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Estimated company tax, MRRT, carbon tax and royalties expenses for the minerals sector. Report prepared for the Minerals Council of Australia - PDF
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1 Estimated company tax, MRRT, carbon tax and royalties expenses for the minerals sector Report prepared for the Minerals Council of Australia September 2013
2 Dr John Kunkel Deputy Chief Executive Minerals Council of Australia Level 3, 44 Sydney Avenue Forrest ACT 2603 Pty Ltd ACN: Level 1, 9 Sydney Ave Barton ACT 2600 PO Box 6334 Kingston ACT 2604 Tel: Fax: July 2014 Dear John, Estimated company tax, MRRT, carbon tax and royalties expenses for the minerals sector Please find attached our report presenting and analysing elements of the tax paid by the minerals sector. We hope this analysis proves useful to the MCA. Please do not hesitate to contact me should you have any queries. Yours sincerely, Chris Richardson Director Pty Ltd Liability limited by a scheme approved under Professional Standards Legislation Pty Ltd
3 Contents Glossary... i 1 Introduction Methodology for royalties estimates Methodology for company tax estimates Methodology for carbon price estimates Methodology for MRRT estimates Comparison with the 2012 MCA tax survey results Comparison with the matching results from last year Limitation of our work Charts Chart 3.1 : Profit/taxable income growth, taxable income (TI) share of profit... 4 Chart 3.2 : Estimated annual profits before income tax, total mining... 6 Tables Table 1.1 : Estimated tax payments, minerals sector... 1 Table 2.1 : Estimated royalties, by commodity and State... 2 Table 4.1 : Estimated direct emissions liability, Table 4.2 : Estimated direct emissions liability, Table 6.1 : Comparison with MCA survey results Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms Pty Ltd
4 Glossary ABS ATO BP BREE CER DAE GFC MCA MRRT TI Australian Bureau of Statistics Australian Taxation Office Budget Paper Bureau of Resources and Energy Economics Clean Energy Regulator Global Financial Crisis Minerals Council of Australia Minerals Resource Rent Tax Taxable Income i
5 1 Introduction was commissioned by the MCA to provide estimates of the likely tax expense (including company tax, royalties payments, MRRT and carbon permit revenues) borne by the minerals sector. Table 1.1 provides a summary of our estimates. Table 1.1: Estimated tax payments, minerals sector Royalties 4,054 7,471 5,742 8,644 9,090 8,338 9,977 Company tax 8,120 13,205 6,135 14,005 15,380 10,003 11,989 MRRT Carbon pricing i Total minerals ii 12,174 20,676 11,878 22,648 24,471 19,163 22,709 Source: State and Federal Budget papers; ATO Taxation Statistics; ABS 5676, BREE, DAE estimates i Does not include indirect emissions liabilities (scope 2 costs) or the cost associated with reduced fuel tax credits under the carbon pricing regime ii Includes carbon tax and MRRT payments in and The figures highlighted in blue in the above table are a mix of official forecasts and Deloitte Access Economics estimates. All other figures are taken from official sources. Note that all the estimates in this report are on an accrual basis. In brief: estimates the total tax burden on the minerals sector at $22.7 billion in the financial year just ended. That is the second highest level on record, behind only , with being the financial year which benefited from the peak in commodity prices. Note that all the estimates in this report are on an accrual basis. An additional $1.6 billion of company tax may have been paid in cash terms in due to the bringforward of the timing of company tax payments in A description of our forecast methodology for royalties, company tax, MRRT and carbon pricing follows. 1
6 2 Methodology for royalties estimates The royalties estimates are essentially as estimated by State and Territory Governments, with the exception that has reduced estimated iron ore royalties in by some $200 million below the projections in the WA Budget. This latter adjustment has been adopted in light of the recent sharp falls in spot iron ore prices. Table 2.1: Estimated royalties, by commodity and State actual actual actual actual actual estimate Budget Coal 1,561 4,290 2,678 3,541 3,786 3,198 3,130 Iron ore 1,196 1,988 1,857 3,701 3,833 3,910 5,242 Gold Other minerals 1,145 1, ,149 1, ,306 Total minerals 4,054 7,471 5,742 8,644 9,090 8,338 9,977 WA 1,704 2,327 2,299 4,193 4,325 4,407 5,701 Qld 1,308 3,410 2,101 2,816 2,881 2,243 2,382 NSW 595 1, ,240 1,464 1,318 1,360 Other States Source: State Budget papers; DAE estimates All the data included in the above table are from published State and Territory Treasury sources (except as noted above with respect to iron ore royalties in , and below where gaps have been filled by estimates made by ( DAE )). As such, the royalty estimates and projections mostly reflect assumptions made by various State Treasuries: For Western Australia for the years and , data are as reported in the Budget Paper No.3 (BP3) published on 8 May 2014, except for a $200 million reduction in iron ore royalties in The data for were sourced from the BP3, those for were sourced from the BP2, while those for were sourced from the BP3, and those for from the BP3. For Queensland for the years and , all data are as reported in the Budget Paper No.2 (BP2) published on 3 June The data for and were sourced from the BP2, while the data for were sourced from the BP2. The data for were sourced from the Queensland Department of Minerals and Energy website. For NSW for the years and , all data on total royalties are as reported in the Budget Paper No.2 (BP2) published on 17 June The 2
7 and figures were sourced from the BP2. The data for were sourced from the BP2, and those for from the BP2. The coal component of total royalties for and were sourced from the BP2, and for and were sourced from the BP2. The coal component of royalties has been backcast prior to that by DAE. The data for Tasmania for are consistent with the post-election Report to the Treasurer: Analysis of Budget Risks April 2014 published on 28 April 2014 (and incorporates the initial estimate for from its Budget adjusted for revisions in the Revised Estimates Report and the post-election Report). The data for Tasmania for and are as reported in the Annual Financial Report published on 31 October 2013, and prior to that are as in its earlier year Annual Financial Reports. For the Other States, the data for Victoria, South Australia and the Northern Territory for and are as reported in their Budget Papers, and for and are as reported in their respective Budget Papers and their Annual Financial Reports for For South Australia, the commodity breakdown is as reported in the SA Department for Manufacturing, Innovation, Trade, Resources and Energy s MESA Journal issues 64 and 68 published in March 2013, March 2012 and in prior year editions. 3
8 3 Methodology for company tax estimates In brief, the company tax estimates are derived from Australian Taxation Office data available through to , with DAE estimates based on ABS numbers for profits before tax thereafter. The most recent available profit data before tax from the official sector is from the Australian Bureau of Statistics (ABS) Business Indicators publication (cat ). This provides quarterly profits for the mining industry through to the March quarter 2014 (and hence covers all of and three quarters of ). DAE has applied judgement to assume that profits for the final quarter of will be 5% lower than in its trend level in the March quarter, so as to reflect falls in some commodity prices in recent months. Chart 3.1: Profit/taxable income growth, taxable income (TI) share of profit 120% TI share of profit Profit Taxable income 100% 80% 60% 40% 20% 0% -20% -40% -60% Taxable income data are available from the Australian Taxation Office to By comparing the growth in both profit and taxable income, as well as the taxable income share of profit (see Chart 3.1), three observations are worth making: On average taxable income tends to account for about 66% of the ABS measure of profit. Hence in normal times this is an appropriate share to expect. When times are good, taxable income tends to grow more slowly than profit. 4
9 When times are bad and profit is falling, taxable income tends to fall quicker than profit, as companies use past tax losses to reduce their tax liability. As Chart 3.1 shows, these are broad tendencies rather than hard-and-fast rules, and a consistent pattern is not seen every year: In , profit rebounded strongly after the global financial crisis (GFC), increasing by 53% in that year, while taxable income grew by 114%, 61 percentage points faster than profit. This gap occurred because net deductions grew less than profit. In other words, miners made relatively more tax deductions in than they did in , and hence the gap between profit and taxable income narrowed between and That makes sense from an intuitive point of view with taxable income falling more rapidly than profit during a downturn, next year s figures are starting from a lower base. In , profit fell by 9% while taxable income grew by 11%. This outcome reflects a break in the general pattern observed that taxable income falls more quickly than profit in bad times, and is also inconsistent with the survey evidence showing a faster than normal drawdown of prior year tax losses. As such, represents an anomaly compared to earlier years. In part, this may reflect companies having used up the majority of their prior year tax losses, and this in combination with a decline in capital expenditure and related deductions may have caused a correction in taxable income relative to accounting profit. Given the outcome for , taxable income is assumed to move in line with profits in both (a fall of 31%) and in (a rise of 19%). Note that these estimates therefore imply and taxable income is 81% of the minerals sector s profit. That is well above the 48% low seen in the latest official data for , and above the historical average of 66% noted in the observations listed above, but is consistent with the last available actual data for , when the ratio was also 81%. To derive separate growth taxable income estimates for oil and gas and minerals for and (official data from the ATO is used for and earlier years), DAE has increased taxable income for oil and gas by the rate of increase in the value of production for oil and gas implied by the latest BREE forecasts of export volumes and unit export prices. The remaining growth in mining taxable income is then attributed to minerals. Gross tax for minerals and oil and gas is calculated as 30% of taxable income, with total mining tax being the sum of the two. 5
10 Chart 3.2: Estimated annual profits before income tax, total mining $ million 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Finally, it should be noted that PAYG instalments are in the process of being moved to being paid from a quarterly basis to a monthly basis for large corporate taxpayers. In , companies with turnover of $1 billion or more commenced paying PAYG instalments monthly from 1 January As such, these companies can be expected to have paid PAYG instalments for April and May 2014 in the financial year, instead of in the financial year. Indicatively, based on this report s estimates of gross tax and taxable income for , that could result in an additional amount of around $1.9 billion in cash being paid by the mining sector in instead of in (comprising of around $1.6 billion from the minerals sector and $0.3 billion from the oil and gas sector). The estimates of company tax in this report are presented on an accrual basis and so are not impacted by this bring forward of company tax payments in
11 4 Methodology for carbon price estimates The Clean Energy Regulator (CER) has data showing the number of carbon permits surrendered by liable entities in the and financial years, as well as the number of free carbon permits allocated to each entity (whether a liable entity or not). Using these datasets, DAE estimates that the minerals sector in Australia generated net emissions liabilities (that is, net of free permit allocations) of some $512 million in and $573 million in By commodity, some 94% of net emissions liabilities ($482 million) are estimated to have come from coal mining, with iron ore and gold mining operations together making up the remaining 6% of net emissions liability in In , around 93% ($535 million) is estimated to have come from coal mining, with iron ore and gold mining operations together making up the remaining 7% of net emissions liability. Although other mining operations, in particular alumina (bauxite) mining, surrendered a significant amount of permits, sufficient free permits were allocated so as to give these mining operations a net emissions liability of zero. Where the free permits share in the table below exceeds 100%, it is assumed that miners completely discharged their scope 1 emission liabilities and then either handed excess permits to related parties (such as their energy supplier), sold them back to the CER, or sold them on the secondary market. Note that the numbers presented here represent miners direct costs under the carbon tax. Miners also face indirect costs in the form of higher energy costs passed on by their energy suppliers, and some of the free permits issued to the sector are designed to partially offset these costs. It is not possible from the data available to identify the indirect carbon liabilities of miners, nor can the free permits allocated to offset indirect costs be identified. As a result, the figures in Table 4.1 include only direct emissions liabilities and the permits used to discharge those liabilities. It should be noted however that, to the extent that some bauxite and other miners have excess free permits after completely discharging their direct emissions liabilities, those permits might be used to reduce or even eliminate their indirect costs. In essence, the figures presented here measure the number of paid-for permits surrendered by the sector a measure of the direct carbon price liability faced by miners (which is in keeping with the concept of tax payable applied elsewhere in this analysis). Note that the estimates have been made based on data published by the CER as at 20 June As such, while the estimates for represent the final emissions liability for that year, for the estimates are preliminary estimates of the emissions liability 7
12 based on the data available with estimates also made to fill in data gaps. Specifically, for , data on the number of permits surrendered as at 20 June 2014 are available, but unit shortfalls are not yet available. Similarly, the number of free permits issued in the first allocation is available, but not the second allocation. Note also that data are provided at a company level and are not broken up by industry. As a result, the dividing line between mining, refining and manufacturing activities is unclear in some cases. DAE has attempted to include only those companies undertaking significant mining activities, but it is possible that some under or overestimation exists with regard to both carbon liabilities and free permits. For example, OneSteel undertakes some mining but is mostly a manufacturing company, and it has been excluded from this analysis. Table 4.1: Estimated direct emissions liability, Emisssions (t) Emissions liability ($) Gross emissions liability ($) Free permits (no) Free permits ($) Free permits share Net emissions liability ($) Coal 20,938,462 $481,584,626 $481,584,626 - $0 0% $481,584,626 Alumina 15,783,726 $363,025,698 $363,025,698 17,938,665 $412,589, % $0 Nickel 1,712,589 $39,389,547 $39,389,547 2,908,499 $66,895, % $0 Iron ore 769,802 $17,705,446 $17,705,446 - $0 0% $17,705,446 Gold 573,379 $13,187,717 $13,187,717 - $0 0% $13,187,717 Other 563,351 $12,957,073 $12,957,073 1,639,495 $37,708, % $0 Uranium 268,988 $6,186,724 $6,186, ,546 $9,258, % $0 Copper 102,985 $2,368,655 $2,368, ,388 $20,179, % $0 Lead - $0 $0 386,856 $8,897,688 - $0 Zinc - $0 $0 - $0 - $0 Total 40,713,282 $936,405,486 $936,405,486 24,153,449 $512,477,789 Source: DAE estimates from Clean Energy Regulator emission databases. Table 4.2: Estimated direct emissions liability, Emisssions (t) Emissions liability ($) Gross emissions liability ($) Free permits (no) Free permits ($) Free permits share Net emissions liability ($) Coal 16,628,475 $401,577,671 $535,436,895 - $0 0% $535,436,895 Alumina 11,843,088 $286,010,575 $381,347,434 16,461,726 $397,550, % $0 Nickel 1,371,182 $33,114,045 $44,152,060 3,130,465 $75,600, % $0 Iron ore 707,848 $17,094,529 $22,792,706 - $0 0% $22,792,706 Gold 469,953 $11,349,365 $15,132,487 - $0 0% $15,132,487 Other 362,503 $8,754,447 $11,672,597 2,143,874 $51,774, % $0 Uranium - $0 $0 - $0 - $0 Copper 56,004 $1,352,497 $1,803, ,841 $14,413, % $0 Lead - $0 $0 326,380 $7,882,082 - $0 Zinc - $0 $0 - $0 - $0 Total 31,439,053 $759,253,130 $1,012,337,507 22,659,285 $573,362,087 Source: DAE estimates from Clean Energy Regulator emission databases. 8
13 5 Methodology for MRRT estimates This report uses updated estimates from the Federal Treasury of the gross minerals resource rent tax (MRRT) for both and , as published in the Budget. Specifically, the Federal Budget papers indicated that gross MRRT cash revenue was $310 million for (Table 10, Budget Paper No. 1 Statement 5, page 5-10). The Final Budget Outcome indicated that the net revenue from the MRRT was $200 million in on both a cash (Table 3, page 6) and accrual basis (Table 4, page 10). On that basis, gross MRRT (accrual) revenue has been estimated in this report at $310 million for For , gross MRRT (accrual) revenue was estimated in the Budget at $170 million (Table 10, Budget Paper No. 1 Statement 5, page 5-10). This estimate for MRRT revenue in has been used in this report. 9
14 6 Comparison with the 2012 MCA tax survey results Care is required when comparing the gross company tax figures provided by the ATO (the ATO series ) and by the MCA survey (the MCA survey series ). In particular, the ATO series (such as the government-sourced royalty series) is based on a collection which aggregates annual data from companies with a tax year ending 30 June and those with a tax year ending the previous 31 December. The ATO (and ABS alike) does not make any adjustment on account of differences in tax years, whereas the MCA survey apportions the (estimated) two six-monthly subtotals from companies with tax years ending 31 December to the relevant years ending 30 June. Nevertheless, Table 6.1 below compares the company tax figures based on ATO data with the results of the MCA survey. Table 6.1: Comparison with MCA survey results Gross tax yr total MCA survey $M (DAE basis) (a) 8,733 7,751 12,848 12,170 41,503 ann % chg n.a. -11% 66% -5% n.a. ATO (b) $M MCA survey/ato ann % chg % 13,205 6,135 14,005 15,380 48,725 n.a. -54% 128% 10% n.a. 66% 126% 92% 79% 85% (a) DAE estimate. (b) Gross company tax as reported in ATO Taxation Statistics. Note that the estimates from the MCA survey are not directly comparable with ATO data. The year-to-year pattern shows a similar volatility between the two series. In aggregate, the MCA survey is around the 85% proportion a result that is broadly as expected. 10
15 7 Comparison with the matching results from last year The MCA also commissioned DAE to derive similar estimates in prior years. Comparing the current estimates versus those in last year s matching report: Royalties have been revised marginally higher in following the incorporation of some additional commodity level data for one State for that year, but are unchanged in earlier years. Royalty estimates are slightly lower in That reflects downgraded estimates by State and Territory Governments for in their Budgets relative to estimates made in their Budgets. Company tax expenses have been revised, reflecting the latest data and economic developments. Company tax expenses were higher than expected in , which largely reflects the incorporation of actual tax data for from the ATO. Company tax estimates are also higher in , which reflects the flow through of the higher base level of taxable income for on the company tax expense estimate for
16 Limitation of our work This report is prepared solely for the Minerals Council of Australia. This report is not intended to and should not be used or relied upon by anyone else, and we accept no duty of care to any other person or entity. The report has been prepared for the purpose of considering company tax, MRRT, carbon tax and royalties expenses in the minerals sector. You should not refer to or use our name or the advice for any other purpose.
17 Contact us ACN: Level 1 9 Sydney Avenue Barton ACT 2600 PO Box 6334 Kingston ACT 2604 Australia Tel: Fax: is Australia s preeminent economics advisory practice and a member of Deloitte's global economics group. The Directors and staff of Access Economics joined Deloitte in Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. About Deloitte Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings worldclass capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence. About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,400 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 2014 Pty Ltd