The Australian Government says mineral resources have been ‘undertaxed’. In fact to take more of their value the Government has to take on more risk.

While the current debate is intense, the two sides could meet on these issues of efficiency and risk.

Until now, part of the value of community-owned mineral deposits has been collected by taxes on outputs (or royalties) levied by State governments. Royalties distort output decisions and project choices. Mines close too early and some mines may not be set up. With rising prices, States would also be expected to increase royalty rates. The current regime is therefore not stable either.

The RSPT is a version of a resource rent tax, designed to capture some of the scarcity value of resources in the ground by taking a share of the difference between total revenue and all expenditure on a project. The RSPT does not have the one sided nature of a tax where losses are not reimbursed. The new regime makes the government a partner in the projects, since it also guarantees to contribute a share of costs, and this leaves the rate of return on the company’s funds invested in a project unaffected. Royalties can be replaced. However, the government carries more risk compared to the royalty regime.

This idea was canvassed in discussion around the report of the Henry Tax Review. But the industry had expected there would be more consultation on all aspects of how the new tax might work.

The first industry worry is that the RSPT applies to existing projects. This is a real concern but transition arrangements will be designed. The debate will be about how to reflect the value of the existing assets, and whether they reflect capital expenditures which should be deducted or whether they embody rents which should be taxed.

Second, returns are said by the critics to be taxed as super-profits once they reach the long term bond rate. This is complex. The Government guarantees 40 per cent of expenditures but losses are carried forward with interest. Since there is eventually to be a tax offset then the right interest rate to carry forward the accumulated expenditure is the government borrowing rate. The risk is one of lending to the government. But having been forced to lend to the government, the companies say they would have to refinance those funds and most likely they could not borrow at the long term bond rate. Companies might have to look at other options like packaging those obligations and selling them separately. Meanwhile, the carry forward rate will be a talking point.

Third, State royalties must still be paid. This is messy and risky. The government will provide a ‘refundable credit’ to companies for royalties paid. That is, when a company pays royalties, they are refunded regardless of the profit or loss situation of the project at that date. A bigger problem is that with the RSPT in place, the States will ramp up their royalty rates to capture RSPT revenue.

Fourth, the RSPT will capture all sources of rent, including skills which are specific to a mining company which might drive them away and would reduce incentives to improve productivity. These are real concerns. Henry noted this effect and the risk that a tax would cause a company which had a lot of assets specific to its business to relocate to another country but also noted the tax rate is not 100 per cent and the community is also sharing its rents with the company. The companies might like to negotiate the tax rate but the Prime Minister has said that it is ‘about right’.

While the industry in its immediate response has run a very strong campaign of opposition, it also has much to gain from the new tax regime. Negotiation is expected around these four areas of concern, alongside a discussion with the States about royalties, and another issues paper will be issued in July.

Finally, there is the question of what to do with the money. The RSPT could support other tax reform, or reduce the extent of government borrowing for infrastructure projects. But its revenue flow is risky and it could be diverted to current expenditure rather than capital. There’ll be a debate now in Australia about whether to park this income into a sovereign wealth fund, transferring an asset in the ground to another form.

The irony is that the critics refer to Australia’s rising sovereign risk but with a well designed tax investing in Australian resources becomes less risky. The real question is how the Australian community will cope with this new way of doing business in the minerals sector.

Christopher Findlay is Professor of Economics and Head of the School of Economics at the University of Adelaide.