profits tax will kill off major new projects. In 1991, the gold-mining industry howled when a tax exemption on gold was removed, but it continued to thrive.

* The biggest threat to Prime Minister Kevin Rudd’s mining tax lies in the upper house of parliament, not in the mines that dot the outback. The reforms will face powerful opponents in the Senate, from conservatives, independents and greens. Rudd is likely to wait until after the next election, which he is expected to win late this year, to introduce the tax laws, but the new Senate is unlikely to be any friendlier. It has already blocked two of Rudd’s biggest reforms in health and climate change. In a taste of the battle ahead, opposition leader Tony Abbott said he was “deeply, profoundly hostile” to the new tax.

* Australia’s state governments, especially the major mining states of Western Australia and Queensland, could also help sink the new mining tax. Rudd must strike a deal with the states to win support for the new scheme, which involves reimbursing miners for royalties they already pay to the states. The two states together account for 75 percent of mining royalties in Australia.

* The companies with the highest-margin assets through the commodities cycle will feel the most pain from the new tax. These include global giants Rio Tinto (RIO.AX: ) (RIO.L: ) and BHP Billiton (BHP.AX: ) (BLT.L: ). Companies that are lower-margin operators would be touched more lightly by the scheme, with London-based Liberum Capital saying miner Xtrata (XTA.L: ) would be in this category. The market impact may also have been partly discounted after top miners lost ground last week on worries over the tax.

* Profit-based tax could also create an incentive for miners to inflate exploration and development costs and minimize profits that would need to be declared to the tax authorities. These costs would not only reduce profits but, in the pre-production years, also inflate the size of project assets, because these costs can be capitalized. Under the new tax, the government plans to soften the blow for miners by giving them an effective discount on the new tax rate, based on the project’s capital base. The bigger the capital base, the bigger the discount.

* Auditing of mining expenses are made harder because projects are often based in the desert, thousands of km (miles) from major cities. Treasury officials, though, are confident they can police the scheme: “The machinery might be in the desert, but the bank accounts will be in Perth or somewhere, and we’d get the bank statements,” said one senior official.

Stock Market Research

(Reporting by Rob Taylor; Editing by Mark Bendeich)

Snap Analysis: Australia tax on miners easier said than done