The impact of the Resources Super Profit Tax

By Nick Crawley on May 17 2010

“That’s not a tax….THIS is a tax”

Australia is a heavyweight amongst the world’s exporters of Minerals. In particular bauxite, iron ore, coal, base and precious metals. Its resources sector has fuelled growth in China and India, provides Japan with coking coal for its steel industry, and has underpinned the survival of the nation’s economy amongst recent global financial turbulence.

The Australian Government has proposed a new tax that may almost double the effective tax rate of a mining company and the industry is reeling as it comes to grips with its uncertainty and complexity. It is called the Resources Super Profit Tax ("RSPT") and when modelled shows some alarming increases in effective tax rates.

If you would like to understand the impact of RSPT on your project, contact us at enquiry@navigatorPF.com or call Daniel Jordi on +61 2 9229 7441.

A little over a week after it was announced on May 14, 2010, Navigator hosted a client briefing to 100+ resource developers, bankers and investors at the Hilton in Sydney to provide an overview of the proposed changes as well as provide an analytical perspective of how the tax is calculated and the expected impact. The RSPT client briefing presentation can be downloaded here.

The Henry Tax and RSPT

When launched, the Henry review was heralded as a once in a generation opportunity to improve the entire Australian tax system which is one of the highest taxing regimes amongst first world countries. One particular recommendation was the increased taxing of mining companies.

On May 2, 2010 the Australian Government responded to the recommendation of the Henry Review. Draft tax legislation has being circulated which plans to tax the ‘super’ profit of companies profiting from non-renewable resources.

The RSPT is intended to be an equalizing tax which will generate increased tax revenue offsetting lower corporate and personal tax to be introduced in other sectors. Of course, it’s easy to be critical but remember that the RSPT is part of a bigger economic equation and to be fairly considered from an economic perspective has to be studied with the other proposed reforms.

The resource and infrastructure focused community of Australian Project Finance is now grappling with the impact on the RSPT to assess the reduction in debt capacity and the potentially lower returns of the asset class.

How will RSPT impact your company?

The tricky aspect of the RSPT is that it affects different companies in different ways depending upon factors including

their level of profitability (as a function of time)
capital allowances
opening tax losses
royalty arrangements
beneficiation / transport / processing burden.

In some of the projects we have modelled in the past few weeks the effective tax rate has increased from ~30% to 55-65%.The impact on NPV is highly dependent upon the timing of the super profit has ranged from a 10% to a whopping 30% reduction in NPV.

The calculations and intra-tax relationships are not trivial, we have been working on this matter since it was announced and have worked with many mining companies, large and small and in different stages of planning verus operations – we understand the calculations well, along with the areas of uncertainty. If you would like assistance understanding the impact of the RSPT on your project we can help you estimate the impact on your effective tax rate contact us at enquiry@navigatorPF.com – in particular we can asses

existing economics
model the enactment of RSPT
the impact of varying taxing point and processing cost deductibility
impact on debt sizing (gearing, DSCR, LLCR)
impact on existing covenants and look at provisional measures to solve
estimate the impact on project and equity returns optimise your profit profile for best NPV

9 facts about the RSPT that you should know

This is an upside tax, miners with lower profit may be better off

Less profitable operations may even be rebated (cash!)
This material change in law will increase the perceived ‘risk’ of investment in Australia
It is not final, a federal election stands between the legislation being final
Even if it does become law, it won’t start until 2012
Big issue is the ‘taxing point’ and if transport / processing costs are deductible
Question over setting of a ‘World Pricing’ used in the RSPT calculation?
If passed, transfer pricing and profit shifting may well occur at mine gate
Kick off date is July 2010 and there is provision for capital spending until then
Future increases in royalties will not be recognised / allowed

If you would like to understand the impact of RSPT on your project, contact us at enquiry@navigatorPF.com or call Daniel Jordi on +61 2 9229 7441.