Fisher Investments Editorial Staff

The Dingo Ate Yo’ Tax Revenues

By, 10/26/2012

We’ve said it before (many times) and we’ll say it again: If you tax something, you can pretty much bank on getting less of it. Or in Australia’s case recently, if you tax something, you’ll get none of it—as in zero revenue from it.

In late 2010, Australian Prime Minister Julia Gillard took office and made passage of a super-profits tax on resource companies a key objective. The proposed tax has shape-shifted a bit over time, being molded by political pressures and lobbying. Ultimately, the “super profits” label was dropped and the tax was modeled after Australia’s existing Petroleum Resource Rent Tax. The Mineral Resource Rent Tax (MRRT) levies a 30% penalty on mining companies with annual profits of over $75 million—affecting about 300 or so companies operating in Australia. The goal, presumably, was to compensate Australians for unrecoverable minerals and resources (once they’re extracted) and fund various federal programs, such as boosting superannuation funds, investing in infrastructure and tax cuts for small businesses. All in all, the government expected to raise around $9 billion for various programs over four years from the MRRT.

Naturally, the tax was fiercely contested from the day it was proposed by Gillard’s predecessor (former Prime Minister Kevin Rudd) in 2010 until its passage in March of this year. Australian miners spent nearly $17 million on advertising campaigns against Rudd and the bill in 2010—eventually helping unseat the then-prime minister. And Thursday, Australian Deputy Prime Minister Wayne Swan (Treasurer Swan under Rudd) announced the product of all that effort, revealing the tax had raised a whopping zero dollars in revenue in its first three months of operation—well off the estimated $2 billion the government expected to raise this year in total. The three companies responsible for paying nearly 90% of that revenue announced they had no plans to pay a single cent this year.

Swan and others have explained the tax was set up this way—to generate significant revenues when commodity prices are high and almost none when prices were low and profits slim. Therefore, recent volatility and falling commodity prices in the run up to the tax’s implementation cost the Aussie government its much ballyhooed revenue. The government argues when resource prices recover, the tax is sure to meet its lofty expectations.

However, in our view, Swan overlooks a couple competing characteristics of the legislation. For starters, although the MRRT will be levied on 30% of “super profits” companies generate, there are generous allowances for taxes and royalties companies already pay. For example, most minerals and mining companies already pay state taxes for extraction and royalties on the volume of resources they extract. Likewise, MRRT payments are deductible for company income tax purposes. These concessions were granted to the miners following Rudd’s dismissal by Gillard and Swan to appease the powerful mining industry (and cease its multi-million dollar anti-tax, anti-politician ad campaign). Further compounding the problem, corporate directors in Australia have a fiduciary obligation to maximize returns to shareholders. Meaning, they’re even more incentivized not to pay taxes they can possibly avoid.

Now, it’s quite possible commodities prices could rise from today’s levels and the strong Australian dollar could weaken—boosting resource companies’ profits. But given the competing characteristics of the legislation, it strikes us the revenue gains from the tax are unlikely to reap the reward planned. Our advice to Gillard, Swan and other politicians still in support of the MRRT? Blame the dingo.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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