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Monday, 6 December 1976
Page: 3342


Mr KEATING (Blaxland) -These Bills give legislative effect to the provisions announced in the Budget by the Treasurer (Mr Lynch) in August. The ones I will concern myself with in this cognate debate are those primarily associated with the mining and petroleum industries. In that respect the Bills encompass at least S important changes to the Income Tax Assessment Act which were the subject at an earlier stage this year of investigation and recommendation by the Industries Assistance Commission. I shall describe them briefly seriatum.

First, the most important one is that allowable capital expenditure by any petroleum or general mining company on the development of a mine or field is deductible at the rate of 20 per cent on a diminishing value basis. This contrasts with the 4 per cent diminishing value basis which is currently applicable. Secondly, allowable capital expenditure on the facilities used for the transportation of minerals including petroleum will be deductible on a straight line basis over either 20 years as previously or 10 years at the taxpayer's option. Also under this category expenditure on rail transport facilities have been extended to cover expenditure at present not deductible on port development such as harbour surveys, initial dredging, navigational aids and breakwaters. Thirdly, allowable capital expenditure on the development of a petroleum field will now be deductible from income from any source, that is, at the same rate as allowable capital expenditure generally. Fourthly, petroleum exploration expenditure will now be immediately deductible against income from any source instead of, as previously, petroleum income only. Fifthly, the retention allowance in respect of trading or business income available to companies for undistributable income tax purposes is to be increased from SO per cent to 60 per cent for income in respect of the 1975-76 year of income initially.

The Opposition has a mixed reaction to these measures. I will briefly state our attitude to them. We support all of the measures except the one pertaining to deductions for capital expenditure at the rate of 20 per cent on a diminishing value basis. At least three of the provisions I have mentioned were the subject of investigation, report and recommendation by the Industries Assistance Commission; that is, expenditure on mineral petroleum development to be deductible from income derived from any source, allowable capital expenditure by petroleum companies to be deductible from income derived from any source, allowable capital expenditure to be extended to cover expenditure on ports and related facilities including housing and welfare facilities located at the port site. In these respects the Government's budgetary proposals are in line with the IAC recommendation. However, in respect of the rate of deduction for allowable capital expenditure on assets used for mining or petroleum operations, the Government's proposition of a 20 per cent diminishing value basis is in conflict with the IAC recommendation, which was that deductibility be allowed on a straight line basis over the life of the asset, the life of the mine or 1 S years whichever is the least.

I shall deal now with the question of the provision of this legislation relating to allowable capital expenditure on assets. The history of this legislation is that when the experience in Australia and elsewhere in the world showed that coal mines and other mines which had a long life the tax Act in respect of depreciation allowed a write-off on capital assets on a strict life of mine basis. This was very different to the deductibility allowed general manufacturing and over a period of time it was changed to come more into line with manufacturing industry and a deduction on a 4 per cent diminishing value basis was established in 1951. Later as Australia moved into what has been termed the mining boom, this was again altered to provide immediate deductibility for depreciation. This of course was clearly concessionary as it did not in any way take into account the life of the asset.

In 1973 the then Labor Government changed the rate of depreciation to a 4 per cent diminishing value basis or, if the life of the mine was less then 25 years, deductions spread over the life of the mine in equal instalments, the rationale being that mines lasted at least 25 years, and if less, the straight line deduction was available. After much indignation on the part of the mining industry at this change, the matter was then referred to the Industries Assistance Commission by the then Prime Minister, the present Leader of the Opposition (Mr E. G. Whitlam), on 2 May 1974. After investigation the Commission recommended in its draft report that the 4 per cent diminishing value basis remain but then changed its recommendation to a 15 year straight line basis in the final report, no doubt in a spirit of compromise- but to no avail. The Government had other ideas.

Be that as it may, the Opposition does see justice and merit in a departure from what is otherwise a clear principle of depreciation based upon the life of an asset or mine. It does so because of the compelling arguments that finance for large capital projects for the mining industry is granted only upon the surety of a firm contract and a demonstrable adequate cash flow. That is because the advances of sums in the hundreds of millions cannot be secured against a participant's other assets. The only realistic security then available to the lender is surety of return of funds and service to loans via the cash flow from the company's earnings. The Industries Assistance Commission recommended IS years on the basis not of facilitating a cash flow but to bring the rate of deductions into line with that generally applying in manufacturing, the IAC proposition being that this would guarantee taxation neutrality. For my part, I think tax neutrality is bunkum, nonsense, and that there is a clear case for a concession arising from the adjustment of the rates of depreciation in favour of the mining industry, in particular because of the difficulties of servicing vast amounts of capital.

It is generally accepted in Australia that the period for loan borrowings in respect of mining is somewhere around 7 years. Because of the uncertainties of the capital market and of the nature of interest, 7 years is about the average lending period for large resource orientated loans wherever one might look in the world. It is during these 7 years that it is important for the mining industry to recoup the major part of its outlay on assets allowable capital expenditure. The Opposition submits that the 20 per cent diminishing value basis of deductions is too generous because it leads to the unhealthy situation that no tax is paid in the first year and only small amounts are paid in the ensuing years. One can find that over a period of four or five years, by the time the Government collects the tax, double figure inflation as we have experienced in the last few years will have eroded the value of the tax dollars by half before they are collected.

We had a situation during the mining boom in the 1960s in which, as Mr T. M. Fitzgerald demonstrated in his report in 1974, with constant development and constant deductions being available tax was not paid. It is true it was paid later but what were 1967 dollars worth in 1974? If one accepts that the departure from the principle of deductions over the life of an asset or a mine is concessionary, the issue is: What is the appropriate concession; what is the level of deductibility permissible to meet the demands of cash financing over this vital initial 7 year period?

In the Opposition's view a reasonable rate of deductibility would be a 10 per cent diminishing rate. This rate is simpler than the straight line method for accounting purposes, as on that basis the life of each piece of equipment has to be assessed individually whereas on the diminishing value basis the balance after each year is lumped together. If one accepts that the diminishing value basis is preferable to the straight line, what needs to be assessed is the level of deductibility. In my opinion and in the opinion of the Opposition a 10 per cent rate is preferable to a 20 per cent rate. This does justice to the cash flow problem for capital financing and it is somewhat better than the rate of deductibility accorded general manufacturing. I refer to a table which I have prepared in relation to a $600m investment and assumed levels of company income for the first 7 years. I seek leave to have that table incorporated in Hansard.







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