super tax savaged by experts

http://www.eurekareport.com.au/iis/iis.nsf/pages/E1FB6EC66A0E8E0BCA25771C00047990?OpenDocument

Ivor Ries of EL & C Baillieu Stockbroking describes the folly of Kevin Rudds great $9 billion super profits tax:

The Resources Super Profits Tax will generate no new revenue for five years, and has stopped new projects dead.

There are 270 major resource projects in Australia undergoing feasibility studies and financing with a total capital value of $320 billion. These projects would have employed somewhere around about 120,000 people during the construction phase.

The Resources Super Profits Tax has stopped them dead in their tracks. All of those projects are now frozen. There are probably about 20,000 engineers working on these projects and by the end of the month half of them will be unemployed.

Over the past few days Ive been struggling to come up with a couple of phrases that sum up the new Resource Super Profits Tax and after considering a great many options most of them unprintable Ive settled on two: sheer arrogance and vast stupidity"

This tax will generate no new revenue (until 2015) because the forecasts in the RSPT document failed to take into account all the projects that are going to be put on ice as a result. The governments forecast of an additional $9 billion in revenue from 2013-14 is rubbish and I bet theres not a single Treasury official who will stand behind that number today.

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Macquarie Private Wealth Premium Research warns its subscribers:



The truly scary aspect of this is the lack of understanding from Rudd and Swann towards equity risk premiums. The equity risk premium is the extra return an investor is paid in return for taking equity risk. The new tax is slated to apply if a business earns more than a 6% return (equal to the rate paid on risk free government bonds). Effectively they are saying we should not bother investing in industry that offers a better return than government bonds or they will double tax you.

Our strategist asked Treasurer Swann a question yesterday on this issue and asked why the tax kicked in when returns exceeded the bond rate rather than the bond rate + an equity risk premium of say 5% (otherwise known as a companies cost of capital). Swann did not understand the question no matter how it was re-phrased - in other words the treasurer of Australia does not know what the cost of capital is for Australian companies. This is economics 101!

Capital will continue to flow from Australia until either Labor loses the election or this tax is dropped. This is the greatest sovereign event Australia has faced since 1974 when Gough Whitlam was ousted.

I will continue to direct my clients funds towards the US until we see clarity in this situation.