THE Rudd government is preparing to back out of applying its new resource super-profits tax on the gravel, lime, phosphate and sand sectors after representations from the quarry industry.
The government included the high-volume, low-value quarry products, which are used in house building and farming, in its new tax against the recommendation of Treasury secretary Ken Henry but is now encouraging industry submissions seeking their exclusion.
Dr Henry yesterday closed off any opportunity for the government to negotiate with the big miners on the threshold at which its new resource tax will apply, warning that to do so would offer the mining industry massive taxpayer subsidies.
However, Dr Henry held out hope that mining companies could negotiate improved terms on the way the tax would apply to their existing projects.
On Sunday, Wayne Swan said opposition claims that the new tax on quarry products would raise the cost of house construction and food through higher fertiliser costs for farmers were "ridiculous" after refusing to offer any relief to the quarry industry in parliament last week.
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* Henry bites back hard over mining tax Adelaide Now, 4 hours ago * Adviser backs up his design principle The Australian, 8 hours ago * Henry opposes changing super tax The Australian, 18 hours ago * Tax on new investments only - BHP Adelaide Now, 1 day ago * Profits tax elegant: Garnaut The Australian, 2 days ago
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The Treasurer said the claims about building and fertiliser costs proved Tony Abbott didn't "have a clue about the tax".
"The fact is, many of these low-value commodities might do much better in a resource super-profits tax than they currently do," Mr Swan said on the ABC's Insiders program.
"So we're talking to them to see whether they might be better off or not. Low-value commodities are punished, absolutely punished, by a royalty regime."
The quarry representative group Cement Concrete Aggregate Australia has told the tax consultation panel that most quarry products are not classed as minerals and at least 85 per cent do not attract any state royalties. Mr Swan had dinner with quarry company leaders in Adelaide on Monday night.
CCAA chief executive Ken Slattery told The Australian last night that 85-90 per cent of quarry products did not attract royalties and had been excluded in the original Henry tax review.
"We've been invited to make an early submission to the tax panel," Mr Slattery said.
Pressure for the government to change its 40 per cent super-profits tax on the resource industry is building, with credit rating agency Moody's yesterday warning that Australia risked following Zambia, which was forced to abandon a similar windfall profit tax after only one year when its exploration industry collapsed.
"Other resource-rich nations such as Canada, Brazil and China may figure more favourably in global miners' plans if Australia enacts the RSPT," the agency said.
Launching his first public defence of the resource industry impost suggested in his tax review, Dr Henry yesterday likened the hostile reaction to the RSPT to the campaign mounted by the gold industry when its tax-free status was abolished in 1991.
"I remember being told in the mid-1980s how the goldmining industry would not survive the removal of its complete exemption from income tax, and how taxing windfall profits from goldmining would destroy thousands of jobs," Dr Henry said.
"The dire predictions of the past have not eventuated and it is unlikely that similar predictions today will fare any better."
Mr Swan said yesterday "a bit of flak" about the new tax was only to be expected.
"Some of the miners that will pay a bit more tax are going to fiercely reject that," he said. "That is their right, but my responsibility is to stand up for the national interest."
Much criticism of the tax has focused on the way it applies to any profits greater than the government bond rate of 6 per cent.
Investment bank JPMorgan said yesterday that only projects with low rates of return would be helped by the tax.
"The imposition of the RSPT would result in significant wealth destruction in the Australian mining sector and would only encourage speculative investment in marginal projects," the bank said.
Dr Henry said the government was giving mining investors a guaranteed return equivalent to the government bond rate on 40 per cent of their investment. If the project went into loss, that return would still be paid with tax credits.
If the government were to increase the guaranteed rate of return, Dr Henry said, it would be like creating a new government bond with a higher rate of interest. "Aside from creating instability in financial markets, this would generate a significant subsidy for investment in the mining sector and, ironically, create incentives to delay resource production," he said.
To guarantee a return that was five percentage points above the bond rate, as was the case under the petroleum resource rent tax, would result in a $1 billion project receiving a subsidy of $20 million a year. Companies would have an incentive to delay bringing a new project into production while they profited from the subsidy.
Dr Henry said the value of the subsidy could rise to as much as $330m over the life of a project for every $1bn invested.
The Treasury secretary said there was scope for the mining industry to negotiate on how the new tax would apply to existing projects, although he said it was not practical to exempt them.
He criticised the hostile approach that some mining companies were bringing to consultations over how the tax would apply to their projects.
Dr Henry said revenue raised should be returned in tax cuts, rather than allowed to accumulate in a sovereign wealth fund.
Opposition Treasury spokesman Joe Hockey, who gives his response to the budget today, has favoured a sovereign wealth fund to insulate Australia from the volatility of resource prices.
However, Dr Henry said it was healthy for budget revenue to be volatile with the economy, because deficits help to support the demand during downturns.
West Australian Premier Colin Barnett yesterday accused the Rudd government of aiming to seize control of Australia's resource industry from the states.
"Constitutionally the minerals belong to the states, that is the natural ownership and the Prime Minister continues to say that all Australians own the minerals," Mr Barnett said. "Well, no they don't. They are owned by the people in each individual state."
Mr Barnett will tomorrow present the state budget, which is tipped to include a royalties windfall that will help the state avoid its first forecast deficit in more than 10 years.
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