SENATOR BIRMINGHAM: (South Australia) (13:01): It is a pleasure to follow Senator Colbeck who, as always, has provided a very wise and thoughtful contribution. Certainly on this Minerals Resource Rent Tax Bill 2011 and associated bills, his contribution and analysis are spot on. I thought it would be useful in this debate today to go back to the genesis of it all, to go back to where we started talking about mining taxes, a minerals resource rent tax and tax reform in the mining space. It has been easy in the tumultuous times that have followed to forget the reality, that this all started as a result of what was meant to be a root-and-branch overhaul of Australia’s tax system.

When Mr Swan became Treasurer he promised to look at everything to do with the tax system from top to bottom-lock, stock and barrel. He said that in doing so he wanted to achieve a simpler tax system, a fairer tax system, a more efficient tax system. He wanted to ensure that, in the end, Australia had a tax system that was as good as you could possibly get. He tasked the then Secretary of the Treasury, with the resources of Treasury to back him up, to undertake this root-and-branch review of the tax system. Ken Henry did that, looked at it from top to bottom, and produced a sweeping report. When his report was released, Ken Henry had 138 different recommendations for reform of Australia’s tax system. What did Mr Swan do in response to that? Did he say, ‘That is an outstanding body of work, we will systematically work through them, we have concerns about a handful of them but otherwise we will plough on’? Or did he say, ‘It’s terribly challenging and we’re going to take the time to sit down with all the various parties, including the states and territories and perhaps even the opposition parties as well as business and industry and all other stakeholder groups, and work through all the recommendations in a sensible way’? No. The government released a response to the Henry review and said that of the 138 recommendations it would adopt essentially 2½ of them-it would adopt two, and one in part, and within that was the proposal to reform mining tax.

What was Dr Henry’s recommendation to reform mining tax? It was recommendation 45 in the Henry review and you can find it in the summary of recommendations on page 89 of his document. The recommendation was:

The current resource charging arrangements imposed on non-renewable resources by the Australian and State governments should be replaced by a uniform resource rent tax imposed and administered by the Australian government …

There is one word I would like everybody in the chamber and everybody who thinks about this debate to focus on in that recommendation, and that is the word ‘replaced’. Ken Henry’s recommendation was very clear. It was that the existing framework of state and territory taxes should be replaced by a uniform minerals resource rent tax.

Oftentimes during this debate I have heard those opposite in this chamber and Mr Swan and Ms Gillard and her predecessor, Mr Rudd, all claim that industry wanted this type of tax reform, that industry wanted to see something that taxed mining activities based on profits rather than just on what it dug out of the ground. But industry did not want to get lumbered with both-and that is what the proposal before us does; it lumbers industry with both. Dr Henry went through the arguments in great detail. People can argue one way or the other as to whether his approach, that we should have this replacement, was valid. He highlighted on page of 226 of his report:

In Australia, governments allow private businesses to exploit non-renewable resources and in return collect a charge for resource production, predominantly through taxation arrangements. The form of tax varies across jurisdictions.

That is a statement of fact that is of course at the heart of much of the argument; that we do all recognise in this debate the resources we are talking about are nonrenewable. You can only dig them out of the ground once, and I hear that line said many, many times.

So there is a good reason why taxpayers should expect some return, some support, from the use and extraction of these resources. Traditionally, rightly-and I suspect my colleague Senator Johnston will touch on this-this has been clearly the domain of the states, that the resources are seen to be vested in the states, that that is the constitutional approach that has been taken and therefore, of course, the tax is applied at the states and has been applied through the application of tax in the form of royalties. Mr Henry went on in his report to refer to ‘output based royalties’, which is what we are talking about here, and he highlighted the impact of applying output based royalties in good times and bad times for the mining industry. He said:

Output-based royalties collect a greater share of the returns to non-renewable resources when profitability is low or negative and collect a smaller share of returns when profitability is high.

Again, it is a fairly simple fact. When you are taxing the sheer volume that is dug out of the ground, you get a situation where, if there is a lot being dug out but profitability is low, there is still a lot of tax paid. If profitability is high, there is actually no more tax being paid for that lot or little, because it is based on volume. This was at the heart of his argument as to why we needed to have this type of change. He argued:

Under output-based royalties, firms are likely to invest and produce less than they otherwise would. The calculation of such royalties does not take production costs into account. This leads to less exploration, lower industry output and earlier closure of projects.

These are the arguments that Mr Henry made for why we should have a significant change in mining tax arrangements.

But remember what that significant change was: it was to replace the regime of output based royalties that exist in all the states of the Commonwealth with a different regime. This legislation does no such thing. It leaves that output based regime totally in place, and instead applies a whole new regime. Is this what Mr Henry recommended? Certainly not. On page 238 of his report, he made it crystal clear when he said:

Existing resource projects should be subject to the new resource rent tax … Leaving existing projects outside of the new regime would increase administration costs by requiring multiple schemes operating in parallel.

That is exactly the outcome we are getting. We are going to have to use Mr Henry’s own words, ‘multiple schemes operating in parallel’ as a result of this tax and this legislation going through.

So we will have miners and businesses across the country who have put their own capital on the line, who have made the investments to extract these resources, who are taking a gamble in doing so but in doing so, hopefully, where they are successful, employing Australians and generating wealth for their local communities and generating valuable export dollars for the people of Australia and, indeed, for our trade balance. We have those businesses and those companies taking that gamble, but they face the reality that under Labor’s proposal they will have to operate under multiple taxation schemes. So effectively, they get none of the benefits talked about in Mr Henry’s paper, whether they are right or wrong. They get none of those benefits from having this new tax in place, because they are still having to pay all the old tax royalties based, output based instruments. They are still getting the downside of everything they were doing and they are just getting a new layer put on top of them.

How did it all go so wrong? How is it that the Ken Henry review went so far off the track? Of course it went so far off the track because of the hopeless handling of this matter in particular by Mr Swan. The Treasurer was just unable, unwilling and incapable of sitting down, once given the Henry review, with the states and the companies and negotiating a sensible outcome to start with, negotiating exactly what Henry had recommended: the replacement of existing regimes with a new regime.

We know from the recent leadership spat within the Labor Party that of course he was incapable of doing this, because Mr Rudd blew the whistle on him. Mr Rudd made it clear that the Treasurer had not just mishandled this, but also misled Mr Rudd as Prime Minister in terms of what was being undertaken. Mr Rudd apparently said-we have seen the media reports of this now as the government aired their dirty linen-that his old friend’s handling of the issue caused the mining industry to accuse the government of a complete breach of faith over the original 40 per cent resource super profits tax. The Treasurer reportedly assured Mr Rudd that mining companies and the Western Australian government were onside and that this assurance was based partially on the understanding that the RSPT announcement in early May 2010 would not come with budget estimates of the amount revenue it would generate thereby allowing further consultation and discussion.

However, in the end what did Mr Swan do? He released the proposal with those budget numbers, which Mr Rudd claimed was viewed as a complete breach of faith by the states and the industry. So rather than going down the process of setting in train an opportunity for further consultation and discussion, what these comments that Mr Rudd exposed was that in reality Mr Swan had never bothered to undertake any consultation or discussion in the first place.

Indeed, the Western Australian Premier, Colin Barnett, described the moment when he learned about the arrangements for the new tax. He said:

I remember it quite clearly, we were sitting in a COAG meeting … Kevin Rudd came in and announced that the commonwealth was going to introduce a resource super-profits tax.

He announced it, there was a bit of a stunned silence-

as one imagines there might be-

and I said that Western Australia would not support that, we would never support that and his [Mr Rudd’s] jaw just about hit the table, he looked across in absolute dismay and said, ‘I thought you had agreed to it’. I said, ‘No, prime minister, I haven’t and I never would’.

Now Wayne Swan had not done his homework, and maybe he had let the then prime minister believe that the states had agreed.

Mr Rudd claims that Mr Swan left him with the impression that the states had agreed. Mr Barnett appears to back up Mr Rudd’s version of events that it came as a complete surprise when Mr Barnett said, ‘There is no way we are agreeing, there is no way we have and there is no way we ever will.’ So Mr Swan just led Mr Rudd down the garden path on this resource superprofits tax and, in doing so, led him into an almighty trap that ultimately saw the demise of Mr Rudd’s prime ministership. This has been a botched arrangement from day one.

As it has progressed, we have seen further distortions to the proposal that further undermine any logic whatsoever in what is being undertaken. To ensure that companies did not end up in a spiral of ever-increasing taxation where they would be worse off, the government said that, if there were increases to royalties before this legislation was passed, those increases would be refunded to the states. So we are going to have an arrangement where, firstly, mining companies around the states will pay the level of royalties they always have to the states; secondly, mining companies in the states of New South Wales and Western Australia will pay an increased level of royalties beyond what they were paying before this proposal was announced; thirdly, they will then pay the new mining tax, the so-called minerals resource rent tax; and, fourthly, the Commonwealth will then refund the mining companies for the second component of the increases in the royalty tax paid in addition to the longstanding royalties taxes in New South Wales and Western Australia.

Is anybody confused? I suspect they are, because what we are creating here is an absolute administrative and bureaucratic nightmare. Of the funds received by the Commonwealth from this mining tax, over the forward estimates some $944 million-nearly $1 billion-will be paid back to New South Wales. They saw an opportunity where, if the companies were going to be paying this tax, the states might as well secure a bit more of it for themselves. More than $2 billion of it will be repaid to Western Australia for the same reason. It is up to the states, of course. Historically, the states have made these decisions and they make a valid decision to say, ‘We think our taxpayers deserve a better return on these extracted resources,’ but in the back of their minds they are no doubt also thinking not only do their taxpayers deserve a better return but, if the Commonwealth is going to tax them anyway, they might as well make sure that they get the money and have some control over it. Frankly, I can appreciate their sentiment because I certainly trust the judgment of the O’Farrell and Barnett governments to manage these billions of extra dollars better than I trust the Gillard government to do so. If there is one silver lining when this thing goes through, it is that at least $3 billion over the forward estimates of the billions raised will go to governments that might have some concept of what to do with the money in a sensible way rather than have it used and wasted by this Labor government opposite us.

Has the root and branch reform of the tax system of Ken Henry delivered a simpler arrangement? Has it delivered something simpler for the mining industry? No. What we will get when this legislation passes is another 287 pages of tax law to add to the already voluminous amounts of tax law that exist in Australia today-not one jot of simplification but instead a whole new layer of tax layered upon existing taxes at the state level, hundreds of pages of new tax law, a complex arrangement of the Commonwealth refunding the states for certain taxation arrangements and businesses facing the spiral of having to pay more tax in more places.

Equally, the Henry review recommended that there should be a lower tax burden for smaller mining ventures to help start-ups grow and prosper and to keep the mining ventures in their declining phase alive for longer. Instead, it will be smaller and mid-tier mining ventures that will pay a higher effective tax rate under this legislation because of the deal done. When the Treasurer finally did sit down and try to negotiate something about the mining tax, he did a deal with just the big three miners rather than something that recognised what was necessary for all of the industry.

The mining industry is critically important to Australia. It is the one industry that saved this country going into recession during the global financial crisis. It is an industry that is providing a bounty of wealth. Yes, Australians should share in it, but Australians are sharing in it already. There have been vast increases to the royalty payments by mining companies to state governments. There have been huge gains in the number of Australians employed. People are benefiting from it. It is a tragedy that this botched implementation of tax reform will now see this industry not only pay more but also deal with a gigantically increased bureaucratic burden, the exact opposite of what was promised. That is the core reason the government should go back to the drawing board, start again and come back with a proposal that makes sense rather than this one.