Tax Incentives for Clean Coal Development in Australia

1. Tax Incentives for Clean Coal Development in Australia Bill Butcher School of Business Law and Taxation, University of New South Wales, Sydney, Australia

4. The Henry Review Australia’s Future Tax System Report 138 recommendations few recommendations adopted by government

5. Recommendation: “Resource Rent Tax” Additional tax to be imposed on mining windfall profits “rent” - a payment to a factor of production or input in excess of that which is needed to keep it employed in its current use. rent tax not to be imposed on low value minerals, possibly including brown coal – raises environmental tax issue

6. Why Impose Additional Tax on Mining? • All minerals in the ground belong to the country • Miners are allowed to extract and sell minerals on payment of additional charge • Most countries charge royalties • Current Australian regime imposes royalties payable to the states, deductible for income tax purposes (effective transfer from Federal to states)

7. Comparison of coal royaltie

8. Grounds for Imposing Windfall Profits Tax on Mining • Economic distortion • Equity

9. Economic Distortion and the Problem with Royalties • Royalties are based on either the quantity or value of coal produced • No consideration of profit • Acts as a disincentive – but acts in some circumstances as an environmental tax, eg low-grade coal

10. Equity: Who Should Benefit from an Upsurge in Mineral Prices? • Government, Miners, or both? • The country owns the minerals • The miners provided the capital and took the risk

11. Solution • Resource rent tax: “levied at a constant percentage of positive net cash flow”

12. Government Response #1:Resource Super Profits Tax (RSPT) • Applies to all entities engaged in the exploitation of non-renewable resources and to all mining and petroleum products (not already covered by the Petroleum Resources Rent Tax (PRRT)) • Brown coal probably included

13. RSPT Features • 40% tax rate on assessable resource profits • Revenue less deductions with an allowance for capital expenditure • Tax imposed on profits above the ‘normal’ rate of return – 6% (government bonds) • Loss on abandoned project refunded at 40% • Government shares risk as well as profits • Cf PRRT – ‘normal’ rate is 11%, but no refund • RSPT deductible, with credit for royalties

14. [1] Ib RSPT Calculation[1]

16. Criticism of RSPT • Taxes profits, not “super profits” • Mining projects will be sent offshore • Potential effective tax rate of 54-57% • Greens – don’t “cave in” to mining lobby • Partial cave-in and a new Prime Minister

17. Government Response #2Minerals Resource Rent Tax (MRRT) • Exposure draft expected June 2011 • Draft legislation – late 2011 • Passage of legislation - 2012

18. Application of MRRT • Applies to mining of iron ore and coal • Excludes ‘small’ miners – less than $50 million of MRRT assessable profits per annum

19. Key Features of MRRT • 30% rate • Immediate write-off for new investment • Unutilised losses carried forward at long term government bond rate plus 7% • Full credit for state royalties • Unused credits for royalties at LTGBR + 7% • 25% “extraction allowance” • Effective tax rate 42-45%

21. Constitutional Issues • Crediting royalties against MRRT discriminates between the states (MRRT is then higher in low-royalty states – different conditions prevailing?) • Under the Constitution, mineral resources belong to the state – Federal government has no right to tax them. Change of name enough? Or move to company tax surcharge?

22. Practical Issue • States could raise royalties, which are a credit against the MRRT • Would result in a transfer from Federal to states Responses: • States give up royalties in exchange for a share of MRRT • Limit tax credits to state royalties that were in place or "scheduled" when the original RSPT was announced

23. Why Persevere With Coal? • Uses

24. Conclusions • ‘Clean coal’ • The role of taxation