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Economics Legislation Committee
21/02/2012

HEFEREN, Mr Rob, Executive Director, Department of the Treasury

MALONEY, Mr Matthew, Senior Adviser, Costing and Quantitative Analysis Unit, Department of the Treasury

MARTIN, Ms Stephanie, Deputy Commissioner, Resource Rent Tax, Australian Taxation Office

O'TOOLE, Mr James, Manager, Resource Tax Unit, Indirect Tax Division, Department of the Treasury

ROFF, Ms Kate, Principal Adviser, Department of the Treasury

SEDGLEY, Mr Patrick, Manager, Business Tax Working Group Secretariat, Department of the Treasury

SOUTH, Mr Ian, Senior Adviser, Department of the Treasury

CHAIR: The committee will come to order. I welcome Mr Heferen and other officers from Treasury. Do you have an opening statement you wish to make or should we go straight to questions?

Mr Heferen : Straight to questions. No opening statement. I just note that Ms Martin is from the Australian Taxation Office.

CHAIR: Very good. Welcome, Ms Martin. Do you have an opening statement to make?

Ms Martin : No.

CHAIR: I just want to address in passing three or four issues that have been raised today and then I will hand over to my colleagues to ask questions to clear up some of the issues. Firstly, we have had this discussion point that the level of revenue that is going to be derived from the bill, when passed, is going to depend on the level of activity in the industry and that raises the issue of volatility of revenue flows to government. This relates to the commitments the government has made in a range of other areas. Can you just put on the record for us, Mr Heferen, how significant in terms of the total revenue take to government on an annual basis this MRRT will be going forward? Is it 10 per cent of government revenue or 15 per cent?

Mr Heferen : If passed in its current form our estimates for what the legislation would raise, I think for 2012-13, is $3.7 billion. That is out of a tax revenue base for the Commonwealth of around $350 billion.

CHAIR: So, something around one per cent, give or take?

Mr Heferen : Yes, that is right. Of course, $3.7 billion is still $3.7 billion, but in terms of the aggregate size of the Commonwealth’s tax revenue base, it is obviously not significant.

CHAIR: Understood. Now, the second point I want to raise with you is this issue that is raised by Fortescue—and it is their continuing attack point. They are a company from inception—less so now—heavily funded by debt. They raised their capital at high interest rates offshore to fund the growth and development of their company. The company is now successful and has a large amount of cash flow funds due to expansion. They are critical of their inability to deduct financing costs or interest costs from their ongoing expenses, because a lot of their outlays were spent in areas remote from the project site, that is rail, port and shipping costs. They say that is per se inequitable and discriminatory compared with their competitors. What is your response to their inability to claim financing costs as a deduction because of the design aspects of this bill? You are familiar with the argument, are you not?

Mr Heferen : I think so. I think I have heard it. When they borrow money and, as they would say—I would not say heavily reliant—are somewhat reliant on debt funding, which is very similar to a whole range of other businesses, the cost of financing that, and also the interest they would pay back, is still deductible under the corporate income tax. The principle of income tax is that costs or outgoings incurred in receiving assessable income are deductible and hence the interest costs would be deductible. That is on an income tax model and presumably they do not have any difficulty with that, because none of this changes their treatment of income tax.

The MRRT, by dint of the heads of agreement, was specifically designed on a profits based tax or a cash flow tax, a bit like but not completely similar to PRRT. It is simply a design element of a cash flow tax that the things that are purchased—the capital acquisitions—are immediately expensed, unlike an income tax where the capital acquisition is not expensed and a depreciation deduction is available over the life of the asset or some other rate if some other life is appropriate, like a statutory life or if the parliament of the day decides that a different rate is appropriate.

So, you do not actually look at the interest costs per se; you look at what it has purchased and then it is depreciated and then, of course, the interest cost is also deductible. That is on an income tax. On a cash flow tax the cost of the asset is written off. So, they borrow money, they buy something and the cost of that is written off. I suspect the design feature is such that if the interest cost was deductible as well you would end up getting two deductions for the one bit of profit. That is my brief understanding. I might turn to my colleagues who might be able to throw a bit more light on that.

Mr O'Toole : I might just add a little bit. Mr Heferen’s answer pretty well covered it. I would just note that under the cash flow taxes, both the PRRT and the MRRT, to the extent that the losses in terms of the capital that you expended on the capital item, for instance, is not fully written off in the year, it is then subject to an uplift. That is the long-term bond rate plus seven per cent in relation to the MRRT. That effectively proxies, if you like, the financing costs for the item as well.

CHAIR: Ms Martin, do you have anything further to add? What do you understand, Ms Martin, to be Fortescue’s complaint about the MRRT?

Ms Martin : Obviously, I cannot talk about taxpayers’ specific instances, but my understanding of the issue is really one of policy, not really one of administration, as the tax office issues are how we administer the tax once it is enacted and brought into place. So, for us it is merely a question of administering the law as enacted and I think, as Mr Heferen and Mr O’Toole outlined, the law is designed so there is not a deduction for financing.

CHAIR: That is right. That is the heart of their policy complaint, is it not? Mr Heferen, are you best to answer that question?

Mr Heferen : That is certainly one of the issues I have heard raised. There may be other concerns and it might be best for the committee to put them to us and we might be able to try to address them.

CHAIR: One of the claims they have made is that established mines can claim a starting base allowance to the point of 1 May 2012, but new and emerging miners will not be able to avail themselves of that deduction and therefore that is a disadvantage for new and emerging miners and, in their words, discriminatory. What is Treasury’s view of that claim?

Mr Heferen : As to the starting base, the idea of saying that if you are a miner in existence as of I think it is 1 May 2010, if you are in existence then, whether you are big, small or medium, your starting base at that point is taken into account in determining your overall liability. If you come into existence after then, by definition you have no starting base. The treatment of the starting base was articulated in terms of the heads of agreement that the legislation is based on. From our point of view, of course, that is just a binding constraint. That is the government policy further enunciated in the policy transition group. That is what the government has adopted. So, it is clear that to the extent that you have a starting base that has a certain treatment to be a form of a shield, if you like, for profits that will be taxable. To the extent you are new and you come into existence after, then clearly you do not have a starting base.

CHAIR: If you move forward 10 years and you are up and producing in 10 years time, presumably you will have a starting base cost then, but if you are new and emerging you do not get to make that deduction because you were not in existence before 1 May 2010.

Mr Heferen : There is a range of issues that could be debated about that, but I guess the point is that the starting base treatment is question of policy articulated in the heads of agreement and it would be inappropriate for us to—

CHAIR: Yes, but what is the policy behind it? We understand it is in the heads of agreement, but it is characterised to us as being discriminatory vis-a-vis projects from 1 May or 2 May 2010. So, it is in the heads of agreement. It has been agreed between the government and the major companies. Why is that? What is the policy behind it? Why is it not discriminatory?

Mr Heferen : To the extent that you are in place at that point in time, it applies equally. A range of investment would have gone into enabling whatever discoveries or capital expenditure was in place, and those commitments were made on the basis of the existing tax regime. The tax regime changes and so the rules change with it. As I have said, it is a pretty standard feature of most particularly significant tax changes. There has to be some recognition of people incurring costs or gaining some benefit prior to a change being announced and that being kept in place.

Ms Roff : It might be helpful to think of it in terms of those profits that have been brought to tax in later years actually being profits that are in part attributable to the investments that were made by miners before the tax was announced.

Mr O'Toole : In terms of a small emerging miner versus big businesses—and I have heard it put in earlier hearings, too—I think it is also important to remember that this is a project based tax. The starting base is attributable to an individual project. To the extent that a larger established miner starts a new project post that date as well then they will be subject to the same treatment.

CHAIR: If you have multiple projects, can you not transfer some of those losses?

Mr O'Toole : Starting base losses are non-transferable.

Ms Roff : That is correct.

CHAIR: Thank you. Senator Cormann.

Senator CORMANN: Mr Heferen, are you now in a position to give us an assessment of the net fiscal impact of the whole mining tax package?

Mr Heferen : Are you referring to the assistant treasurer’s response to the notice of notion?

Senator CORMANN: What I am referring to is that the government announced a mining tax with some revenue attached to it, and the government also announced a whole series of related measures which the government decided to attach to the mining tax. Then, of course, we also have the cost of the commitment in the MRRT heads of agreement to credit all state and territory royalties, which has sudden impact because of decisions in various states to increase royalties. So, what I am interested to know from you, here and today, whether you are in a position to tell us, is what the net fiscal impact of the whole mining tax package is going to be of the current forward estimates.

Mr Heferen : As to the statement by the Assistant Treasurer, the documents of the Senate order relating to the Minerals Resource Rent Tax, which he tabled in the Senate on 9 February, and attaching Attachment A, the underlying cash balance estimates of—

Senator CORMANN: I am aware of that table. I have it, just to, as you say, shortcut it. That table does not include information, for example, about the cost of the proposed company tax cut in 2014-15. It does not include a cost of the early starters company tax rate cut for small business companies. It does not include the cost of the proposed superannuation contribution caps operation or the higher caps for the over fifties in 2014-15, and of course the revenue estimates do not include the impact of the decision in New South Wales to increase royalties on coal. Are you now in a position to tell us what the overall net fiscal impact of the mining tax package will be over the current forward estimates?

Mr Heferen : I am not in a position to add anything to that Attachment A in relation to the costs for 2014-15 for the revised company tax cut with the early start to the company tax rate for small business companies and for the superannuation contribution caps operation, the higher caps for over fifties. But in respect of the New South Wales budget announcement, I think as we discussed at Senate estimates with this committee examining the additional estimates for the Treasury last week, that if a state government comes out and has a proposal that we can cost and take into account of course we do that and then have that in the relevant update, whether it is the budget or the midyear update.

The New South Wales budget came out before last year’s MYEFO, but what it did not do was specify what they were going to do and, in particular, I note that in the budget papers it stated:

New South Wales legislation to implement the royalty supplement will be prepared after the Australian government finalises its carbon tax and MR RT legislation .

I am taking this from the New South Wales budget papers. It continues:

The royalty supplement is intended to protect New South Wales revenue from the Australian government changes while minimising the financial impact on New South Wales coal mining. The New South Wales government is willing to discuss with the Australian government alternative proposals—

Senator CORMANN: I have the budget papers from New South Wales in front of me. Can I just ask a question, because in the news—

Mr Heferen : Sorry, could

CHAIR: Order!

Senator CORMANN: He is quoting what I have in front of me.

Mr Heferen : I just wanted to finish the answer at the end of the quote.

CHAIR: Keep going, Mr Heferen.

Mr Heferen : I was using the quote to put the context around it. It continues:

The New South Wales government is willing to discuss with the Australian government alternative proposals that recognise the impact of the carbon tax on New South Wales finances.

The point is that they have not then said, ‘And this is the royalty rate we will have on these particular products.’ Contrast that, say, with the WA budget, where last year it was clear that they were going to increase the royalty on a range of iron ore, I think, lumps or fines, and had the rate, had the product, had when it was going to become operative by, and so then you can take that into account and we can factor that into the costings and the revenue projections. So, when there is no detail there we just cannot do it; it is not possible to do it.

Senator CORMANN: So, are you saying the state government from New South Wales has not released enough information in these budget papers for you to be able to properly assess?

Mr Heferen : Exactly.

Senator CORMANN: Which is a bit ironic given that everybody else around Australia, including state governments, are saying that the federal government has not released enough information for them to properly scrutinise the implications for them on state royalties and GST sharing arrangements that flow from the MRRT, given that there is no detail on commodity price, production volume and other various revenue assumptions. I will just leave that to one side for the moment.

Mr Heferen : I think they are sort of different things, though, with respect.

Senator CORMANN: Sure, but it is the same principle. As to the question that flows from it, though—in the New South Wales state government budget papers these are the three key things it says. It says that New South Wales will increase royalties on coal, it says that the increase will only apply to firms that are subject to the Australian government’s proposed Minerals Resource Rent Tax, and it puts a figure over the forward estimates of $944 million in revenue that they expect to raise from it. So, Treasury here in Canberra does not take at face value the revenue estimate that the New South Wales Treasury has attached to that measure? Is that the reason you are not reflecting that revenue which would expect to come from this increase, by netting it off against the mining tax revenue that you expect to raise over the forward estimates?

Mr Heferen : No.

Senator CORMANN: So, you do not take the revenue estimate at face value?

Mr Heferen : No. You are saying: is that the reason why Treasury does not see something? Then, no; that is not the reason why. I had heard your question cast in the negative, so my ‘no’ was, no, that is not why we do it. The line in the budget states:

The New South Wales government is willing to discuss with the Australian government alternative proposals ...

So, this is in the context of the coal royalties, and they are saying:

... discuss alternative proposals that recognise the impact of the carbon tax on New South Wales finances.

I think to actually try to put together—

Senator CORMANN: So, you are saying it might not get to it?

Mr Heferen : I do not know what the alternative proposal might be. It might say, ‘We were going to do this, but given whatever might be contemplated there, maybe there might be different products, might be a different rate, it might be something else.’ Because it is an—

Senator CORMANN: There is a qualifier?

Mr Heferen : It is a genuine unknown. We just do not know what they would be doing. Therefore, I do not think it would be prudent to adjust the revenue estimates until such time as there is clarity around what their intentions are.

Senator CORMANN: Even though the state government there has included that revenue from that measure into their forward estimates?

Mr Heferen : I do not recall there being a year-to-year breakdown, but even the—

Senator CORMANN: There is. $235 million in 2012-13, $244 million in 2013-14 and $465 million in 2014-15. It is on page 52 of the 2011-12 budget statement under the heading ‘Revenue Policy Changes’. I will move on from New South Wales because I—

Mr Heferen : In finishing off that line of questioning, the point is that until such time as those alternative proposals—and I do not know what they are; I have not been involved in any of those discussions—are worked through, then there might be greater clarity about whether they are going to raise the coal royalties and what rates they might be, and information that we could take into account. Of course, then we would.

Senator CORMANN: The cost of the revised company tax cut for 2013-14 is $1.4 billion. All other things being equal, and without you being able to put a specific figure on it, would you expect that figure to increase or to reduce between 2013-14 and 2014-15, given that you expect an increase in company tax receipts?

Mr Heferen : All other things being equal, we would expect the company tax take in 2014-15 to be larger than 2013-14. We would expect nominal GDP to grow, we would expect the profits to be bigger and so, yes, we would expect that number to be bigger.

Senator CORMANN: In terms of the cost on the superannuation contribution caps, operation of the higher caps for over fifties, is it fair to say that more people would take advantage of that? The trend line seems to be between 2012-13 and 2013-14 that it is growing. Would you expect that figure to be bigger in 2014-15?

Mr Heferen : I do not know that issue as well, but we might expect the superannuation one to not be as big.

Senator CORMANN: Is it fair to say that the increase in the superannuation guarantee rate to 12 per cent, looking at what was in the 2010-12 budget, will continue to go up given that you are increasing the rate by a quarter of a per cent the first two years and then by half a per cent from there on in until you reach 12 per cent?

Mr Heferen : Yes.

Senator CORMANN: Even though you are not in the position to give us all of the costings for all of the measures that the government has attached to the mining tax, do you concede that the net fiscal impact of the whole mining tax package is negative over the forward estimates?

Mr Heferen : At this stage, of course, as the committee would be aware, the figures that are here are all then incorporated into the aggregate forward estimates. The aggregate forward estimates at MYEFO showed that the budget in 2012-13 was in surplus, in 2013-14 in surplus and in 2014-15 in surplus. One could, I suppose, pick out individual bits and discuss those, but—

Senator CORMANN: Sorry, with due respect, I am not asking about the budget overall. What you call individual bits just happens to be the package that is in front of us and the package that we are currently scrutinising on behalf of the Senate. There is a mining tax proposal before us. The government has made announcements about various budget measures that it has attached to it. When you talk about individual bits, we are entitled to ask questions about the net fiscal impact of the mining tax package. I put it to you that over the current forward estimates the net fiscal effect of the mining tax package is negative. Do you agree with that? Or do you, based on the information that has been released by the Treasurer—and you have read it out—

CHAIR: Mr Heferen, prior to answering that question you might give consideration to whether the government, in answering that question, disaggregates the effect of bills in its budget papers or does it only have an aggregate figure.

Senator CORMANN: In the explanatory memorandum, do you not provide information on the net fiscal effects?

Mr Heferen : Thank you, Chair, for the reminder. As I have said before, in any budget and any MYEFO there might be a range of measures. I think from the aggregate point of view what matters is the overall fiscal balance or the overall cash balance. In this case, of course, we are talking about a 2012-13 budget that is in surplus, 2013-14 budget that is in surplus, and 2014-15 budget that is in surplus. On Attachment A, which I have before me—and when compared with the MRRT revenue, which is outlined in MYEFO—they could be put side by side and people can inspect the numbers and see what they are. I do not think there is any controversy about that. The point is that the revenue anticipated in MRRT and the cost to revenue from the various tax cuts, concessions or other measures listed in Attachment A have all been taken into account and the 2012-13 budget remains in surplus.

Senator CORMANN: But as I say, we are assessing specifically the impact of the mining tax package. It is a new tax and, all other things being equal, you would expect a new tax with new revenue to leave the budget in a better position than when you started. On the basis of the information provided so far—and you have told us the costs of the company tax cut would be higher in 2014-15—there is absolutely no argument that the net fiscal impact of the mining tax package is going to be negative. My next question is: what is the—

Mr Heferen : The mining tax itself still raises revenue and there is a range of—

Senator CORMANN: We will get to the revenue the mining tax raises. I understand your discomfort.

I completely understand that.

Mr Heferen : There is no discomfort.

Senator CORMANN: No, I understand why you might be in a state of discomfort.

CHAIR: Mr Heferen, you would be aware that the government releases a whole range of material in the budget papers, MYEFO, supplemented with releases from time to time by the Treasurer and the Assistant Treasurer. Senator Cormann has chosen to put a question to you in a particular form.

Senator CORMANN: About the mining tax package?

CHAIR: About the net effect of a package of bills. You are not under any obligation to go beyond the public information that the government has chosen to release.

Mr Heferen : Senator Cormann, with respect, is asking about the public information that the Assistant Treasurer has tabled.

CHAIR: That is fine.

Senator CORMANN: Moving forward and beyond the forward estimates, what would be Treasury’s expectation of the revenue trend over the medium to long term, given the statement in MYEFO that the medium term outlook is for Australia’s terms of trade to decline as the global supply of iron ore and coal increases? What would be your expectation of the mining tax revenue trend beyond the forward estimates?

CHAIR: We do not go beyond the forward estimates. We had that discussion last week. You know that.

Mr Heferen : We have canvassed that pretty well. We would provide costings over the forward estimates period.

Senator CORMANN: With all due respect, there is a limit to how cute we can get about this. Treasury, under FOI, has released information about revenue projections to 2020-21, so let us not start playing these games. I did not ask you about specific revenue estimates. I am asking you about a trend line. If I were to put to you that, given what Treasury has put itself, about the medium and longer term outlook into MYEFO regarding the expectations there will be a decline in our terms of trade and an increase in the supply of iron ore and coal, would it be fair for me to say that the revenue would be expected to be downward trending over the medium to long term, again all other things being equal?

Mr Heferen : That would be contestable, because prices are an important element, but clearly volume and the exchange rate are also important. If the exchange rate stays high in comparison with the US dollar or increases, that will have an effect as well.

Senator CORMANN: If it is contestable, will you release the revenue and production volume assumptions that you have used to determine the MRRT revenue estimates so they can be properly scrutinised by the Senate?

Mr Heferen : To be fair, we have also canvassed this before. That material is typically provided to Treasury as commercial-in-confidence information.

Senator CORMANN: All of the material?

Mr Heferen : All of the material—

Senator CORMANN: Not even the Treasurer was as absolute in his statement when he refused to release that information. It seems to me, the way you are putting it, you are even more secretive than what the Treasurer would have wanted to be. The Treasurer said that some of the information was, in part, based on information provided by relevant companies. Now you are saying all of that material comes from these mining companies.

Mr Heferen : I am sorry. I think we might be talking about different things. If we are talking about the prices and volumes that we get from mining companies regarding their expectations of what the market will do—

Senator CORMANN: You know that state governments in Western Australia and Queensland get the same information from the same mining companies and publish their assumptions in their budget papers, so they can be part of the scrutiny of the budget estimates?

Mr Heferen : To the extent we can publish material and are not in any difficulty of compromising the relationship we have with firms that provide us with information to refine a range of things that we do—not just revenue forecasting, but economic forecasting. We obviously have to be very reluctant to do that, because part and parcel of being able to provide that information to governments is relying on information that we provide in-confidence. We have to respect that confidence.

Senator CORMANN: With respect, it is exactly the same process that state governments in Western Australia and Queensland go through, whether they are Labor or coalition state governments. Because their revenue estimates are sensitive to changes in a number of variables, they publish the assumptions they have made about those variables so that people can properly scrutinise whether their revenue estimates are credible. The Treasurer has jumped on some of the assumptions used to query them, because they were properly and transparently published in both the budget papers in Western Australia and Queensland.

Mr Heferen : I recall some of the Treasurer’s comments and, from my recollection, which I confess is obviously not perfect and might not be all that good, there was certainly discussion about the exchange rate forecast that the WA government had used in its budget. I know there was a range of discussions about the exchange rate forecast. I think even at the previous sitting of the—

Senator CORMANN: Take it on notice. I do not want us to waste too much time.

Mr Heferen : The issue about the exchange rate is one that we put in there. If the proposition is that WA releases the commodity prices in more detail—

Senator CORMANN: They do. WA and Queensland release their commodity price and their production volume assumptions. They are all based on surveys done by departments like yours of the same companies that you are dealing with and they publish them in their budget papers. We will move on from that point.

Mr Heferen : We will take that on notice.

Senator CORMANN: Have you assessed the medium to long-term fiscal impact of the MRRT? You said to me that you cannot share information with us about what happens beyond the forward estimates, but has Treasury assessed the medium to long-term fiscal impact of the mining tax package, that is, the revenue that you expect in terms of medium to long-term trends and the cost of all of the related measures and the trend that you expect to happen there over the medium to long term?

Mr Heferen : As with one of the initial questions from the chair, we forecast the mining tax revenue to raise around $4 billion or a bit under. It may be slightly over one per cent of the tax revenue. I think with the sheer logistics of it, with something that is a small proportion of the tax base like that, to try to pluck out a few elements that make up about one per cent and test its sustainability is something we simply would not do across any particular revenue head.

Senator CORMANN: That raises a pretty important issue. There are parts of Treasury that have published papers about the fact that we are already in a structural deficit position. When the RSPT was initially announced most of the related measures only took effect in the final year of the forward estimates. So, there is only one year of costs and there are obviously long-term trends in terms of where that cost is going to, in particular in relation to things like the increase in compulsory super where there are changes beyond the forward estimates in terms of the rate. You are saying to us that that is not something that you assess in terms of where the revenue is likely to trend over the medium to long term and where the cost of all of the related measures is likely to trend over the medium to long term to see how it impacts on the structural health of the budget over the medium to long term?

Mr Heferen : There are a lot of questions in there. With the first bit about the paper on the structural deficit, I am not saying there has not been one.

Senator CORMANN: I am happy to email it to you.

Mr Heferen : That would be excellent. In any budget and in many of the media updates there will be a range of policy decisions sometimes giving effect to tax increases or tax reductions, and their compounding effect. As you would imagine, if you had 10 or 15, another 10 or 15 and then another 10 or 15, their compounding effect is huge. We simply do not do that. Logistically it would be next to impossible.

Senator CORMANN: If that is true—

Mr Heferen : May I finish? As to the sheer logistics of that compounding effect, it is not as if there is one year and then the half year and those same measures going through, but each year there will be a number building on. As they will actually build on one another—and in this case changes to the MRRT—that will be a deductible expense for company tax. Obviously, as the MRRT goes up, company taxpayers have an extra deduction. That interaction has to be worked through. Each year highlighted in budget statement 5 in Budget Paper No. 1 is a detailed breakdown on the head of revenue and what we think it will track over the forward estimates period. That is at head of revenue. That is at an aggregate level where companies will pay their company tax, firms will pay their excise, companies pay their income tax withholding, and other individuals pay their personal tax. It makes sense to look at it at that level. One can have a look to see how it tracks over time. The tax to GDP ratio is, of course, tracked in a number of the statements. At that level we are reasonably confident that it is a pretty robust measure. But to go down underneath that and attempt to itemise particular things would be unreliable, because a big issue will be how the various measures would impact on one another or have effect on one another.

Senator CORMANN: The evidence that has been put to us is that the MRRT revenue will be volatile. If you look at what Treasury said in MYEFO, whenever you have high prices there is likely to be a supply response, and a supply response means that prices will come down over time. I grant you that production volumes will have an impact on the other side. However, we have a volatile revenue source that is potentially downward trending and you have the cost of related measures, which most definitely, in aggregate, is not only fixed but upward trending, increasing over time. Surely on the face of it that is a recipe for fiscal disaster?

Mr Heferen : I would not like to be associated with that strong language. The nature of the MRRT is a resource rent tax. By definition it will be more volatile than a range of other taxes, because those profits will increase. As to the rate at which they do, we have our best go in forecasting what that would be. I do not know of any method that is superior to what we would do. It is a bit like company tax. Company tax is quite volatile. The nature of corporate profits is that they are inherently more volatile. Capital gains tax was seen as extremely volatile. The individuals tax, personal income tax, is less volatile. Obviously with something like the global financial crisis they dipped. Nonetheless they are a bit more consistent. I do not think there has ever been any debate about the fact that a profits based tax or a rent tax is more volatile than others.

Senator CORMANN: There has been evidence put to us that the MRRT is more volatile than others, certainly more volatile even than the company tax.

Mr Heferen : The Treasurer himself has said that the rent tax is a more volatile source of revenue than other sources of revenue. At the other end is probably the consumption tax, where the rate of consumption typically does not vary that much.

Senator CORMANN: That does not answer my question. If you agree that it is a volatile revenue source, and obviously it is—

Mr Heferen : I think by its nature, definition and design.

Senator CORMANN: By its nature and by its definition it is clearly a volatile revenue source. If that is the case, how can it be responsible to attach a whole series of measures to it that have a cost which in aggregate will increase over time? You have a fixed cost that flows from all of the related measures and you have a revenue source that is volatile. How can that be a good thing in terms of sensible fiscal planning?

Mr Heferen : I think we are circling around the same discussion again. On the question of whether something is fiscally sustainable, the best measure of that is what the budget aggregate is. As I said before, in MYEFO 2012-13 it is forecast to be a surplus and in 2013-14 and 2014-15 it is projected to be a surplus.

Senator THISTLETHWAITE: Those figures, particularly in 2012-13, include the full impact of the MRRT on the budget bottom line?

Mr Heferen : Yes.

Senator THISTLETHWAITE: So, a forecast return to surplus with the full impact of the MRRT in 2012-13?

Mr Heferen : Yes, as at MYEFO. As the Senate would be aware, as things change, obviously from any budget to any MYEFO the key driver would be economic parameters. The economic parameters need to be updated and those economic parameters have an effect. When we are talking about the numbers that the Assistant Treasurer tabled, based on what was announced or calculated out of MYEFO, the underlying cash balance is in surplus. If we are going to get an estimate or an assessment of the fiscal sustainability, then that would be the key assessment. To drill down to things that are one percent, half a percent or a quarter per cent of the tax base, the margin for error is too great. The aggregate measure is the one that needs to be done. The aggregate measure has those features I have mentioned.

Senator CORMANN: There are three issues that I want to explore.

CHAIR: No. You have had the floor for 45 minutes and other senators want to ask questions. One of your colleagues next to you wants to ask questions, so be quick.

Senator CORMANN: I will be very quick and if we can have concise answers that would be great. During Senate estimates we talked about the cost or the value of the market valuation method as a starting base, because obviously that offers a tax deduction to some miners. You said you had assessed the impact of that on the mining tax revenue.

Mr Heferen : Yes.

Senator CORMANN: We have had evidence this morning that in order to be able to assess that you need to have project-by-project information, because the depreciation should not exceed 25 years, according to the MRRT heads of agreement, but will be based on an appropriate effective life of assets. Have you received information from those companies that will be eligible to use the market valuation method about what their intentions are around how they will claim that upfront tax deduction?

Mr Heferen : So, whether they will use the market value or book value and over what period they will depreciate things?

Senator CORMANN: If they use the market valuation method, the market value is obviously higher. Are you with me?

Mr Heferen : Yes.

Senator CORMANN: If you depreciate that, the shorter the period over which you depreciate the market value the higher the upfront tax deduction. What sorts of assumptions have you made about what the BHPs, Rios and Xstratas are likely to do in relation to their projects that are eligible for the market valuation method in order to cost the impact of that tax deduction on the MRRT revenue that you are likely to collect?

Mr Heferen : Mr Maloney might need to correct me where I go astray, but essentially in looking at this in a top-down approach, we would ask as at 1 May 2010 what was the starting base across the country for the eligible items, which is iron ore and coal, and what are the profits that are to be expected? In working out that starting base we received information from those in the industry.

Senator CORMANN: So, are you saying that the industry has not provided information about what their intentions are?

Mr Heferen : When you say ‘their intentions’?

Senator CORMANN: They have the option of depreciating assets up to 25 years. They can do it in 10 or 15 years, depending on what the life of the assets are in particular circumstances. Unless you have that information you cannot assess the impact of that particular feature of the MRRT heads of agreement on MRRT revenue over the current forward estimates.

Mr Heferen : We would assume slightly less than 25 years to be the case, and then the results come out.

Senator CORMANN: What is Treasury’s expectation of revenue from onshore expansion of PRRT over the forward estimates? In the explanatory memorandum you say ‘unquantifiable’. This is a new tax that the government is proposing to put forward with revenue that is unquantifiable. Does ‘unquantifiable’ mean that you expect no revenue from the onshore expansion of PRRT over the forward estimates and what are your longer term expectations? When do you expect that the onshore expansion of PRRT will start to deliver a revenue stream to the government?

Mr Heferen : I think I took a question on notice on this.

Senator CORMANN: Which has not had an answer. You have taken questions on notice on this from me about three or four months ago, and I am still waiting on it. I looked at the explanatory memorandum. When I asked you the question you took it on notice and I have not had a response, but in the explanatory memorandum—

Mr Heferen : I apologise for that.

Senator CORMANN: In the explanatory memorandum it says the revenue estimate from the onshore expansion of PRRT is unquantifiable. Why would we impose additional red tape on the onshore oil and gas sector if there is no benefit in terms of a revenue estimate that comes with it? My specific question is: does ‘unquantifiable’ mean that there is an expectation that there will be no revenue from onshore expansion of PRRT over the forward estimates and, if so, when do you expect revenue to flow from the onshore expansion of PRRT?

Mr O'Toole : In terms of the PRRT extension to onshore, it is unquantifiable in the sense that existing projects, because of the transitional arrangements for the PRRT, which are similar in nature to the MRRT, are expected to basically shield the existing projects, which are currently operating. It is unquantifiable in the sense that new projects may start and are likely to start onshore, which are likely to not have that shield and so there will be some revenue. Again, that is unquantifiable.

Senator CORMANN: They would have upfront deductions, too, from their investments and so on.

Mr O'Toole : Exactly, yes.

Senator CORMANN: With any offshore project it takes quite a while before you start to collect revenue.

Mr O'Toole : Ultimately, when it is going to start collecting revenue, like any profits based tax, depends on the quantum of the upfront expenditure.

Senator CORMANN: But you do not have a year targeted?

Mr O'Toole : No.

CHAIR: Senator Ludlam.

Senator LUDLAM: Can you talk us through your views on the narrowing of the application of the tax to only two commodities? The version that Treasury came up with first, or the original iteration through the Henry tax review, obviously applied to a much broader range of commodities. What justification is there for doing that, apart from the fact that the mining industry wanted it?

Mr Heferen : I think you are going to a policy question.

Senator LUDLAM: So, it was not on the basis of anything that you folk provided? There is no rationale or argument that you can put to us to have it make sense; it was just a political decision?

Mr Heferen : Do not get me wrong. I am not saying there is no justification or rational argument. It is quite the contrary. In a hearing such as this, matters of policy ought to be directed to the relevant minister.

Senator LUDLAM: Can you provide us with anything? I am not asking you to provide us with what the minister thinks was appropriate, but presumably you have advised him at some point that there is some rationale for doing so, otherwise it just looks like a gigantic carve-out.

Mr Heferen : Again, this is a question of policy. Our role before the Senate is to explain details of the legislation or possibly some issues about costings that we have done, but fundamental questions of policy are really matters for ministers and not officials.

Senator LUDLAM: We have heard both points of view today. Some witnesses have said that it creates distortions in singling out these two commodities and letting others off the hook and some have claimed the reverse. Does Treasury have a view either way as to whether we would have been better off leaving all the commodities in?

Mr Heferen : When one uses the term ‘better off’, there are some benchmarkings that are to be judged, which again fundamentally is a matter of policy.

Senator LUDLAM: That is interesting.

Mr Heferen : I note that a rent tax, by its nature, if properly designed and properly carried out, will not be affecting investment decisions.

Senator LUDLAM: We have heard a lot of folk in the mining industry today disputing that basic premise that, in fact, it will affect investment decisions to varying degrees of calamity. Do you have a view of how much more revenue the MRRT would raise if it were extended to cover—and we will just pick two for the moment—gold and uranium?

Mr Heferen : No.

Senator LUDLAM: Have you done any research on that or have you been asked to model any of that?

Mr Heferen : No.

Senator LUDLAM: How difficult would it be to provide the committee with an estimate?

Mr Heferen : That would be something that we would need to take on notice and seek our minister’s guidance on.

Senator LUDLAM: I think we can safely predict what kind of answer will come back, but I appreciate your taking that on notice. How much revenue raised by the proposed tax will return to the mining industry in savings in the company tax rate from 30 per cent to 29 per cent?

Mr Heferen : That is something that in principle we would not be able to know. That would be implying what the tax payable by those mining companies would be, which is something our very strict secrecy provisions would prohibit us from getting from our colleagues at the ATO.

Senator LUDLAM: Sorry, ‘secrecy provisions’?

Mr Heferen : The tax that an individual taxpayer pays is something that the Tax Administration Act treats as being confidential to the taxpayer. Obviously the tax office and the taxpayer will know, but the tax office is also precluded from passing on that information.

Senator LUDLAM: The people in the parliament passing the law are prevented from knowing?

Mr Heferen : In respect of an individual taxpayer.

Senator LUDLAM: No, in aggregate.

Mr Heferen : If you had a class of taxpayers, if you had people who were involved in mining—

Senator LUDLAM: Yes. That is the question that I am putting to you, in aggregate. I am not interested in exposing commercial-in-confidence.

Mr Heferen : We could probably get some estimate of that. One of the difficulties is that the mining companies are often not just involved in mining. There is a range of other activities where they will generate income. When we get the aggregate tax about a particular industry and how much tax might be collected from that particular industry, one has to be very careful about going behind the industry label, because what might be mining might actually be a lot more than mining. There are caveats. We will take it on notice and see what we can provide and whatever is provided will be appropriately caveated.

Senator LUDLAM: That is understood. You must be in the business of making educated guesses about these things or we would not get four-year forward estimates in the budget. Nobody is going to hold you to it to too many decimal places, but we should know to within an order of magnitude.

Mr Heferen : We will do our best.

Senator LUDLAM: One of the other difficulties we faced is an impressive variety of different estimates of the amount of tax that is actually paid by the mining industry. We hear ranges. In our committee papers we have five different estimates from three different sources. Can you help us nail it down for two years? For one year, which is the last available or most recent figures, and also for a baseline year that I would let you choose prior to 2004, before the boom really got going. I understand this would all be published somewhere. Where can I find a disaggregated breakdown of profit in the mining sector—expenditure, royalties and company tax—as fine grained as you are able to break out, so that we can see how those different categories of flow have changed over those two reference years?

Mr Heferen : We can take it on notice.

Senator LUDLAM: What is the difficulty factor on a question like that. I am presuming that is all available. We need an agreed set of figures.

Mr Heferen : We could look at the name of a company and, if we had sufficient numbers of companies, we would go to the tax office and say, ‘For these particular companies can you add up their tax all together and give it to us?’ That is not identifying any particular taxpayer. Provided that sample was sufficiently large, I am sure that would be okay. But that is what those companies have paid. I think what you are after is not so much what they have paid but the tax they have paid in respect of their mining operations. When people come up with a whole lot of different numbers and, indeed, they calculate different effective tax rates, one of the inherent complexities is trying to get down to a situation where an apple is compared with an apple, which is very challenging.

Senator LUDLAM: I agree.

Mr Heferen : You might be aware that Treasury has produced a couple of roundup papers in our three-monthly publication. People prepare papers looking at effective tax rates across industries. Again, that is contestable, because people have a different take on what is the appropriate base and the issues to include. There are those uncertainties. Please don’t get me wrong. I am not meaning to be difficult. It is just that they are very contestable. If one were after a definitive source, I suspect that is going to be very challenging and, in fact, the only people who really know what tax we pay in respect of mining operations would be the companies themselves, because they would be able to dissect or take that apart.

Senator LUDLAM: Into that ambiguity I suspect some pretty lazy arguments are being run. There are people in this debate taking advantage of the ambiguity, either wittingly or unwittingly, to run particular arguments. We will have heard that the mining sector is taxed much more heavily than other sectors of the Australian economy. We have also heard completely the opposite. It is really difficult to make a judgment call on those arguments, which are partly economic and partly political. We are looking to you to provide us with figures that we could at least agree were fair.

Mr Heferen : We can endeavour to do those. Even with a simple nomenclature issue, a royalty, for argument’s sake, a lot of people for all intents and purposes will talk about royalties being a tax.

Senator LUDLAM: We had that disagreement this morning.

Mr Heferen : It would be nice if it was, but clearly it is not. A taxation on the value of goods would be arguably equivalent to a duty of excise, which would be something that states could not levy but the Commonwealth can levy constitutionally. The argument is that the royalty is not a tax, it is actually a charge for taking the material from the state.

Senator LUDLAM: I am afraid the IPA strongly disagrees with that point of view, so we might need to write to it.

Mr Heferen : I would not want to go down that path, because to muck up that part of the Federation’s finances would seem to be a bit reckless. People talk about what the appropriate rate is. When a royalty is charged it is charged on a different base to say, income tax. I have read analyses from various places where it says that the tax rate that mining companies pay is 30 per cent, because they work out the taxable income and say what tax they pay, which is obviously 30 per cent by definition. The question is not what tax rate is applicable, it is what is the appropriate denominator, so what ought it be over? These come down to very contestable propositions, on which I think it is fair to say reasonable people can disagree. We can take it on notice and provide the committee with what we can.

Senator LUDLAM: Thank you. I do not want to labour the point. Can you provide us with that, preferably before we report while we are evaluating the bill, and at least how these matters are seen within Treasury, which would provide us with some kind of platform on which to base our views. That would be helpful.

Mr Heferen : We will take it on notice and through the normal process we will put it to the Treasurer to see what the Treasurer wants to provide.

Senator LUDLAM: The Treasurer has been running the counterfactual argument that the mining industry does not pay enough tax, but presumably we need to know how much they are paying before we can run that case. I presume the figures are there. I would like to go into a bit of detail, if there is time, on some of the complexities of this tax. A couple of witnesses have said that you are not going to end up collecting any money at all; that this thing has been written and negotiated by the three big miners in such a way that they will be able to wriggle out of most of their obligations. There are a couple of mechanisms that have been cited for that. Do you support the idea of a rolling review, even an annual review of the tax to see whether it is performing as expected and, if it is not, where the loopholes have emerged?

Mr Heferen : It is probably not our place to support or not support such a thing. I hope the committee would take it as being prudent that we, along with the tax office, through the early months of the MRRT, will be monitoring very closely what taxes will be paid. We will also be monitoring very closely the investment patterns, because clearly it is also an important issue for us to work through. After that monitoring we will be providing the Treasurer with information on progress, because as you would no doubt appreciate the Treasurer is very interested in the revenue that will be provided through the tax.

With respect to the question of a more thorough examination of how the tax is working, post the implementation review, there are a number of post implementation reviews that are done. At the end of the day this may well be one, but it will be matter for the government. Over the shorter term, we along with the ATO will be monitoring this very closely and providing ongoing information to the Treasurer.

Mr O'Toole : On the point of the post implementation review, from memory, one of the PTG’s recommendations was to have a Board of Tax post implementation review, and the recommendations were all accepted by the government.

Senator LUDLAM: How long after the implementation of the tax would that occur?

Mr O'Toole : Within five years.

Senator LUDLAM: Five years?

Mr O'Toole : Within five years. The precise timing would be a matter for the government.

Senator LUDLAM: Are those sorts of things normally published?

Mr O'Toole : I believe so, yes.

Senator LUDLAM: I am proposing something a bit different, which is a statutory review that would be public that would tell us whether people were wriggling out of their obligations or not.

Mr Heferen : The Board of Tax will be given a reference by the government to do a post implementation review. They would typically undertake quite a thorough consultation process. They will speak to all interested folk, put out a paper, call for submissions and do a substantial piece of work on how the tax is performing. The recommendations would be provided to ministers and then those reports would become public. That is the standard methodology. Obviously it is not set in stone and the government will no doubt respond if there are other variants that might need to be done.

Senator LUDLAM: I think the budget papers will tell us well before five years whether the tax is working as intended or not. Can I invite you, if you have not already had the opportunity, to at least review the submissions of FMG, BDO and AMEC, who pointed out in some detail how it may well be possible for the big three to simply slide away from their obligations using a number of different methods? I would like to ask you about two of them. The uplift rate has been criticised as an incentive effectively to bank losses and stretch our projects. Have you given any thoughts to those concerns?

Mr Heferen : No. Is this the seven per cent uplift?

Senator LUDLAM: Yes. It has been criticised as being very high.

Mr Heferen : That was in the heads of agreement.

Senator LUDLAM: Does that mean you cannot touch it, you cannot critique it or have a view on it?

Mr Heferen : We exist obviously to provide advice to the Treasurer and then implement decisions that the government makes. In respect of this, the government made its clear decision and it is our role to implement it. If we come across things that we think are important for the Treasurer to consider, we obviously provide those.

Senator LUDLAM: Have you provided advice in particular on whether that rate was set too high?

Mr Heferen : I hope the committee appreciates that issues on which we provide advice to the Treasurer are a matter of confidence between the Treasurer and his department.

Senator LUDLAM: I have heard that one.

Ms Roff : I note, too, that it is a design feature of the law that allowances have to be applied to the full extent to which they can be used. I am not sure how that bears on the issue that you are thinking about.

Senator LUDLAM: So, they do have to be applied or they do not?

Ms Roff : To the extent they can be and to the extent there are profits.

Senator LUDLAM: I draw your attention to the comments by two professors of accounting, Professor Carey and Fargo, who state:

Depreciating assets based on market valuation is not generally accepted accounting practice, yet it is allowed in the legislation.

I am not an accountant. That is not my background at all. To me it looks as though a miner could use a very high valuation to calculate depreciation and get a windfall gain on money that only they notionally spend on a project. Why are we allowing that, if it is a departure from generally accepted accounting practice?

Mr Heferen : When you say ‘generally accepted accounting practice’, my understanding is that the tax is designed around a standard cash flow tax. I do not know whether that would be a departure, but I might defer to others, if there is better information.

Ms Roff : I do not think there is much I can say on it other than to point out that the reference is here to the starting base, which from a policy perspective is not there as a depreciation allowance per se. It is part of this broader policy that pre-existing investments and income flowing from them should be shielded.

Mr O'Toole : Ultimately you start off with a pool of money, which is the market value and the depreciation which is the decision made by government, and then it is spread by what is called depreciation over the years of the asset. That is basically how it works. I am not sure of the relevance of accounting to that process.

Senator LUDLAM: I will come back to this if there is time later. It is effectively that mining companies appear to be able to choose whether to use the book value or the market value when calculating the starting base. Presumably they would read forward their projected tax payment under both methods and just choose the lower. Is that what you would expect them to do? That is how it has been designed.

Mr O'Toole : I would expect that they would make the choice which is in their best interests according to their circumstances.

Senator LUDLAM: What is the public benefit in allowing them simply to choose their method of tax avoidance? That is what they will do if they are smart.

Mr Heferen : If it is clear they have a choice and they choose the one that suits their circumstances better, it might be a bit strong to call that tax avoidance.

Senator LUDLAM: Minimisation. As far as the taxpayer is concerned, they are getting less.

Mr Heferen : They are choosing the one that suits their circumstance. Aggregate tax is obviously an important one. Compliance costs would be another. How they see their future developing would be another. These were clear choices in the heads of agreement:

Miners may elect to use the book or market value as the starting base for project assets with depreciation accelerated over five years when book value ...

In the heads of agreement it is a clear choice that they have.

Senator LUDLAM: It sounds like another one of those things that was decided with or without Treasury. Perhaps you cannot go there.

Mr Heferen : To be fair, the government has decided on its policy articulated in the heads of agreement. As I said before, our role once the decision is made is to do our best to implement the government’s decision. Together with the PTG, we hope that the legislation before the committee gives an accurate reflection of that, which is entirely appropriate.

Senator LUDLAM: I suspect the parliament is going to have to come back and revisit this. I will leave it there. I have no other questions, apart from encouraging, without overcomplicating it, and in as simple terms as possible, you to provide us with those disaggregated figures we were speaking of before from a baseline year and the most recent available data for the sector as a whole. Not just the commodities in question, but the sector as a whole. That would be really useful.

CHAIR: Senator Thistlethwaite.

Senator THISTLETHWAITE: In terms of the bills before the Senate at the moment, what is the net effect of all of the bills in the forward estimates?

Mr Heferen : The net effect of all the bills?

Senator THISTLETHWAITE: Yes.

Mr Heferen : I am afraid you have an advantage over me. I do not know which bills are before the Senate.

Senator THISTLETHWAITE: The MRRT and the superannuation changes.

Mr Heferen : I have the Assistant Treasurer’s Attachment A in front of me. Quite frankly, I think it would be a waste of the committee’s time if I sat here and added things up to work out which ones were before the Senate and which were not.

Senator THISTLETHWAITE: Is it a saving over the forward estimates?

Mr Heferen : In respect of?

Senator THISTLETHWAITE: The net effect of the bills?

Mr Heferen : I think we traversed this—

Senator CORMANN: What Senator Thistlethwaite wants to know is whether the company tax cut is not yet before the Senate, even though it was attached to the mining tax when the government announced it, and whether that means there is not yet a negative net fiscal impact. That is what Senator Thistlethwaite is after and trying to get you to say.

Mr Heferen : If you look at page 3 of the explanatory memorandum, ‘Financial Impact’, there are the first three years over the forward estimates. Those second and third year figures would have been written down in MYEFO.

Senator CORMANN: Has Labor abolished the company tax cut that was attached to the mining tax?

Mr Heferen : The explanatory memorandum with the Minerals Resource Rent Tax Bill and others, on page 4, under ‘Financial Impact’ has $3.7 billion for 2012-13, $4 billion for 2013-14 and $3.4 billion for 2014-15. This is the explanatory memorandum that accompanied the introduction of the bills into the House of Representatives. The Midyear Economic Fiscal Outlook update was done post then, and the MRRT revenue has been adjusted for both 2013-14 and 2014-15.

Senator THISTLETHWAITE: So, they have been written down by $500 million or so?

Mr Heferen : MYEFO states that for 2012-13 our revenue forecast is $3.7 billion. It is the same as the EM. For 2013-14 it is $3.8 billion rather than $4 billion, and then for 2014-15 it is $3.1 billion rather than $3.4 billion.

Senator THISTLETHWAITE: That is on the revenue side. These are the figures that I have dug up going through the individual elements. The abolition of the entrepreneurs tax offset; the increase in the small business instant asset write-off threshold; the small business entities deductions for motor vehicles; the low income super contribution; the superannuation guarantee and the SG age limit—these are all of the bills that are before the Senate. All of the figures are in the explanatory memorandum. The figures that I get are a net saving over the forward estimates of $5.7 billion. Can you confirm that?

Mr Heferen : In respect of those, I do not have a couple before me. Abolishing the entrepreneurs tax offset is obviously a saving, but that is not included in that. I am working off Attachment A that the Assistant Treasurer tabled.

Senator CORMANN: Is the government planning to proceed with the company tax cut that was attached to the mining tax package? That is as a supplementary to what Senator Thistlethwaite just asked.

Mr Heferen : Shall I finish?

Senator THISTLETHWAITE: My question was quite specific. It is the net effect of these bills that are before—

CHAIR: What is the net impact of the bills over the forward budget estimates period? He has the table in front of him.

Mr Heferen : This table is not the same set of bills that—

Senator THISTLETHWAITE: Perhaps you could take on notice the net effect of the bills that are the subject of this inquiry and are before the Senate at the moment. What is the net effect in terms of the forward estimates?

Mr Heferen : I will take that on notice.

Senator CORMANN: Can I ask a supplementary question?

CHAIR: Senator Cormann.

Senator CORMANN: What Senator Thistlethwaite is clearly getting at is that the bills currently before the Senate do not include the company tax cut, for example, which the government had attached to the mining tax when the mining tax was initially announced and, in fact, the government revised the company tax cut that was attached to the mining tax when it changed from the RSPT to the MRRT. Is it still the intention of the government to proceed with the revised company tax cut that was attached to the MRRT when it was announced back in July 2010?

Mr Heferen : Yes, as far as I am aware. The MYEFO numbers obviously contemplate that with the commencement in 1 July 2013-14.

CHAIR: Senator Eggleston.

Senator EGGLESTON: I would like to ask about the starting base provisions in the MRRT, the intention of which, I understand, was to protect existing businesses in operation at 2 May from retrospective taxation on prior investments. The UWA did some modelling on this and they came to the conclusion that in comparing an identical mine pre and post the introduction of the MRRT the new mine will have an effective higher taxation rate compared with an existing mine. Do you agree with that?

Mr Heferen : No. I have not had the opportunity to review that thoroughly, but it sounds counterintuitive to me.

Senator EGGLESTON: It is counterintuitive, but it is an important question.

Mr Sedgley : I think the modelling you are referring to is the modelling by the University of Western Australia.

Senator EGGLESTON: I did say that.

Mr Sedgley : The modelling shows the impact of the starting base in one case versus a new miner that does not have a starting base on the other.

Senator EGGLESTON: Does that mean to say that it is, in effect, biased towards the existing miner?

Mr Sedgley : No. It is just demonstrating in one case that the pre-existing miner has the benefit of a starting base, because they have undertaken investment prior to the announcement of the MRRT.

Senator EGGLESTON: In general, the bigger miners would be the ones who would benefit, rather than a newly established mine?

Mr Sedgley : It does not affect big versus small. It affects miners that were in operation prior to the announcement and miners with projects undertaken after the announcement.

Senator EGGLESTON: That was the answer given to the House of Representative’s committee, that it was operational, but does that really equate to an established big mine compared with a small mine?

Mr Heferen : As at 1 May 2010 there would have been a number of small miners in operation, and bearing in mind the starting base is over the project, presumably there is a range of big miners, whatever the threshold for big is, that will have new projects going forward, and so they will not have a starting base because that mine or project has not been in existence prior to 1 May. To equate big with existing and small with new, as a general proposition, is a little incomplete. There will be some projects that big miners have that will start after 1 May 2010, and there will be some existing, new and medium miners who have projects in place on 1 May 2010.

Senator EGGLESTON: Will the MRRT result in the same or lower effective tax rates for iron ore or coalmines in Australia? Will they be the same? Are their starting base provisions inadequate to protect existing mines from retrospective taxation?

Mr Heferen : There are two parts to that question?

Senator EGGLESTON: Will there be a difference in the effective tax rates for, firstly, iron ore or coalmines? Presuming the MRRT is designed to raise more revenue and not less.

Mr Heferen : The 30 per cent rate applies to both. The rate is the same.

Senator EGGLESTON: Is the government aware that an increasing proportion of new funds raised in Australia is flowing offshore to mineral projects in Africa, South America, Canada and other jurisdictions, and is the government concerned about this transfer of capital and intellectual property to offshore destinations?

Mr Heferen : As I understand it, the mining investment, say, from 2011-12, the forecast is to be not quite twice, but for 2010-11 it is $47.3 billion and to 2011-12, $87 billion. That is probably a significant ramp-up in investment. I have numbers in front of me from the ABS, category 5-62-5.0, Table 2E, ‘Actual Expenditure’. The proposition is that, notwithstanding nearly a doubling from quite a sizeable amount of $47.3 billion, there is even more over and above that being invested offshore. That sounds like there is a lot of money available for investment. It just does not sound right.

Senator EGGLESTON: That was an assertion by AMEC, and I wondered what your view about that was.

Mr Heferen : The information that I have before me is that the ABS measure of expenditure in mining investment shows quite a significant increase from 2010-11 to 2011-12.

Senator EGGLESTON: Domestically?

Mr Heferen : That is investment in mining. If AMEC’s proposition is that there are Australians investing and rather than investing in domestic mines they are going offshore—

Senator EGGLESTON: Yes, that is what their proposition is.

Mr Heferen : And that that extra $40 billion is all foreign investment coming into Australia, we would have to take it on notice to examine that.

Senator EGGLESTON: If you would I would be grateful, because I am very interested in the answer to that. In view of the complex nature of the MRRT and the resultant administrative and enforcement burdens placed on government agencies, what additional financial resources, including systems and staff, will be required by Treasury and the ATO on an annual basis, if any, to meet the extra workload over the next 10 years? Are you making provision for extra staff?

Mr Heferen : In Treasury, no.

Ms Martin : In ATO we have had people working through and assisting with PTG and Treasury through the Resource Tax Implementation Group, and also consulting with industry for administration. We have had a consultative forum to consult with industry and the tax profession for nearly a year now that meets regularly. There is funding in the 2010-11 budget papers that provides funding for the ATO as well as capital funding.

We are in the process of building our capability to administer the tax. There is a number of aspects of this tax that, while they are complex, we have quite a lot of experience in dealing with complexity. For example, consolidation, there are issues of market value and market value in the GST. We also have expertise on pricing issues and around capital allowances—some of those things you have been talking about today. We will be using our existing body of knowledge and building further capability.

We are working and consulting with industry, both the smaller and the larger players, on what their needs are. We have also been providing some early guidance. We have issued nine papers now and we have some more coming. We will be continuing that process of providing guidance as early as we can. We will also be looking at some arrangements around—

Senator EGGLESTON: I am interested in whether you are going to put on extra personnel.

Ms Martin : We have funding to put extra people on for this.

Senator EGGLESTON: You have funding for it?

Ms Martin : Yes.

Senator EGGLESTON: How much funding?

Ms Martin : The figures are in the budget papers. For 2010-11, it was $7.7 million. For 2011-12, it was $23.9 million for revenue expense. Related capital was $9.8 million. For 2012-13, it is $32.2 million for related expense, and $5.6 for related capital. For the 2013-14 year, it was $27.3 million for related expense, and no capital. I think that is the ongoing amount.

CHAIR: I thank officials from the Treasury and the Australian Taxation Office for appearing today and being of assistance to the committee. We will see you again tomorrow on further discussions. The committee stands adjourned until 9.00 am tomorrow morning.

Committee adjourned at 17:01