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Rudd's compromise mines tax was distorting, advisers warned

The Age

Saturday March 12, 2011

BY MATHEW MURPHY

GOVERNMENT advisers on the mining tax expressed concerns two days before former prime minister Kevin Rudd was dumped that a compromise deal apparently struck between him and Fortescue Metals Group founder Andrew Forrest would set "a very bad precedent" and create a "distorting tax".In email exchanges released yesterday under freedom of information laws, members of the government's panel on the mining tax said the Fortescue proposal was "contrary to the very nature of the (resource super-profits tax)" and "seeks interest deductibility to . . . turn into an income tax surcharge".According to the documents, the Forrest proposal included:€“That the uplift rate should be at the cost of borrowing (about 10.2 per cent) plus 10 per cent.€“Royalties to be credited not refunded.€“Interest deductibility, not only on the debt but on the total capital. This is a proposal that the Treasurer's office said was "presumably expensive".Days after Mr Rudd was dumped as prime minister, Mr Forrest said the pair had struck a deal regarding sticking points in the since-revised mining tax.In the emails, dated June 22, two days before Julia Gillard rolled Mr Rudd for the top job, senior Treasury official David Parker said Fortescue's main concern was that the tax "not be payable until after has (sic) financiers have been repaid in full".Mr Parker suggests in the emails that Mr Forrest's demands are excessive."It appears that FMG are also worried about the investment outside the taxing point. No other 'normal' business gets the capital repaid before a tax kicks in ‚€¯ still that is what FMG appear to be asking for," he wrote in an email to the panel.On June 21, before the government received the Fortescue proposal, Treasurer Wayne Swan's chief of staff, Chris Barrett, suggested to Treasury officials that it would be "worth you guys having thoughts on this ‚€¯ or defensible public policy positions approximating this wherever possible ‚€¯ given the request will be coming, and may need a turnaround for early tomorrow."The government's independent corporate financial adviser, Paul Binsted, told Treasury that he had concerns about the compromise deal."The FMG proposal is contrary to the very nature of the RSPT as a cash-flow type tax and instead seeks interest deductibility to, as David (Parker) has explained below, turn it into an income tax surcharge," he said. "My initial reaction is that this would be a very bad precedent and would defeat some of the objectives of the RSPT as a non-distorting tax."My conclusion is, therefore, that if government wishes to assist FMG with its highly leveraged financing proposal, for transitional reasons, this should be done outside of the tax system by an industry grant or soft financing (eg preference shares)," Mr Binsted said.Fortescue was not available for comment.

Ā© 2011 The Age

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