Julia Gillard to pay for sloppy tax deal

THE government's tenuous grip on stability will become even more shaky if the miners relaunch their campaign against the super-profits tax.

BHP, Rio Tinto and Xstrata compromised ahead of the election when Julia Gillard agreed to refine the terms of Kevin Rudd's version of the new mining tax, a move which privately angered many Liberals who expected the big miners to oppose the tax right through until polling day.

But that's all ancient history. The situation now is that Gillard's negotiated super-profits tax on the mining industry is fast unravelling. That at least is the impression the miners want to create. They claim that the government is reneging on the deal struck, and they have written evidence to prove it.

That evidence is the signed agreement between the parties which stipulates: "All state and territory royalties will be creditable against the resources tax liability." Because the commonwealth either didn't have the guts to abolish state royalties or felt that it constitutionally could not, it instead promised to refund companies the royalties they paid the states once the new tax took 30 per cent more of miners' profits.

Sounds simple enough, right? Apparently not, because now that state governments, like that of Colin Barnett in Western Australia, are talking about increasing state royalties, the commonwealth claims the deal struck with the miners does not require them to refund increases. Federal Labor says its pledge to credit back royalties only applies to existing royalties, not future increases.

It isn't just the Liberal government in WA which disagrees. Labor's own Anna Bligh government in Queensland claims the commonwealth has to stick to the exact wording of its agreement. And even the government's own Policy Transition Group report into New Resource Taxation Arrangements, released yesterday, recommends "that there be full crediting of all current and future state and territory royalties under the MRRT (mineral resources rent tax) so as to provide certainty about the overall tax impost on the coal and iron ore mining industries".

That is a little awkward for the government, isn't it?

The outgoing Treasury secretary, Ken Henry, who wasn't party to the agreement the Labor government struck but was responsible for the initial design of the tax, took public servant support for government positioning to a new level when he fronted a Senate hearing. He suggested that because the agreement signed didn't include clear reference to "future royalties", terminology like "all royalties" was ambiguous enough to give the government wiggle room to get out of paying for future royalty increases. With skills of obfuscation like that, Henry should consider politics as his next career move.

I find it extremely hard to believe, however, that the big miners weren't aware of the implications of what they were signing. A commonwealth government pledging to refund all current and future royalties imposed by states? Tell them they're dreaming. It is something no federal government could do without guarantees from states and territories not to increase royalties. That is a guarantee the PTG wants, but the government does not have. Giving state governments a blank cheque to increase royalties at the commonwealth's expense would be totally fiscally irresponsible, even for this federal administration. The big miners have a low opinion of the Labor government to be sure. But surely not so low as to assume that Gillard and her ministers would knowingly take on such fiscal risk?

That leaves two realistic possibilities of what happened when Gillard, Wayne Swan and Martin Ferguson signed off on a deal which stipulated that: "All state and territory royalties will be creditable against the resources tax liability." Either they did so by accident, realising only after signing the agreement the implications of such wording. Or it was a political calculation by the government to give the big miners the impression that all royalties would be included, all the while with the intention of clarifying that the legislation once drafted would not include future royalties.

If it was an accident, it was one the government quickly realised it had made. Reference to all royalties being refunded by the commonwealth was left off the press release immediately after the deal was struck. It was the only variation between the two documents.

How on earth could the miners have missed that important variable? I don't believe they did.

The opposition and the media can be absolved of blame for missing it because we weren't permitted to see the signed agreement until recently. The story behind that process is interesting. In the era of open and transparent government, the Prime Minister's Office repeatedly refused for five months to release the signed agreement publicly. That is, until at a Senate hearing on December 8 a BHP spokesman explicitly told senators the PMO had requested they don't make the document public: 30 minutes later a staffer brought the signed agreement to the hearing for senators to take a look.

Caught out, I believe, is the appropriate terminology.

If the "all" wording was indeed an accident in the signed agreement, the big miners must have known they were taking advantage of the stupidity of the Labor ministers in the room who endorsed the terms. If, on the other hand, the government was trying to be tricky with the wording, the big miners must have seen this coming. What else are they paying their lawyers and political advisers the big bucks to do? If the miners truly were blindsided by the debate we are now having, they need to get new advice because as far as attempts at political trickery go, this was ham-fisted.

My money is on the "all" wording being an accident created by a government rushing to politically put an end to the mining tax issue ahead of the election, not a ham-fisted attempt at trickery. No public servants in the room to offer advice, no commonwealth legal experts, just a group of politicians and their staffers. It was hardly an Algonquin Round Table.

Even the PM who is a lawyer by trade wasn't present, only signing off on the deal once Swan ran it over to her after the negotiations were concluded. She signed it trusting Swan and Ferguson's judgments, and only later put her lawyer's hat on and realised the lemon agreement she had endorsed. Sloppy, yes. Calculated, I doubt it.

The government signing off on a deal which clearly stipulates that all (current and future) mining royalties are to be refunded to companies once the new super-profits tax is enacted (without state guarantees not to hike up royalty rates) is incompetent.

The miners saw the error coming because they aren't fools, but are now using it as bargaining ambit to make the final design of the tax as favourable to them as possible. The opposition members are acting as patsies for the mining companies, but that's OK. The political benefits of attacking the government for the error are obvious.

As 2010 comes to a close it is business as usual: government incompetence, an opportunistic opposition and vested interests taking advantage while they can.