Overview of Resource Super Tax Profit - Example

Running head: MANAGEMENT ACCOUNTING Management Accounting Name Course Institution December 6, 2010 INTRODUCTION Overview of Resource Super Tax Profit (RSTP) The Australian Government declared its strategy to introduce a Resource Super Profit Tax (RSPT) with effect from 1 July 2012. The RSPT is a tax on profits which is charged at a rate of 40%, exclusively on excess profit made from the exploitation of non-renewable resources from Australia. It is meant to apply to all mining projects which are involved in the extraction of resources directly. The tax is described as a fundamental part of the on going tax reform agenda in that country. Royalties and taxes that are in operation currently, fail to accumulate suitable returns from private companies that extract non-renewable resources that belong to the people of Australia. The RSPT provides a mechanism that will allow proper collection of returns for the community. It will promote greater investment and employment in all resource sectors (Zimmerman, 1986). Investors in the mining companies have been severely affected by the Australia’s action. Companies that have experienced a big blow from the proposed RSPT include the BHP Billiton Ltd. (BHP: 89.15 0.00 0.00%), whose headquarters are located in Australia. Moreover, Rio Tinto PLC (RTP: 0.00 N/A N/A) has also been put in doubt. The two are one of the largest mining companies and exporters of iron ore in the world. They are now seeking to combine their Australian operations on an equal basis joint venture (JV). Companies such as Cliffs Natural Resources Inc. (CLF: 78.47 0.00 0.00%) that has a moderate exposure to Australia has also experienced a huge blow. Other mining companies such as Teck Resources Ltd. (TCK: 56.55 0.00 0.00%) which is insignificantly involved in the in the operations in Australia have been hit back (Zimmerman, 1986). In the mining sector, the RSPT will allow deductions for the cost of extracting resources. This includes the exploration expenditure for income tax purposes and the development, and getting them to the taxing point. However, RSPT will not allow deductions for expenditures such as payments of income tax or Goods and Services Tax, payment to acquire interests in projects subject to RSPT, payment to acquire an interest in an existing exploration permit or a production license and payment of interest and financing costs, including the cost of issuing shares, the repayment of equity and the payment of dividends (Mawby, 1972). Reasons why the federal government proposed the super tax profit on mining Political cost hypothesis asserts that companies will tend to show their earnings lower by applying different methods of accounting and procedures. This is done so that the firm does not attract the attention of politicians, who constantly keep an eye on the excess profits of the company. According to political cost hypothesis theory, politicians have the authority to use politics of the wealth distribution by applying mechanisms like taxes. Larger firms like the resource mining companies incur more political costs as compared to small companies. The amount of these political costs depends on the size of the company. There are several limitations or criticisms behind the political cost hypothesis. Firstly, the hypothesis assumes manager or owners of the company have self interests in the execution of their duties. It is assumed that their motive is to maximize their own wealth. Secondly, it does give guidelines or state what is supposed to happen but rather it explains what would happen. This is the aim of accounting which is deemed as insufficient. Thirdly, it is only explains and predicts what might be done while ignoring what should be done. It thus regarded as not value free. The federal government supports the introduction of the proposed tax system in place of the current charging system arguing that RSPT will allow stability in the increase and decrease in the resource profits as they occur. Royalties are unresponsive to changes in profits and thus the community ends up not enjoying the wealth generated from sale of resources. Royalties tax those projects that generate high profit less tax as compared to the low profit projects, thus disrupting the pattern of investment. Following the continued debate on the issue of mining tax, a lot is grasped on the way politics operates in Australia. The Treasury in collaboration with the Australian Government exempt the second ranked companies like the mining sector, some taxes and thus end up paying less tax. The exemptions include exploitation, depreciation and fuel taxes. Moreover, many mining companies debts are funded which gives them a tax advantage over other companies. The engagement of the Australian parliament over the issue of mining tax is an obvious illustration that this debate is about politics and not economics. The politics of this issue is about the struggle between labour and capital between the power of multinational corporations and the power of government in ruling (Watts &Zimmerman, 1986). The Australian Government supports the proposed RSPT on the mining sector because it will provide a more appropriate and reliable return to the entire community in Australia. The additional return will be generated from the exploitation of its non-renewable resources as compared to tax arrangements applied currently. The Australia’s current taxing arrangements fail to collect substantial return for the community from private sectors exploiting non renewable resources. These current arrangements do not put into consideration the variation in profits. The proposed RSPT on the mining sector will provide a mechanism for collecting returns to the community (Mawby, 1972). Reaction of stakeholders to RSPT The first category of regulation theories is the public interest theory and aims at the general public. It is the best possible allocation of limited resources for individuals. The private interest theory on the other hand does not take into account the interest of the general public. It focuses mostly on individuals in private companies while disregarding the welfare of the majority. Some regulatory bodies may try to regulate the allocation of resources but it ends up being limited by the larger regulatory associations that are more superior. The Australia’s proposed Resources Super Profits Tax (RSPT) has received severe criticisms from the mining companies. They claim that this tax will hurt their industry and the entire Australia’s economy. However, the Government has argued that the RSPT is a fiscal reform that is backed by the IMF and the extra tax revenue will help in restoring the Australian budget to surplus. The mining companies claim that the RSPT allowance of 6% does not reflect the 11% interest rate they pay for the risk nature of their operations. They also claim that the 40% tax credit is likely to reduce the risk they experience and that the uncertainty caused by the RSPT will discourage foreign investment. Consequently, any harm to the mining industry will affect the Australian infrastructure and even the jobs. The Australian Government fights for the satisfaction and benefit of the community as a whole. It also safeguards the welfare of the miners who constantly complain of the new taxing system. Due to this public demand, a regulation is placed which aims at addressing the demands of the public which are ignored by the current charging arrangements. This regulation is placed in order to ensure that the tax payer is not over taxed and also to correct the inefficient market practices. The regulation is hoped to benefit the entire community rather than the individuals with self interests. It safeguards the welfare of the miners from the industry and ensures that their rights are not violated by the introduction of the new taxing system (Watts &Zimmerman, 1986). The aim of the introduction of the RSPT is for the government to be able to obtain some payment in return for the extraction of the resources. The regulators will support an initiative to protect the public interest although they are sometimes limited by the regulated industries. Regulated industries may benefit through entry control, control over compliments and substitutes, price fixing and direct subsidies of money. However, they must comply with certain rules and regulations that govern their conduct. These are expensive and they eventually reduce the absolute return to the regulated industries (Stigler, 1972). The mining projects involve a lot of risks which are reflected in their overall cost of capital. In order to be termed as a viable undertaking, mining projects need to generate more than the risk free rate. However, the RSPT fail to tax the risk premium associated with the capital employed in the mining project. The miners argue that they are entitled to some deductions which should be refundable when the project winds up. They says that they projects are entitled to a value of deductions associated with the capital invested on that particular project. There has been an outcry by the miners on the variation of effective rates of RSPT. This is because the rates vary according to the returns of the project and thus projects that involve highly valuable resources will tend to pay more tax compared to others. Under the proposed RSPT, low profit mines will only pay company tax but high profit projects may pay more tax if they earn higher resource profits (Mawby, 1972). Reaction of capital the market The Australian capital market closed on a higher performance since it was boosted by mining stocks. The standard Share and Price/ASX200 index was up by 35.3 points which is an equivalent of 0.75% at 4,771.9 points. On the ASX 24, the share price index futures contract during the month of March was 43 points higher at 4,772 points, with 19,015 traded contracts. Mining companies such as BHP Billiton experienced a rise on their share prices which was up by 60 cents which is equivalent to 1.34% at 45.42 dollars. Rio Tinto added 1.25 dollars an equivalent of 1.46% up to 86.70 dollars. Shares in Rio Tinto that comprised of the majority owned Energy Resources of Australia (ERA) which was the largest miner of Uranium, fell drastically following the profit downgrade. The ERA shares went down by 1.22 dollars or 9.26% to 11.95 dollars (Stigler, 1972). Shares prices in Giralia Resources went down after Atlas Iron an average level producer of steel offered 828 million dollars off market friendly takeover that was recommended by iron ore explorer. Giralia shares closed up by 1.19 dollars or 39.8% to trade at 4.18 dollars while Atlas shares lost 4 cents or 1.35% to 2.92 dollars. Shares in new Newcrest which is the largest gold miner in Australia, fell by 5 cents to trade at 40.34 dollars. Mining is one of the sectors that have complex resource companies. The mining industry is very risky and capital market research should be done to minimize such risks. Exploration opportunities influence the share price and capital market research is necessary in order to help in the interpretation of exploration results which will eventually add value to investors (Mawby, 1972). Conclusion Despite the fact that the proposed resource super profit tax is criticized by some individuals, it is intended to be an equalizing tax which will provide increased tax revenue thereby offsetting lower the cooperate and personal tax. However, the intriguing aspect of the RSPT is that it impacts on variety of industries in different ways depending on factors such as opening tax losses, capital allowances and royalty arrangements. The Resource Super Profit Tax will replace the crude oil excise. The Government will work in conjunction with stakeholders on the design of RSPT. This consultation began once the RSPT was announced and released. The consultation will also cover the exemptions from RSPT where applicable. The proposed tax will provide a more appropriate return to the Australian community from the exploitation of its non-renewable resources compared with the operating tax arrangements. This arrangement must be replaced since it does not consider changes in profits. The RSTP is more efficient and will encourage investment and employment. Under this new tax, the community will receive a higher share of resource profit and will capture a stable share of variations in resource profit. In the assessment of the liability for the Resource Super profit tax (RSPT), the scope of revenues and cost considered are defined by the taxing point. It is proposed that the taxing point be set close to the point of extraction of the resource. In the current system, royalties are paid o the extraction or sale of resources but under the RSPT, mining firms will receive a refundable credit that will offset the royalties paid. Under this proposed system, the project will not incur any tax liability until it starts making profit after recovering its cost. The Australia’s non-renewable resources are becoming more significant to the community and the entire economy and this arouse the need to introduce the RSPT. It will deliver a great return to the community from the extraction on sale of its non renewable resources as well as enhance the performance of the e resource sector (Watts &Zimmerman, 1986). There have been a lot of comments in Australian media concerning the Resource Super Tax Profit (RSPT) and submissions are being made to the Government about the effects and impact of the tax system on current and future mining projects. Since its announcement, the system has faced criticisms and it is therefore the subject of consultation with key stakeholders. There are high chances that the RSPT will not be passed or if it will be passed it means therefore that it must be modified. In my opinion, the new tax system should not be introduced since it applies to both new and already existing projects. The new projects should be allowed to stabilize and make a significant profit before it is subjected to the resource super profit tax (Watts &Zimmerman, 1986). In my opinion, although the initiative by the Australian Government to introduce the proposed Resource Super Profit will help in the collection of revenue, it is a bigger challenge to smaller companies. The RSPT is meant to apply to all companies involved in the extraction of resources regardless of their size. Most of the junior companies do not have enough cash flows. On the other hand the new tax arrangement adopted will also have a negative effect on the Australia stock market Reference Mawby, M. 1972, Mining prospects and public policies, The Australian Director, Sydney. Nick C, 2010, the impact of the resource super profit tax, retrieved on 7/12/201 from http://www.navigatorpf.com/blog/impact-resources-super-profit-tax Percy D. L, 1980, Commercial goodwill: its history, value, and treatment in accounts, Ayer Publishing, Melbourne. Sir George H. K, 2009, Official year book of the Commonwealth of Australia, Volume 51, Commonwealth Bureau of Census and Statistics, California. 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