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Uncertainty will impact resource sector investment


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Sunday 2 May 2010: Today’s Henry Review announcements raise significant uncertainties for the resources sector particularly the impact of a new 40% tax rate on investment and the transition to a completely new tax regime, according to Deloitte’s leading Resource Sector Tax experts, Gordon Thring and Darren Lee.

According to Government estimates, the resources sector’s new 40% resource super profits tax (RSPT) is anticipated to cost the mining industry an additional initial $3 billion in tax in the first year (2012/13) and $9 billion in the 2013/14 financial year.

“Essentially the Government’s response to the Henry Review has been to use the resources sector’s profits to fund changes to Australian corporate tax rate and superannuation contributions rates, with greenfield projects benefiting under the resource exploration rebate,” said Mr Thring, Deloitte Energy and Resources Tax Partner.

According to Energy & Resources Tax Partner, Darren Lee the resource rich states of WA, QLD and NSW that are most affected by the change in tax may benefit from the proposed new infrastructure fund of $700 million each year from 2012-2013.

“None-the-less, the move represents significant change to cash flow and feasibility models for the energy and resources sector in future,” he said.

Mr Lee notes that the industry will no doubt be looking to review the proposed changes and consult closely with the Government over the coming 18 months prior to its implementation on 1 July 2012.

“Initial uncertainties at this stage include the impact on investment of the 40% rate, transitional arrangements and the adequacy of the ten-year bond rate as a measure of super profits,” he said.

Allowance rates

The partners believe that if this is to be a “super profits tax,” it is expected that there will be some debate about whether the RSPT allowance based on the ten-year government bond ” risk free rate” is appropriate.

Mr Lee said that another contentious issue for the industry is that the RSPT is calculated without allowing for intangible capital expenditure such as mineral rights. In addition, financing costs are not deductable under the new regime, which will increase the tax cost.

Transitional issues

“The question the industry is likely to raise about transitional issues is how resources entities including partnerships, trusts and companies, will fare under transitional arrangements where the Government proposes a starting tax base using accounting book values when calculating RSPT. Again, the industry will seek further consultation on this matter.”

Many resource entities have in place long-term supply contracts, which have been modelled on the current tax regime. This new tax regime will require existing arrangements being reviewed to re-assess ongoing viability.

Stronger, fairer, simpler for the energy & resources industry?

Mr Thring said that the energy and resources sector may have difficulty agreeing with this evaluation.
“Further consultation will be required in the coming 18 months, but certainly for the resources sector it is unlikely to be simpler or viewed as fairer,” he said.

To view all of Deloitte’s media releases on the Henry Review, go to the Deloitte Henry Review website here.

NB: See our media releases and research at www.deloitte.com.au

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Contacts

Name:
Karina Randall
Company:
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Phone:
Tel: + 61 2 9322 3778, Mobile: +61 414 823 712
Email
karandall@deloitte.com.au

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