Thursday, June 17, 2010

New Mining Tax explained

This news report taken from Sydney Morning Herald on 3rd May tries to explain the new mining tax in Australia.

How the new mining tax works
May 3, 2010

The suggested new 40 per cent tax on mining profits is not as far-reaching as it first seems.The tax will sting, no doubt, but it will not apply to all the profits of miners working in Australia. Any profits derived from mines outside Australia will be left untouched.So companies like Anglo-Australian mining giants BHP Billiton and Rio Tinto have less to lose than the naked headlines would suggest: their non-Australian mining operations are completely outside the tax.

A mining company will need to calculate how much profit it makes from each of its Australian operations and declare that to the tax authorities. The profit is to be calculated as close to the ground as possible: that is, at the mine gate. But the details on this have yet to be hammered out, leaving wide scope for mining companies to agree on a more flexible approach.For example, a miner with two adjacent operations may push for both mines to be included in one profit calculation for the tax authorities, if it felt this would lead to a lower tax bill.These profit calculations are purely for the tax authorities and are not the group accounts drafted for investors, but they won't be entirely new arithmetic for global miners. South Africa and Canada and the U.S. mining state of Nevada already require them to produce accounts for profits-based taxes.

The federal government knows there are very few votes to be lost from taxing rich miners that hire fewer workers per dollar of profit than many other sectors of the economy. But Canberra is still dangling some carrots for the mining industry in the form of a tax allowance and an exploration tax rebate.The allowance represents an amount of profit that is exempt from the new tax. In principle, it is the government's estimate of a fair rate of return on mining assets.Utilities world-wide understand this concept well because their returns on assets are routinely regulated in order to prevent them from unjustifiable increases in power bills.For miners, there is a lot to play for here: the government wants untaxed returns on assets to be set at a rate equivalent to the 10-year government bond yield, now just 5.76 per cent. But, if the miners lose their war against the tax, they could win a decisive battle by raising the tax-free return rate.

...Say, a mine (not a miner) has assets worth $100 million. Using the current bond yield, the company may deduct $5.76 million from its calculation of the mine's profit."Using a rate higher than the government bond rate would result in a significant subsidy to the resource sector...," the government said. Expect the miners to lobby for exactly that.

The government is also offering a tax rebate on exploration costs, which will be set initially at 30 percent. That means for every dollar spent on exploration, 30 cents will be available for miners as a tax credit. The industry spends hundreds of millions of dollars every year on exploration in Australia.And when mines are wound up, the owners can crystallise any leftover tax credits accumulated during the mine's life.

Mines can be an auditor's nightmare: in Australia, they are scattered over the desert, thousands of km (miles) from any place where people go to work in suits. So auditing of a mine's assets could be trickier to confirm than a utility's balance sheet.The new tax calculations will be kinder to mines with lots of assets and conservative accounting for expenses, so tax officials will be on the lookout for any clever accounting. Armed with sophisticated data-matching systems, they will compare public accounts against the figures produced for tax purposes.More than ever before, tax officials will keep an eagle eye on the outback.


The story can be found at this address:

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