Archive: July 2012

This section provides a selection of media items from Jul 2012.


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REFORMS TO DELIVER SURPRISE TAX HIT

David Crowe, The Australian, 27 Jul 2012

Thousands of taxpayers are at risk of a hit to their earnings from backdated tax laws as the Australian Taxation Office prepares to apply new rules to protect $1.9 billion in federal revenue.

Tax officials expect to open new cases to enforce the transfer-pricing bill, despite warnings the retrospective changes breach the rule of law, amid accusations the government failed to consult on the reform.

Corporate giant GE slammed the changes yesterday as a dangerous departure from past practice as companies including BHP Billiton and Rio Tinto also warned it was unfair to back date the rules. “The introduction of this bill will retrospectively change the law to create a new taxing power that operates from 2004. This is contrary to the rule of law,” said GE vice-president Ardele Blignault.

Transfer pricing allows companies to shift money between jurisdictions to reduce liabilities and avoid paying tax twice on the same amount, under treaties signed between countries.

While the lower house passed the bill last month, business groups are urging changes in the Senate to prevent taxpayers being caught out over arrangements they thought were fair several years ago but turn out to breach the new law.

Tax Institute member and KPMG director Damian Preshaw said at least 12,000 individuals and companies used cross-border transfers of at least $1 million and could be captured by the “transfer pricing” amendment.

PricewaterhouseCoopers partner Peter Collins warned the change was being pushed through without fair consultation. “From the very beginning of consultation we were told that this law would apply from eight years ago, and that this question was completely off limits. That doesn’t seem to me to be consultation,” he told a Senate inquiry in Canberra yesterday.

Treasury and the ATO sought to calm fears over the changes by saying the $1.9bn figure was not a revenue estimate but the value of tax in dispute as companies and the ATO argued over interpretations of current law. The ATO lost a transfer-pricing case against French chemical company SNF in the Federal Court last year. ATO second commissioner Bruce Quigley said the ATO would not reopen settled cases if the bill became law.

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MINERS ATTACK GLOBAL TAX CHANGES

Clancy Yeates, Sydney Morning Herald, 27 Jul 2012

Mining companies have attacked a government plan to secure up to $1.9 billion in tax revenue through tougher laws on global profit-shifting, saying the changes threaten to increase uncertainty in the industry.

In a move that has raised the ire of companies including General Motors and GE, the government is set to make retrospective changes to laws on ”transfer pricing” – trade between different parts of a global company. The changes will apply to tax disputes going back to 2004.

The general manager of transfer pricing at Rio Tinto, Richard Atkinson, said yesterday the changes raised the ”significant risk” that companies would face ”double taxation” across different jurisdictions.

BHP’s manager of tax in Australia, Don Spirason, said the miner opposed the changes ”in principle” because they would lead to more uncertainty. ”Perhaps the motivation for the legislation is that it will remove uncertainty, but from our perspective it increases it,” he said in Canberra.

While government senators suggested the companies were trying to minimise their tax, Minerals Council of Australia deputy chief executive John Kunkel said the laws failed the ”critical tests” of transparency and fairness.

”Retrospective change to taxation laws damages investor confidence in a way that makes Australia a less attractive location for capital investment,” Dr Kunkel said.

The government has defended the laws by saying they are only designed to clarify Parliament’s intention. Treasury says up to $1.9 billion is at risk if they are not passed.

Labor senator Doug Cameron suggested that the big companies’ main gripe with the changes was not one of principle but that they threatened to eat into profits, asking Rio Tinto’s Mr Atkinson: ”It’s not just a matter of principle, is it? It’s about money.” Mr Atkinson conceded that it was ”about dollars” but companies also needed certainty about global tax arrangements.

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LABOR RULES OUT TAX INCREASE TO FUND DISABILITY REFORM

Jessica Wright, Sydney Morning Herald, 27 Jul 2012

The Gillard government has ruled out any increase in income tax to fund the National Disability Insurance Scheme as Tony Abbott failed to back a Liberal premiers plan to resolve the stand-off over funding to trial the scheme.

Prime Minister Julia Gillard today stepped up the pressure on Victoria and NSW to contribute their share of funding to set up trials of the disability reform scheme as reports emerge that she had knocked back a proposal for full support from the coalition states in exchange for a levy-style funding model for the scheme.

Touring a catering company in Geelong staffed by people with a disability, Ms Gillard called on Premier Ted Bailieu to commit the $40 million of funding it would take to proceed with the southern state trial.

Accompanying Ms Gillard, Ms Macklin said both Mr Bailieu and his NSW counterpart Barry O’Farrel, needed to ‘‘put their hands in their pockets and put the money on the table.’’

Ms Gillard said the sums required from the states to enable the trials to go forward were relatively small – $40 million for Victoria, $70 million for NSW – and were commensurate per capita to the amounts kicked in by South Australia, Tasmania and the ACT. “All we are asking is for them to live up to the expectations they have raised in their own communities,’’ Mr Gillard said.

It is understood Queensland premier Campbell Newman first raised the idea of a nationwide levy to fund the scheme, similar to the flood levy at a meeting at the Lodge on Tuesday night.

But Ms Gillard took aim at Mr Campbell saying he was ‘‘insincere’’ in his approach to the COAG process and funding model for the scheme. “This is total insincerity [from Mr Newman] designed to distract from the appalling approach he is taking to NDIS,’’ she said. “He is not prepared to spend one new cent and in the business of cutbacks to disability services. “Ms Gillard said

Queensland did not ‘‘bother’’ to make a bid for a trial site for the NDIS, labelling the current per capita spend in the state for people with a disability – the lowest in the nation – as an ‘‘embarrassment.’’

The Queensland Premier confirmed the discussions at the Lodge by tweeting this morning: ”PM did fail to seize unique opportunity to fully fund NDIS on Tuesday night with support of ALL premiers. I am still asking why !!??”

He later added: ”Re PM and NDIS. Since when has an offer of full bi-partisan support by all states to fund a vital national scheme been a political stunt?”

Disability Reform Minister Jenny Macklin said today she wanted to end the ”cruel lottery that sees people with the same disability treated better just because of where they live or how they acquired their disability”.

She was scathing that the Victorian and NSW governments for failing to commit the necessary funding for the trials and break the deadlock. ”I am very disappointed that Victoria and New South Wales have made clear they will not contribute funding for launch sites in Geelong and the Hunter,” she said. ”They asked for 24 hours. We gave them that, and we gave them an offer that was crystal clear and backed by $1 billion in new Commonwealth funding.

”That time has now lapsed, and we have a lot of work to be getting on with. Our serious offer remains on the table. If (NSW Premier Barry) O’Farrell and (Victorian Premier Ted) Baillieu decide to get serious, our door is open.”

Ms Macklin would not be drawn on whether a Medicare-style levy was still a viable option. ”The Prime Minister has made it clear that we’re not about increasing income tax which is the other proposition that Campbell Newman is putting around,” she said.

Asked directly if the Medicare-levy model was being considered, Ms Macklin said: ”I was not in the room and I have not been party to any of those discussions.” ”What we know is that we have been able to fund our contribution from our budget by making careful savings. And we are now saying to NSW and Victoria you need to do the same,” Ms Macklin said.

Meanwhile, Mr Abbott has undermined the push by his conservative state colleagues for a Medicare-style levy to fund the NDIS, arguing that it should be funded from general revenue.

With Ms Gillard launching a media blitz to place pressure on the Liberal states to commit to their share of funding, Mr Abbott wrote to the Prime Minister last night accusing her of ”political posturing”.

Renewing his call for a cross party parliamentary committee to be set up to oversee the rollout of the NDIS, the Opposition leader said: “The last thing that we would want to do would be to give people with a disability and their families false hope that there will be an NDIS by allowing it to become bogged down in political posturing.”

Mr Abbott repeated his call this morning for a bi partisan parliamentary committee to ”take the politics out” of the issue. ”If we had a prudent, frugal government that respected taxpayers’ money, it ought to be possible to fund this important reform out of general revenue,” he said.

The Productivity Commission initially made the recommendation that the federal government should be the sole funder of the NDIS and that is should be funded from ordinary government revenue.

Mr Abbott took the opportunity to criticise the Gillard government’s economic record in the context of the funding fracas surrounding the NDIS. ”I think it’s very important to understand that this is a national reform. It’s a national reform to try and ensure we give people with serious disabilities finally the fair go that they deserve. ”If it’s a national reform, it has to be led by the national government. It has to be funded by the national government.” The NDIS is estimated to cost $15 billion a year once it is fully rolled out in 2018-19.

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‘LIVING AWAY‘ TAX CHANGES TO HIT MANY

Sydney Morning Herald, 26 Jul 2012

Proposed amendments to the living away from home allowance (LAFHA) will affect more than a “narrow group of people” as described by Treasurer Wayne Swan, a federal parliamentary hearing has been told.

The House of Representatives Economics Committee brought together a cross-section of industry groups, unions, universities and tax experts on Thursday to share their thoughts on the tightening the LAFHA rules that will save $1.9 billion over four years.

The changes announced in the May budget include restricting the allowance to one year and the need to have the main Australian residence left empty while away.

Australian Industry Group director of public policy Peter Burn told the roundtable discussion that while he supported the objective of addressing the misuse of LAFHA, he believes the impact of the changes go beyond what Mr Swan described as “the abuse by a narrow group of people”.

The hearing was told employers could be forced to make up the difference from the removal of the allowance to retain and attract staff.

PricewaterhouseCoopers (PWC) partner Norah Seddon said a survey of clients found 77 per cent expected the tax changes would come at a cost that would either be borne by business or the consumer. “The removal of the living away from home allowance for temporary residents, and the significant and unwarranted limitations for everyone else, is a disincentive for employees to be mobile. This will make the skill shortages in Australia worse,” she said.

Australian Constructors Association executive director Lindsay Le Compte said there were a large number of employees whose work required them to be mobile. “They are required to move around and work on projects invariably involved in timeframes well over 12 months,” he said, adding that major construction projects often run from two to five years.

Professor at the University of Sydney, Ann Brewer, said the bill would likely have a “significant and unintended” negative impact on research. She said the LAFHA has enabled universities to attract high quality foreign candidates, and help them to afford to live temporarily in Sydney, Melbourne and Perth – among the most expensive cities in the world. “The reforms to LAFHA will prove to be a false economy in the next decade, outweighing the value of immediate savings to the budget,” Prof Brewer said.

The Institute of Chartered Accountants’ Paul Ellis questioned the requirement to keep a home empty. “Many people who would do that are having trouble getting insurance, so they basically have to leave an uninsured, vacant home. That is plainly not practical,” he said.

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MIDDLE-INCOME EARNERS BIG LOSERS

John Wasiliey, The Australian Financial Review, 25 Jul 2012

Australia’s middle-income earners stand to lose the most from the Labor government’s decision to reduce the tax concessional super contributions limit to the current $25,000 a year, a prominent super adviser has warned.

Alan Dixon, managing director of Dixon Advisory & Superannuation Services, says income earners on $80,000 to $90,000 a year who have been among the greatest supporters of salary sacrifice strategies after the age of 50 are those most likely to miss out as a result of this government policy move.

Wealthier Australians and those who have saved a reasonable amount under the previous contribution rules will be least hurt by the halving of the contribution limit, says Dixon. Most affected will be those on middle incomes who face the prospect of ending up on the government age pension.

Dixon says that in the 26 years that the firm started in Canberra by his father has been in business, salary sacrifice by those over 50 has been the most effective wealth creation strategy available to get people off the age pension.

Whereas it used to be mainly senior company executives who used salary sacrificing most extensively, in the past decade a much wider group of people has employed this as a low risk way of boosting their retirement savings. This includes those with do-it-yourself super funds who since the introduction of choice of funds in mid-2005 have found employers much happier about transferring super contributions to a DIY fund.

Salary sacrifice employs the tax deferral opportunities that superannuation offers. It has been especially effective for those with extra salary income because certain major financial commitments such as a home mortgage and children’s education are no longer an expense.

Dixon says it has been quite amazing how many middle-income earners have in the past quarter century made the effort to save the $50,000 a year and more when the limit was $100,000 a year.

One reason many were able to do this was because they were already used to living fairly frugally because of mortgage and family obligations. Dixon describes the government’s decision to reduce the contribution limit for those over 50 as one of the worst policy decisions in years. It’s short sighted, he says, and will take 20 years to show with the ultimate outcome of more Australians on the age pension.

Dixon says that while the government’s initiative to increase the compulsory super obligation to 12 per cent is welcome, it won’t get people off the age pension. He also doubts whether middle-income earners will make up the difference in super savings through after-tax contributions.

He is also sceptical about the government’s promise to allow those over 50 to contribute $50,000 in two years from now if their super balances are below $500,000 as a pledge that is vulnerable to being cancelled for any number of reasons. In recent years government hasn’t shown itself as very honest about super promises, he says.

That said, older Australians should still use salary sacrifice into super as a valid retirement savings strategy for the attraction of being able to convert salary that is taxed at 25-to-30 per cent into super contributions taxed at 15 per cent.

For someone on $90,000 a year, a super contribution of $25,000 that would include the $8100 compulsory super amount could boost their annual retirement savings by more than $5200 because of the concessional tax treatment granted to contributions. In this instance a $25,000 super contribution would translate into after-tax super savings of $21,250.

A $50,000 contribution on the other hand would benefit from a more than $10,000 tax break and add $42,500 to super savings. Dixon says while the government will collect more tax as a result of the reduced super contribution limit, it will end up paying more in future government age pensions.

At the same time where it is possible to get a tax break by sacrificing salary, making this commitment as early as possible can not only get the tax concession on contributions but also the lower rates of tax on investment income.

It’s possible that in the future such concessions as the 15 per cent tax on investment income generated by a super fund and the 10 per cent tax on capital gains will become super’s main attractions.

Superannuation will continue to require the commitment of locking money away, although these days the right to take a transition to retirement pension from the age of 55 makes this restriction less rigid.

With salary sacrifice arrangements between employers and employees who are independent of each other, certain rules must be followed. The most important is that an agreement, preferably in writing, should be in place before any remuneration is received. When it reviews salary sacrifice arrangements, the Australian Taxation Office generally likes to see a written agreement that is formally accepted by an employee.

All salary sacrifice arrangements should be properly documented. The same should happen if an existing arrangement is amended which many may need to do given reduced contribution limits. Having an agreement in place is necessary because salary sacrifice arrangements must be prospective in nature and can only apply to future salary and not be backdated.

A major issue to watch with salary sacrifice contributions is that they don’t reduce a compulsory super entitlement. All employers are required to contribute 9 per cent of salary to super.

However, salary sacrifice is viewed as an employer contribution and employees need to be aware a salary sacrifice contribution can satisfy an employer’s super guarantee obligation. This means making sure a salary arrangement doesn’t lead to an employer reducing compulsory contributions.

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BARNETT SUGGESTS RADICAL CHANGE TO GST CARVE-UP

Graeme Powell, ABC News, 25 Jul 2012

The West Australian Premier Colin Barnett says he is working on gaining support for a new model of how revenue from the Goods and Services Tax (GST) is returned to the states and territories.

Mr Barnett, who is attending the COAG meeting in Canberra, says he is trying to gain support from New South Wales, Victoria and Queensland for the plan.

He says under his proposal most GST revenue, for example 70 per cent, would be allocated to the states on a per capita basis, and the remaining 30 per cent on a needs basis. “I think if the big four states agree, then that’s a powerful argument for going that way because those states represent 90 per cent of the Australian economy and 90 per cent of Australia’s population,” he said.  “That would be a simpler and fairer system and would give stability of GST revenue to each of the states and would also look after the smaller or weaker states. “What I’m seeking to do is get, in the first place, a broad agreement between those big four states and I think we are pretty close to that, so I hope that’s what can be achieved in these next two days [ at COAG]. “We’re looking at some different models whether it’s a 40/60 or 50/50 or 60 per cent per capita and 40 per cent on needs.”

The plan has drawn immediate fire from South Australian Premier Jay Weatherill. “Western Australia was built off the back of a net transfer of benefits to them and now they’ve had the windfall associated with the mining boom, they’re not interested in sharing it with the rest of the nation,” he said.  “So, not only is it deeply selfish, it’s completely contrary to principle, it’s contrary to the way in which this nation was formed.”

Mr Barnett says, however, the needs of smaller economies would be taken into consideration. “Any change would be phased in slowly over a period of time so we’d make sure no one is disadvantaged in the transition and we’d make sure that South Australia, the Northern Territory and Tasmania is looked after,” he said.

Northern Territory Chief Minister Paul Henderson has also lashed out at Mr Barnett’s push for GST changes. “The proposition being put forward is not about fairness and equity across this nation,” he said. “It is just an unprincipled dash for cash. “It is certainly not acceptable to the Northern Territory and it goes against all the fundamentals of this great Commonwealth nation of ours.”

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REGIONAL WA SHOULD SUPPORT MINING TAX, SAYS CREAN

Matt Brann, ABC News, 25 Jul 2012

The Federal Regional Development Minister, Simon Crean, says the Mineral Resource Rent Tax (MRRT) will underpin the next three rounds of the Regional Development Australia Fund (RDAF).

Money from the RDAF was last week made available to projects in regional Western Australia such as $15 million towards flood protection levees in Carnarvon and $2.5 million for a St John Ambulance office, training and ambulance centre in Broome.

The MRRT has come under plenty of scrutiny in the minerals rich state of Western Australia, but Mr Crean says regional WA has a lot to gain from it.. “The first two rounds (of RDAF) were not dependent on the mining tax, they were commitments by us, but we’ve made sure that out of the mining tax (MRRT) the regions will continue to get a growing share and the next three rounds are dependent on it,” he said. “So people can’t have it both ways, they can’t oppose the tax and then want the benefits from the redistribution of it. “The tax doesn’t come back to the government, the tax goes to the regions.  “The same as the (WA) Royalties for Regions is paid for by a mining tax, it’s no different to when you’ve got a resource rent tax… and it’s a smart way to redistribute to the whole of regional Australia the benefits of the strength of the economy in the resources sector.”

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‘DOUBLE DIPPING’ FEAR IN GST REVIEW

David Crowe, The Australian, 24 Jul 2012

The commission overseeing the GST has warned against state demands for new ways to carve up the $51 billion tax, saying some of the proposals would lead to “double dipping” that favoured one government over another.

The warning counters calls for reform from state leaders who are pressing for a bigger share of the tax proceeds, raising fears that smaller states and territories could lose out to more powerful neighbours.

The rare intervention from the Commonwealth Grants Commission is seen as a “reality check” on some of the ideas put forward to a landmark review advising Wayne Swan on how to allocate the cash.

States have criticised the way the GST is divided each year using rules set by the Treasurer and enforced by the commission. There is concern that minor changes to the calculations can shift hundreds of millions of dollars between the states.

Those who receive big one-off payments from Canberra can lose an equivalent amount when their share of the GST is calculated each year.

Victoria has called on Canberra to instruct the grants commission to ignore one-off infrastructure grants, such as the $3.2bn allocated to the state’s regional rail link, so that the state would not lose as much GST.

The Business Council of Australia also argued for a “neutral” approach to one-off payments to give states an incentive to put forward convincing cases for federal funding. “One-off payments for long-term infrastructure projects such as those made under the Building Australia Fund should be excluded from the assessment,” the BCA told the review led by former Victorian premier John Brumby and former NSW premier Nick Greiner.

The Queensland Treasury Corporation said the GST assessments should exclude any federal payments to support “nationally significant” projects.

Tasmanian Premier Lara Giddings successfully argued last month that $325 million in health funding from Canberra should not be included in the GST calculations. In a rare concession, the Gillard government agreed to Ms Gidding’s call and is expected to instruct the commission to exclude the $325m from future GST calculations.

The commission warned that giving states an exemption for some of their payments would raise questions over the regime. “In the parlance, there would be ‘double-dipping’,” it said in a submission to the review.

The final report is due in October.

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FIX MINING TAX, GST: GARNAUT

Geoff Winestock, The Australian Financial Review, 23 Jul 2012

Eminent Labor economist Ross Garnaut has called for a wide-ranging shake-up of federal-state relations, including the way GST money is shared among the states and how the system of state ­mining royalties is undermining Canberra’s resources tax.

Professor Garnaut describes proposals put forward in the current GST review, being conducted by former premiers Nick Greiner and John Brumby, as “incremental” and says a more substantial constitutional convention should be convened in a ­process that may take until 2020.

This was needed to clear up the ­confusion in federal-state financial relations, overhaul goods and services tax handouts and tear up the deal with big resources companies over the mining tax, Professor Garnaut has urged.

The former head of the Climate Change review said the federal government must go beyond just rejigging the GST formula and use a review now under way to launch a more fundamental process that may take until 2020. The goal would be to end the confusion of responsibilities between state and federal governments in health, education and urban infrastructure.

To untangle the mess, states could receive guaranteed streams of federal revenue beyond the $50 billion pool of GST, including a guaranteed share of the mining tax. In exchange, states would take back total control of some areas. “We have a serious problem in federal-state financial relations,” Professor Garnaut told The Australian Financial Review. “If we don’t take this opportunity, it’s not likely we will come back to it in a serious way for a generation.”

In his submission to the GST review, Professor Garnaut said any solution to the confusion over state mining royalties and the federal mining tax must abandon the deal the Gillard government struck with the big mining companies. “A solution inevitably involves some re-examination of the arrangements that were negotiated with part of the resources industry two years ago,” Professor Garnaut wrote.

In a delicate quid pro quo to win state support for radical reforms, Professor Garnaut recommends abandoning the current complex formula of “horizontal fiscal equalisation”, which redistributes GST funds from rich to needy states to guarantee delivery of the same quality of services across the nation.

Professor Garnaut argues that because resource-rich states lose most of their mining revenues under this system, they have no incentive to switch to a more efficient tax base. If the resource-rich states took a long-term view, they would be more inclined to switch to something like a minerals resource rent tax than royalties. Professor Garnaut proposes the GST be shared among states and ­territories based on population.

Western Australia would have received an extra $2 billion this year if funding were on such a per capita basis.

However, he also suggests political compromises to overcome likely opposition from the small states and territories. He said small states such as South Australia, Tasmania and the Northern Territory should get a lump sum payment of perhaps $130 million as compensation for their higher administration costs, and the ACT should be allowed to levy payroll tax on diplomats and to boost its revenue base.

The federal government should take over responsibility for Indigenous Affairs, which would compensate NT for the loss of about $1 billion it receives under the existing GST formula in recognition of its large indigenous population.

States may eventually receive similar revenue under the new deal but they would not have the confusing situation whereby that as they became wealthier or more efficient than average, they lose GST.

Professor Garnaut suggested delaying the changes until 2020 because it would let states take a longer-term view. For instance, SA and the NT are net recipients now but they have several large resources projects coming on stream, meaning they could benefit from the new resources revenue system.

The final report of the GST review, led by former state premiers Nick Greiner and John Brumby, and finance expert Nick Carter, is due for release in October.

Professor Garnaut, who reviewed the GST a decade ago at the request of three of the states, describes the proposals in discussion papers so far as “incremental”.

His submission also urges an end to almost all of the $50 billion in “partnership programs” where the federal government hands over cash with strings attached to areas of ­traditional state responsibility such as education and health.

These federal programs have expanded several fold in the past decade but Professor Garnaut said they created a constant blame game over who would pay and who was in charge.

Instead, areas of responsibility should be defined more clearly and states should be given guaranteed revenue streams to fund their spheres of activity. He said this could come from federal revenue, such as an expanded mining tax, or by extending the GST to exempt items such as food and education.

Professor Garnaut suggested the federal government could cut the mining tax rate from 22 per cent to 20 per cent, but it would be far better off since it would no longer refund billions of dollars of royalties. This would mean tearing up the deal struck with BHP Billiton, Rio Tinto and Xstrata before the 2010 ­election. He said WA would be compensated for the loss of royalties by its bigger share under the new per capita GST formula. And WA and other states would be free to impose whatever other mining taxes they liked on top of the federal mining tax.

They could stick with royalties but the states would be invited to switch from royalties to a resources rent tax.

Indeed, they could ask the government to collect on their behalf up to another 20 per cent on top of the resources rent tax.

Professor Garnaut admitted the mining companies would not like reopening the mining tax issue but said it would be in the long-term interests of Australia and the miners to switch from royalties to profits-based mining taxes that provided greater certainty and allowed mines to operate for longer.  “This would be a good outcome for economic efficiency,” Professor Garnaut said.

To encourage a co-ordinated approach to infrastructure, Professor Garnaut said the federal government should fund only roads and railways projects that have secured approval from Infrastructure Australia, the independent advisory body to the government. He said the current system, where states and the federal government make promises at election time, ­creates “chaos”.

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SURPLUS IN DOUBT FROM LOW TAX TAKE

Milanda Rout, The Australian, 23 Jul 2012

One of Australia’s leading economic consultancies has warned the budget surplus remains under pressure because of soft tax revenues sparked by a lacklustre sharemarket and by weaker house prices.

The latest Deloitte Access Economics business outlook warns that manufacturing will endure “further pain” due to the rising Australian dollar and that the peak of the mining investment boom is already in sight.

Nevertheless, the June quarter report hits out at pessimistic approach to Australia’s economy, saying the outlook for growth is better than most people realise and the current negative debate does not help. “With global prospects under a cloud, investment question marks already on the horizon and both sides of politics pandering to populism, Australian exceptionalism is at risk of coming a cropper down the track,” the report says. “We didn’t celebrate our happy 21st birthday without a recession on July 1 because we were too busy seeing a glass half-empty.”

Deloitte finds that consumer spending is still surprisingly strong yet much of the financial outlook depends on what happens in China and Europe. The report says economic recovery since the global financial crisis has not been matched in recovery of tax revenue. “Australia’s sharemarket is still soggy . . . and our housing prices are down 7 per cent in the past 18 months,” it says. “In fact, were the Treasurer to be bringing the federal budget today, he’d have to cut further to reach a 2012-13 surplus.”

Deloitte goes on to say that tax revenue has been hit because before the GFC, families were spending, generating more GST, petrol and beer excises, and Customs duty on imports. “But now spending is dominated by companies as they invest a fortune in new capacity. And while extra spending by families adds to the tax take, extra spending by businesses cuts it,” the report says.

The economic recovery may be hampered by a lack of supply in skilled workers and the strong growth of the “sunbelt” states rich in resources may not always stay that way. “The miners are signalling that costs have risen fast and potential profits are being dialled down as commodity prices deflate,” it says. “This is a reminder that the “sunbelt” states won’t stay in poll position forever.”

The report breaks down the financial outlook state by state, saying Queensland continues to recover strongly but the recovery is very much one-sided, with “surging engineering spending very much the prime driver of state growth” which may present risks to the resource investment pipeline in the future.

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MINING TAX CHALLENGE HYPOCRITICAL: UNION

The Australian, 19 Jul 2012

A Queensland union wants 1000 people to sign a petition to stop the state government’s plans to join a High Court challenge against the mining tax.

United Voice says the $300,000 challenge against the minerals resource rent tax is a waste of money when the government is axing thousands of public sector jobs to save funds.

Secretary Gary Bullock claims the challenge is a front to protect Liberal National Party friends like billionaire mining magnate Clive Palmer.

“The premier is fooling no one by pretending to bankroll this court action in the interest of Queenslanders when he’s clearly looking out for his rich mates,” he said. “That’s why we have decided to take a stand and speak up for the Queensland public.”

The federal government says the legal challenge started by Fortescue Metals Group is futile.

The petition is online at www.notinournames.com

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$1.9B OF TAXES THE PRIZE IN PROFIT-SHIFTING CRACKDOWN

Sydney Morning Herald, 18 Jul 2012

Up to $1.9 billion in tax revenue could be at risk if the government cannot pass changes designed to crack down on profit shifting by multinational companies, the federal Treasury says.

In rules that are fiercely opposed by several global companies, the government is pushing for retrospective changes to the laws on ”transfer pricing” – trade between different parts of a global company.

Giants including Chevron and General Motors have criticised the changes – which could affect tax disputes going back to 2004 – as unfair to foreign investors.

But Treasury has told a Senate committee the changes are vital for protecting up to $1.9 billion in revenue being disputed at present. ”It has been claimed that the revenue protected by this measure is insubstantial; however there is a significant risk to revenue if this law is not enacted,” Treasury said.

Transfer pricing rules relate to the prices charged in trade between different parts of a global business. It is an area where the Australian Tax Office has suffered significant legal defeats in recent years, prompting the government to propose the changes last year.

The bill, which passed the House of Representatives late last month and is now being investigated by a Senate committee, has been attacked by corporate powers including the Minerals Council of Australia, Chevron, and the American Chamber of Commerce in Australia.

The lobby group for American firms – the biggest source of foreign investment in Australia – claims the changes are ”highly discriminatory” against the US because they will apply only to countries with which Australia has tax treaties.

It urged the Senate economics committee to recommend the government cancel the retrospective operation of the law, saying it would hurt investment. ”The retrospective operation of the new law – going back to 2004 – is simply unjustified and creates unnecessary uncertainty and business risk, which in turn will negatively affect foreign investment in Australia,” its submission said.

The Tax Institute and the Institute of Chartered Accountants in Australia, have also criticised the retrospective nature of the changes.

Treasury argued trade and tax conventions allowed governments to tax businesses as they saw fit, and the changes were needed to clarify Parliament’s intention for the law.

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CALL FOR TAX INCENTIVES TO LURE WORKERS NORTH

Jane Bardon, ABC News, 18 Jul 2012

Northern Territory Chief Minister Paul Henderson has called on the Federal and State Governments to consider tax changes to help resource-rich states attract workers for oil and gas projects.

Mr Henderson addressed an Australian Petroleum Production and Exploration Association conference in Darwin today. He says in the current climate, as new oil and gas projects start, states will drive up inflation by poaching from each other’s workforces.

Mr Henderson says he will ask all states and territories at the next COAG meeting to work on a coordinated national solution. He says this could include helping workers who have lost jobs in declining industries in southern states to find employment in northern Australia.

This could include providing relocation assistance and making changes in tax zone rebates.

Mr Henderson says the Territory also needs a special regional migration agreement that it is negotiating with the Commonwealth to bring in more skilled temporary workers from overseas.

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GST BOOST THE MEDICINE WE NEED

Alex Malley, The Australian Financial Review, 18 Jul 2012

Isn’t it interesting how the costumes fall away when a party gets tired? Until recently, public policy discussions about tax were staged in a party (as in festive) environment. As the financial and economic circumstances have waned, the illusion of cost-free choices also drained away.

Now, as we experience a more immediate sense of reality, we see some unavoidable hard facts. Welcome truth; but harsh truth for those who have liked to believe in magic puddings.

Ken Henry’s recent comments seem to indicate a view that the minerals resource rent tax, as delivered, may not be worth the trouble. Nick Greiner – asked, like all of the government’s advisers, to disregard the goods and services tax – pointedly commented that the GST was the way to go when it came to tax reform.

At CPA Australia we have tried hard to promote the cause of effective tax reform – notably a broadening of the GST – as a means of improving economic reform.

The Grattan Institute, too, has said this key reform could be immediately effective. To address the collective challenges of an ageing population, flagging productivity growth and ensuring Australia does not get left behind in a dynamic and volatile Asian century, revisiting the GST must be seriously examined.

Experts agree on the need to revisit the GST as a central element of comprehensive tax reform. The problem, as with so much necessary business and economic reforms at present, is a lack of political will.

The evidence is overwhelming. Research commissioned by CPA Australia paints some interesting scenarios showing gross domestic product growth if various inefficient (mainly state-based) taxes are retired and the GST rate is increased to 12.5, 15 and 20 per cent, respectively. The modelling also showed that increasing the GST to the higher rates would enable reductions in the corporate and personal tax rates, again fuelling GDP growth.

A common argument against increasing the rate or removing the GST-free status of some items is the potential effect on those with the lowest incomes. Naturally any increase in GST, rate or base, must be accompanied by appropriate compensation.  The economic and business arguments are stacking up to the point where they cannot be ignored.

Unfortunately, we live in strange political times, when the stomach for tough decisions and long-term thinking is in short supply. This potential boost to economic growth is a critical consideration.

Australia’s productivity growth has flagged in recent years, leaving question marks about its future competitiveness. While GST revenue is distributed to the states, the broader community should be the ultimate beneficiary through the state-delivered services that it funds.

The MRRT is mentioned as an alternative revenue source but the revenue forecasts from this tax look ambitious at best. We appear to be at the tail end of a phenomenal resources boom, and all sensible projections point to a much more sober outlook.

With each downward revision of global commodity prices, a tax on mining super profits is looking less like the revenue silver bullet.

It is not just in Australia where the GST is top of mind. In fact other nations are further down the track – admittedly out of necessity.  Spain is introducing a staged increase in the rate of its value added tax from 16 to 21 per cent. While we should certainly not compare ourselves to teetering European economies, it would be infinitely worse if we waited until our situation became similarly dire before exploring a solution that we always knew existed.

The current political reality presents a significant hurdle in the path of significant economic reform, but if we’re to bring about the necessary productivity improvements, our political leaders must make a strong business case to make increasing the GST palatable to the broader community.  The stakes are too high for those charged with the decision making to succumb to timidity or scaremongering.

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BACK TO BASICS ON REAL TAX REFORM

The Australian Financial Review, 18 Jul 2012

Ken Henry is right to question the results of the Labor government’s efforts at tax reform. The head of the government’s comprehensive review of the tax ­system has suggested that the mineral resources rent tax (MRRT) in its final form may not have been worth the trouble.

That underlines a basic point about Labor’s failure to fulfil Kevin Rudd’s promise to embrace “root and branch” tax reform. Despite numerous choreographed forums and endless discussions, there has been no meaningful reform since the goods and services tax (GST) was introduced by the Howard government more than a decade ago.

Dr Henry’s recommendations in 2010 for an overhaul of the tax system included a complex proposal to tax the super profits of the mining sector, which despite its technical “elegance” was nonetheless difficult to understand.

The main structural problem with Dr Henry’s resource rent tax, which formed the basis of Treasurer Wayne Swan’s resource super profits tax, was that it in effect made the government a silent 40 per cent partner in every resource project in Australia.

Miners found that impossible to swallow, but the fatal political flaw was that it assumed that taxpayers would also cough up 40 per cent of any losses to shareholders. Again, that wasn’t politically feasible.

The compromise tax that emerged from the opaque political process was more complicated than Dr Henry’s original proposal, as he pointed out on Monday. In fact, the MRRT has added to tax system complexity. Rather than a single and simple resource tax, we’ve got the new resources tax covering iron ore and coal, and the existing petroleum resource rent tax. And because the federal government did not reach agreement with the states about the implementation of the MRRT, state-based ­royalties still exist and some minerals are not taxed at all.

Little wonder that professor John Freebairn, one of Australia’s leading tax academics, said the best thing that could be done with the MRRT would be to “start again”. A proper “root and branch” overhaul of the tax system would recognise the important role that capital and investment plays in a commodity-based economy such as ours, where funds are invested in long-term mining projects in the hope that there will be occasional apparently windfall profits to make up for the inevitable lean years.

Plenty of glaring problems with the tax system were well known before the Henry review. As was pointed out at a tax forum at the Australian National University this week, the government could shift the tax base away from income and towards consumption by eliminating the exemptions to the GST in health, education and financial services, and increase the 10 per cent tax rate. The extra revenue from a broader and higher GST could offset the losses from a much-needed cut in the corporate tax rate from 30 to 25 per cent, which would encourage investment, particularly in the slower-lane parts of the economy, and boost labour productivity and wages. Another obvious change aired at the ANU forum was the introduction of road congestion charges to send proper price signals for using and investing in infrastructure.

A serious tax overhaul would involve complex political and technical problems, and involve a considerable challenge, but would increase Australia’s efficiency and competitiveness. The problem is that the federal Labor government is no longer the party of reform that it was during the 1980s and is now interested only in policies it hopes will help it cling to power.

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HENRY’S TAX PLAN ALSO COMPLEX: CRITICS

Katie Walsh, Gemma Daley and Lucille Keen, The Australian Financial Review, 17 Jul 2012

Former treasury secretary Ken Henry had complained of the complexity of the minerals resource rent tax, yet his own proposed resources super profits tax was almost as complicated, lawyers and miners said.

One of the key elements that drives complexity of the MRRT – the valuation of the resource at extraction point – was a part of the RSPT proposed in Dr Henry’s review of the tax system in 2010. “Ultimately the RSPT would have been complex as well,” said Perth-based Greenwoods & Freehills director Nick Heggart.

Dr Henry told a forum on Monday that the MRRT was more complicated than the 40 per cent tax on super profits that he proposed in the 2010 tax review. “The obvious question I dare not ask is whether it is worth it . . . I dare not even think about that question,” he said.

Aside from valuation, the other force complicating the MRRT is its transitional relief, by way of a deduction for a company’s starting base of assets at May 2010.

That element was not a part of the earlier RSPT; but Mr Heggart said its absence was the whole problem with that earlier tax. “That is what caused all the anxiety in the first place,” he said. “You could question the form of the transition, but the reality is that you had to provide some relief.”

The starting base was built into the tax after closed-door negotiations between the federal government and the three big miners BHP Billiton, Rio Tinto and Xstrata. Those negotiations saw the tax rate plummet from 40 per cent to an effective 22.5 per cent.

Other key differences between the Henry-proposed RSPT and the eventual MRRT are the latter applies to iron ore and coal, not all extracted resources; the MRRT allows a credit for the payment of state royalties which Dr Henry advised working with the states to scrap; and an exploration rebate was kyboshed in the MRRT.

However, Mr Heggart said: “When you boil it all down, the main thing that differs between them, in terms of complexity, is that one’s got transitional relief. “When it all settles down, say in around 20 years time, when the starting base has all washed out of the system, some of that complexity will disappear.”

Fortescue Metals Group chief financial officer Stephen Pearce said it was hard to compare the two. “They each had their complexities and issues,” he said. “We’ve been saying for a while that the [MRRT] is incredibly complicated – it really is, once you get into the details, the records you have to keep, the millions of dollars to administer it.”

Even those not paying the tax had to keep records on individual projects and tenements, he said.

Fortescue is challenging the tax in the High Court and chairman Andrew Forrest has long said the tax will not raise the revenue forecast.

Keith DeLacy, Nimrod Resources chairman, said the tax would not raise any money in the first five years because of a range of factors, including tax shelters and falling commodity prices. “It’s a dud,” Mr DeLacy told The Australian Financial Review. “It won’t raise anywhere near what they forecast it to in the near future. “Resource prices have fallen and capital costs have doubled in the sector in the past five years – a big part of that is labour – for both the established projects and the new projects.”

Speaking from China, Association of Mining and Exploration Companies chief executive Simon Bennison said the MRRT was too complex. “When you’re introducing a tax design that is too complicated for people to understand on your own admission it puts a serious question mark over the policy makers that are given the responsibility of putting it into play,” he said.

AMEC fought hard against the mining tax, including to remove an exploration rebate that Mr Bennison said was “effectively going to create a sub-prime market”. It won that battle, but failed to get an exploration tax credit in its place.

Mr Bennison said exploration finance was tight, with the Hong Kong market one of the few that remained, through high net worth individuals.

Federal Resources Minister Martin Ferguson hit back at Dr Henry’s claims: “The MRRT represents a fair outcome in terms of our responsibility to spread the benefits of the resources boom. “I thought the Argus-Ferguson process was a great learning process for Treasury in terms of getting a hands-on understanding, through talking with industry, on how the real world, the mining industry actually operates. “It is entirely different to come up with an economic theory as against being able to apply it to reality of the nature of the mining industry, such as where are the taxing points.”

Dr Henry said the country would have to increase consumption taxes as two leading economists, professor John Freebairn and Bob Gregory, a Reserve Bank of Australia board member from 1985 to 1995, said the goods and services tax should rise and the base be broadened to help the government raise revenue.

Earlier on Tuesday, Treasurer Wayne Swan again rejected that idea.

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HIGHER GST RATE LOOMS AS POPULATION AGES

David Crowe, The Australian, 17 Jul 2012

Taxpayers will face higher rates of GST to help repair the nation’s finances as the population ages, the head of the government’s tax review has warned amid new doubts over projections for Labor’s controversial mining tax.

Former Treasury secretary Ken Henry declared that Australians would have to get used to higher consumption taxes as he issued an alert about the pressure on state budgets from slower growth in the GST.

Independent experts also called for the GST to be raised above 10 per cent and extended to food, health and education to make room for personal and company tax cuts.

The calls came at a forum yesterday that heard widespread scepticism about the government’s revenue estimates for the minerals resource rent tax, which is projected to raise $13.4 billion over the next four years.

Adding to doubts about the budget forecast, University of Melbourne economics professor John Freebairn and Australian National University emeritus professor Bob Gregory questioned the estimates amid uncertainty over global growth and commodity prices.

Debate on the GST has intensified in the wake of a Grattan Institute report last month that said a wider consumption tax was one of three reforms that could pay for income tax cuts and add $80bn to economic output by 2022.

State governments have also stepped up calls for reforms as they confront lower GST receipts, partly as shoppers move to overseas internet sites but also because key parts of the economy are exempt from the tax.

Wayne Swan ruled the GST off-limits in the Henry review of the tax system from 2008 to 2010, but the former Treasury secretary declared yesterday that consumption taxes would have to rise despite objections from voters. “Certainly if we think about the challenges to the revenue base over the years ahead, even if we don’t for whatever reason feel comfortable with relying on consumption-tax bases for more and more revenue, we’re going to have to. Because it is one of the things that we can practically tax,” he said.

Professor Freebairn said the recent British decision to raise the VAT — Britain’s consumption tax — along with a similar move in New Zealand, showed that an Australian government should be able to tackle the reform.

About $18bn in budget revenue is forgone each year as a result of decisions in 1999 to rule out GST on food, education, health and other parts of the economy. The tax is forecast to raise $51bn this financial year.

Former opposition leader John Hewson told yesterday’s forum that one way to pay for substantial tax reform was to broaden the base of the GST, increase it to 20 per cent and ease income tax and company tax.

Dr Henry warned of pressures on the tax system that would lead to an increased reliance on consumption taxes. “It is more likely over time that tax revenue will have to be expanded in order to meet the future needs of government, in part because of the ageing of the population,” Dr Henry told the ANU forum in Canberra. “And that raises a very important question — whether the tax bases that Australia is presently relying on (and by the way, particularly the states) are sufficiently robust to be able to raise more revenue. With respect to the states, the answer to that question is very clearly no.”

Dr Henry emphasised his review’s call for a business cash-flow tax to replace a plethora of state imposts and make room for cuts to other levies.

That would clear the way for a cut in the company tax to 25 per cent from the current 30 per cent, one of the key recommendations of the Henry review but a source of continuing political friction after Labor dropped a more modest business tax cut in the May budget.

Dr Henry dismissed criticism from the Left that a company tax cut would help only big business. “Over time it should be expected that the beneficiaries of such a reduction in corporate income tax are in fact the people who would benefit from a higher rate of productivity growth in Australia,” he said. “And guess what? That’s everybody. And in particular it is workers as much as it is capitalists.”

Professor Freebairn also said an increased GST could fund a cut to company taxes to adjust to a world in which capital flowed freely across borders, luring investment that would benefit workers.

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GREENS PUSH FOR EXTRA $300M TO ASSIST SMALL-BUSINESS OWNERS

Clancy Yeates, Sydney Morning Herald, 17 Jul 2012

Small-business owners would receive extra support worth up to $300 million a year, to be funded by cuts to mining tax breaks, under a new proposal from the Greens. The party wants Labor to boost the instant asset write-off, which now allows small-business owners to write off any new business asset they buy worth up to $6500.

The benefit is funded by revenue from the mining tax. Labor had also sought to use mining tax revenue to cut company taxes, but the Greens refused to back the plan because it would primarily benefit big businesses.

Now the Greens say more people will benefit if the instant write-off for small businesses is raised from $6500 to $10,000.

Treasury has found the policy would cost $650 million over the three years to 2015-16, a price that the Greens leader, Christine Milne, said was ”entirely affordable”.

“Unlike the CEOs of big corporations, small-business people invest their own hard-earned money and we as a society should reward that risk by giving them the opportunity to write off the great majority of their asset purchases,” Senator Milne said. “With the mining bubble already damaging other businesses across the country by skewing the economy in its favour, we can build a more diverse and sustainable economy by funding this tax write-off for small businesses through cuts to fossil fuel subsidies to miners worth billions of dollars every year.”

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COMPANIES FIGHT TAX LAWS ‘THREATENING’ OVERSEAS TOURS

Robin Usher, Sydney Morning Herald, 16 Jul 2012

Australia’s major arts companies are fighting proposed changes to tax laws, which they say threaten future overseas tours.

The Treasury department wants to tighten rules covering tax concessions for funds raised for operations outside Australia to minimise tax avoidance and reduce the risk of money laundering and terrorist support. But the Australian Ballet’s executive director, Valerie Wilder, says the wording of the changes risks putting an end to such events as last month’s tour to New York as part of its 50th anniversary celebrations.

”No tour would be possible without fund-raising,” she says. ”Government support would be lucky to cover 10 per cent of the income we need to raise to go to New York and for the 2008 tour to Paris and London. The proposed changes are definitely a threat.”

Other companies that regularly travel overseas include the Australian Chamber Orchestra and Chunky Move. Wilder says there is no doubting the cultural benefits of such visits, whose opening nights become gala events for ambassadors and other dignitaries. Wilder says the company fully supported the case against the changes made by the umbrella organisation for 28 arts companies, the Australian Major Performing Arts Group. These include national opera and ballet companies, state theatre companies and main orchestras.

It wants changes to the wording, which states that companies eligible for tax exemption must operate ”solely in Australia” or their touring must be ”merely incidental” to their Australian operations.

Yet the government’s national cultural policy discussion paper calls for the support of ”excellence and world-class endeavour” and for the ”telling of Australian stories both here and overseas”.

AMPAG’s statement says the proposed changes create too much uncertainty, compliance costs and complexity for performing arts companies. A spokesman for Assistant Treasurer David Bradbury says the government is working with arts organisations to remove any uncertainty. It is believed Arts Minister Simon Crean is also supporting the calls for change.

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POLICY IS A GREAT STEP FORWARD: NOBEL WINNER

Katie Walsh, The Australian Financial Review, 16 Jul 2012

Threats to repeal the carbon tax were jeopardising the outlook for green investment, Nobel prize-winning British economist James Mirrlees said.

“Australia is not in economic difficult times. You should be able to introduce these new things quite easily, quite well,” Sir James, who is here on a speaking tour, told The Australian Financial Review. “It seems from the outside that it’s a great step forward but in Australia I know it’s enormously controversial,” he said.

Sir James said the carbon tax, as a fairly revenue-neutral change, “seems exactly the right thing” and he stressed the importance of certainty.

“It’s very important with something like this that you will expect the policy will remain in place for the foreseeable future and because of the politics of it, there’s no way that that can be, which is a great shame. The incentives to bring in new investments in green energy are much weaker when you don’t know for sure that it’s going on in that way,” he said.

But he said the volume of trading permits in the system seemed large and continual measurement of emissions was important.

Sir James will speak in Canberra today about the Ken Henry review of the tax system, after leading a similar review of the British system last year. He is founder of the modern theory of optimal taxation and is a Cambridge University professor.

He also backed the minerals resource rent tax, which started in July at an effective rate of 22.5 per cent. “In some ways it’s not clear to me why that would be controversial. I can see the owners of the resources would not be happy but I’d imagine everybody else would be quite happy,” he said. “It’s a tax on property that somebody has and the resource, which is going to be there whatever you do in the way of taking tax revenue. So there are no incentive effects; there’s no reason why they shouldn’t continue to make them available.”

He said tax reform was often thought of as an increase in taxes or introduction of new taxes. “there is substantial difference of opinion among economists whether we’re at a time when taxes should be raised or reduced. In my view they should be reduced because we need bigger government deficits. It’s easier in times of full employment to consider if you might shift the burden to people who might be doing well.”

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CARBON TAX RECEIVES FEWER COMPLAINTS THAN GST

Marcus Priest, The Australian Financial Review, 13 Jul 2012

The consumer regulator has received fewer complaints about the carbon tax since it began than it received about the goods and services tax.

In a quieter than expected start to the scheme, carbon-tax-related complaints to the Australian Competition and Consumer Commission about small business and the electricity sector have been most common.

Despite well publicised cases of companies blaming the tax for in­creased prices, there have been fewer complaints than expected. The ACCC revealed it had received more than 630 complaints and inquiries – less than 10 per cent of the 8350 general complaints received since July 1.

“We put a fair bit of effort into ensuring that people weren’t using the carbon price as an opportunity to dupe consumers and the [number] of complaints we are having indicates that business has by and large picked up that message,” ACCC chairman Rod Sims said. “It is a lot less than the GST but that was a bit different because it was such a precise calculation of a defined impost replacing particular other imposts so you could actually calculate what the price impact was.”

The highest category of complaints and queries was about claims by energy retailers, especially in relation to price increases for electricity. More than 250 consumers and businesses reported concerns about how the carbon price would affect their electricity and gas bills.

“It is people querying that what they have got is right, by and large, [but] there are some complaints in there – one about the WA company charging a carbon cost on a green product,” Mr Sims said.

Complaints about small business were also common.

“With the building and refrigerants sector it is mainly comments by [subcontractors] who are installing things,” Mr Sims said.  “This is the usual small business lament – big companies can throw resources at these things . . . whereas for small business there are so few people around who have the capabi­lity to deal with these issues that it puts a bigger burden on them.”

The Australian Chamber of Commerce and Industry has been critical of the ACCC’s role in warning business against misleading carbon claims. Mr Sims said such criticism was “very strange indeed”.

“How can our attempt to get people to make honest representations be deemed as scaring business or intimidating business in any way ?” “We are just simply seeking business to be honest in their dealings with consumers. I don’t see how that is different from what we do in other sectors.  “The law in relation to misleading and deceptive conduct has been around for about 40 years so this isn’t anything new.”

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HELP VOTERS ASSESS THE CARBON TAX, WARTS AND ALL

Geoff Carmody, The Australian Financial Review, 12 Jul 2012

Greens leader Christine Milne wants the government to explain the environmental benefits of its joint carbon tax/carbon pricing policy to help “sell” it. This is sensible. Voters must understand why this major tax/benefit churning exercise is needed, and agree that benefits exceed costs, if they are to accept it.

Any benefits from pricing carbon come from reducing global greenhouse gas emissions compared with a “business as usual” approach.

With less than 1.5 per cent of global emissions, and falling, Australian action alone won’t reduce global emissions much.

Others, including Transport Minister Anthony Albanese, say this isn’t the right question. They’re correct, for two key reasons.

First, the government/Greens policy is intended to encourage other, much larger emitters to price carbon and reduce their emissions as well. Australia wants to be part of a global deal. Will this work? The evidence over two decades of failure – including increasingly vacuous communiques after climate conferences – suggests not.

Worse, we are chasing the wrong policy design – actually impeding global action. The preferred carbon pricing model taxes exports and exempts imports. It only works if everybody takes the same action at the same time. This hasn’t happened. The Kyoto Protocol ratifies the reality of differentiated national action.

For countries deciding to act in the absence of a global deal, this model undermines their trade competitiveness. Their action is a strong incentive for their competitors not to act, so they can reap the trade competitiveness benefits given away by the “first movers”.

The Prime Minister and others compare their carbon pricing policy to the goods and services tax. The GST exempts all exports and taxes all imports, and is trade competitiveness-neutral. But our carbon tax does the opposite. Senator Arthur Sinodinos noted this crucial difference. He labelled the carbon tax a “reverse tariff”.

Australia’s carbon pricing policy is in effect an engineered exchange rate appreciation that also increases local prices. We could do without this policy quinella, especially now. Carbon pricing costs for Australia are magnified. Global environmental benefits are minimised.

There’s a second reason why Albanese and others are right.

Climate negotiators seek progressive implementation of a global emissions trading scheme (ETS), with international linkage via free trading in emissions permits between ETS participants. This is the so-called market-based ideal towards which current, even more dirigiste national attempts at an ETS are to evolve.

How is a fair sharing of emissions adjustment burdens to be measured under a global ETS? By reference to national carbon prices, not by comparing reduced emissions production across countries. Under a global ETS with international permit trading, carbon prices will be the same in every country. That’s the only definition of “fair” that makes sense under a global ETS.

This point is crucial. Production of emissions will shift between countries as the permits market seeks out the lowest-cost ways of reducing emissions. This is the rationale for the “trading” part of ETS models.

The search for lowest-cost emissions reductions may mean emissions in some countries change little, or even increase, compared with business as usual. Australia may be such a country. The fact that the government/Greens policy envisages large purchases of emissions permits from offshore (subject to non-market limits) indicates that our emissions- reduction commitments will be partly “contracted out” to countries selling us emissions permits (and reducing their own scope to emit as a result).

Albanese and others have drawn attention to another question. If Australia can’t make a large contribution to global emissions reductions itself, and equal burden sharing implies the same carbon price across countries under the preferred ETS model, why should it get out ahead of its competitors?

In May 2011, the Productivity Commission (PC) concluded that, economy-wide, Australia’s effective carbon pricing was about the same as the average for a selected group of developed economies (for electricity, equivalent to a carbon price of about $9 a tonne). Australia’s trade competitors were not fully covered by the PC, and our effective carbon price was probably well ahead of our competitors.

With a carbon tax of $23 a tonne (and rising) until 2015, allowing for winding back of inefficient existing schemes (e.g. feed-in tariffs), and including the 20 per cent renewable energy target (RET), Australia is now even more ahead of our trade competitors on average.

At $23 to $29 a tonne, the carbon tax is not high enough to induce a major shift even from coal to gas (and gas prices may continue to rise). Environmental benefits are due to the more costly RET.

But the carbon tax will raise revenue, at least until 2015. This will be used to finance other measures, including compensation, albeit temporarily. Lower-income groups will be overcompensated – for now. This further undermines the carbon price. Increasing real incomes for groups likely to spend it increases their demand for emissions-intensive products, weakening price effects intended to reduce emissions.

The bottom line is that the government/Greens policy smells more like inefficient income redistribution than emissions reduction, efficient or otherwise.

Explaining the environmental benefits of the joint carbon pricing policy is crucial. If voters believe there is no environmental benefit from the carbon pricing policy, and see almost exclusive government emphasis on selling the hip-pocket consequences for them, even those receiving a fistful of dollars, shoved into their bank accounts with no questions asked, might smell a rat.

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MAKE PUBLIC JOURNALISM TAX DEDUCTIBLE, FOUNDATION SAYS 

Stephen Brook, 11 Jul 2012

Public interest journalism produced by not for profit media groups should be tax deductable, a journalism foundation says.

The Public Interest Journalism Foundation has written to Communications Minister Stephen Conroy urging him to introduce tax deductibility for philanthropic and non-profit media groups.

Tax deductibility in the US had prompted an increase in the number of not-for-profit media organisations, the foundation said. “In the United States, a civic crisis due to the financial meltdown of the media was ameliorated because philanthropic foundations, wealthy individuals and mum and dad donors provided funding for non-profit news organisations.” foundation spokesman Bill Birnbauer, a former editor at The Age, said.

The New York Times, The Washington Post, commercial programs such as 60 Minutes and public broadcasters NPR and PBS had used stories from such centres, which had won journalism awards, including Pulitzer Prizes. “The fact that there are now about 75 investigative non-profit reporting centres in the US is due to the fact that donations to them are tax deductible,” he said. “Any reporting organisation created under this model in Australia would have to operate on a non-profit basis in order to attract tax deductibility. If successful, a commercial model could eventuate in future.”

Mr Birnbauer pointed to upheavals at News Limited and Fairfax Media, which has announced 1900 job cuts. “We are in a time of incredible transition in the media and what is needed now is a recognition that meeting the information needs of communities is no longer the sole responsibility of newspapers,” Mr Birnbauer said. “The problem we face needs to be reframed from one of ‘saving’ newspapers to finding new ways of preserving the core of quality journalism on a variety of digital platforms.”

The federal government is yet to announce its reponse to the Convergence Review and the Finkelstein inquiry, which supported tax deductibility.

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OBAMA TURNS TAX CUTTER AS JOBS FALTER

Mark Landler, Sydney Morning Herald,10 Jul 2012

WASHINGTON: With a sluggish job market and fragile economy threatening his re-election chances, the US President, Barack Obama, has changed the subject to tax fairness, calling for a one-year extension of the Bush-era tax cuts for people making less than $250,000.

Mr Obama was due to make his announcement yesterday as Congress returned from its Independence Day recess, and as both parties and their presidential candidates head into the rest of the summer trying to seize the upper hand in a campaign that has been closely matched and stubbornly static.

House Republicans plan to vote this month to permanently extend all the Bush administration tax cuts for middle-income and upper-income people.

US President Barack Obama speaks during a campaign event at a school in Durham, New Hampshire. Photo: AFP

The President’s proposal will most likely do little to break the deadlock in Washington over how to deal with fiscal deficits, an impasse that has only hardened as Republicans sense a chance to make gains in Congress this autumn.

But by calling for an extension for just a year, Mr Obama hopes to make Republicans look obstructionist and unreasonable.

Trying to bounce back from another weak jobs report last week, he also hoped to deepen the contrast with his challenger, Mitt Romney.

On Friday the President said Mr Romney would ”give $US5 trillion of new tax cuts on top of the Bush tax cuts, most of them going to the wealthiest Americans”.

From their stronghold in the House, Republicans plan to vote this week to repeal Mr Obama’s healthcare law, hoping to energise their base even though they know the campaign to abolish the law stands no chance in the Democrat-led Senate.

The struggle to frame the tax debate comes as the campaign moves into a period, only four months before the election, when the perceptions of voters begin to harden. Polls show a persistently tight race, with Mr Romney closing in on Mr Obama in certain swing states, but with neither candidate able to break out decisively.

White House officials insisted that yesterday’s move was more than politics. They said it would ease anxiety over the so-called ”fiscal cliff” – the combination of tax increases and automatic spending cuts that are scheduled to kick in at the end of this year. Proposing a one-year extension, a senior official said, recognises that Mr Obama and the Republicans are not likely to resolve the larger debate over whether to permanently extend the Bush tax cuts for everyone.

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‘TAX THE RICH MORE,’ SAYS OBAMA

The Australian, 10 Jul 2012

President Barack Obama has drawn sharp election battle lines between himself and rival Republicans by pressing Congress to maintain tax breaks for most US families but end them for the wealthy.

“We don’t need more top-down economics. We have tried that theory. We have seen what happens,” president Obama said in a White House speech reminding voters of the trillion-dollar tax breaks instituted during president George W. Bush’s administration that “benefited the wealthiest Americans” more than others. “That is why I believe that it is time to let the tax cuts for the wealthiest Americans – folks like myself – expire,” he added.

“I’m not proposing anything radical here. I just believe that anybody making over $US250,000 ($245,000) a year should go back to the income tax rates we were paying under (president) Bill Clinton, back when the economy created nearly 23 million new jobs, and the biggest budget surplus in history.”

With Bush-era tax cuts set to expire at the end of 2012, taxes will rise for virtually all US households if Congress does not pass new legislation.

The announcement came as it was revealed that Republican Mitt Romney has again trounced president Obama in campaign fundraising.

Mr Romney raised $US106 million, while president Obama raised $US71 million. This does not include money paid into ‘independent’ Super PACs, which are believed to be funnelling huge sums from wealthy conservatives and corporations into attack ads against the president.

President Obama gave his remarks amid a fierce 2012 campaign in which his strategy for bringing the economy into fuller throttle in the aftermath of a devastating recession differs sharply from that of his Republican adversary Mitt Romney.

Taxes will play a crucial role in November, and president Obama acknowledged as much yesterday. “In many ways the fate of the tax cut for the wealthiest Americans will be decided by the outcome of the next election,” he said. “My opponent will fight to keep them in place, and I will fight to end them. But that argument shouldn’t threaten you,” president Obama added, suggesting Democrats and Republicans should work together now to extend the tax cuts for about 98 per cent of Americans.

Such a move would be unlikely in the Republican-controlled House unless it was part of broader legislation to extend all the tax breaks.

Republicans have made the argument for months that Congress should approve a full extension, and use 2013 as an opportunity to focus on comprehensive tax reform outside the furnace of election-year politics. “Many members of the other party believe that prosperity comes from the top down, so that if we spend trillions more on tax cuts for the wealthiest Americans, that that will somehow unleash jobs and economic growth,” president Obama said. “I disagree. I think that they are wrong. I believe that our prosperity has come from the economy that is built on a strong and growing middle-class.”

Even before president Obama’s speech, Republicans were assaulting his plan as a massive tax hike that would hurt small businesses and snuff out job growth. “Unlike President Obama, governor Romney understands that the last thing we need to do in this economy is raise taxes on anyone,” Romney campaign spokeswoman Andrea Saul said in a statement.

Mr Romney, she said, “has a plan to permanently lower marginal rates, help middle-class Americans save and invest, and jumpstart economic growth and job creation.”

President Obama insisted that his proposal would extend tax cuts for 97 per cent of small business owners, a move the president argued “is about helping job creators.”

Republican Senate minority leader Mitch McConnell insisted “it simply isn’t true.” “Today’s proposal is clearly based on a political calculus, not an economic one. But in the Obama economy, we need policies that are designed to create jobs, not designed to protect his,” he added. “No one should see an income tax hike next year – not families, not small businesses and other job creators.”

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PHILIPPINES CALLS FOR MINING TAX BOOST

ABC News, 10 Jul 2012

The Philippines is set to significantly increase royalties imposed on mining companies, under a new mining policy that will also impose stricter environmental protections.

The policy contained in a new executive order signed by President Benigno Aquino said no new mining permits would be approved until Congress passed a bill backing the increase.

The announcement follows months of heated debate between mining firms, environmentalists, tribal groups and church leaders.

The order seeks to impose a 5 per cent royalty on the companies’ gross earnings compared to the existing 2 per cent tax and extends a moratorium on mining permits that President Aquino imposed last year when he was still drafting the new executive order.

Environment Secretary Ramon Paje announced the order and said the government’s main intention was to increase revenues from mining. He stressed the order would respect existing mining agreements with the 33 mining operations already in the country, but would be imposed on new entrants. He said existing contracts would be reviewed to ensure the companies are complying with their obligations.

Mr Paje said if the law was passed by 2016 the country could earn an additional 16 billion pesos ($US381 million) from the higher royalties.

In addition, the order designates all abandoned mine waste and tailings as state property, allowing the government to extract any remaining minerals.

Environmental protection

The order also bans mining in 78 areas designated as “eco-tourism” sites and in “prime agricultural and fishing areas”, and imposes controls on poorly-regulated “small-scale mining industry”, particularly banning the use of mercury, which can poison the environment.

Leo Jasareno, director of the Philippines Department of Environment’s mines and geo-sciences bureau said the order was a response to concerns raised by conservation groups and local communities. “There has to be no mining operations in these areas,” he told Radio Australia’s Asia Pacific program. “And second, it’s [the order] calling for a review of existing mining operations, and the cleansing of mining tenements that are non-performing. This will ensure compliance with environmental standards and the mining law.”

Boosting the coffers
Finance Secretary Cesar Purisima expressed confidence the new order would help the industry and boost revenues. “We are confident that by investing in a stronger regulatory framework and a more equitable revenue sharing mechanism, we are improving mining’s long-term growth potential,” he said in a statement.

The Chamber of Mines of the Philippines said it welcomed the new rules, hoping it might end lengthy debates over the sector. “We are hopeful that the policy will harmonise conflicting interests, encourage investments, and foster sustainable development especially in the countryside where it is greatly needed,” a chamber statement said.

The Philippines is believed to have some of the biggest mineral reserves in the world — the government estimates the country has at least $US840 billion in gold, copper, nickel, chromite, manganese, silver and iron ore deposits.

However, the minerals have been largely untapped, partly because of a strong anti-mining movement led by the influential Catholic Church, while poor infrastructure and security concerns have also kept investors away.

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O’FARRELL RULES OUT MINING TAX FIGHT

Sydney Morning Herald, 10 Jul 2012

The NSW government will not join a legal challenge to the federal mining tax by Andrew Forrest’s Fortescue Metals Group because it has little chance of success.

The decision leaves Queensland and Western Australia to put forward their arguments in the High Court challenge launched by Fortescue last month against the constitutionality of the minerals resource rent tax.

The Premier, Barry O’Farrell, sought advice from the Crown Solicitor in March about joining the challenge after discussions with the then Queensland opposition leader, Campbell Newman. Mr O’Farrell believed there were ”certainly arguments that suggest that it’s going to treat different states in different ways”.

The NSW government estimates that the mining tax revenue from companies in NSW will be about $450 million a year in its initial years.

While the government will not release the legal advice, it is understood to conclude that any challenge would have a minimal chance of success.

Fortescue will argue that the mining tax, which the federal government hopes will raise $13.4 billion over the next four years, discriminates between states and impedes their ability to encourage mining.

The Queensland government announced yesterday it would intervene in the case, meaning it will put forward its own arguments, but not formally join the Fortescue challenge.

The WA Premier, Colin Barnett, confirmed it would also intervene in the challenge.

But a spokesman for Mr O’Farrell said NSW would ”closely monitor” the proceedings. ”NSW will not intervene in the proceedings unless this review determines that intervention by the state of NSW is warranted.”

With the tax forecast to raise $3 billion this financial year, a successful challenge could threaten federal Labor’s vow to bring the budget back to surplus.

However, the federal Treasurer, Wayne Swan, described the challenge as ”futile”. He was ”very confident” the government’s position would be upheld in the High Court, and had received legal advice that the Commonwealth would succeed.

Mr Swan accused Mr Newman, now Premier, of wasting taxpayer money to give billionaires a tax cut. ”Campbell Newman says he hasn’t got any money, therefore he’s got to sack thousands of workers in Queensland. But he’s got enough money to fund an expensive High Court challenge which will be futile and which would ultimately deliver a tax cut to the likes of Clive Palmer.”

But Queensland’s Attorney-General described the cost of the intervention as ”minimal”, estimating it would be up to $300,000.

Mr Palmer – who last week walked away from a plan to contest Mr Swan’s seat in Brisbane – said through a spokesman that he had not spoken with the Queensland government before its decision.

Mr Barnett described the tax as ”flawed economically” but could not predict the outcome of the challenge.

The decisions come as the federal government seeks to revive its fortunes by arguing that the mining tax will spread natural resource wealth across the community through cash handouts and business tax cuts.

The Opposition Leader, Tony Abbott, would not be drawn on whether the interventions were appropriate use of taxpayers’ money, but reiterated the Coalition’s plan to remove the mining tax. ”There is no doubt that the mining tax particularly targets the resource rich states and if the states in question wish to challenge it in court, that’s a perfectly reasonable thing for them to do,” he said.

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WE’LL BEAT ‘PAYBACK’ MINING TAX CHALLENGE: SWAN

Lanai Vasek, The Australian, 9 Jul 2012

Wayne Swan says he is confident the government will successfully defend its mining tax in the High Court, as Queensland joined Fortescue Metals in its challenge against the $13.4 billion levy.

As Julia Gillard prepared to meet with Queensland Premier Campbell Newman in Brisbane today, Mr Swan said the state government’s move was “futile” and Queensland taxpayers should not be forced to foot the bill for such a challenge.

Mr Swan said Mr Newman was simply taking the action to “pay back” billionaire miner Clive Palmer for “bankrolling” his election campaign. “It appears the Queensland government is prepared to waste taxpayer money on a futile challenge,” Mr Swan told ABC News 24. “I think what we’ve seen here is the influence of Mr Palmer in Queensland. They are prepared to effectively rob the punters so they can give a very big tax cut to Mr Palmer.”

Mr Palmer donated heavily to the Liberal National Party campaign ahead of Labor’s landslide defeat in the March state election.

Mr Swan said he was confident the High Court challenge to the mining tax, launched by Andrew Forrest’s Fortescue Metals Group last month, would not succeed. “It won’t be successful, the legal advice we have is very strong,” he told Sky News. “We are confident in our legal advice.”

Mr Palmer denied he had influenced the Queensland government’s decision to join the legal challenge. “This is just another personal attack from Mr Swan, which has no substance,” a spokesman said.

Opposition treasury spokesman Joe Hockey said that the latest moves by the Queensland government to join the legal challenge against the mining tax confirmed the “mess” Labor had got itself into. “From our perspective this just confirms the Labor government is making a mess of the taxation system and again reflects the fact they don’t know how to govern the country,” Mr Hockey said.

Queensland’s challenge, revealed in The Australian today, will claim the minerals resource rent tax unfairly discriminates against the resource-rich state.

If successful, the challenge could derail the government’s plan to deliver a budget surplus next year.

Fortescue believes it has a good case for challenging the MRRT on constitutional grounds.

Opposition Leader Tony Abbott said Queensland was within its rights to join Fortescue Metals’ mining tax challenge. “I think states are entitled to bring forward action in the High Court if that’s what they want,” Mr Abbott said. “There is no doubt that the mining tax is bad for the Australian states. There is no doubt that the mining tax particularly targets the resource-rich states and if the states in question wish to challenge it in court well that’s a perfectly reasonable thing to do.”

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MINING TAX LEADS OTHER RESOURCE-RICH NATIONS TO FOLLOW SUIT

Sarah-Jane Tasker, The Australian, 9 Jul 2012

Miners are becoming concerned with resource nationalism in resource hubs around the globe, some ready to blame the Gillard government for setting the precedent for other governments to lift mining taxes.

Ernst & Young’s annual mining risk report, released today, indicates resource nationalism is the No 1 concern, highlighting that projects around the world have been delayed or even dumped because of the degraded risk and reward equation because of increasing royalties and taxes.

Perth’s Cazaly Resources joint managing director Clive Jones said resource nationalism was clearly a concern in Australia but was also becoming an issue in the world’s other mining regions.

He said a concern about the introduction of the minerals resource rent tax was that it would have a knock-on effect in other countries, setting the example for other governments to follow. “Obviously it is fairly concerning to have this added issue to address if you want to deal overseas,” Mr Jones said. “It has always been there, countries changing laws without much consultation, but generally when you do engage with governments they will make changes that fit with the industry.”

Indonesia has increased its focus on increasing benefits to locals from the mining boom and introduced this year a 20 per cent tax on mining exports, which followed the introduction of another rule that forces all foreign mining companies to sell majority stakes in their operations to locals.

In Argentina, the government changed a policy last year and ordered all oil, gas and mining companies to repatriate all future export revenue to force domestic development.

Mr Jones said in Australia, governments and the general public tended to rank all miners as the same, with no distinction between the majors and junior explorers. “People assume that juniors are the same as the major players, but we do not have access to the balance sheets the majors do, yet we are treated as if we do, which is extremely frustrating,” he said.

The business risks report highlights that the 2010 announcement of Australia’s new mining tax had a significant ripple effect around the world. “Many mining and metals jurisdictions announced increases in taxes and royalties during the course of 2011-12 and many looked at Australia’s action as commercial cover for proposed changes,” the report says.

It says last year and in the first six months of this year, a number of countries announced or enacted increases to taxes or royalties, including Democratic Republic of Congo, Ghana, Mongolia, Peru, Poland and the US.

Ernst & Young global mining and metals leader Mike Elliott said resources nationalism was a bigger challenge now than it was 12 months ago, when the myriad risks facing the sector had become increasingly complex and critical. “In Australia, the capacity constraint issues have been biting for longer and, combined with the softening of prices and the high Australian dollar, cost inflation is of particular concern for miners here,” he said.

Mr Elliott said there was no doubt that projects around the world had been deferred and delayed, and in some cases investment withdrawn altogether because of the degraded risk/reward equation. “The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated,” he said.

The business risks report highlights that amendments to mining and tax laws could result in changes to capital allocation based on the weaker risk/reward profile. “The average global risk has increased for investment, so the related reward must be higher in order to make the requisite investment,” the report says. “Mining and metals companies will make choices for future and current investments across projects and countries based on the expected returns as risk adjusted. “Those governments which increase their take will lower the returns and increase the risk for mining and metals companies, and will jeopardise future foreign direct investment.”

The Ernst & Young survey also shows that the skills shortage is still the No 2 risk, while infrastructure access jumped from sixth spot to third and cost inflation rose from eighth spot last year to fourth in the 2012-13 survey.

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PUSH TO WIDEN LEVY ON ‘SUPER PROFITS’ REJECTED

Annabel hepworth, The Australian, 9 Jul 2012

The government’s business tax working group is set to reject controversial proposals that would see a super-profits tax rolled out across the economy to target companies such as banks. The group argues that the tax would undermine Labor’s stance that it remains committed to a corporate tax cut and saddle the system with even greater complexity.

The Australian can reveal that the working group is concerned the system – where super-profitable companies pay more tax but many more businesses are relieved of paying any tax – would be likely to narrow the company tax base, meaning a higher company tax rate would need to be imposed to offset it.

Sources say Julia Gillard’s vow at last month’s economic forum that a cut in the company tax rate would be an “absolute top priority” gave the group a further “nudge”.

While the government infuriated the business community by welshing on its promise of a one-percentage-point cut in the company tax rate to 29 per cent in the May budget in favour of a multi-billion-dollar cash splash for parents, it has promised that cuts would be considered by the business tax working group by the end of the year.

The Prime Minister insisted last month that the government would reinstate the cut only if the working group found other tax changes from within the business tax system to pay for it, a move set to split the business community.

Miners already fear they will be targeted to fund the company tax cut, while Reserve Bank board member Heather Ridout has warned against changing tax concessions for research and development to fund the cut.

Under the “allowances for corporate equity” model, which would see a wider application of super-profits tax, companies can claim a tax deduction on the level of profits needed to get a reasonable return on equity.

Companies making above-normal or “super” returns would pay the tax.

The reform would remove a bias in the tax system that critics say encourages companies to saddle themselves with debt because while interest payments on debt are a tax deduction, there is no deduction on raising money using equity. A spokesman for Wayne Swan said the government would “await the findings of the business tax working group after Tony Abbott and the Liberals blocked a cut to the company tax rate”.

When the Treasurer set up the business tax working group after last year’s tax forum, he said the allowance for corporate equity model would be considered as an option to relieve the tax on new investment.

The group was told to focus on changes to the tax treatment of business losses in the near term, and to consider longer-term options such as cutting the corporate tax rate or alternatives such as allowances for corporate equity.

John Freebairn, from the University of Melbourne’s economics department, who was appointed to the business tax working group, suggested at last year’s tax forum that an allowance for corporate equity would require a tax rate “towards 40 or 50 per cent”. “And let’s rub it into the banks,” he was reported to have said at the forum. “They seem to make much higher returns than anyone else.”

Sources said at this point there was no big champion of the model on the working group, following presentations from academics, reviews of international research and work by Treasury on where the model had been rolled out overseas.

While the allowance could be confined to new equity capital in order to limit the squeeze on government revenues, sources said it would be an administrative nightmare to stop companies trying to exploit this to cut their tax burden.

And a full-blown adoption of the model would undermine the corporate tax base, meaning a higher company rate generally, sources said.

There are also concerns on the group that by adopting the model, it would send a message to potential investors that those making poor returns would not pay any tax, but those who were successful would be taxed too heavily.

It is understood that the group was looking into a higher company tax cut than the 1c in the dollar abandoned in the May budget.

The working group is expected to release a discussion paper this month, which will contain Treasury costings on reform options. A final report is due to be delivered in December.

Last year, the Business Council of Australia chief executive Jennifer Westacott, who is also on the working group, dismissed as “wrong” reports that the group favoured the introduction of the model.

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RIFT DEEPENS ON BUSINESS TAX CUT

Gemma Daley, The Australian Financial Review, 9 Jul 2012

Businesses and tax experts have renewed their call for a company tax cut as hostilities between unions and the Greens increase doubt on Prime Minister Julia Gillard’s ability to deliver a $2.4 billion-a-year reduction.

Treasurer Wayne Swan’s business tax working group is due this month to recommend ways of reducing the rate for businesses earning more than $2 million.

President of the CFMEU mining and energy division Tony Maher and Australian Workers Union secretary Paul Howes have joined a Labor push for differentiation from the Greens before the party’s NSW conference next weekend, which has enraged the Greens. This comes as the Gillard government tries to argue for reforms such as the tax cut that are expected to need Greens support in the Senate.

The Tax Institute’s Robert Jeremenko said the stoush could threaten the delivery of reform that would reduce business costs, which would see higher pay and more wages. “There seems to be some disconnect that this reduction is just a gift to the company, but in reality it will mean higher wages, more jobs, increased investment and expansion from these companies and that’s good for the economy,” he told The Australian Financial Reviewyesterday. “We should be looking at a significant business tax cut. It delivers a much broader economic impact that people think.”

A spokesman for Mr Swan said: “The Prime Minister has made it clear the government’s priority in this area is cutting the company tax rate with the support of the Parliament after Tony Abbott and Liberals refused to support a reduction in company tax.”

The government plans to reduce taxes for all businesses one percentage point to 29 per cent as part of its minerals resource rent tax package, but the Greens are opposed to the measure applying for big business.

Ms Gillard said at her economic forum in Brisbane in June the government still wanted to push ahead, funding the cut through budget changes.

Australian Chamber of Commerce and Industry chief executive Peter Anderson said companies should not be punished through other budget savings to deliver it and joined Mr Jeremenko in saying both sides of politics needed to commit to it. “The business community have been short-changed because the cuts that were promised ended up not being delivered,” Mr Anderson told the AFR. “We are pleased the Prime Minister has put them back on the agenda, but we are frustrated at the political impasse.”

NSW Labor secretary Sam Dastyari is to move a motion at the state party conference at the weekend calling for Labor to “no longer provide the Greens party automatic preferential treatment in any future preference negotiations”.

Mr Howes described the Greens as a hardline party that wanted to “openly crush” jobs, a sentiment Mr Maher backed on Twitter. Mr Maher tweeted: “I’m with Paul on this. Greens see job losses as trophies. Labor must turn on the Greens and destroy them.”

Labor would benefit from preference flows from the Greens in just a few federal seats – Kingsford Smith in Sydney, Wills in Victoria and Fremantle in Western Australia.

At the same time a swag of core Labor seats in western Sydney, Illawarra and the Hunter in NSW, in Queensland and north of Melbourne are regarded as potentially endangered by perceptions Labor is too close to the Greens because of the carbon tax and the Greens asylum seeker policy.

Party polls are reportedly showing Labor needs to go through some “product differentiation”.

Ms Gillard avoided weighing into the dispute, saying the question of preferences was one for the organisational wing of the party. “For this government, which I lead, we will always pursue Labor values and a Labor vision. We are prepared to work with others who will help us enact those values and that vision,” Ms Gillard said in Deception Bay.

But she also referred reporters to her speech to the Whitlam Institute in March last year in which she called the Greens “a party of protest with no tradition of striking the balance required to deliver major reform”. “The differences between Labor and the Greens take many forms but at the bottom of it are two vital ones. The Greens wrongly reject the moral imperative to a strong economy,” Ms Gillard said in that speech. “The Greens have some worthy ideas and many of their supporters sincerely want a better politics in our country. They have good intentions but fail to understand the centrepiece of our big picture – the people Labor strives to represent need work,” she said at the time.

Greens senator Sarah Hanson-Young said a move by Labor to deprive Greens of preferences would deliver control of the Senate to Mr Abbott. “That’s bringing back Work Choices, it’s destroying the price on carbon, it’s towing boats back.”

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SO MUCH FOR A LOWER TAX-FREE THRESHOLD

The Australian Financial Review, 9 Jul 2012

Federal government claims of a tripling in the tax-free threshold as part of its carbon tax compensation deserve the same scrutiny as claims that companies are blaming price increases on the tax.

In reality the effective tax-free threshold for lower income earners will only rise 25 per cent from $16,000 to $20,000 after allowing for the low-income tax offset, an existing rebate that eases many people into the tax system by reducing their tax obligation.

This is a reality check the government should bear in mind next time it complains about businesses embarking on normal price rises that simply reflect the carbon tax.

The Australian Competition and Consumer Commission has investigated two claims about carbon tax price rises, raising issues of how far it should go in limiting such claims.

In the first case, the regulator accepted undertakings from two solar panel companies not to make similar claims in future. The companies had claimed that electricity would rise by 20 per cent in a year and by at least 400 per cent by 2019 due to the carbon tax. They sourced the first figure from Australian Trade and Industry Alliance advertising but the ACCC says there is no reasonable basis for the claim.

State regulators have approved electricity tariffs in which the carbon tax is responsible for price rises of 5 per cent to 10 per cent this year, although other green schemes will add to this rise.

The head of the Brumby’s Bakery chain has resigned after urging franchisees to blame the carbon tax for planned retail price increases. The ACCC said it would make inquiries about this and the company now disowns the suggestion.

The first case represents a misleading claim, ironically from a consumer products provider which stands to benefit from the carbon tax whatever the power price rise.

The Brumby’s case is more problematic because input prices for wheat and electricity will rise under a carbon tax and so it is quite legitimate to blame the carbon tax for some higher prices. Baking is a competitive market and it is unlikely that a nationwide franchise would be able to sustain uncompetitive prices for very long whatever it tells its franchisees in an ill-advised internal staff memo.

The ACCC should not be injecting the fear of tough sanctions into the normal thinking of companies about adjusting prices when an input price has clearly risen. It should turn its attention to government claims about compensation for which long term budget funding is unclear amid mooted changes to the carbon price system.

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 TAX CARBON TO FEED THE POOR: UN

Ben Woodhead, The Australian Financial Review, 6 Jun 2012

The United Nation’s has proposed globally co-ordinated carbon and financial taxes to raise money to fill a $US167 billion shortfall in funding for developing nations as the world’s rich countries cut assistance.

The UN issued the proposal as it released a new report, World Economic and Social Survey 2012: In Search of New Development Finance.

Measures outlined in the report include proposals to raise $US250 billion a year from carbon taxes, $US75 billion a year from financial transaction taxes, $US50 billion a year from a tax on billionaires, $US40 billion a year from currency taxes and $US10 billion a year from an airline tax.

In total, taxes proposed in the US report, which was compiled by the organisation’s Department of Economic and Social Affairs, would raise $US400 billion a year.

“Donor countries have fallen well short of their aid commitments and development assistance declined last year because of budget cuts, increasing the shortfall to $US167 billion,” the report’s lead author, Rob Vos said.“Although donors must meet their commitments, it is time to look for other ways to find resources to finance development needs and address growing global challenges, such as combating climate change.”

Among the details of the UN’s proposals:

  • “A tax on carbon dioxide emissions in developed countries: a tax of $25 per tonne would raise an estimated $US250 billion per year, collected by national authorities, but earmarked for international cooperation;
  • “A tiny currency transaction tax of one half of a “basis point” (0.005 per cent) on all trading in four major currencies (the dollar, euro, yen and pound sterling), which could yield an estimated $US40 billion per year for international co-operation;
  • “Earmarking a portion of the proposed European Union financial transaction tax (which is expected to raise up to €55 billion or $US71 billion per year) for international cooperation;
  • “Regular allocations of IMF special drawing rights (SDRs) and use of “idle” SDRs could yield about $US100 billion per year for the purchase of longâ€ÂÂÂÂÂ�term assets which would then be used as development finance.”

 

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TAX HITS RICH IN ATTEMPT TO DRAG FRANCE OUT OF THE RED

Angelique Chrisafis, Sydney Morning Herald, 6 Jun 2012

PARIS: The new Socialist Party government in France has announced tax rises worth €7.2 billion ($8.8 billion) mainly targeting the wealthiest households and biggest corporations, as the country struggles to plug a gaping hole in its budget.

The tax increases come as a deeply indebted France battles to stick to its deficit-reduction targets and keep Brussels and the markets at bay. A grim economic assessment by state auditors this week warned of a €40 billion hole in state coffers over the next two years and the government has lowered its growth predictions.

The raid on the wealthy is in line with Francois Hollande’s election promise: ”If there are sacrifices to be made – and there will be – then it will be for the wealthiest to make them.”

More than half the measures target households, mainly the country’s richest, and just under half target big business. They include lowering France’s wealth tax threshold, which had been raised by Nicolas Sarkozy. France’s wealth tax is unique in the EU and Mr Hollande will now add a one-off higher levy on those with net wealth of more than €1.3 million.

Inheritance tax, which had been loosened by Mr Sarkozy, will be tightened. Banks will face higher taxes, as will petrol companies through a new tax on energy firms holding oil stocks. A 3 per cent dividend tax must be paid by companies on dividends distributed to shareholders. This aims to encourage firms to use cash flow for investment as France seeks to close the competitiveness gap with Germany. The tax on financial transactions will be doubled to 0.2 per cent.

The Prime Minister, Jean-Marc Ayrault, told Parliament: ”I’m not the enemy of money.” He said tax increases would focus on the biggest corporations while small companies would get favourable tax initiatives. He said poorer households and the lower middle classes would be spared.

The government will axe two initiatives by Nicolas Sarkozy: it will reintroduce tax on overtime hours and repeal a law that was about to shift labour charges on to the consumer with a rise in sales tax. The measures are part of an amended 2012 budget.

In autumn Mr Hollande will launch his deeper tax reforms for 2013 including, introducing his signature 75 per cent tax on income above €1 million – a measure that is popular with the French public.

Mr Hollande, who campaigned on a ticket opposing one-size-fits-all austerity, now faces the difficult task of dragging France out of the red while avoiding the taboo word ”austerity” and refusing cuts to the public sector and welfare system.

Meanwhile, after a meeting in Rome on Wednesday, the German Chancellor, Angela Merkel, and the Italian Prime Minister, Mario Monti, appeared to be no closer to resolving their differences on how to contain Italian interest rates, which have soared as a result of the crisis.

Mr Monti asked the European summit for a new mechanism that could be deployed if the yields on Italian government bonds spiralled out of control for reasons that had nothing to do with the economic fundamentals.

However, speaking after a meeting of Italian and German ministers in Rome, Dr Merkel again insisted existing procedures approved for the new European stability mechanism were sufficient.

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INTERVIEW WITH ANDREW ROBERTSON (SUBJECTS: SMALL BUSINESS TAX RELIEF, ACCC CARBON ENFORCEMENT ACTION)

The Treasury, 5 Jul 2012

HOST:

David Bradbury, welcome to the program.

BRADBURY:

Good evening Andrew, good to be with you.

HOST:

Small business feels that it’s been short-changed by the Government over the carbon tax in that households are getting compensated, big polluters are getting big compensation, but small business feels like it’s getting nothing. What do you say to small business?

BRADBURY:

Look, we’ve always taken the view, and I should firstly say that a very large proportion of small businesses in this country are not incorporated, they are sole traders and partnerships. Now for those small business people, they will benefit every bit as much as every other taxpayer when it comes to the massive tax cuts that are being delivered when it comes to personal income tax cuts.

Let’s just have a look at what that means. There are seven million working Australians, of which many of them would be small businesses which will get a tax cut. It’ll start to flow through, from the first of July, and people will start to see that in their pay packets from here on.

Six million of those workers will get a tax cut of $300 or more for the year, so those small businesses that are not incorporated will certainly get the benefits of the tax cuts.

HOST:

Whether you’re incorporated or not, you’re going to see your energy costs go up and see your input costs go up and you may not have the market power to raise prices because you’re a small player, so you’re going to be worse off, aren’t you?

BRADBURY:

For many businesses, they won’t be feeling significant increases. And can I make the point about energy costs, COSBOA have provided information that would suggest that for the average small business, the average small retail business, energy costs as a proportion of total expenditure for that business is somewhere in the order of about two per cent.

HOST:

The Australian Chamber of Commerce and Industry though believes that small business profits will be cut by about 10 to 20 per cent because of the carbon tax, and if that comes true that’s a lot of votes, isn’t it?

BRADBURY:

Well, can I tell you that today, two suppliers of solar panels were pulled up by the ACCC and they’ve provided voluntary undertakings because they were found to have provided information that the ACCC found was to be misleading customers. And the information they were providing was suggesting that power prices would go up by 20 per cent. Now, can I point out to you that the reason those businesses had indicated that the increase was to be 20 per cent was because they had relied upon a newspaper advertisement that was put together by a peak body, an organisation of which ACCI happens to be a member, this was the Trade and Industry Alliance, the Australian Trade and Industry Alliance, who put out a political advertisement – that’s what it was – saying that electricity prices would go up by 20 per cent as a result of the carbon price. Now, these two businesses out there have relied upon the information that was put in that advertisement and as a consequence of that they’ve now found themselves on the wrong side of the law.

So there is a lot being said, a lot of claims being made out there in the political debate, but people have to be careful, particularly those that are engaging in trade and commerce, businesspeople, they have to be careful to try and put all of the political rhetoric to one side, and there’s a lot of that, a lot of misleading claims being made. Mr Abbott’s been making many of them. They’ve got to put all of that to one side, but frankly, the sorts of claims we see being made by some of the vested interests and Mr Abbott, they’re actually confusing businesspeople and potentially making it more likely that businesses like the two that got into trouble that were announced by the ACCC today that will end up falling on the wrong side of the law.

HOST:

Just on that, you mentioned the ACCC. The ACCC is warning business to be careful if they do put their prices up because the ACCC is watching and may prosecute them, but the Government is saying to business, well pass on increased costs. Isn’t that a mixed message?

BRADBURY:

Let me be really clear about this. The first point is, if your prices, if your costs are going up as a result of the carbon price then there’s nothing unfair, unreasonable, unjust about you increasing your prices by a commensurate level that reflects an increase in your costs. But where there is a problem is if you mislead your consumers. If you come out and you jack your prices up and the increase in those prices has nothing to do with the carbon price and you’re out there telling customers that you’ve only increased your prices because of the carbon price. Now that’s a rip off. It’s a rip off in any man’s language and it actually doesn’t matter whether it relates to the carbon price or any other matter. The message to business out there in our community is: we understand that this can be confusing but be very careful about the representations you make.

HOST:

Alright David Bradbury, thank you very much for your time, we have to leave it there.

BRADBURY:

Good to be with you Andrew.

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TAX BITES INTO FOREIGN PROPERTY SALES

Sarah Danckert, The Australian, 5 Jul 2012

The total value of commercial properties sold fell over the second quarter of 2012 as market ructions and changes to taxes for foreign investors kept offshore buyers at bay.

Sales of more than $5 million each for the three months to June dropped nearly 20 per cent, to $2.215 billion, compared with the first quarter, according to research by CBRE.

The retreat of foreign investors accounted for a large part of the fall. Last year offshore groups purchased about 30 per cent of all commercial properties. The same trend was recorded in the March quarter, with foreign investors accounting for 27 per cent of all investment activity. In the June quarter that halved to 14.7 per cent.

CBRE senior managing director, international investments, Rick Butler said foreign buyers were in a holding pattern, concerned over the state of the US or European economies. “The federal government’s proposed doubling of the MIT (managed investment trusts) withholding tax (for foreign investors) has been a further stake in the heart for investors, who must revise their figures downwards to achieve the same returns, post the law change. This has an impact on a wide range of Australian vendors who are trying to divest for their own portfolio reasons,” he said.

The Property Council of Australia has estimated that $1bn worth of property deals could be abandoned by offshore buyers as a result of the May budget tax rise to 15 per cent.

Australian listed property trusts filled some of the gap, lifting their share of sales for the quarter to 11.69 per cent from 3.25 per cent in the March quarter. However, no sales to unlisted property trusts were recorded during the quarter.

The industrial property sector took the largest hit. Sales fell to $190.175m compared with $355.156m in the first quarter.

Meanwhile, a separate report from Jones Lang LaSalle found that investment volumes on commercial property to June 21 had reached $4.6bn, a $700m decline on the $5.3bn recorded during the first half of 2011.

About $2.07bn of retail property sales were struck over the first half of calendar 2012, against $1.8bn in the first six months of 2011. “The national retail investment market continues to be the strongest performer, recording higher volumes in the first half of this year compared to last,” said JLL managing director, investments and advisory, John Talbot.

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NSW EYES $250 EMERGENCY SERVICES TAX

Sydney Morning Herald, 5 Jul 2012

NSW property owners could face a new tax of some $250 apiece to pay for emergency services.

A property-based tax is being considered to raise the more than $1 billion a year needed to keep firefighters, police, paramedics and the State Emergency Service going. “The way we currently fund these services in NSW is complicated, inefficient and unfair,” Treasurer Mike Baird said, flagging the plans on Thursday. “Recent reviews of the state tax system, including the Henry Tax Review, have recommended we move to a property-based levy.”

The change would bring NSW into line with other states, including South Australia, Queensland and Western Australia.

Victoria is also set to move to a property levy system.

In NSW, emergency services are primarily funded via a tax on insurance companies and to a lesser extent through local and state government coffers. But ministers say this is unfair because those who don’t have insurance don’t contribute.

Documents released by the state government on Thursday show that if the proposed tax were applied uniformly across the state, each household would pay about $250 a year. This could be offset by a reduction in household insurance premiums – if insurers lowered their prices as a result.

But the government has also raised the possibility of varying the tax depending on the value of properties and their location. That would mean Sydneysiders pay more than rural residents, and owners of more valuable properties would be slugged more.

Opposition Leader John Robertson dismissed the plan as a cash grab. “This just sounds like a straight-out cash grab by the O’Farrell government,” he told reporters in Sydney.

The Insurance Council of Australia CEO Rob Whelan welcomed the idea. “Ultimately the Insurance Council would like to see all state and territory governments working to abolish all taxes on insurance by 2015,” he said in a statement.

The Property Council of Australia also favoured the plan.

The state government has opened a three-month consultation period.

A discussion paper and feedback form is available at haveyoursay.nsw.gov.au/ESL.

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NO-GO AREA FOR PRESIDENTIAL CANDIDATES

The Australian Financial Review, 4 Jul 2012

US President Barack Obama would be in a far more precarious position if he’d pursued a carbon tax in an energy-obsessed nation rather than changes to the healthcare system, top US political analyst and University of Sydney graduate Gina Despres believes.

“In the beginning of the administration, people thought Obama’s top priority would be a carbon tax,” Ms Despres said. “Instead he decided to do healthcare. But if he had done a carbon tax, he’d be where [Julia] Gillard is, and the almost unthinking ideologically based opposition just for the sake of opposition would be something he would be contending with,” she said.

The US Supreme Court ratified controversial changes to the healthcare system last week.

Ms Despres said the issue of changing the healthcare system through legislation was arguably far less thorny than a carbon tax. “The carbon tax in the US is even more divisive than healthcare because of American attitudes towards energy prices,” she said. “Cheap gasoline is sort of a right of citizenship.”

Since leaving Sydney in 1964 to study in the US, Ms Despres has had a 21-year career in law and US politics, first as a staffer at the Department of Energy and as an adviser to Democratic senator Bill Bradley.

She is now an investment adviser at the $1.1 trillion funds management company Capital Group.

Ms Despres is in Australia this week meeting Capital Group’s Australian clients. She said the race for the White House would be close as Republican candidate Mitt Romney challenged for the leadership. “In my gut, if you pinned me down, I would say Obama will win,” she told The Australian Financial Review. “But looking at the polls, which as an analyst I have to do, every indication is that it will be a very close race.”

The 2012 election campaign is shaping up to be among the most partisan in recent history, as the views of Democrats and Republicans on society, government and the economy diverge.

Ms Despres said the current environment of “ideological fervour” was a reflection of the deep divisions in the US electorate with regard to the role and size of government. “I think it reflects to some extent what has been happening, that government has been getting bigger. Tax revenues as a share of GDP [gross domestic product] – even if the Bush tax cuts are extended within a decade or so – will be about 22.6 per cent, whereas since World War II they averaged between 18 and 19 per cent.”

The apparent expanding role of the US government has reinforced the battle lines of Republicans and Democrats. “People want a small government but we want it to pay our retirement benefits and we want it to take care of our medical needs and provide a decent education,” she says. “They want government to do all of this but at the same time to lay off their backs.”

Regardless of who won the election, Democrats and Republicans would need to work together. The pending “fiscal cliff” as mandated tax and spending cuts expire simultaneously are expected to result in a sharp contraction in the economy unless action is taken. “There has to be a time frame. If nobody acts by the end of the year, the US will face the largest tax increase since World War II. So someone has to act,” Ms Despres said.

In a world that appears to lack decisive leadership, Ms Despres saved some praise for German Chancellor Angela Merkel, calling her “a true statesman” who was skilfully managing the mindset of her electorate while considering the broader interests of Europe. “On the one hand, she knows that if the euro falls apart this will be bad for Germany on many counts, but on the other hand she correctly believes sloshing money at the solution without conditionality is counterproductive,” Ms Despres said. “People have said she has fallen so far short of [predecessor] Helmut Kohl and that she doesn’t have the vision of Europe. His vision of Europe was fundamentally flawed and she has to figure out how to fix it.”

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NO EASY WAY TO PUNT ON CARBON TAX REPEAL

Geoff Winestock, The Australian Financial Review, 3 Jul 2012

With the opinion polls showing the Gillard government faces near certain defeat at the next election, it is time to start asking exactly what difference a Liberal Party win would make to the stockmarket.

The most immediate issue is that as soon as he wins office Opposition Leader Tony Abbott has pledged to start the process of repealing the $11 billion carbon tax which took effect at the weekend.

There should be an investment opportunity for those who want to believe that Abbott will deliver on the promise and scrap the tax.

But Deutsche Bank has just published some research which argues that the impact on specific stockmarket-listed companies of the carbon tax will be “quite modest in the early years” which implies that repealing it won’t necessarily make that much difference either.

Deutsche Bank says that there is in fact only one company in the ASX 200 in the list of the top 10 emitters of carbon dioxide in Australia. It is BlueScope that comes in at No. 8.

The other nine top spots on Deutsche Bank’s emitters list are all filled by power generation companies. In fact AGL should be on the list since on Friday it completed the purchase of Great Energy Alliance Corporation, which owns the Loy Yang power station A.

Origin also has some exposure to the Australian power industry since it bought the right to resell power from the state-owned NSW generator Delta Electricity.
The other power stations for the most part do not have Australian shareholders. They are either owned by state governments, for instance Macquarie Generation, or by foreign investors, such as TruEnergy. Deutsche estimates only about 80 million tonnes of Australia’s 550 million tonnes of annual carbon emissions come from ASX top 200 listed companies.

If you throw in AGL/GEAC, it would be about 100 million.

In fact, the carbon tax won’t affect power generators’ profits much in the medium term because they can pass on almost all their carbon costs to their customers.

Eventually, if the carbon price rises, coal-fired generators will face stiff competition from cleaner gas-fired generators. But at the fixed price of $23 per tonne of carbon, power from black coal is still cheaper.

Brown-coal power stations, which produce about 40 per cent more carbon per megawatt, are potentially more exposed but they have received special compensation. AGL announced on Friday that it will get $240 million.

While power generators have captive markets, the carbon tax could have a bigger direct impact on industrial companies that compete on international markets with manufacturers in countries that do not pay the tax.

That poses a risk for big resource companies such as BHP, Rio Tinto, Santos and Woodside which emit fugitive gases from their mines and wells and carbon pollution from smelting and refining. Yet as Deutsche points out many of these firms will receive free emissions permits or direct grants as compensation for the carbon tax.

So-called trade-exposed emissions-intensive companies such as BlueScope that compete internationally and cannot pass on higher costs will receive free emissions permits to cover almost all their bills.

BlueScope, which emits 11.3 million tonnes of carbon dioxide equivalent, could have faced a bill of $259 million. But it will receive free permits equal to 95 per cent of its carbon bills. Medium-intensive companies will receive two-thirds of their permits.

And as Deutsche notes, most of these emitters have received various ad hoc forms of compensation. BlueScope won hundreds of millions of dollars of subsidies last year. There will be a few companies that missed out on all this compensation but not apparently any of the really big ones.

The other side of the investment equation is that even if Abbott loses and Labour presses on with the carbon tax, in the short to medium term the impact on profitability from the carbon tax will likely diminish.

After all, from 2015 the carbon price will be linked to the much lower world price.

The price of permits in the European emissions trading scheme has slumped to about $12 and there is a huge oversupply of permits from clean energy permits in the Third World.

Perhaps the most confusing scenario would be if Abbott wins the election but not clear control of the Senate from the Greens and the ALP. Deutsche Bank warns it could take months or years to call a double dissolution to try to override the Senate. That makes it even trickier for investors to take a punt on an Abbott win.

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CARBON TAX: NOT EVERYONE’S WORSE OFF

The Australian Financial Review, 3 Jul 2012

The Opposition Leader says he will repeal the carbon tax if the Coalition wins the next federal election.

The political process, through either a slow double dissolution or a faster but unlikely annihilation of Labor and the Greens in the Senate, has been widely canvassed in the media and elsewhere.

Most of the coverage highlights support from the business community for Tony Abbott’s plans. However, our research into the business response to climate change suggests this support may not be as forthcoming as it seems today.

Several issues are likely to stand in the way of Abbott’s ability to gain widespread backing from the business community, especially if he is forced to take the slow, double dissolution path to repeal the tax.

First, by the time he has the power to act, a price on carbon will be embedded in activities ranging from the carbon price mechanism itself to fuel surcharges, electricity contracts, forward hedging contracts, mining products, energy management and carbon audit and reporting services, compensation packages to businesses and families, biodiversity and land management funds, and the Clean Energy Finance Corporation.  Trying to disentangle a price on carbon from these activities may require the same effort and expense as bringing it in.

Second, while some companies will try to avoid locking themselves into investments that rely on Abbott keeping his “blood pledge”, many will make more pressing investment decisions on an assumption of future carbon pricing. As one senior executive told us, his company avoids “billion-dollar bets” one way or another, but not all investments can be postponed.  As 75 per cent of senior executives believe the carbon tax is here to stay (“Carbon tax mostly bad for business: execs”, The Australian Financial Review, June 26), this will affect investment decisions accordingly.

Third, despite the Liberals’ claims to the contrary, demands for compensation for emissions permits rendered worthless by the Coalition are likely to become an expensive legal quagmire that the High Court may have to resolve. According to one company we spoke to, if you ask half a dozen lawyers for their opinion on this issue, you get six different answers.

Fourth, the recent business opposition to the carbon tax, which has appeared in the media, has come largely from companies that expect to lose as a result of the Gillard government’s action on climate change. However, for every loser there is a winner, and the winners include not only a handful of small companies and fringe industries. There are also large and mature corporations that, through serendipity or early-mover strategy, seek to gain a competitive edge. Some senior executives in our research stated they largely avoided public support for the tax because their customers included companies that are against a carbon tax.

Also, we know from research into behavioural finance that a dollar lost is perceived as significantly more valuable than a dollar gained. The business “winners” from a price on carbon may well become vocal if Abbott tries to repeal the legislation at their expense.

These business hindrances add to the political hindrances that Abbott may face, and taken together they explain why the senior business people we spoke to struggled to see how the Coalition can reverse a price on carbon without creating havoc.

Of course, as the broader climate change discourse has shown, overwhelming evidence does not win an argument. Persuasiveness depends more on rhetorical skills, and so far Abbott has been the more effective communicator with a simple, highly negative campaign.

He may or may not repeal the current legislation, but before we get that far, we are likely to see some creative redefinitions of “repeal”, “carbon tax” or – a term Abbott has avoided – “a price on carbon”.

A foretaste of such reframing was evident in the untenable image of a “cobra strike” killing the economy on July 1 being replaced by the image of a slow “python squeeze” in the years to come. Expect much more creativity in the future, from both sides of politics.

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CARBON TAX HOSTILITY AT RECORD HIGH

Marcus Priest, The Australian Financial Review, 3 Jul 2012

Public opposition to the Gillard government’s carbon scheme hit a record high on the eve of its introduction, despite the payment of billions of ­dollars of household assistance and bonuses to parents of schoolchildren.

Despite the widespread opposition to the carbon tax, Prime Minister Julia Gillard and her senior ministers talked up the prospect that people would over time come to accept the scheme after its start on Sunday. “It’s not individuals who are paying the price on carbon, it’s big businesses that generate a lot of carbon pollution – yes they pass some of that cost through and that means people will see costs increases of less than a cent in a dollar,” Ms Gillard told ABC Radio in Darwin on Monday.

But the new Australian Financial Review/Nielsen poll shows Labor’s primary vote has barely moved in the last month – up 2 percentage points to 28 per cent, within the margin of error.

Support for putting a price on carbon also fell four points to a record low of 33 per cent, and opposition rose three points to 62 per cent – its highest level yet. The poll found that 40 per cent strongly oppose the tax, while just 10 per cent strongly ­support it.

The poll of 1400 people was taken at the end of last week after a two-week period in which the government had promoted the money going to households under the carbon scheme. Yet only 5 per cent of those polled thought they would be better off, while 51 per cent thought they would be worse off.

On a two-party preferred basis, the Coalition leads Labor 58-42, up one point from last month. Approval ratings for Ms Gillard and Tony Abbott were steady; 35 per cent for the Prime Minister and 39 per cent for the Opposition Leader. “We’re going to get emissions down by spending money from savings in the budget, going to the market and buying abatement through our emissions reduction fund,” Mr Abbott told ABC Radio on Monday. “We are happy to help power stations clean up their act but we certainly don’t want to close them down.”

As Mr Abbott repeated his pledge to repeal the tax if elected and launched an advertising campaign arguing voters will be worse off, Ms Gillard said people’s views would change after the dust had settled on the carbon scheme.  “I think Australians are pretty smart, pretty practical people and they will judge it through their lived experience,” Ms Gillard said on Sunday. “They’ll see, millions of them, 7 million of them in their pay packet in the coming week, the benefit of the tax cuts. That is, we’re putting a price on something we want to see less of, carbon pollution, and rewarding people for something we value, work.”

Climate Change Minister Greg Combet said the public would come to see through the Coalition’s pledge to repeal the carbon tax.  “I think it is as credible as Labor’s commitment to repeal the GST, being really frank about it,” Mr Combet said.

But he told the Financial Review he was prepared to deal with ­“wrinkles” in the scheme, if and when they appear. The government is also yet to introduce regulations to provide a $15 floor price for international permits when emissions trading begins after 2015.  “We will be making announcements on that in the not-too-distant future,” Mr Combet said. “There is still policy work to be done, particularly in the international front.”

In response to the government’s media blitz, the Coalition’s new advertising campaign targets Ms Gillard and her promise before the last election not to introduce a carbon tax as small anti-carbon tax rallies were also held in Sydney and Melbourne. “I think that phrase will haunt this Prime Minister every day until the next election,” Mr Abbott said. “If you want to punish politicians who lie, vote for the Coalition.”

As the carbon tax began, the business community was divided over its merits. A group of 300 companies and associations, including Westpac, AGL, Grocon, Unilever and GE, will release a statement today endorsing the carbon price scheme. “As major Australian and inter­national corporations, small and medium enterprises, operating across the Australian economy, we endorse the need for a carbon price as the mechanism to support the transition to a clean economy,” the statement reads.

Businesses for a Clean Economy spokesman Nathan Fabian said while some members of the Coalition may advocate for changes to the scheme in the future, all wanted to “get on” with the carbon pricing framework.

But the Minerals Council of Australia said the failure to align the carbon tax with international efforts to reduce emissions meant that the environmental benefits of the scheme would be negligible. It released figures from the Centre for International Economics showing Europe’s emissions trading scheme, which ­covers 30 nations, had generated $23 million a week so far in 2012. “Australia’s weekly carbon tax bill is more than three times greater than Europe’s, but we emit less than a quarter of Europe’s emissions,” MCA chief executive Mitch Hooke said. “The CIE figures show that in 2013-14, Australia’s carbon tax will be generating $127.1 million per week and $140.5 million per week in 2014-15.”

Nielsen pollster John Stirton said the latest poll figures showed either people had made their minds up about the carbon scheme or Labor, or they were waiting to see what happened after July 1. More than a third of people, or 37 per cent, said it would make no difference – down four points in the past month. “The numbers suggest that nothing much has changed over the last four polls,” Mr Stirton said. “Yes, the compensation has not had an effect but the tax has not taken effect either, and I suspect people are in wait-and-see mode. People are judging it along party lines as much as anything, and until people have experience with it, that is unlikely to change.”

Support for the carbon scheme was highest among Greens and ALP voters (65 per cent and 60 per cent, respectively) while most Coalition voters (86 per cent) were opposed. Opposition was also highest in Queensland and NSW at 65 per cent.

Mr Stirton said the swing against Labor was broadly consistent across Australia.

Separately, a review by the Australian Conservation Foundation of analysis undertaken by banks and brokers of the impact of a carbon price on the earnings of listed companies was “largely immaterial”. There were no market disclosures by companies of major job losses. “The ASX reports that it expected a surge in second quarter 2012 listings, growing to 31 companies,” the ACF report says.  “Clearly, there remains strong confidence in the market, especially in companies that are within the high emissions industry of resources, or servicing that industry, either upstream, downstream, or as a supplier of key services.”

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CARBON TAX IMPACT WILL BE ONLY MODEST, OVERALL

The Australian Financial Review, 3 Jul 2012

The carbon tax is too high but the economy will survive its introduction, economists argue, as economic growth holds steady at about 3.2 per cent a year.

JPMorgan chief economist Stephen Walters says a good fiscal policy would be more flexible than the carbon tax. “With the government having pre-committed to compensation based on a $23 price, this policy appears to lack the flexibility to respond to a materially lower global price for carbon – if desired – at this point in the global cycle,” he says.

International carbon prices have plummeted as leading economies have slowed or turned down, leaving Australia’s fixed $23 a tonne price one of the highest in the world.

The weaker economic environment makes a price change more important, says AMP Capital’s Shane Oliver. “Ideally the starting carbon tax should be lowered to be nearer that prevailing in Europe.” That price has recently been less than €10 ($12) a tonne.

But Oliver is sure that while sectors will suffer, the big-picture impact will be modest. “As with the introduction of the GST more than a decade ago, the impact on the economy of the carbon tax will be far more benign than feared. In fact it could turn out to be a big non-event for the economy as a whole.”

HSBC’s Paul Bloxham says any perceptions of a weak economy should not inhibit reform. “The carbon reduction initiatives and the timing of their introduction are not things that should be determined by the stage of the economic cycle,” argues Bloxham. “Structural policy initiatives and management of the economic cycle should be kept separate, such that the scheduled introduction of the carbon tax should go ahead largely irrespective of the state of the economy.”

The carbon tax will worsen inflation, consumer confidence and business investment, economists anticipate, but they generally expect those effects to be modest. “Overall, we suspect the impact of the carbon tax on the economy will be relatively minor,” says ANZ economist Justin Fabo.

They expect growth will hold up well in Australia, managing 3.2 per cent in both 2011-12 and 2012-13. This growth will be delivered against a backdrop of a falling value in exports.

The economists believe the peak terms of trade is in our past, and we must adjust to a permanently lower price on commodity exports.

Barclays interest rate strategist Gavin Stacey reckons increased supply and weak global growth should see the terms of trade fall over the next couple of years, and RBC Capital MarketsSu-Lin Ong says in calendar 2012 that fall will amount to 10 per cent. “[That] may, indeed, be conservative, given the extent of the decline in Q1 [March quarter] and the increasingly fragile global outlook,” she says.

Economists tip just one more interest rate cut in the next six months to steady the ship. Median expectations for the official interest rate in six months are 3.25 per cent.

The big cloud on the horizon is a small but real chance of Europe tipping the world into recession. Ong argues that’s a 1-in-5 chance. “The multiple headwinds and challenges for the EU [european Union] are immense and demand multiple solutions.” “At best, the EU faces a period of stagnation if it emerges from recession. At worse, it is a deeper and more protracted recession which spills over to the rest of the globe.”

National Australia Bank chief economist Alan Oster has a more sanguine outlook. He believes a Lehman Brothers-style collapse would be needed to trigger a liquidity panic, which would in turn lead to a recession. “Given that an event of this magnitude has not already occurred in Europe, we do not see this as a likely scenario. Rather, we see Europe continuing to muddle its way through its sovereign debt problems, which will spark bouts of volatility in financial and commodity markets for some time to come.”

Against this backdrop, the median expectation of the survey was that the dollar would sit at $US1 in six months. But the range of estimates told the story. BT Financial Group’s Chris Caton expected the dollar to fall to US90¢, while Macquarie Group’s Richard Gibbs has it increasing to $US1.10.

For the largest economy, there was more clarity. The US will continue to grow, if slowly. Bloxham describes the US economy as “stumbling.” “We expect GDP growth to be sluggish this year, much as it was last year, at around 1.5 per cent, which is below its potential. We see the unemployment rate drifting a touch lower this year to end the year around 8 per cent,” he says. “This will not provide Barack Obama with a strong economy story to set the tone of the November election.”

Micro-economic reform was singled out by some economists as another area for improvement.

Caton reflects that Reserve Bank governor Glenn Stevens said recently the solutions were identified and just wanted for politicians willing to implement them.

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INDUSTRY SLAMS ‘TOP-UP‘ MINERALS TAX

Leo Shanahan, The Australian, 2 Jul 2012

The nation’s peak mining body grudgingly acknowledged the introduction of the Gillard government’s mining tax yesterday, labelling it a workable but excessive revenue-raising exercise.

Miners are preparing for the first payments of the tax, which the government expects to receive in three months’ time.

The Minerals Resource Rent Tax, in various forms, has taken more than two years to be implemented.

An earlier version was blamed for contributing to the downfall of Kevin Rudd as prime minister.

Minerals Council of Australia chief executive Mitch Hooke said yesterday that while the new mining tax was “workable”, its stated objective of spreading mineral wealth to all Australians was not genuine because it was a “top-up tax”, adding to the existing company tax and royalties regime. “The minerals industry was paying its way under the tax arrangements that existed prior to the introduction of the Minerals Resource Rent Tax, contributing more than $20 billion to state and federal coffers in 2010-11 alone,” he said.

Mr Hooke claimed that if the tax regime had not changed between 2005 and 2015, mining would have raised $250bn for the federal budget. “This is 500 per cent more than at the start of the mining boom,” he said.

While remaining tight-lipped on the introduction of the new tax, mining companies are keenly observing an attempt by iron ore billionaire Andrew “Twiggy” Forrest to have the tax declared unconstitutional by the High Court on the basis of states rights.

Mr Forrest’s company, Fortescue Metals Group, will argue that the MRRT discriminates between states, curtails the states’ sovereignty and restricts a state’s ability to encourage mining.

West Australian Premier Colin Barnett has thrown his support behind the challenge, but constitutional experts agree it will be difficult for Mr Forrest to succeed.

Meanwhile, Keith DeLacy, the former Macarthur Coal chairman, now chairman of Nimrod Resources and a director of Queensland Energy Resources, has taken issue with negative perceptions of miners. “Everybody in the industry feels like they are the enemy, but we are the part of the economy driving the country forward and keeping it strong,” he said. “But we are so often seen as the enemy among politicians and in the big city.”

Mr DeLacy said that while he thought the coalmining sector had a “very strong” future in Australia, the current regulatory environment was “a thousand times worse” than 10 years ago.

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TAX ALREADY AFFLICTS MINERS

The Australian Financial Review, 3 Jul 2012

Smaller miners have spent up to half a million dollars each preparing for the federal government’s 22.5 per cent mining tax which came into effect yesterday, but remain uncertain how much they will pay due to volatile commodity prices.

The first quarterly instalment is due in October and advisers expect that many will ratchet down default payments – 8 per cent of gross revenue for iron ore and 3 per cent for coal – despite risking fines if they get it wrong. “We will be varying to some extent, but the level will depend on how we view the first quarter performance,” said BC Iron finance director Morgan Ball.

The junior iron ore miner, whose key project is a joint venture with Andrew Forrest’s Fortescue Metals Group in the Pilbara region of Western Australia, has spent well over $250,000 to prepare for the tax, by Mr Ball’s estimate.

That’s without accounting for his own time and that of CEO Mike Young and their financial controller. “We’re a small company. Part of the problem with this tax is it doesn’t differentiate between small companies and big companies as far as preparatory work goes,” Mr Ball said.

BC Iron had worked “in earnest” for around 12 months preparing for the mining tax, setting up systems and procedures to accurately calculate the tax and talking to valuation consultants, accountants and tax experts.

Casual staff were hired to plug gaps while existing staff addressed the tax. Although the company was ready to tackle the tax, Mr Ball said it was “very hard” to estimate how much they would end up paying, as it depended on iron ore prices.

Mr Forrest, who is fighting the constitutionality of the tax in the High Court, has cast doubt on the $13.4 billion that the government expects to collect over four years. Fortescue and some other iron ore miners expect to pay little initially, largely due to the ability to deduct the market value of the “starting base” of assets, which values resources and infrastructure at May 1, 2010, when Treasurer Wayne Swan first announced the impost.

BC Iron has appointed independent valuers to determine its starting base but does not anticipate an outrageous figure. “We are one of those few iron ore companies that has quite low capital intensity in establishing our projects, so our starting base won’t be as high – that’s the penalty we pay for being entrepreneurial,” said Mr Ball.

Association of Mining and Exploration Companies chief executive Simon Bennison said he did not know of any miners who would pay the default instalment amount, but estimated massive compliance costs. “For some of them it’s in the hundreds of thousands, they’ve set up separate systems and they’ve got to accommodate the tracking of the extra information that’s required,” he said. “The cost of compliance is really significant, and an absolute burden on the companies.”

Magnetite Network executive director Megan Anwyl said that one member had reported an estimate of close to $1 million to comply: roughly half a million to set up systems and an on-going annual bill of half a million. “The amount of time of internal company staff that has gone into it is enormous. In addition to that the costs for external consultants, most notably legal and financial accountants, have been very significant,” she said.

The lobby group for magnetite iron ore producers fought hard but failed for a carve-out for their members, claiming the government would get “little or no tax benefit” because of the low value of the resource when extracted.

The Australian Taxation Office has released documents to help companies with compliance, but it is still complex terrain, said KPMG resource tax partner James Macky. “A miner will be required to apply income tax law rules, mining concepts, OECD guidelines on transfer pricing, project costing methodologies and market valuation concepts,” he said. Each required a “different skill set and approach” and at least one subjective assessment – with “different but equally valid” views – was necessary at every step of the mining revenue determination process, he said.

AMEC has asked the ATO for a moratorium for the first 24 months. The ATO has stated it will take more of a guidance approach in the initial term, switching to audit mode once the first year returns start to roll in. For companies with a December year-end, that will be in June 2013. “It’d be extremely disappointing to see a very hard line by the ATO,” Mr Bennison said.

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