Economist weighs in on the resource tax debate

AMP economist My Bui has said that Australia’s mining royalty and petroleum resources rent tax (PRRT) settings may be due for a revisit, but warned policymakers against hiking mining taxes in isolation.

In a research note on Tuesday (5 May), Bui explored the complexities of Australia’s resource taxation settings, which have been under renewed scrutiny following a crossbench campaign for a 25 per cent gas export tax.

“As the Federal budget returns to deficit in the foreseeable future and spending pressures rise from higher defence expenditure, reshoring of manufacturing, and an ageing population, there is a question for the government on how to optimise their revenue sources,” Bui said.

In this context, the economist said it was worth examining Australia’s current resource tax settings, and whether they delivered an appropriate return to the community.

In Australia, the mining sector accounts for a substantial proportion (39 per cent) of the company tax take, almost double the share of the next largest contributor (financial services, 20 per cent). Given this, Bui said mining companies were “not obviously underpaying company income tax.”

She added that the “booming minerals trade” had been a significant contributor to Australia’s federal budget position over the years. That being said, the resources sector had unique characteristics which raised legitimate questions about its tax settings.

Unlike industries such as agriculture or manufacturing, which sell products they create, mining and gas companies extract and sell resources owned by the Australian public. Because of this, Bui noted that Australian citizens were correct to expect a share of the profits to flow back to them.

Secondly, as minerals are non-renewable, future generations are set to inherit less resource wealth. Bui said that additional taxes were necessary to ensure that future Australians got a share of this wealth.

Profits from resource extraction were also highly lucrative compared with those of other industries. Since 2007, mining profit margins have averaged at approximately 28 per cent, while other industries sat closer to 11 per cent.

“All of this points to a role for taxes on mining outside normal company income tax, which in Australia are largely implemented through production taxes (royalties),” Bui said.

Across states and territories, Australia’s average effective royalty rate sits at around 6.4 per cent, well below the profit differential between mining and non-mining companies.

“This suggests there’s a case to lift the effective royalty rate, as the sector has the capacity to absorb a higher royalty burden, while still earning returns well in excess of normal profits,” Bui noted.

That being said, royalties did not apply to offshore oil and gas projects, which account for a vast majority (73 per cent) of Australia’s annual gas production.

These projects are instead covered by the PRRT, a 40 per cent tax designed to capture above-average returns, or ‘super profits,’ derived from the extraction of valuable natural resources.

Bui noted that the capital-intensive nature of these projects and generous deductions and allowances had kept PRRT collections relatively low.

“High construction costs and generous deductions (including full expensing of plants and equipment rather than depreciation over the years) have meant PRRT collections have stayed very low at around 2 per cent of revenues, well below the ~6.4 per cent effective royalty rate in onshore mining,” she said.

When measured up to core taxation principles of efficiency, simplicity and equity, the PRRT has middling performance, Bui noted.

While resource rent taxes are arguably more efficient than royalties, as they are designed not to distort investment decisions, the current system is not simple. Companies often paid well below the headline rate due to deductions, pricing methods and the ability to uplift losses across years and projects, she said.

However, according to Bui, the biggest problem with the PRRT lay in the realm of equity.

“Equity means a fair share of profits (after compensating companies for risk) should flow back to Australian citizens and compensate the public for environmental and social costs,” she said.

“This principle is particularly lacking in the PRRT, where the revenue share of taxes has drifted down since FY20–21.”

Going forward, she said there was scope for policymakers to tighten carry-forward rules for the PRRT, create a stricter list of deductible expenses or introduce a more progressive rate to address these issues.

“While there is scope to increase onshore royalties higher, the most problematic issues are certainly concentrated in the PRRT for offshore gas projects, given effective rates remain well below the industry’s additional margin,” she said.

“However, we also need to avoid simply hiking mining taxes in isolation, which amount to a broader tax hike on the economy at a time when we need stronger private business investment overall.”