Sectoral Implications

p
Royalties: reduced prices, investment and production.
„ Royalties impair the price signals in
ECONOMIC IMPACT OF the mining industry.
ROYALTIES
„ Returns
etu s to industry
dust y a
are
e lowered
o e ed by
Supply curve
P with royalties the amount of the royalty payment.
r Mining supply
i
c
curve „ Fewer mines are viable. Lower
e grades at operating mines are
untapped.
World price
Pw
„ Removal of royalty impact on prices
Royalty Deadweight
revenue loss returns industry to the “no-tax”
P(1-r)
Production
supply curve.
reduced by
royalties „ RSPT taxes distribution of rents
Qroyalties Qperfect (somewhat akin to producer
Quantity mined
surplus).
p ) Price signals
g and resource
NB: specific royalty illustrated. Principles remain unchanged for ad
valorem.
allocation unaffected.

18
Sectoral Implications
p
Resource rent tax: price signals and resource allocation unaffected.
„ For any given price,
price RSPT increases
ECONOMIC IMPACT OF mining output relative to royalties.
RESOURCE RENT TAX
„ Miners
e s receive
ece e market
a et pprice
ce o
of
Mining supply
P curve output.
r
i
c
„ Economics of resource rent taxes
e mean production and investment
Govt share of decisions unaffected by tax.
economic
rent (40%) World price
Pw
Mining industry
„ Government takes 40% share of
share of economic economic rents. Government
rent (60%)
Cost of rebates 40% of losses.
production
(inc. capital)
„ Deadweight loss of taxation to
Qperfect society reduced.
Quantity mined

19
Sectoral Implications
p
Progressivity garnishes higher returns.
„ Optimal response to royalty regime
%
EFFECTIVE TAX RATE % is to exploit higher value deposits.
60 60 These have relatively lower effective
RSPT + taxes Companies keep
taxes.
28% company tax
proportionally higher share of rents.
50 50

„ Share of rents constant under

40 40
resource rent tax.

Royalties + 30% „ Results in effective tax rate

company tax
30 30 i
increasing
i as project
j t returns,
t or
commodity prices, rise.

20 20 „ Tax rate falls as project returns,

returns or
6 10 15 20 25 50 commodity prices, fall.
Source: Treasury Rate of return

„ Post tax returns smoothed through

g
commodity price cycle.

20
Sectoral Implications
p
AAA guarantee: minimum 40% of capital refunded.
„ Design of RSPT reduces required
REQUIRED RETURN ON return for mining investment.
% MINING INVESTMENT %

15 15
„ 40%
0% o
of u
undeducted
deducted cap
capital
ta
Lower WACC investment government guaranteed.
post-RSPT
12 12
„ Capital deducted (i.e. returned)
40% @ risk
free 6% before RSPT imposed.
9 9
Transferability further reduces risk,
and tax payments.
6 6
60% capital
100% capital @ risk - 15% „ Volatility of post-tax returns
@ risk - 15% req. return
3
req. return
3 marginally smoothed by operation of
tax (i
(i.e.
e higher tax paid when highly
0 0 profitable, lower tax paid when less
Current post-RSPT profitable).

21
Sectoral Implications
p
If it can’t move, tax it!
„ The Henry Review advocated a
TAX TAKE change in the burden of taxation.
% (% of GDP) %
3 6
2007/08 level „ Internationally mobile capital to bear
Company tax lighter tax load.
+
PRRT & RSPT
(rhs) „ Immovable tax bases (like land and
2 5
non renewable resources) more
non-renewable
Company tax likely to generate economic rents.
(rhs)

1 4
„ RSPT generates extra 0.5% of GDP in
revenue in 2013/14.
Resource Rent Taxes
(PRRT & RSPT) (lhs)
„ But offset by 0.4% of GDP fall in
0 3 company tax take.
2001/02 2004/05 2007/08 2010/11 2013/14
„ Tax mix relatively unchanged at
2013/14 from 2007/08 le
levels.
els

22
Sectoral Implications
p
Where’s the carrot? Discount on interest earnings.

„ 50% discount on first $1000 of

DEPOSITS GROWTH interest earnings.
% (annual % change) %
25 25
„ Applies
pp es to:
to depos
deposits;
ts; bonds;
bo ds;
20 20
debentures; and annuities.
Deposits
(M3 less currency) „ Positive for household budgets. But
15 15 unlikely to be a significant boost to
stock of deposits.
10 10
„ Interest Witholding Tax reductions to
5 5
lift foreign bank competition.

Source:
Sou ce RBA. „ First home saver accounts more
0 0 flexible. Still unattractive.
Jan-2000 Jan-2003 Jan-2006 Jan-2009

23