Can Australia's new mining tax achieve its objective?

Julia Gillard
Image caption Australia's prime minister Julia Gillard has said the tax will help to support other parts of the economy

A "huge win for the Australian people" or a "bad tax from a bad government"?

These are the formidable questions raised by a controversial "super tax" on Australia's roaring mining sector that has narrowly squeezed through the lower house of parliament.

The levy is due to start next July and is expected to generate billions of dollars for the Labor government.

The money will be spent on pensions, tax cuts for small businesses and infrastructure projects, most notably in the key mining states of Western Australia and Queensland.

An approving nod from the upper parliamentary chamber - the Senate - is expected in the New Year.

'Very big win'

The Minerals Resource Rent Tax (MRRT) will start when annual profits reach 75m Australian dollars ($73m; £47m), a measure designed to safeguard the development of smaller firms.

It will apply to all new and existing iron ore and coal projects, and affect about 30 of Australia's biggest miners, including BHP Billiton, Rio Tinto and Xstrata, which struck a deal with the government last year.

Although it is set at 30%, the tax will have an effective rate of 22.5% when special concessions are taken into account.

"We shouldn't forget what this is all about - taking the super-profits of super-profitable mining companies and spreading them to every corner of the country," said Treasurer Wayne Swan.

"Our terms of trade as we go through the next few years are going to be higher than they have been historically," he added.

"It's only fair that the Australian people receive a share of that bounty which comes from the mineral resources they own 100%. I think this is a very big win for Australia."

In Canberra, the Assistant Treasurer Bill Shorten said that some of the nation's best-performing companies should pay more into the public purse.

"Mining profits have jumped 262% in the last decade. Along with the coal and the iron ore, a large share of these profits are also shipped off overseas," he said when the legislation was introduced into parliament.

"The current arrangements fail to provide an appropriate return for these non-renewable resources to the Australian community who owns the resources 100%," he added.

'Bad tax'

Despite all the assurance from the government, sections of the mining industry insist that the new system is overly punitive and will drive investment and jobs overseas.

The head of Fortescue Metals, Andrew Forrest, believes that the tax burden will fall disproportionately on small operators.

"It is bad policy and poorly designed," Fortescue Metals said in a statement.

"The MRRT will ensure the world's biggest miners have an unfair advantage in the market place by reducing their overall unit cost compared to the smaller miners. It will reduce investment in Australia," it adds.

Image caption The boom in Australia's mining sector has been one of the biggest drivers of its economic growth

Fortescue said it also doubts the scheme's ability to raise revenue because of inbuilt tax deductions.

"Fortescue's modelling and independent research verifies that we will not be paying any substantial MRRT contributions. We also know through independent research that BHP Billiton and Rio Tinto won't be paying any substantial MRRT."

The company argues that if the top three iron ore producers in the country don't end up contributing substantially to the MRRT, the government may not be able to raise the proposed A$11bn in tax revenue.

"It doesn't make sense," Fortescue says.

The conservative opposition has also vowed to repeal the measures if it gets into government, even though a recent opinion poll found 51% of Australians support the mining tax, while only 33% opposed it.

"This is a bad tax from a bad government," was the blunt assessment from the opposition leader Tony Abbott.

Political rhetoric?

The arguments will no doubt grow louder as July approaches and as the government strives to convince voters that the mining tax can help Australia's red hot resources trade do its bit to reverse sharp declines in local manufacturing, tourism and retail by sharing more of its wealth.

Matt Fusarelli, from AME Group, an international firm of independent economists in the metal and mineral sectors, believes the tax will do little to make Australia's two-speed economy more fair.

"I don't think the mining tax will see a rebalancing of the Australian economy," he tells the BBC.

"I think that is more political rhetoric. The mining sector in Australia is doing particularly well and this is because of its exposure to the development story in Asia, and in particular China," he adds.

So far the markets seem relaxed about the passing of the mining tax legislation, with analysts stressing that investors have already priced in the details of the new arrangements into their decisions.

However, concerns remain about possible attempts by the Australian government to seize a bigger slice of resources profits in the future.

Were that to happen, it will trigger a completely different reaction.

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