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Australian Government - GST Distribution Review

Chapter 4 - State mineral royalties and the Commonwealth’s resource tax reforms

The supplementary Terms of Reference for the Review require the Panel to examine the interaction between State mineral royalties and the Commonwealth’s resource tax reforms. Specifically, the Panel has been asked to ‘examine the incentives for States to reduce Minerals Resource Rent Tax (MRRT) or Petroleum Resource Rent Tax (PRRT) revenue through increasing State mineral royalties’.1

In considering this issue, the Panel must be guided by the findings of the Australia’s Future Tax System (AFTS) review relating to mineral royalties, and that ‘the MRRT and PRRT provide a more efficient approach to charging for Australia’s non-renewable resources than mineral royalties’.2

The Panel’s first interim report (Chapter 6) outlines how State mining revenues are currently equalised between the States, and invites comments on the merits of several possible refinements to this existing approach. This Chapter deals only with the MRRT and PRRT,3 focussing on the interaction between these taxes and existing royalties.

The Panel’s examination of the interaction between State mineral royalties and the MRRT and PRRT consists of four parts:

  • How Australia has charged for its non-renewable resources, including the roles of the States and Commonwealth (section 4.1).
  • The findings of the AFTS review (section 4.2).
  • The Commonwealth’s recently enacted resource tax reforms, including how the MRRT and PRRT will interact with existing State royalty regimes and the incentives that these interactions produce (sections 4.3, 4.4 and 4.5).4
  • The Panel’s views on how the interaction between the MRRT, PRRT and State royalties could be improved (sections 4.6 and 4.7).

Opportunities to use the GST distribution process to encourage improvements in the efficiency of State taxes and mineral royalties (along with options for removing the GST share effects of any proposals) are discussed in the following Chapter.

As with all of the topics covered in this interim report, the Panel encourages interested parties to comment on its analysis of this particularly difficult and contentious issue.

4.1 How Australia has charged for its non-renewable resources

Historically, responsibility for Australia’s onshore mining industry has largely rested with the States. This includes responsibility for:

  • the regulation of the industry
  • the allocation of exploration and production rights
  • the charging arrangements through which the industry pays for the use of the community’s valuable non-renewable resources.

Responsibility for the development of offshore petroleum resources has exclusively been the Commonwealth’s.

In their submissions to the Review, several States have reiterated their strong support for the continuation of this division of responsibilities.

Western Australia says:

    [I]t is a well accepted fact that States have a constitutionally based right to levy royalties. While royalties might be characterised as serving a similar purpose to taxation, they are, in reality the price paid by the extractive industry for the resource which is constitutionally owned by the people of the State in which the resource is located.5

New South Wales notes that:

    Mineral resources are the property of the states. A mining right is, in essence, a contract between a state and the proponent of a mining project specifying the rights, obligations, terms and conditions for the development of the project, and the framework for ongoing relations and cooperation between the parties.

    Royalties are payments to the owners of the mineral resources in exchange for the right to extract them.

    Mining royalties have been a long-standing revenue source for state and, before federation, colonial governments. New South Wales has been levying mining royalties since 1884, nearly two decades before federation.6

This position is supported by the New South Wales Minerals Council, which says:

    The Crown, and therefore the people of [New South Wales], owns the majority of mineral assets in [New South Wales]. A royalty is the price charged by the Crown for the transfer of the right to extract a mineral resource … [Given this], and in the absence of any agreement between the Commonwealth and the States to reform these arrangements, it remains the right of the States to charge for the transfer of the right to extract a mineral resource, and set the price for that charge.7

The belief that the States’ long-standing power to levy royalties should not be interfered with is strong, especially in the resource States. For example, the Leader of the Opposition in Western Australia endorses the Western Australian Government’s submission on the supplementary Terms of Reference, and says:

    Western Australia has the sole constitutional right to levy royalties on its minerals. The WA Labor Party, when in Government, reserves its right to alter the rates upon which royalties will be set. Ultimately it is the people of Western Australia who are the owners of the minerals.8

It is also apparent from their submissions that most States have interpreted the supplementary Terms of Reference as a precursor to an attack on their ability to freely decide their mineral royalty policies. For example, Western Australia says:

    It is obvious that it is inherent in the new terms of reference that a State should be penalised by the Commonwealth Government for changing royalty rates applicable in that State.9

New South Wales shares this view:

    [The supplementary terms of reference] appear to be motivated by the Commonwealth Government’s desire to influence an outcome of its MRRT/PRRT policies.10

The Panel is mindful of the depth of concern amongst the States regarding their historical role in charging for the right to mine under their soils. For this reason, the Panel assures the States that it approaches this issue from a starting point that recognises this long-standing responsibility, with the expectation that they will continue to exercise this function into the future. However, the Commonwealth similarly has a well-established position in the field of taxation. The challenge is therefore to find a way to reconcile these two competing interests.

State mineral royalties

All States (except for the Australian Capital Territory, where no mining takes place) collect royalties in return for granting the right to private businesses to exploit mineral resources within their jurisdictions. With limited exceptions, these take the form of output-based royalties imposed as a percentage of the value (or, less commonly, the volume) of production.11

The applicable royalty rate for a given commodity is determined differently in each State, as is the taxing point in the production chain and the scope of allowable deductions. Within each State, different commodities are often subject to different charging arrangements (see Appendix F).

The amount of royalty revenue differs greatly across the States

As discussed in Chapter 6 of the Panel’s first interim report, the geographical distribution of Australia’s most valuable mineral deposits is uneven. The resources subject to the MRRT, namely iron ore and coal, are overwhelmingly located in the three large resource States (Western Australia, Queensland and New South Wales).

As shown in Table 4.1, virtually all of Australia’s identified iron ore is located in Western Australia (97 per cent). Although coal is distributed somewhat more evenly, differences in quality have resulted in 96 per cent of all black coal being extracted in only two States, Queensland (52 per cent) and New South Wales (44 per cent).

Table 4.1: Proportion of key minerals and extraction by State

Commodity

NSW

VIC

QLD

WA

SA

TAS

ACT

NT

Coal identified resources (%)

21

4

38

3

33

0

-

-

Black coal production (%)

44

-

52

2

1

0

-

-

Iron identified resources (%)

0

0

1

97

1

0

-

0

Iron ore production (%)

-

-

-

97

2

1

-

0

Source: Derived from AGSO, National Mineral Deposits Dataset.
Note: A dash (-) indicates the State has none of that type of mineral or does not extract that mineral, whereas a zero indicates the State has a relatively small amount of that mineral. Totals may not sum to 100 due to rounding.

The concentration of resources in a few States is reflected in the distribution of royalties collected. Table 4.2 shows that in 2011-12, the three large resource States are expected to account for more than 95 per cent of the $11.1 billion in total royalty revenue.

Table 4.2: Estimated mining royalty revenue by State

Year

NSW

VIC

QLD

WA

SA

TAS

ACT

NT

Total

2011-12 ($m)

1,768

46

3,445

5,494

203

48

0

144

11,148

2012-13 ($m)

2,128

46

3,651

5,937

232

55

0

122

12,172

2013-14 ($m)

2,215

47

3,436

6,956

225

56

0

134

13,069

2014-15 ($m)

2,351

49

3,674

7,255

258

54

0

134

13,774

Source: Secretariat calculations. Royalties are from State Budget papers, and grants in lieu are based on Commonwealth estimates published in the 2012-13 Budget.
Note: These figures include Commonwealth payments to Western Australia and the Northern Territory in lieu of royalty payments from, respectively, the North West Shelf project and from uranium mining. They also include payments to Western Australia to compensate it for the loss of royalty revenue resulting from the removal, in 2008, of the exemption of condensate from crude oil excise.

This pattern of extraction shows the significance of iron ore and coal royalties to the large resource States. Iron ore accounts for the bulk of Western Australia’s royalty revenue (around $4.1 billion in 2011-12). Around 95 per cent of New South Wales’ royalties and more than three-quarters of Queensland’s (around $2.6 billion out of an estimated $3.4 billion in 2011-12) are from coal.

State oil and gas royalty collections have constituted only a fraction of those from iron ore and coal. For example, in 2010-11 Queensland collected $52.1 million in petroleum royalties,12 and Western Australia around $26 million.13,14 This total is likely to increase sharply in coming years, particularly in Queensland following the completion of several proposed projects to recover coal seam gas from the Surat and Bowen basins for conversion to liquefied natural gas for export. The previous Queensland Government expected the first royalty payments from these projects to commence in 2013-1415 and estimated that the projects could ultimately contribute $850 million in royalties a year.16

Notwithstanding the uneven distribution of resources across the States, the system of HFE means that all States, including those without large mining or petroleum industries, have a genuine stake in the performance of those industries. As discussed in Chapter 6 of the Panel’s first interim report, the principle that royalty revenues should be distributed across the Federation enjoys strong support, even though there is debate over the desirable extent of this redistribution and over some aspects of the way this principle is currently implemented. Equally, all States have a stake in ensuring that the supply chains for the resource industries work well, and that appropriate infrastructure is provided. Chapter 6 of the Panel’s first interim report therefore also explores whether economic development costs associated with expanding mining industries are fully recognised by the current HFE system.

Commonwealth resource taxes

In addition to the income tax arrangements that apply across all industries, the Commonwealth has specifically charged for the right to recover petroleum from Commonwealth waters, through the PRRT and crude oil excise regimes.17

The PRRT, which is levied at a rate of 40 per cent on the positive annual net cash flow of a petroleum project, has applied to certain offshore petroleum projects since 1�July�1986. Before the introduction of the PRRT, offshore petroleum projects were subject to output-based royalties and excise arrangements levied by the Commonwealth. These arrangements were largely replaced upon introduction of the PRRT, although the Bass Strait project remained subject to Commonwealth royalties until it was brought into the PRRT system from 1 July 1990.

The North West Shelf project has (until 1 July 2012) remained outside the PRRT regime, and has continued to pay crude oil excise and an offshore petroleum royalty. The offshore petroleum royalty is collected by the Commonwealth, which retains one-third, with the remaining two-thirds transferred to Western Australia, pursuant to a long-standing agreement between those governments.

The amount of revenue collected each year from these petroleum taxes is highly variable, and heavily influenced by commodity prices and exchange rate levels, as well as the profile of investment (which is immediately deductible under the PRRT). In recent years, gross PRRT collections have averaged around $1.5 billion a year.

Crude oil excise is payable on production from individual prescribed production areas, and is calculated as a percentage of the volume-weighted average of realised free-on-board prices. Higher excise rates apply to higher levels of production, with the rates dependent on the project area’s dates of discovery and start of production.

The Commonwealth extended the crude oil excise regime to cover condensate produced from non-PRRT areas from 13 May 2008.18 The Commonwealth estimated this would have an ongoing gain to revenue of around $2.5 billion over the then forward estimates period (around $625 million a year by 2011-12).19

Table 4.3: Commonwealth resource tax collections to 2011-12

Revenue ($m)

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12 (e)

PRRT

1,917

1,510

1,686

2,184

1,251

806

1,510

Crude oil excise and condensate

362

525

470(e)

1,060(e)

*

*

*

Source: PRRT revenue is taken from 2012-13 Budget Paper 1 (Cwth), Table C1.
Crude oil excise and condensate figures are from 2008-09 Budget Paper 1 (Cwth), Table C1. Since 2009-10, estimates of revenue from crude oil and condensate excise have no longer been published separately, as this would risk the disclosure of sensitive commercial information in relation to the tax affairs of potentially identifiable businesses.
Notes: The Commonwealth also collects, but does not retain, uranium royalties on behalf of the Northern Territory.
(e) Denotes the figure is an estimate, rather than an actual amount.

4.2 The AFTS review and resource charging

As outlined in Chapter 1, in 2008 the Commonwealth established the AFTS review to examine ways in which the existing tax and transfer system could be improved over the medium-term. The taxation of Australia’s non-renewable resources was one of the issues canvassed in detail in this report.20

The AFTS review recommended two major shifts in the way Australia charges for the use of its non-renewable resources:

  • an increase, overall, in the taxation of non-renewable resources
  • a shift away from royalties based on the value or volume of output, and towards rent-based taxation, particularly for the most valuable commodities.

Higher taxes on non-renewable resources

The AFTS review’s conclusion that taxes on the use of Australia’s non-renewable resources should be increased can be seen as the product of several other assessments made by that panel, namely that:

  • overall tax burdens in Australia may need to increase, over the medium term, owing to a combination of factors including an ageing population, high population growth, and increasing expectations in relation to public services21
  • this revenue should be raised primarily from four robust and efficient broad based taxes, on personal income, business income, private consumption, and economic rents from natural resources and land22
  • in an era of continuing globalisation, decisions about where to work and invest are likely to become more sensitive to tax settings.23

Taken together, these judgments lead to one of the conclusions that runs through the AFTS review — that, as well as improving the tax bases themselves, over time there should be a shift between the tax bases. Overall, the taxation of consumption and of immobile factors of production, such as land and natural resources should be increased, in order to enable the lowering of taxes on more internationally mobile factors of production, namely capital and labour.

In addition to these longer-term considerations, the AFTS review concluded that Australia’s resource charging arrangements were inadequate, both from an efficiency perspective, and in that they ‘fail to collect an appropriate return for the community from allowing private firms to exploit non-renewable resources’.24

A shift towards rent-based resource taxation

The AFTS review recommended a fundamental overhaul of the way resource revenue is collected, and who it is collected by. It called for the replacement of all existing resource charging arrangements with a single, uniform resource rent tax imposed and administered by the Commonwealth.25

One of the stated motives for this recommendation, as well as for the particular form of resource rent tax preferred by the AFTS panel, was to remove the effect of existing royalty and excise regimes — which it saw as distortionary and highly inefficient — on investment and production decisions. The AFTS panel noted that distortions are caused in large part because output-based royalties are levied on projects without due regard to their overall profitability. Because some costs are not recognised, output-based royalties and excise taxes can result in some economically viable projects not proceeding, or closing earlier than is desirable.26

These concerns were reflected in modelling published in the AFTS review report that found existing royalties and the crude oil excise to be the most economically inefficient of Australia’s major taxes (that is, a small increase in royalties or excise would reduce overall welfare by more than would a similar increase in any other tax).

The AFTS report concluded that a well-designed resource rent tax will be more economically efficient than a royalty applied on the basis of value or volume. However, the AFTS panel also acknowledged that other factors, such as the size, variability and timing of receipts to government, and administration and compliance costs are relevant when evaluating any particular resource charging regime. In particular, the perceived stability and predictability of royalty revenue was recognised as highly valued by the States. These considerations were emphasised in several States’ submissions to the GST Distribution Review.27

Western Australia identifies fairness, timing and stability of royalty revenues, economic impact, net revenue retention after HFE, sovereign risk, simplicity, transparency and the legislative environment as important factors that inform its royalty policy settings:

    Overall, Western Australia’s royalty regime is considered to strike a reasonable balance between the sometimes competing objectives of maximising economic efficiency, fairness, revenue stability, simplicity, and transparency, while also considering the legislative environment practicalities.28

Queensland makes similar points:

    Even if it were accepted that a mining royalty is not as efficient as a resource rent tax (a matter not without dispute), it could be argued that a mining royalty regime can be assessed as very strong when measured against other criteria. It can be more equitable, because it gives a return to the State as the resource is being exploited; simpler, because it is based on readily available measures of volumes and prices rather than a complex calculation of economic rent; and more stable, because volumes and prices are less susceptible to fluctuations than profitability … [T]aking a State perspective, a mining royalty may arguably be a more desirable mechanism for resource charging than a resource rent tax.29

South Australia says:

    Ad valorem royalties ensure that the community always receives some return from the grant of exclusive extraction rights over its mineral assets. Modelling undertaken for the AFTS Review suggests that ad valorem royalties are highly inefficient, but the size of the welfare loss is highly contingent upon the level of commodity prices (as prices rise, the difference between the excess burdens of gross income (royalties) and net income mining tax structures diminish.30

The Northern Territory says that its royalty policy settings are designed to ‘ensure that the regime compensates the whole community for allowing the private extraction of the Territory’s non-renewable resources’, while also seeking to:

  • maintain and foster the resource developer’s capacity to pay including sharing the benefits between the resource developer and the community fairly
  • apply a uniform royalty regime across all royalty payers in equal situations and to be competitively neutral across competing resources
  • avoid distorting commercial decisions regarding the levels of capital and other outputs devoted to economic activities which should be made in response to market signals
  • minimise compliance and administration costs for business and government
  • achieve consistency with broader environmental, social and fiscal objectives such as environmental, social and infrastructure objectives
  • maintain competitiveness of the Territory within Australia and internationally.31

The Panel’s view on the design of resource taxation regimes

The Panel accepts the finding of the Australia’s Future Tax System (AFTS) review that well-designed rent-based taxes are likely to be more economically efficient than royalties applied on the basis of value or volume, particularly in periods of low commodity prices or high costs.

The Panel also agrees with the AFTS review’s assessment and States’ views that other factors, such as the size, variability and timing of the return received by government, as well as relative administration and compliance costs, are important considerations when evaluating any particular resource charging regime.

The Panel is mindful of the depth of concern amongst States regarding their historical role in charging for the right to mine under their soils. However, the Commonwealth has a similarly well-established position in the field of taxation. The challenge is therefore to find a way to reconcile these two competing interests.

Allocating the revenues and risks of resource taxation

The approach adopted by the AFTS panel was to first make recommendations for the design of Australia’s future tax system based on the quality of particular taxes, and then to consider how responsibility for these taxes might best be assigned between the different levels of government.32

The AFTS conclusion that the Commonwealth would be best placed to administer the resource rent tax follows to some degree from the nature of the proposed reforms themselves. In the event that resource projects were to be taxed uniformly across the country, it would be more administratively efficient to have a single tax authority, rather than one in each State. An even more pragmatic concern was that under the resource rent tax proposed in the AFTS review (and also under the MRRT) losses are transferrable between (Australian) commonly owned projects. If the resource rent tax were to be levied by each State (and not the Commonwealth), it is not clear how a transfer between, say, a loss-making project located in one State, and a highly profitable project located in another, would be treated.

Although the AFTS panel concluded that the resource rent tax would be best imposed and administered by the Commonwealth, it was equivocal about how the additional expected revenues (as well as the increased volatility) should be shared between governments. The AFTS review urged the Commonwealth and State governments to ‘negotiate an appropriate allocation of the revenues and risks from the resource rent tax’.33 This recommendation reflects the reality that resource tax reform along the lines proposed in the AFTS report can only succeed with the support of at least the major resource States, as well as the Commonwealth, and that States would not forego their royalty revenue without receiving an alternative revenue stream as replacement. Recognising this, as well as the premium placed by the States on revenue stability and predictability, the AFTS review canvassed an alternative approach whereby the new rent tax would apply in parallel with State royalties.

Under this dual approach, royalties would have continued to be levied by States, but would have been fully refundable to the resource companies (like other costs in the AFTS model). This approach would have continued to provide States with a stable revenue stream (with the added volatility risk associated with the rent tax being assumed by the Commonwealth), while ensuring that State royalties would no longer bias investment or production decisions. However, the benefits associated with reductions in administrative and compliance costs flowing from the introduction of a single standardised regime would have been lost.

Importantly, the AFTS report recognised that a guarantee to refund royalties would need to be accompanied by a Commonwealth-State agreement in relation to royalty policy, ‘to ensure that the [Commonwealth] does not automatically fund future increases in royalties’.34 No such agreement has yet been concluded.

The desirability of a negotiated outcome between the Commonwealth and the States in relation to the revenues and risks of resource tax reform is returned to later in this Chapter (see Section 4.6), following an examination of how the resource tax reforms ultimately pursued by the Commonwealth (the MRRT and extension of the PRRT) will interact with existing royalty regimes.

The findings and recommendations of the AFTS report in relation to State taxes and resource charging arrangements are reproduced in full at Appendix C.

4.3 The MRRT and the extension of the PRRT

On 2 May 2010, the Commonwealth Government released the AFTS review report and announced a suite of measures in response. One measure, the Resource Super Profits Tax (RSPT), adopted the AFTS review’s call for a greater use of profits-based taxes on all resource projects, as well as an overall increase in their amount of tax paid.

The RSPT model provided for the refunding of State royalties, so as ‘to reduce the impact of State royalties and negate concerns that the [RSPT] is a “double” tax’. The Commonwealth indicated that ‘the refundable credit will be available at least up to the amount of royalties imposed at the time of announcement, including scheduled increases and appropriate indexation factors’.35

On 2 July 2010, the Commonwealth announced a revised set of resource tax arrangements. The RSPT model was replaced with the MRRT, applying only to iron ore and coal projects. The scope of the existing PRRT was to be extended to cover all onshore and offshore oil and gas projects.36 Legislation giving effect to these arrangements was passed by the Commonwealth House of Representatives on 23�November 2011 and by the Senate on 19 March 2012, with only minor adjustments.37 The new arrangements will commence from 1 July 2012.

Both the MRRT and the extension of the PRRT will apply alongside existing resource taxes. That is, iron ore and coal projects will remain subject to royalties levied by State governments, and onshore petroleum projects (and the North West Shelf project) will remain subject to existing royalty and excise arrangements. Existing resource taxes will be creditable against MRRT and PRRT liabilities.

The introduction of the MRRT is estimated to generate around $13.4 billion in net revenue in its first four years. The extension of the PRRT is unlikely to give rise to significant collections over the forward estimates period, largely due to the starting base arrangements which prevent any retrospective application of the tax.38

Table 4.4: Estimated revenue from the Commonwealth’s resource tax reforms

Revenue ($m)

2012-13

2013-14

2014-15

2015-16

Resource rent taxes (PRRT and gross MRRT revenue)

7,160

8,190

7,380

8,200

Net revenue from the introduction of the MRRT(a)

3,000

3,500

3,200

3,700

(a) This represents the net impact on revenue across several different revenue heads. This includes the offsetting reductions in company tax (through deductibility) and interactions with other taxes.
Source: Commonwealth Government, 2012-13 Budget, Budget Paper No.1, Statement 5, Table 9.

The key features of the PRRT and MRRT are set out in the following boxes.

Key features of the PRRT

  • The PRRT is levied on the taxable profits of petroleum projects at a rate of 40 per cent.
    • Taxable profits are calculated by deducting eligible project expenses from the assessable revenues derived from the project.
    • Previously it has applied only to offshore petroleum projects (other than the North West Shelf project). From 1 July 2012, the PRRT will be extended to all oil and gas projects, including those located onshore.
  • Existing projects transitioning into the PRRT are provided with additional deductions that recognise investments made prior to the announcement of the Commonwealth’s resource tax reforms.
  • Like for the MRRT, all State and Commonwealth resource taxes are creditable (but not refundable) against current and future PRRT liabilities from a project.
  • The PRRT is a project-based tax. Losses (including unused royalty allowances) from one project cannot generally be used to offset income from another project.
    • The exception is exploration expenditure, which is transferable to other petroleum projects, subject to a number of conditions.

Key features of the MRRT

  • The MRRT will apply to iron ore and coal projects, at an effective rate of 22.5 per cent (a headline 30 per cent rate, reduced by a 25 per cent extraction allowance).
  • The ‘valuation point’ is typically soon after the point of extraction. Only the value of the resource at this point is subject to the MRRT and only expenditure occurring up to this point is deductible for the purposes of the MRRT.
  • There will be no MRRT liability for taxpayers with low levels of resource profits. Those with annual group mining profits of less than $75 million will be fully relieved of their MRRT liability that year.
  • MRRT payments are deductible against income tax.
  • MRRT losses are transferable to offset MRRT profits the taxpayer has on other projects of that commodity (that is losses from iron ore (coal) projects are only transferable to other iron ore (coal) projects). Any remaining MRRT losses are carried forward at the uplift rate of Long Term Bond Rate plus 7 per cent. Unused losses (except for some rehabilitation costs) are not refundable upon closure of the project.
  • Investments made prior to 2 May 2010 are recognised through a ‘starting base allowance’.
    • Taxpayers can use the market value of the project (as at 2 May 2010), including the value of the resource, in which case the starting base is applied on a straight-line basis over the shorter of the life of the mine or until 2037. Unused starting base amounts are uplifted in line with the Consumer Price Index.
    • Alternatively, taxpayers can use the project’s book value as at 2 May 2010 (excluding the value of the resource). Book value starting bases are written-off over five years, and are uplifted at the Long Term Bond Rate plus 7 per cent.
  • All other resource charges (including State royalties) are fully creditable, but not transferable between projects or refundable. Unused royalty credits are carried forward at the uplift rate of Long Term Bond Rate plus 7 per cent.

4.4 How the MRRT and PRRT interact with State royalties

Dual resource charging regimes for iron ore, coal, oil and gas

From 1 July 2012, iron ore and coal producers will be subject to the MRRT imposed by the Commonwealth, as well as to State-based royalties. Similarly, oil and gas producers first becoming subject to the Commonwealth’s PRRT will remain subject to existing royalties and excise arrangements.39

Other mineral resources, such as copper, gold, uranium and nickel, are not subject to the MRRT. They remain subject only to the relevant State royalty regimes.

Other resource charges are creditable against MRRT and PRRT liabilities

One outcome sought by the AFTS review was the removal of the effect of royalties and excises on production and investment decisions. Under the model proposed this would have been achieved either through the removal of all State royalties (as well as the Commonwealth’s crude oil excise), or by fully refunding to the resource companies any royalty or excise payments (the approach contemplated by the RSPT).

Under the MRRT and PRRT, royalty and excise payments are not refundable, but are taken into account in determining the MRRT or PRRT liability of a project, through allowing a credit for royalties paid. Crediting royalties has the same effect as refunding them where the taxpayer’s MRRT liability remains positive for the year in question.

Table 4.5 shows the way royalties are taken into account under the MRRT40 compared with refundability of royalties, where MRRT is payable.

Table 4.5: Comparison of refundability and creditability of royalties, where MRRT is payable

Project parameters ($m)

Royalties are refundable

Royalties are creditable, not refundable

MRRT revenue

500

500

MRRT expenditure, excluding royalties

100

100

Royalty payments

50

50

Royalty allowance (payment/22.5%)

N/A

222.2

MRRT profit

400

177.8

MRRT payable @ 22.5%

90

40

Less MRRT royalty refund

50

N/A

Net MRRT payable

40

40

Total resource charge (royalty plus MRRT)

90

90

Under the crediting approach, the royalty payments actually made ($50 million in Table 4.5) are converted into a pre-MRRT equivalent by dividing by the effective MRRT rate of 22.5 per cent. The resulting ‘royalty allowance’ then reduces the size of the project’s profit that is subject to the MRRT. The same result is obtained if, instead of reducing MRRT profits by the grossed-up royalty amount, the royalty payment is disregarded for the purposes of calculating MRRT payable and then refunded at the end of the calculation. In the above Table, whichever of these approaches is taken, the net MRRT payable is $40 million, giving a total resource charge of $90 million.41

Table 4.6 repeats this analysis for a situation where MRRT is not immediately payable. All parameters are the same as before except for MRRT expenditure, which now totals $500 million rather than $100 million (perhaps as a result of investment made in expanding the mine). In this case, crediting royalties will produce a different outcome to refunding them. The project will make an MRRT loss this year of $222.2 million (wholly attributable to the effect of royalties in this example), which is able to be carried forward to offset future MRRT profits from the project. As the full value of royalties paid is not needed to reduce the MRRT liability to zero, the unused amount is carried forward for future use, uplifted at the long term bond rate (so that it maintains its real value) plus 7�per cent (a premium which reflects the possibility that the allowance may never be used). If royalties were refundable instead of creditable, then, in this example, the Commonwealth would immediately reimburse the taxpayer the $50 million in royalty payments it has made to a State. This project would face no net resourc e charge this year.

Table 4.6: Comparison of refundability and creditability of royalties, where MRRT is not immediately payable

Project parameters ($m)

Royalties are refundable

Royalties are creditable, not refundable

MRRT revenue

500

500

MRRT expenditure, excluding royalties

500

500

Royalty payments

50

50

Royalty allowance (payment/22.5%)

N/A

222.2

MRRT profit

0

-222.2

MRRT payable @ 22.5%

0

0

Less MRRT royalty refund

50

N/A

Net MRRT payable

-50

0

Total resource charge (royalty plus MRRT)

0

50

Unused allowance available for future years (and uplifted at long term bond rate + 7 per cent)

N/A

222.2

The MRRT will operate as a ‘top-up’ tax on highly profitable projects

The MRRT (and the PRRT for those projects also subject to excise or royalties) effectively acts as a ‘top-up’ tax on the most highly profitable projects, while leaving the amount paid by less profitable projects unchanged.

This interaction between the MRRT and State royalties is illustrated in Figure 4.1, which shows how the amount of royalty and MRRT payments vary with the profitability of a project. In this example, the project’s revenue is held constant, with mining expenditure (as measured for MRRT purposes) decreasing from left to right, so that the project’s profitability (revenue minus expenditure) increases from left to right in the chart.42

Figure 4.1: Project profitability, royalties and MRRT for a single year

Figure 4.1: Project profitability, royalties and MRRT for a single year. The Figure illustrates the interaction between the MRRT and State royalties.  In this example, the project�s revenue is held constant, with mining expenditure (as measured for MRRT purposes) decreasing from left to right, so that the project�s profitability (revenue minus expenditure) increases from left to right in the chart.  State royalties are shown as a horizontal line; they do not vary with project profits.  No MRRT is payable until a certain level of profitability is reached.  After that point, each dollar of profit leans to a 22.5 cent MRRT liability.  The total resource charge is the sum of royalty and MRRT payments.

This Figure shows that no MRRT is payable when profitability is relatively low. For example, if the project’s MRRT revenue is $1 billion and it makes $100 million in royalty payments, it would only pay MRRT if profitability was such that it would have paid more than $100�million in MRRT in the absence of any royalty regime.43 For each extra dollar of profitability beyond this point, the project’s MRRT liability (and the total amount paid for the use of the resources) will increase by 22.5 cents.

4.5 What incentives are created by the interaction between MRRT, PRRT and State royalties?

In its supplementary issues paper, the Panel asked whether ‘States have an incentive to reduce MRRT or PRRT revenue through increasing State mineral royalties?’

Western Australia says that if such an incentive exists, it is a second-order issue:

    First and foremost, States’ decisions to increase royalties on State-owned minerals will be driven by the objective of ensuring fairer returns to the community, rather than by any malicious intent of depriving the Commonwealth of revenue from its proposed MRRT (through the royalty–crediting arrangements). States cannot increase royalties with impunity, as they need to have regard to the impact on less profitable operations.

    A resource-rich State such as Western Australia with substantial infrastructure spending needs may nonetheless have an incentive to increase, say, iron ore royalties to help compensate for the already large net redistribution of wealth out of the State (including through the HFE process) and inadequate support from the Commonwealth’s Budget.44

Western Australia also suggests that ‘to the extent there is any incentive, this is attributable to the poor design of the MRRT and lack of collaboration with the States’, and points out that the full crediting of royalties could provide a disincentive to reduce royalty rates:

    [T]he terms of reference reflect a one-sided view which overlooks that the royalty-crediting arrangements could equally discourage States from reducing mineral royalties. To the extent that this would result in an offsetting increase in MRRT, there would be no benefit to the mining industry and an increase in [vertical fiscal imbalance].45

New South Wales says:

    Making future state royalty payments fully deductible under the MRRT is not consistent with the normally accepted principles of revenue base sharing. These principles demand that the taxes applied by different governments to the common tax base should be independent and separately visible so as to foster individual government accountability. By making state royalty payments fully deductible, the MRRT could reduce the transparency of royalties on large iron and coal projects.

    The key issues are transparency and accountability. The outcome in this case is a feature of the design of the MRRT. It has no relationship to HFE.46

Tasmania says that States do not have an incentive to reduce MRRT or PRRT revenue, but acknowledges that this may be one consequence of State royalty policy decisions made for other reasons:

    States have the incentive to maximise revenue at low economic or other cost. In so doing, states do not have an interest, or an incentive, to reduce the revenue of other governments, such as the Commonwealth. However, in pursuing the objective to maximise their mining revenue, an indirect consequence can be a reduction in MRRT or PRRT revenue.47

The Northern Territory notes that its circumstances may be different from the other States, given that it already has a profit-based royalty system in place:

    The design of the profit-based royalty system in the Territory means that there are no incentives for the Territory to increase its mineral royalty rate for the purpose of reducing MRRT and/or PRRT revenue.48

The interaction of the MRRT and extension of the PRRT does create an incentive for States to increase royalties — in certain circumstances

The Panel accepts the proposition that when States determine their royalty policies on iron ore, coal, and onshore oil and gas, the existence of the MRRT and PRRT will not necessarily be the only consideration, and sometimes not even a major one. States will continue to determine their royalty policy settings having regard to matters such as industry and regional development, and the timing, stability and predictability of expected revenues. However, notwithstanding that other factors play a role, the Commonwealth’s commitment to fully credit all royalty payments against its own resource taxes has created a situation whereby the States can increase their revenue at the expense of the Commonwealth. It is even conceivable the States could erode the Commonwealth’s entire onshore resource rent tax base, if they were minded to do so.

The incentive to increase royalties is strongest where profitability is highest

The size of the incentive for States to increase their royalty revenue at the expense of the Commonwealth’s MRRT and PRRT revenue is a function of the amount of MRRT and PRRT payable. All else being equal, States will have a stronger incentive to increase royalties on highly profitable projects that pay a large amount of MRRT than they would for more marginal projects that pay little MRRT (or none at all).

On highly profitable projects, a reduction in State royalty payments would be offset by an equal increase in MRRT payments. As long as the project continues to pay some MRRT, a change in State royalties leaves the project no better or worse off overall. In these circumstances, the only substantive effect of an increase or decrease in royalties is the transfer of revenue between the Commonwealth and the States.

This is illustrated by Table 4.7. The numbers used in this example for mining revenue, expenditure and carried forward losses are drawn from Example 2.1 in the Explanatory Memorandum to the Minerals Resource Rent Tax Bill 2011. In that example, the project is shown as paying $37.5 million in royalties, as well as $35.3 million in MRRT, a total resource charge of $72.8 million for the year.

Table 4.7: The effect of different royalty payments for an MRRT project

State royalty payment

$37.5m

$50m

$70m

Mining revenue

$500m

$500m

$500m

Mining expenditure (ex. royalties)

($120m)

($120m)

($120m)

Mining profit

$380m

$380m

$380m

Royalty allowance (payment/22.5%)

($166.7m)

($222.2m)

($311.1m)

Uplifted mining loss allowance(a)

($56.5m)

($56.5m)

($56.5m)

MRRT profit

$156.8m

$101.3m

$12.4m

MRRT liability (to Commonwealth)

$35.3m

$22.8m

$2.8m

Total resource charge (royalty plus MRRT)

$72.8m

$72.8m

$72.8m

Note: The numbers here for mining revenue, mining expenditure and mining loss allowance follow ‘Example 2.1: The basic MRRT calculation’, from the Explanatory Memorandum to the Minerals Resource Rent Tax Bill 2011, page 16.
(a) In this example, losses are uplifted at 13 per cent each year. That is, it is assumed that the long term bond rate is 6 per cent per annum, and therefore the long term bond rate plus 7 per cent is 13 per cent.

If the State were to increase its royalty rate, so that its total royalty payment from the project increased by $12.5 million to $50 million, this would result in a reduction in MRRT payments of $12.5 million. If royalties were increased by a further $20 million (to $70 million) MRRT revenue would fall by another $20 million. In all three cases, the total resource charge (royalties plus MRRT) paid by the project would be $72.8 million. The amount of royalty levied determines only how this total is shared between the States and the Commonwealth (see Figure 4.2).

Figure 4.2: MRRT and State royalties for a stylised MRRT-paying project

Figure 4.2: MRRT and State royalties for a stylised MRRT-paying project. This Figure follows on from table 4.7.  In table 4.7, for all three cases, the total resource charge (royalties plus MRRT) paid by the project would be $72.8 million.  This figure shows that the amount of royalty levied determines only how this total is shared between the States and the Commonwealth.

The incentive to increase royalties is less where profitability is lower

In the previous example the State where the project is located could increase its royalty revenue by $32.5 million, with the result that Commonwealth revenue would be reduced by $32.5 million and the project itself would be no better or worse off overall (except for an adverse cash-flow effect to the extent that royalty payments occur substantially in advance of MRRT payments).

However, such a ‘dollar-for-dollar’ trade-off will not occur in every case. The MRRT is only payable on a project once all of the initial investment has been recouped, including a generous return on that investment. As such, a project will typically have a profile of changing MRRT liabilities over time. New projects may not pay MRRT until several years after they have commenced production. Projects which are insufficiently profitable may not pay any MRRT over their lifetime. These are intended features of resource rent taxes such as the MRRT and PRRT.

Where an iron ore or coal project has commenced production, but is not yet sufficiently profitable to be liable for MRRT, the interaction between royalties and the MRRT does not result in a simple trade-off between State and Commonwealth revenue. If the starting point is that no MRRT is payable, it follows that any increase in State royalty is not immediately offset by the Commonwealth.

Table 4.8 adjusts the previous example so that it represents a project with higher costs. Annual mining expenditure is now $300 million instead of $120 million (all other parameters are unchanged). In this case, a royalty payment of $37.5 million is enough to ensure the project incurs an MRRT loss for the year. If State royalties on the project were increased, to say $50�million or $75 million, then this is (at least initially) borne by the project, rather than the Commonwealth through reduced MRRT revenue.

Table 4.8: The effect of different royalty payments for a project not paying MRRT

State royalty payment

$37.5m

$50m

$70m

Mining revenue

$500m

$500m

$500m

Mining expenditure (ex. royalties)

($300m)

($300m)

($300m)

Mining profit

$200m

$200m

$200m

Royalty allowance (payment/22.5%)

($166.7m)

($222.2m)

($311.1m)

Mining loss allowance (earlier loss x 1.13) (a)

($56.5m)

($56.5m)

($56.5m)

MRRT profit/loss

-$23.2m

-$78.7m

-$167.6m

MRRT liability (to Commonwealth)

0

0

0

Total resource charge (royalty plus MRRT)

$37.5m

$50m

$70m

(a) This assumes a long term bond rate of 6 per cent per annum, so that the long term bond rate plus 7 per cent is 13 per cent.

Figure 4.3: State royalty revenue, for a non-MRRT paying project

Figure 4.3: State royalty revenue, for a non-MRRT paying project. This Figure illustrates State royalty revenue for a non-MRRT paying project using numbers from table 4.8.  Because no MRRT is paid, an increase in State royalties means that the project faces a higher resource-charge burden overall.

… but as long as the project is expected to pay MRRT at some point, there will be an incentive to increase royalties

The previous two examples show, in a stylised way, the effect of a State’s decision to change its royalty policy on the profitability of affected mining projects as well as on MRRT revenue. The first example shows that, in a year where an affected project would still face an MRRT liability after a royalty increase, the State may be able to claim additional revenue at the expense of the MRRT without adversely affecting the project’s profitability overall. The second example shows that, if a project is not paying any MRRT to begin with in a particular year, a State increasing its royalty rate will receive this money at the expense, at least initially, of the project’s profitability, rather than at the expense of the Commonwealth.

In practice, mining projects will typically have a profile of MRRT liabilities that varies significantly over time. Initially, a new project will be in an MRRT loss position for several years as it outlays the capital expenditure needed to establish the project, and then begins to recoup this investment once the mine starts production. For this reason, even projects that are ultimately very highly profitable will be unlikely to pay any MRRT during their first few years.

Royalty payments are able to be carried forward and uplifted at the government’s long term bond rate plus 7 percentage points. For example, when the long term bond rate is 6 per cent, unused royalty credits are uplifted by 13 per cent before being carried forward to offset future MRRT liabilities. Because of this, States will generally be able to increase royalties and secure revenue at the expense of MRRT collections without making affected projects any worse off overall, provided that the project ultimately becomes profitable enough to face an MRRT liability.49 Put another way, whether States can now increase their royalty revenue without making mining projects worse off depends not on whether a particular project pays MRRT in any given year, but whether it will pay MRRT at some future point.

The charts at Appendix E show that a decision by a State to increase its royalty rate will:

  • increase State royalty revenue each year
  • delay the collection of MRRT revenue from the project and decrease the amount of MRRT payable once the project starts paying the tax
  • not change the total resource charge faced by the project each year, once its MRRT liability has been fully phased-in
  • not make the project any worse off over its life, if the appropriate discount rate is taken to be the long-term bond rate plus 7 per cent.

Increases in iron ore and coal royalties since the announcement of the Commonwealth’s resource tax reforms

The previous section examined whether the introduction of the MRRT and the extension of the PRRT creates an incentive, in theory, for States to increase royalty rates and, if so, under what circumstances. This section notes that, in practice, four States have increased their iron ore or coal royalties since the Commonwealth’s resource tax reforms were first announced in May 2010 (see Table 4.9).

Table 4.9: Increases in royalties since 2 May 2010

State

MRRT commodity

Date of announcement

Date of effect

Estimated
increase in
State revenue
(to 2014-15)

Estimated effect
on MRRT revenue

SA

Iron ore, coal

16 September 2010

1 July 2011

N/A(a)

Unlikely to be material(a)

WA(b)

Iron ore (fines)

19 May 2011

Increased in two
stages, from
1 July 2012
and 1 July 2013

Over $2b

Material (no
estimate separately
published)

TAS

Iron ore, coal

16 June 2011

1 January 2012

N/A(c)

Unlikely to be material

WA

Iron ore (magnetite)

20 July 2011

2011-12

$60m in
2011-12,
increasing to
around
$160m a year
by 2014-15

Unlikely to be material

NSW

Coal

6 September 2011

1 July 2012

$944m

Not yet reflected in
MRRT estimates

(a) South Australia estimated this royalty change, which applied to all commodities, would increase total royalty revenue by $65 million between 2011-12 and 2013-14. The contribution of iron ore and coal projects to this figure has not been published separately.
(b) Prior to this general increase in the rate on iron ore fines, the Western Australian Government agreed with BHP Billiton and Rio Tinto to remove a concessional royalty rate (of 3.75 per cent) that had applied to their operations so as to align it with the standard rate of 5.625 per cent, with effect from 1 July 2010. That change was estimated to raise an additional $340 million in royalties in 2010-11.
(c) Tasmania’s royalty increase, to a cap of 5.5 per cent of net sales, is estimated to increase its revenue by around $3.6 million a year, or $12.6 million by 2014-15. The contribution of iron ore and coal projects to this figure has not been published separately.

Two of the increases, those by South Australia and Tasmania, apply to all commodities, not just to the relatively small amount of iron ore and coal mined within their jurisdiction. These increases are unlikely to materially reduce MRRT revenue.

In July 2011, Western Australia announced the imposition of a five per cent royalty on magnetite concentrates (as well as uranium oxide concentrates), which it estimates will raise approximately $160 million a year by 2014-15. As a form of iron ore, magnetite is subject to the MRRT. However, it is not expected to account for much, if any, MRRT revenue, at least over the forward estimates period. One reason for this is that unlike conventional haematite projects, magnetite ore requires substantial (and expensive) processing in order to produce a saleable product. The value added downstream of the MRRT valuation point will not be subject to the tax. Further, those magnetite projects that commence production in coming years will not face any prospect of an MRRT liability until their upfront costs have been recouped. Because magnetite projects are not expected to account for any significant amount of MRRT revenue, at least initially, the impact of Western Australia’s decision to impose a magnetite royalty is unlikely to have a material effect on MRRT revenue over the forward estimates period. However, it is possible that it could lower MRRT revenue over the longer-term, particularly if iron ore prices remain high.

The remaining two announced changes in royalty arrangements are likely to have an impact on MRRT revenue collections. These are Western Australia’s decision to increase the rate payable on iron ore fines, and New South Wales’ decision to selectively impose a higher coal royalty rate on certain companies.

Western Australia’s decision to increase the royalty rate on iron ore fines

On 19 May 2011, the Western Australian Government announced it would increase the royalty rate on iron ore fines. The rate is to increase in two stages, from 5.625 per cent to 6.5 per cent on 1 July 2012, and to 7.5 per cent from 1 July 2013. This increase will result in the royalty rate for iron ore ‘fines’ being the same as for iron ore ‘lump’.

Table 4.10: Western Australia’s estimates of additional revenue due to iron ore royalty rate changes

 

2011-12

2012-13

2013-14

2014-15

Total to 2014-15

Royalty rate — iron ore ‘fines’

5.625%

6.5%

7.5%

7.5%

 

Change in Royalty income ($m)

 

378

824

817

2,019

Impact on GST share ($m)

     

-96

-96

Net revenue impact ($m)

 

378

824

722

1,923

Source: Government of Western Australia, 2011–12 Budget, Economic and Fiscal Outlook, Budget Paper No. 3, page 75.

Western Australia expects the higher rate to generate around $2 billion in extra royalties by 2014-15.50 Like other royalty revenue, this additional amount will be taken into account by the Commonwealth Grants Commission (CGC) in its assessment of the States’ relative fiscal capacities.51

For the reasons outlined above, the Commonwealth’s decision to fully credit all State royalties means that an increase in those royalties will reduce the amount of MRRT revenue collected. Because iron ore projects located in Western Australia form a large part of the MRRT tax base (iron ore projects are estimated to account for around three-quarters of MRRT revenue,52 and around 97 per cent of iron ore production is in Western Australia), changes in Western Australia’s iron ore royalties can potentially have large effects on MRRT revenues.53

To the extent that miners affected by royalty increases face an MRRT liability, they might be expected to be largely indifferent to paying the higher royalty (because their MRRT liability is reduced by the same amount), potentially enabling a State to increase its revenues at the Commonwealth’s expense, without incurring the political pain ordinarily associated with increasing taxes and charges.

Western Australia strongly denies that its decision to increase royalties was motivated by a desire to increase its own revenue at the expense of the Commonwealth’s MRRT collections. Instead, it says that this increase, like all of its royalty policy decisions, was based solely on its own assessment of the appropriate price to charge firms for the use of the Western Australian community’s resources:

    First and foremost, States’ decisions to increase royalties on State-owned minerals will be driven by the objective of ensuring fairer returns to the community, rather than by any malicious intent of depriving the Commonwealth of revenue from its proposed MRRT (through the royalty-crediting arrangements). States cannot increase royalties with impunity, as they need to have regard to the impact on less profitable operations.54

This position is supported by the Leader of the Opposition in Western Australia:

    The recent amendments to the WA State Agreement Acts to increase the iron ore ‘fines’ royalty rates … were supported by the Labor Opposition. These increases were due to the fact that the argument for ‘fines’ to be treated differently from iron ore ‘lump’ were no longer relevant.55

The Commonwealth Treasurer says that both Commonwealth and State governments ‘share a responsibility to ensure the taxation of Australia’s resources preserves our international competitiveness’ and that ‘the MRRT is a more efficient way to provide Australians with a return on their mineral wealth than revenue-based royalties’.56 The Commonwealth Treasurer also points out that:

    [Western Australia’s] decision means it will be much harder for the [Commonwealth] to finance additional infrastructure projects in Western Australia funded by the MRRT.57

New South Wales’ decision to selectively increase royalties on coal

In its 2011-12 Budget, the New South Wales Government announced its intention to increase coal royalties to raise an estimated $944 million by 2014-15 ($235 million in 2012-13, $244 million in 2013-14 and $465 million in 2014-15).58

Unlike the other States that have altered their royalties since the announcement of the MRRT, the New South Wales Government has explicitly justified its policy in terms of its broader fiscal relationship with the Commonwealth. It has presented the increased royalty as a response to ‘the negative financial impacts on [New South Wales] of the [Commonwealth’s] carbon tax’.59

Further, the New South Wales Government has expressly stated its intention that the increased royalty be funded out of Commonwealth revenue rather than by the mining industry, and has indicated it will tailor its royalty regime to achieve that outcome:

    The increase will only apply to firms that are subject to the [Commonwealth’s proposed MRRT]. As the [Commonwealth] has committed to compensate mining companies for any royalties that are paid to state governments, the increase in royalties will not be an additional tax burden on mining companies.

    NSW legislation to implement the royalty supplement will be prepared after the [Commonwealth] finalises its carbon tax and MRRT legislation. The royalty supplement is intended to protect NSW revenue from [Commonwealth] Government changes, while minimising the financial impact on NSW coal mining.60

The Panel’s view on whether the interaction between the MRRT, PRRT and State royalties creates an incentive for States to increase royalties

The Commonwealth’s decision to fully credit State royalties under the MRRT and PRRT has created an opportunity for States to seek to increase their revenue at the expense of the Commonwealth.

While States will no doubt continue to determine their royalty policies based on a range of considerations, one State has already expressly cited this incentive as the basis for its royalty increase.

4.6 The need for a negotiated outcome

The current position is not sustainable

The introduction of the MRRT and the extension of the PRRT go some way to implementing the reform directions proposed in the AFTS review. These changes will increase the overall return to the Australian community from the exploitation of its most valuable non-renewable resources, and do so in a relatively economically efficient way. However, other important aspects of the AFTS review’s recommendations are yet to be actively pursued, including that the Commonwealth and the States negotiate how to share the revenues and risks of Australia’s resource taxes.

The importance of an agreement between the two levels of government was highlighted by the Policy Transition Group. This Group, co-chaired by the Commonwealth Minister for Resources, Energy and Tourism and Mr Don Argus AC, advised the Commonwealth on the design and implementation of the MRRT and PRRT extension and considered the interaction between existing royalties and the new resource rent taxes. The Policy Transition Group’s advice on this issue is reproduced at Appendix D.

Both the AFTS report and the Policy Transition Group recognised that an unsustainable dynamic would be created by the introduction of a resource rent tax at the Commonwealth level that fully recognised royalty payments made to the States — unless the States and the Commonwealth were able to agree on how to share the risks and rewards of resource taxation. With the passage of the MRRT and PRRT legislation, and the continued absence of an accommodation between the Commonwealth and the States, the harmful and unsustainable situation warned against has eventuated. The States and the Commonwealth now each lay claim to part of the same tax base. It is not surprising that one State has already announced its intention to seek to erode the MRRT revenue base, nor that the Commonwealth has responded by threatening to reduce other funding to that State if it proceeds.

This situation is not sustainable. The States make the point that it is the manner of the Commonwealth’s entry into the field of resource taxation that has created a tension between the two levels of government. However true this observation might be, it does not contribute to a resolution of the problem with which both levels of government now find themselves. The States need to assess the likelihood and nature of the Commonwealth’s response in the event that its MRRT and PRRT revenue base continues to be eroded by States’ actions — whether or not that erosion is the deliberate objective of a State decision to increase royalties.

For these reasons, it is likely that there will be a point at which the Commonwealth will act to ensure its resource tax base is supported. The fiscal imbalance between the Commonwealth and the States means that there are a number of other funding mechanisms that the Commonwealth could employ to seek to influence States’ decisions, if it chose to do so.

The Panel’s view on the unsustainability of the current interaction between the MRRT, PRRT and State royalties

The Panel accepts the States’ position that the new incentive that exists for them to increase royalties is the product of the way in which the Commonwealth has designed its own resource tax reforms.

However, if it is unreasonable for the Commonwealth to expect the States to relinquish their discretion over royalty policy, it is equally unrealistic for the States to expect the Commonwealth to allow them to capture the revenue stream generated by the Commonwealth’s undertaking of a significant and challenging reform. The current situation is not sustainable and needs to be resolved.

How could the problem be fixed?

In its supplementary issues paper, the Panel asked, if States have incentives to reduce MRRT or PRRT revenue by increasing their royalties, how these should be removed.

Submissions recognise there are three broad ways of resolving the current impasse between the Commonwealth and the States:

  • The Commonwealth could unilaterally seek to penalise States that increase royalties on MRRT and PRRT commodities.
  • The Commonwealth could revisit its design of the MRRT and PRRT.
  • The Commonwealth and States could agree on how to share the resource tax base.

The Panel considers the third of these options to be clearly the best outcome. Before focusing on that in more detail though, it is important to recognise some of the implications of the other two approaches.

Unilateral Commonwealth penalties for States

In their submissions States indicate they would strongly oppose any Commonwealth attempt to penalise States that choose to increase royalties.

Western Australia says:

    [A]ny move by the Commonwealth Government to penalise a State from exercising its constitutional right not only raises significant constitutional law issues, but also can only be to the detriment of the Australian community, federation and nation.61

New South Wales considers that:

    … the interrelationship between the revenue potential of the Minerals Resource Rent Tax (MRRT) and Petroleum Resource Rent Tax (PRRT) and state mineral royalties arises solely because of the design of the MRRT/PRRT and has nothing to do with the GST or fiscal equalisation … New South Wales requests the Review Panel make no recommendations linking HFE and the distribution of GST revenue to the adoption of particular state policies in relation to taxation or mineral royalties.62

The Northern Territory agrees:

    The proposal that there should be a cap on state royalty rates to avoid reducing Commonwealth MRRT or PRRT revenue is entirely inappropriate. This would place further constraints on states’ revenue raising capacities, exacerbating the increasing level of vertical fiscal imbalance in Australia. The Territory strongly supports the continued autonomy of state governments to determine state mineral royalty rates and that the Commonwealth should not penalise a state through the GST distribution for exercising this autonomy.63

Tasmania also considers that it would not be appropriate to use the GST distribution to influence States’ royalty settings:

    The GST distribution would be a highly inappropriate tool for imposing such sanctions, given that it would interfere with HFE’s equity objectives, increase complexity, reduce transparency, and set an undesirable precedent in Commonwealth-State relations.

    There will be occasions where states will adjust mineral royalty and other tax rates in line with their policy and revenue needs, regardless of the presence or not of the MRRT or other incentives. It is important that states are still provided with flexibility to adjust their own taxation systems in these circumstances.64

The States are unanimously of the view that the Commonwealth should not adjust the GST distribution system to influence States’ royalty policy decisions. Most States, and in particular the major resource States, would firmly oppose any Commonwealth attempt to interfere with their traditional role in charging for the use of their mineral resources.

Such an approach would also risk perverse unintended outcomes. An inevitable consequence of one State suffering a lesser GST share by way of penalty would be that other States would receive more GST than otherwise. Whenever a large resource State was penalised, other States, including those with little or no mining of their own, would receive a corresponding unintended ‘reward’.

In theory, it would be open to the Commonwealth to use one of the other fiscal levers at its disposal, rather than the GST distribution process, to penalise States for increasing royalties. For example, while the Australian Capital Territory agrees with others that a State’s share of the GST pool should not be dependent on its royalty policies, it also recognises the importance of protecting the MRRT revenue base, and suggests:

    … that the Federal Government continue to influence the policies of the mining States outside HFE, such as through direct Commonwealth payments and the use of infrastructure payments.65

The Panel’s view on the Commonwealth penalising States for increasing royalties

The Panel agrees with the States that it would not be desirable for the Commonwealth to adjust the GST distribution system to penalise States for increasing their royalties. Not only might this not achieve the Commonwealth’s goals, the zero-sum nature of the GST distribution system would result in a corresponding unintended reward for other States.

As pointed out earlier, while the Commonwealth continues to provide significant non-GST revenues to the States, there are other means at the Commonwealth’s disposal to prevent States from eroding its resource rent tax revenue base. However, use of these means would be an unfortunate alternative to a cooperative solution.

Revisiting the design of the MRRT and PRRT

A second way of removing the incentive for States to increase their royalty rates at the expense of MRRT and PRRT revenue would be for the Commonwealth to credit royalties only up to a certain amount, rather than all royalties. This would sever the link between prevailing State royalty policies and the MRRT and PRRT revenue base.

Some States are attracted to this option. They consider that the Commonwealth’s exposure to losing revenue if States increase their royalties is solely an issue for the Commonwealth — and is within its competence to solve without needing the involvement of the States.

For example, Tasmania says:

    If this problem requires addressing, the logical solution is to address problems with the design of the MRRT. As simple solution would be to cap, at current levels, the state royalty rate that can be treated as a credit for MRRT purposes. Under this scenario, the burden of any increase in state royalty rates then falls upon the taxpayer rather than the Australian Government, although this would have efficiency implications.66

New South Wales also suggests that the Commonwealth should reconsider this element of the MRRT’s design, on the basis that it breaches normally accepted principles of revenue base sharing:

    These principles demand that the taxes applied by different governments to the common tax base should be independent and separately visible so as to foster individual government accountability. By making state royalty payments fully deductible, the MRRT could reduce the transparency of royalties on large iron and coal projects.67

Queensland points out:

    If the [Commonwealth] has a concern that the States’ use of their sovereign right to increase royalty charges on the exploitation of their mineral resources will detract from their resource rent revenues, it is open to the [Commonwealth] to redesign their taxes or undertake negotiations with the States. The HFE process should not be used to generate specific policy outcomes that can be achieved through more appropriate means.68

South Australia suggests that breaking the link between royalty payments and the credit under the MRRT and PRRT could be part of a broader agreement between the Commonwealth and the States that would involve lower royalties and a ‘more revenue effective design of mining rent tax to ensure no overall loss in expected value of revenue’.69 South Australia considers this approach could promote greater overall efficiency, while restoring full accountability to the States for their policy settings:

    While there would be potential risks to miners from increased State royalties, this is no different to the pre-MRRT situation where States were required to balance mining investment certainty considerations with the need to ensure that the community was receiving an adequate return from mining investments.70

Western Australia does not accept there should be changes to the royalty crediting arrangements:

    The best way to address concerns about any such incentives (or disincentives) would be for the Commonwealth Government not to proceed with its flawed mining tax regime — if the regime proceeds, Western Australia would not support any change to the crediting of royalties against the MRRT and PRRT, which has now been settled with the mining industry and reduces the risk of total resource charges exceeding mineral rent.71

As discussed above, the treatment of royalties is one of the policy areas the Commonwealth Government adjusted between announcing the RSPT and signing a Heads of Agreement with key parts of the mining industry. One change was to make royalty payments creditable against MRRT (and PRRT) liabilities, rather than guaranteeing a full refund. The other change was from recognising royalties ‘at least up to the amount of royalties imposed at the time of announcement, including scheduled increases and appropriate indexation factors’72 to an approach that ‘[a]ll State and Territory royalties will be creditable against the resource tax liability but not transferable or refundable’.73

The Policy Transition Group recommended that in this context ‘all’ should be taken to mean ‘all current and future’ royalties,74 although it should be noted that this is not the only possible interpretation of this part of the Heads of Agreement between the Commonwealth Government and representatives of the mining industry.75 The Commonwealth accepted the Policy Transition Group’s recommendation and drafted the MRRT and PRRT laws to give effect to it.

It is theoretically open to the Commonwealth to revisit this aspect of the design of the MRRT and PRRT. If it was willing to break the link between future State royalties and the allowance provided for royalties against its taxes, this could be achieved in any of several ways. For example, the royalty allowance currently available against MRRT and PRRT liabilities could be replaced by a uniform allowance that was not tied to the specific amount of royalties paid by a given miner. This uniform allowance could conceivably be calculated with reference to the average (or highest or lowest) rate of royalties that applied at a point in time, such as the announcement of the Commonwealth’s resource tax reforms (2 May 2010), the announcement of the MRRT (1�July 2010), the commencement of the MRRT (1 July 2012) or some other date.

Tasmania’s suggestion of ‘capping’ the royalty credit at the current level applying in each State also has some logic to it. However, on the face of it, this approach would appear to be at a higher risk of breaching the Constitutional prohibition against Commonwealth tax laws that discriminate between States than a uniform allowance regardless of location.76 To the extent that State royalties are currently not uniform, capping at any particular ‘current’ level would result in different credits being available to operations in different States.

Another implication of this option is that, to the extent that actual royalties levied by States exceeded the amount credited by the Commonwealth, this would increase the overall level of tax payable by mining projects. By ensuring that State royalties ‘bite’ over a certain level, there is a risk that investment and production decisions will be undesirably distorted, undermining part of the initial rationale for the introduction of a resource rent tax. The flip-side of this argument is that severing the link between State policies and credits against Commonwealth resource taxes would have the benefits of ensuring that States retain their policy autonomy in this area and are once again made fully accountable for the consequences of their royalty settings.

The Panel’s view on revisiting the design of the MRRT and PRRT

The Panel considers that the Commonwealth unilaterally revisiting the design of the MRRT and PRRT is a fall-back position available to the Commonwealth in the event that it is unable to secure an agreement with the States. As the royalty allowance forms part of the MRRT and PRRT laws, any amendment would be subject to passage through the Commonwealth Parliament.

The Commonwealth and the States could agree to share the risks and rewards of resource taxation

Several States are of the view that a robust solution to the problem caused by the interaction between State royalties, MRRT and PRRT must be based on an agreement between the Commonwealth and the States.

South Australia says:

    Ideally there would be agreement between all governments as to the preferred ‘all-up’ mining tax structure from a national viewpoint. The assignment of components and allocation of revenues from that structure would then be an important, but secondary issue.77

Western Australia highlights the benefits of cooperation between governments in securing economic reform:

    The Commonwealth could have instead achieved one of its MRRT objectives —an improved return to the community from natural resources when commodity prices are high — by working with, rather than against, the States.78

Queensland agrees that cooperative reforms are best secured through negotiations between the Commonwealth and the States, and offers the 2008 Intergovernmental Agreement on Federal Financial Relations as a useful model.

    Historically, it has been processes and agreements such as these that have successfully achieved worthwhile and enduring policy changes in the Australian federation. They allow for more measured approaches to tax policy changes that can balance social, economic and budgetary considerations.79

Unlike some other aspects of the Review, the interaction between State royalties and the Commonwealth’s resource tax reforms clearly presents a readily identifiable, and immediate, problem.

The Panel’s view on the need for the Commonwealth and the States to reach an agreed outcome on resource taxation

The Panel’s role is not to pass judgement on the evolution of the Commonwealth’s resource tax reforms or the merits of individual States’ royalty policy decisions. The Panel considers, though, that the current situation is both undesirable and ultimately unsustainable and strongly endorses the advice of the Australia’s Future Tax System review and the Policy Transition Group that the risks and rewards of Australia’s resource tax arrangements be the subject of a negotiated agreement between the Commonwealth and the States.

4.7 What form might an agreement take?

The Panel concedes that it is easy for outsiders to urge governments with widely differing perspectives to reach an agreement on a complex issue such as resource taxation, but that it is more difficult to propose even the contours of a possible solution, much less the matters of detail that would ultimately need to be settled.

Nevertheless, the Panel considers it may be worthwhile to set out, at a high level, some possible options for how the resource taxation recommendations of the AFTS review might be advanced, given the developments since that report. This high level design discussion is intended to illustrate the feasibility, at least in theory, of a negotiated outcome between the Commonwealth and the States. However, while the Panel is firmly of the view that an agreement should be pursued, ultimately this — along with the parameters of any agreement80 — is a matter for the governments concerned.

What have States suggested?

As previously discussed, the States generally consider that this Review is not the appropriate forum to canvass measures designed to influence State royalty policy decisions. Accordingly, most States have not outlined their preferred basis for an agreement between the Commonwealth and the States on these issues.81 For example, New South Wales says:

    [The supplementary Terms of Reference] appear to be motivated by the Commonwealth Government’s desire to influence an outcome of its MRRT/PRRT policies. Given the underlying cause is not related to GST, New South Wales recommends the Review Panel make no recommendations linking the distribution of GST revenue to the adoption of particular State policies.82

These points are echoed in the Western Australian submission:

    Western Australia considers it inappropriate that in the new terms of reference it is inherent that a State should be penalised by the Commonwealth Government for changing royalty rates applicable in that State, which unfortunately may also compromise the independence of the Review Panel.83

South Australia is the only State so far that has outlined what a Commonwealth-State agreement on mining taxation might look like. While it considers that States’ royalty settings are likely to remain relatively stable over time:

    Nonetheless if the policy commitment to uncapped crediting of state royalties against MRRT (rather than permitted as a mere deduction against the calculation of the MRRT base ) creates undesirable revenue shifting incentive effects between the States and the Commonwealth, a solution may be for the States to receive the MRRT revenues.84

South Australia provides some more detail about how this option might work in practice.

    If the Commonwealth were to assign the MRRT revenues to the States this could be shared among jurisdictions on a per capita basis. Existing royalties would continue to be assessed by the CGC, achieving a per capita sharing at the national average royalty rate but allowing States policy flexibility to generate additional (or less) revenue from choices about their own effective royalty rates. The assignment of MRRT revenues to the States would require an offsetting reduction in some other Commonwealth payments to the States — most likely a National Specific Purpose Payment (NSPP), although there may be other options in respect of a re-allocation of roles and responsibilities. From the States perspective this would involve replacing a stable revenue stream (NSPP), with a potentially volatile one (MRRT). Some form of ‘no worse off’ guarantee would need to be considered as was the case with the IGA reforms, at least for a transitional period.85

As South Australia acknowledges in its submission, although this approach would remove tension between the Commonwealth and the States, it would result in a situation where ‘increases in royalty rates by an individual jurisdiction would … be to the financial detriment of other States [and] … management of this would be a challenging political exercise’.86

If the Commonwealth and the States are inclined to move cooperatively towards further improving resource taxation, several other options may also merit further investigation:

  • the complete removal of States’ royalties on MRRT and PRRT commodities, in return for replacement payments from the Commonwealth
  • a reduction in royalties on MRRT and PRRT commodities to a lower, uniform rate, in return for replacement payments from the Commonwealth
  • an undertaking by the States not to further increase royalties on MRRT and PRRT commodities, perhaps in return for a Commonwealth commitment on future funding.

Royalties could (theoretically) be removed

As discussed earlier in this Chapter, the AFTS review considered that Australia as a whole would be better off if State mineral royalties were to be replaced by a well-designed resource rent tax. Although differing from the particular model proposed by the AFTS review, the MRRT represents a significant shift towards taxing the most valuable commodities using a more profits-based approach.

Additional revenue from the introduction of the MRRT, although highly sensitive to currency fluctuations and commodity prices amongst other things, is currently estimated to be around $13 billion over its first four years. While this higher level of taxation on the most profitable projects is consistent with the direction proposed in the AFTS review, the retention of royalties alongside the MRRT and PRRT means that less profitable projects do not receive a reduction in their overall tax burden. The economics of these projects will therefore continue to be influenced by the royalties that (the AFTS review found) could significantly distort production and investment decisions, to the detriment of the community over time.

Given the importance of iron ore and coal royalty revenue to the States, either directly or indirectly through the HFE system, the States would not countenance their removal (if at all) unless the Commonwealth was to provide them with an alternative revenue stream. The discussion in the AFTS review suggests two ways this could be done:

  • All (or part) of MRRT revenue could be allocated in proportion to each State’s share of gross MRRT receipts, calculated before the transfer of losses from non-tax-paying projects. This would ensure that a State’s share of net revenues is not diminished because of loss-making projects in another State.87
  • The Commonwealth could make regular payments to the States based on notional royalties applied to State-based production data.88

Of these two options, the first could provide States with more revenue, but the second would provide greater certainty and predictability. An arrangement along these lines would have the benefit of reducing the compliance and administration costs associated with operating parallel resource charging regimes. It would also remove the effect of royalties on marginal projects, as recommended by AFTS.

The removal of the effect of royalties on marginal projects would come at a net cost to revenue overall, at least initially. The amount of MRRT revenue received by the Commonwealth would increase as a result (because highly profitable projects would pay an extra dollar of MRRT for every dollar not paid in royalties), but by less than the full amount given up by the States (because less profitable projects would then pay neither royalties nor MRRT). There would also be timing effects associated with a substitution from State royalties to MRRT, although their overall direction is not clear. Royalties would ordinarily begin to be collected earlier in a project’s life than a profits-based tax such as the MRRT. However, removing royalties would mean that part of project costs would no longer be uplifted at a rate of 7 percentage points above the long-term bond rate faced by the Commonwealth.

At least one State has already ‘ruled out’ relinquishing its royalties, even in the event they were to be compensated financially. Western Australia says:

    Western Australia would not under any circumstances support the finding of the [AFTS] review that State royalties should be replaced by a Commonwealth tax.89

These concerns might be reduced somewhat if the Commonwealth were to guarantee that no State would be worse off overall (or would be even better off, fiscally) as a result of giving up their royalty revenue. However, even in those circumstances, it is difficult to see the States agreeing to remove their royalties altogether.

Royalties could be reduced to a single, uniform rate

A second approach could be for the States to reduce royalties on MRRT and PRRT commodities to a single, uniform rate, rather than removing them completely. Such a ‘hybrid’ structure could be thought of as splitting the resource charge into two parts:

  • a standard royalty component that represents a minimum payment for the right to mine the commodity (irrespective of how profitably the mining activity is conducted)
  • a variable component that depends on the profitability of the particular project.

This structure would represent an improvement over the situation prior to the introduction of the MRRT. As the AFTS review concluded, by themselves existing State royalties are too blunt an instrument to simultaneously secure an adequate return from highly profitable projects while avoiding damage to less profitable ones. One result of the bluntness of the royalty instrument has been a tendency to undercharge for the right to exploit Australia’s most valuable non-renewable resources. A hybrid structure could combine the best features of the value-based and profits-based approaches. To the extent that States currently seek to use variable royalty rates as a proxy for the average profitability of different commodities, this would no longer be necessary.

Under this hybrid approach, the Commonwealth could agree to make additional payments to the States, sourced from the increase to MRRT revenue generated by the royalty reductions, so that no State was disadvantaged. Relative to removing royalties altogether, this approach would result in States retaining a component of royalty revenue, while not increasing MRRT revenue by as much.

The retention of State royalty regimes would mean that the compliance and administration costs associated with parallel resource charges would remain.

Royalties on MRRT and PRRT commodities could be fixed

Even if States were not willing to set their royalties at a single rate on MRRT and PRRT commodities, a more limited agreement might be possible, by States undertaking not to increase royalties above a certain level. For each commodity, this level could be fixed in several ways, including:

  • the prevailing royalty rates in each State at the time any agreement is reached (or when the Commonwealth’s resource tax changes were first announced in May 2010)
  • the average, or highest, royalty rate across the States at the time any agreement is reached (or in May 2010).

An undertaking by the States along these lines would address the Commonwealth’s concern that future increases in royalties would reduce MRRT and PRRT revenue and dilute the overall benefits of its changes to resource taxation. It would also provide certainty to the mining industry. Fixing royalties would prevent the erosion of the MRRT and PRRT revenue base.

However, the States might only be willing to give such an undertaking that would reduce their policy autonomy in return for some additional benefit. That would be a matter for negotiation between the Commonwealth and the States.

The Panel’s summary view on resource taxation within the Federation

The Commonwealth has designed the MRRT and the extension of the PRRT in a way that is intended to minimise the economic effects of State royalties, consistent with the AFTS review’s findings that these royalties are relatively inefficient. However, this design has also provided the States with an opportunity to erode the MRRT and PRRT revenue base by increasing royalties.

The Panel considers that an agreement between the Commonwealth and the States on the taxation of resource projects would secure, and build upon, the benefits of the resource tax reforms already undertaken.

The Panel believes there are potential solutions which could benefit all parties. For example, a reduction in the rate of ad valorem royalties on iron ore, coal and petroleum, with greater use made of resource rent taxes to deliver a return to the community would:

  • secure the MRRT and PRRT revenue base, allowing the Commonwealth to return to the States the value of foregone royalty revenue
  • produce a more efficient system overall, by reducing the distortions to production and investment decisions that can be caused by royalties
  • be expected to deliver a tangible fiscal dividend over time.

Any such fiscal dividend would be available to be shared between the two levels of government.


1 GST Distribution Review Terms of Reference, as amended on 17 November 2011, subparagraph 6A(c).

2 GST Distribution Review Terms of Reference, as amended on 17 November 2011, paragraph 6B.

3 Levied on iron ore, coal and petroleum projects, but not other mining.

4 The MRRT is primarily governed by the Minerals Resource Rent Tax Act 2012. The main PRRT law is the Petroleum Resource Rent Tax Assessment Act 1987 (as amended by the Petroleum Resource Rent Tax Assessment Amendment Act 2012).

5 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 1.

6 New South Wales supplementary submission to the GST Distribution Review, March 2012, page 11.

7 New South Wales Minerals Council submission to the GST Distribution Review, March 2012, page 4.

8 Submission from the Hon. Mark McGowan MLA to the GST Distribution Review, April 2012, page 7.

9 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 1.

10 New South Wales supplementary submission to the GST Distribution Review, March 2012, page 4.

11 The Northern Territory imposes a profit-based royalty of 20 per cent of the net value of the extracted minerals. Queensland’s coal royalty rate varies somewhat with the prevailing price level, which is intended to be a proxy for profitability. Western Australia imposes a resource rent royalty (similar to the PRRT) on the Barrow Island project.

12 Queensland Government, Office of State Revenue, http://www.osr.qld.gov.au/royalties/statistics.shtml, accessed 8�February�2012.

13 2011-12 Budget, Budget Paper No.3, Table 10.

14 Other States also collect oil and gas royalties, including South Australia on gas recovered from the Cooper Basin. The amount of royalties collected by commodity is not published in all cases, including for confidentiality reasons.

15 2011-12 Budget, Budget Paper No.2, page 71.

16 Queensland Government, Blueprint for Queensland’s LNG Industry, http://www.industry.qld.gov.au/documents/LNG/Blueprint_for_Queenslands_LNG_Industry.pdf, accessed 8 February 2012.

17 The Commonwealth also imposes a royalty on uranium extracted in the Northern Territory.

18 Condensate is a form of hydrocarbon that is a liquid at standard temperature and pressure, and is obtained as part of the process of extracting crude oil and or natural gas.

19 This estimate took into account increased payments from the Commonwealth to Western Australia designed to offset the effect on Western Australia’s finances that the condensate measure would otherwise have had (because excise payments are deductible against the offshore petroleum royalty).

20 The AFTS review’s recommendations in relation to other State taxes are discussed in Chapter 1.

21 Australia’s Future Tax System, Report to the Treasurer, Overview, page xvi.

22 Australia’s Future Tax System, Report to the Treasurer, Overview, page xvii.

23 Australia’s Future Tax System, Report to the Treasurer, Overview, page 8.

24 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 228.

25 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 231.

26 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 222.

27 In addition to being critical of the Commonwealth’s specific MRRT and PRRT policies, Western Australia considers that the AFTS report represents ‘an unbalanced analysis’. Western Australia considers that the relative efficiency of rent based taxes and ad valorem royalties remains the subject of debate in the literature, and that this was not properly reflected in the AFTS report. See Western�Australian supplementary submission to the GST Distribution Review, March 2012, pages 16-18.
New South Wales also refers to modelling that it commissioned prior to the 2011 Tax Forum that showed royalties are among the most efficient State taxes. New South Wales says that ‘the difference to the AFTS results occurs because the efficiency of royalties varies with mineral prices; royalties are relatively efficient when they are a low proportion of profits’. See New South Wales supplementary submission to the GST Distribution Review, March 2012, pages 11-12.

28 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 14.

29 Queensland supplementary submission to the GST Distribution Review, April 2012, page 7.

30 South Australian supplementary submission to the GST Distribution Review, March 2012, page 19.

31 Northern Territory supplementary submission to the GST Distribution Review, March 2012, pages 17-18.

32 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 669.

33 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 231.

34 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 240.

35 Commonwealth Treasury, The Resource Super Profits Tax: A fair return to the nation, May 2010, page�31.

36 However, the PRRT is not being extended to projects within the Joint Petroleum Development Area in the Timor Sea, as these projects are governed by the Timor Sea Treaty.

37 The low-profit offset was adjusted so that miners with annual group mining profits of $75 million or less (up from $50 million or less in the original announcement) have no MRRT liability. To ensure this offset does not distort production behaviour, it phases out over the next $50 million of profits, that is, from $75 million to $125 million.

38 Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (and related Bills), page 3.

39 The Barrow Island project will remain subject to the Resource Rent Royalty. Payments made under this Royalty will be creditable against any PRRT liability incurred by the project.

40 A similar analysis would yield the same conclusions in relation to the PRRT, albeit with a different effective tax rate.

41 A third approach, under which royalty payments would be treated only as ordinary deductible expenditure (that is, not refundable or creditable), would result in a greater amount of MRRT being paid. This approach would clearly not remove the effect of State royalties on investment and production decisions.

42 Because project revenue is held constant, the size of State royalty payments made is also constant, on the assumption that the royalty operates as a fixed percentage of revenue, and is not dependent on the costs (and by extension, the profitability) of the project. For simplicity, this example also assumes that the project has no MRRT starting base or other allowances, and that the low-profit offset is not a relevant consideration.

43 In this example, this would occur if the project’s revenue minus expenditure was at least $444.4 million (being the royalty payment of $100 million divided by the effective MRRT rate of 22.5 per cent). Because the project’s revenue is $1 billion in this example, it would face a net MRRT liability if its expenditure was less than $555.6 million.

44 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 13.

45 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 13.

46 New South Wales supplementary submission to the GST Distribution Review, March 2012, pages 12-13. Although the word ‘deductible’ is used here, ‘deductible’ and ‘creditable’ have slightly different technical meanings in the context of tax laws, including the MRRT law (see footnote 40).

47 Tasmanian supplementary submission to the GST Distribution Review, March 2012, page�14.

48 Northern Territory supplementary submission to the GST Distribution Review, March 2012, page 16.

49 If the appropriate discount rate is taken to be the long term bond rate plus 7 per cent.

50 The Commonwealth Treasurer has previously stated he does not share this estimate. “The exchange rate assumptions, for example, that they are using are completely unrealistic. So I think there’s a real doubt to the extent to which their claims of revenue at $2 billion are matched by the facts”, transcript of interview with Fran Kelly, ABC Radio National, 20�May 2011.

51 Western Australia considers that the way this occurs through the CGC’s current mining assessment is neither equitable nor sustainable. As discussed in the Panel’s first interim report (see page 98), an outcome whereby Western Australia ultimately loses more in GST revenue than it raises directly from the higher royalty would be a ‘perverse and inappropriate result’. The Panel encourages the CGC and other stakeholders to review the mining revenue assessment at the earliest opportunity.

52 Mr Colin Brown, Commonwealth Treasury, cited in the Advisory Report on the Minerals Resource Rent Tax Bill 2011 and related bills, House of Representatives Standing Committee on Economics, 21�November 2011, page 36.

53 The Commonwealth, in its 2011-12 Mid-Year Economic and Fiscal Outlook revised down its estimates for PRRT revenue by $150 million in 2011-12 and for MRRT and PRRT revenue by $70 million in 2012-13, reflecting ‘increased state royalties, weaker production expectations and lower commodity price assumptions, partly offset by the lower Australian dollar’, page 41.

54 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 13.

55 Submission from the Hon. Mark McGowan MLA to the GST Distribution Review, April 2012, page 7.

56 The Hon Wayne Swan MP, ‘Barnett’s ‘Own-Goal’ on Iron Ore Royalties’, media release, 19 May 2011.

57 The Hon Wayne Swan MP, ‘Barnett’s ‘Own-Goal’ on Iron Ore Royalties’, media release, 19 May 2011.

58 New South Wales Government, Budget Statement 2011-12, page 5-2.

59 New South Wales Government, Budget Statement 2011-12, page 5-3.

60 New South Wales Government, Budget Statement 2011-12, page 5-3.

61 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 2.

62 New South Wales supplementary submission to the GST Distribution Review, March 2012, pages 11 and�14.

63 Northern Territory supplementary submission to the GST Distribution Review, March 2012, page 17.

64 Tasmanian supplementary submission to the GST Distribution Review, March 2012, page 16.

65 Australian Capital Territory supplementary submission to the GST Distribution Review, March 2012, page 5.

66 Tasmanian supplementary submission to the GST Distribution Review, March 2012, page 15.

67 New South Wales supplementary submission to the GST Distribution Review, March 2012, page 12.

68 Queensland supplementary submission to the GST Distribution Review, April 2012, page 8.

69 South Australian supplementary submission to the GST Distribution Review, March 2012, page 22.

70 South Australian supplementary submission to the GST Distribution Review, March 2012, page 21.

71 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 13.

72 Commonwealth Treasury, The Resource Super Profits Tax: A fair return to the nation, May 2010, page�31.

73 Mineral Resource Rent Tax Heads of Agreement, as published by the Senate Select Committee on Scrutiny of New Taxes, Inquiry into a National Mining Tax, Additional Information Received, item 4.

74 Policy Transition Group Report to the Australian Government, New Resource Taxation Arrangements, December 2010, page 55.

75 See, for example, the evidence given by Dr Ken Henry and Mr David Parker to the Senate Select Committee on Scrutiny of New Taxes, 22 November 2010, in particular pages 12-17.

76 See footnote 5 and related text in Chapter 1.

77 South Australian supplementary submission to the GST Distribution Review, March 2012, pages 19-20.

78 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 13.

79 Queensland supplementary submission to the GST Distribution Review, April 2012, page 7.

80 Including whether aspects of the design of the MRRT and PRRT should be revisited.

81 Hopefully this situation will be remedied through the next round of Panel consultation.

82 New South Wales supplementary submission to the GST Distribution Review, March 2012, page 4.

83 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 19.

84 South Australian supplementary submission to the GST Distribution Review, March 2012, page 20.

85 South Australian supplementary submission to the GST Distribution Review, March 2012, page 20.

86 South Australian supplementary submission to the GST Distribution Review, March 2012, pages 20-21.

87 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 239.

88 Australia’s Future Tax System, Report to the Treasurer, Detailed analysis, page 240.

89 Western Australian supplementary submission to the GST Distribution Review, March 2012, page 5.