Mining tax probe is more water torture for Gillard

THE minerals resource rent tax is an irrecoverable financial and political negative for the Gillard government and the deal between the Greens and Coalition for a new Senate inquiry will become a form of pre-election water torture.

This will probe Labor where it is weakest: how the MRRT was devised, its flawed design and the deal between Labor and the big three miners when Julia Gillard and Wayne Swan were desperate in mid-2010 to negotiate a peace treaty with the mining industry.

The MRRT is not just a policy embarrassment for the Labor government. It is an exhibit in the Rudd-Gillard rivalry with plenty of lethal material released by Treasury under Freedom of Information, notably that Kevin Rudd's abandoned resource super-profits tax had real teeth and would have raised nearly $100 billion revenue across nine years.

This is devastating because it suggests the rewriting of the tax came at a huge cost to revenue. The Greens will exploit this to argue for a better tax while the Coalition will exploit it to argue Labor's incompetence.

Gillard will be disadvantaged because the inquiry is about the defects of her tax, not the defects of Rudd's tax. These were vital but seem largely forgotten.

In his recent interview on Sky News' Australian Agenda, Rudd advanced two propositions: (1) he fully accepted responsibility for his government's RSPT; and (2) he said the test for the mining tax "is ultimately its long-term revenue performance". What Rudd cannot openly say is obvious: his tax had revenue teeth and Gillard's tax is a toothless tiger.

The policy and personal rifts triggered by the mining tax are second only to carbon pricing as a cathartic event in the decline of Labor, with the RSPT pivotal to Rudd's removal as prime minister and the MRRT a core factor in undermining Gillard.

Treasury documents released under FoI on February 14, 2011, show RSPT revenue estimates were $24.5 billion across the first three years, reaching a plateau of about $12.5bn annually and totalling $99bn extra revenue in its first nine years of operation.

This constituted a serious effort to redistribute the benefits of the boom and was a structural reform to revenue.

It is only now the full implications of rewriting the tax are becoming more apparent. "This decision could have cost the Australian government revenue over a decade upwards of $100bn," is the comment from one senior official involved in these talks.

The point, of course, is that Rudd lost the political battle over the RSPT and its design was found to be flawed. That flaw lay in the idea of government becoming a silent 40 per cent partner in projects, sharing costs and returns, because a 40 per cent rebate wasn't bankable. It was not valued by the market or finance sector, so his tax couldn't work as intended.

With Gillard and Swan now pledged to the MRRT and the Coalition pledged to repeal the MRRT there seems no prospect of any mining tax surviving.

Treasury's February 2011 estimates show the vast gulf between the revenue expected to be extracted under the RSPT compared with the MRRT. Across the nine years to 2020-21 the MRRT was estimated to raise $38.5bn, a massive $60.5bn less than the RSPT.

On Treasury's own figures, therefore, the tax revision was a lethal hit on revenues. Moreover, it is now conceded these MRRT revenue figures were greatly inflated. MRRT estimates have been repeatedly scaled back and the tax raised only a humiliating $126 million in its first two quarters. Whether it will deliver any significant revenue remains dubious.

A recent analysis of the MRRT's design from an insider says: "The MRRT gave miners a tax shield which included not just the book value of their investment in fixed capital (like the RSPT) but also the full market value of the mine (including the ore). Given that the market value of any asset is equal to the present value of the profit stream it is expected to generate, in principle this concession equated to a complete shield from the tax. This concession in theory could have reduced the tax revenue close to zero for existing mines."

Gillard and Swan argue the MRRT shortfall is not because of their tax design but because of commodity prices. This position will be stress-tested by the new Senate inquiry.

Coalition shadow assistant treasurer Mathias Cormann said: "The RSPT and the MRRT are both deeply flawed taxes in their own way. Given Treasury was very directly involved in designing and costing the RSPT, we can safely assume that the revenue forecasts for the RSPT would have been more reliable than for the MRRT. It was quite convenient for Julia Gillard and Wayne Swan just before the last election that the MRRT revenue was seriously overestimated." Gillard and Swan are trapped. Their MRRT is based on a July 1, 2010, political compact between the big three mining companies and Labor. It would be folly to unravel that deal before the 2013 election.

Claims that Treasury was uninvolved in this process are wrong. The initial talks leading to the MRRT were conducted in a ground-floor room at Treasury with the miners and Treasury opening their books to discover how apart were their assumptions related to the RSPT.

Gillard and Swan stand exposed by the damaging stance at their July 2, 2010, media conference that revenue losses from the MRRT in the immediate years were only about $1.5bn. Their message was there was little financial penalty from winning the political peace with the industry, ditching Rudd's RSPT and cutting a deal with the big three miners. Well, Treasury's estimates across nine years show a $60bn loss and, on latest information, this is many billions short.

Yes, these are just estimates and the real world has changed. But such estimates are used to make political judgments. As for the argument that under the RSPT miners would be paid for their losses, consider the following.

The RSPT operated on a mine-by-mine basis. This means that Rio Tinto, for example, which has recorded a large profit on its Australian iron ore operations this year but a large loss on its foreign operations, would have paid RSPT on its Australian profits but not received a refund on its foreign losses attributed to mines not covered by the RSPT and not paying Australian royalties.

The bottom line is immensely damaging to the government on two fronts: the MRRT cannot spread the benefits of the boom as promised, and Gillard and Swan offered grossly misleading yet politically convenient revenue estimates from the tax.