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Australian super-tax defeated

THE ROW over a proposed "super-tax" on mining, oil and gas companies has been settled in spectacular style after the ousting of prime minister Kevin Rudd in a modern-day palace coup

The government's proposed resource super-profits tax (RSPT) has been watered down significantly in a concession that confirms the immense political influence of Australia's resources sector, but has also highlighted the financial fragility of some of its biggest projects.

The planned "rent tax" on mining profits has been lowered from 40% to an effective 22.5%, a climb-down accompanied by other concessions to the mining industry, which had threatened to mothball projects if the proposed regime became reality.

The new proposals are the culminations of tense negotiations between Julia Gillard, Australia's new prime minister, and the heads of BHP Billiton, Rio Tinto and Xstrata, the country's biggest mining corporations.

"Our discussions with the government have been very constructive and we're pleased with the progress that has been made," Marius Kloppers, BHP Billiton's chief executive, said in a note to staff after the concessions were announced in July. "However, there is still a great deal of work to be done before the tax is enacted," referring to the long-winded and uncertain process of legislating the agreement, which is scheduled to come into force in July 2012.

The resources companies have also expended much of their public goodwill in this bruising political encounter. The government's climb-down has compromised a popular plan for across-the-board corporate tax cuts, causing other business leaders to cry foul and resentment in regions without a resources industry.

The industry's campaign against the original proposals – which included rallies, demonstrations, a high-profile TV advertising campaign and threats by BG Group, ConocoPhillips, BHP, Xstrata and others to freeze more than AU$80bn ($70bn) of projects – also caused a rebellion within the ruling Labor Party and the removal of a prime minister who had seemed bulletproof only months earlier.

Rudd was widely credited with steering Australia through the global financial downturn; his abrupt replacement has raised allegations that big corporations have undermined democracy. On the morning the government's deal with mining companies was announced, one writer to the Sydney Morning Herald asked: "So who do we vote for now – BHP, Rio or Xstrata?"

With a general election set for 21 August, there is a strong likelihood of political rhetoric targeting the resources companies. In policy terms, however, the matter seems broadly settled – at least for now.

The newly agreed mineral-resources rent tax (MRRT) maintains the principle behind the original proposal, which was that a tax targeting profits would be a fairer way for the country to share in the soaring valuations of Australia's mineral assets – and yield more for government coffers – than the present system of royalties, company tax and excise duties. But the sums being claimed by the taxman will now be far lower than hoped for.

The effective total tax burden of the big miners once the MRRT is introduced will be about 45%, say analysts – down significantly from the 57% projected under the RSPT, but slightly up from today's tax bill of about 43%. Under the new regime, the government's official headline rate is 30%, but companies' MRRT bills will come to about 22.5%, because of a so-called "extraction allowance'' on one-quarter of taxable profit. The tax will become applicable at seven percentage points above the long-term bond rate (about 5% now).

Significantly, a proposal to apply the tax to existing projects retrospectively has been neutralised by a concession that allows the big miners to value their assets at market value for depreciation purposes. Smaller mining enterprises are exempt from the MRRT altogether, as are businesses involved in extracting minerals that require processing, including gold, copper, nickel and uranium.

For energy companies, the scrapping of the RSPT proposal – which would have covered oil and gas projects – also looks positive. Under the new settlement, the country's petroleum resource rent tax, which applies only to offshore petroleum projects, will be extended to all oil, gas and coal-seam gas projects, onshore and offshore.

Queensland's burgeoning unconventional gas industry and the nation's biggest operating resource development, the North West Shelf liquefied natural gas (NWS LNG) project, will move to a new tax regime, as will onshore petroleum assets such as those in the Cooper basin of South Australia and Queensland.

The tax will apply at a rate of 40%, but will allow for heavy up-front deductions in respect of capital spending, giving energy companies the opportunity – at least in theory – to avoid paying the taxman anything for years at a time.

Opinion is divided, for example, on how the new regime will affect the iconic NWS LNG project, operated and part-owned by Woodside Petroleum. Woodside says the change is tax-neutral. But projects now have the option of a starting-base for depreciation of either book value or market. Switching to the latter would more than double the value of NWS for accounting purposes, meaning that depreciation costs would not have been fully deducted and the project's owners had most likely over-paid the taxman up to now. Deutsche Bank analyst John Hirjee says the tax change has added 7% to the net present value of the entire project.

Given the country's present political climate, however, this feels like an unintended outcome. Another analyst at a large investment bank says that if Woodside could use $60bn as its starting base, the project would not pay tax for five years after making the transition to the new regime. But he adds: "It is hard to see the government allowing that sort of hole in its revenue''.

Indeed, the uncertainties of Australia's hastily assembled tax package leave plenty of scope for future argument. Resource companies in Australia will continue to be highly profitable in future, thanks to the seemingly unquenchable demand from China and India; and those profits will be tempting targets for any government trying to plug a public-sector deficit. Australia's political leaders may once again be on course for an eventual collision with the country's mining, gas and oil companies.

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