Feds Get the Wrong Man

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Have the Federal Government targeted the wrong man with its controversial resources super profit tax? While the proposed tax endeavours to ensure that the mining industry is paying its fair share of tax, the same Government has provided unprecedented assistance to another very profitable sector and I particular, one company – Macquarie Bank. Not only has Macquarie Group been an extremely profitable business in recent years, but the rate of tax it pays is far lower than Australia’s much maligned mining companies.

The RSPT was predicated largely on two bases. Firstly, that the mining sector has been able to generate ‘super’ profits and don’t pay enough tax. Second, that those profits were earned through the exploitation of resources which are the property of all Australians. While there are other aspects to the proposed tax (including replacing the inefficient state-based royalty regime and high levels of foreign ownership of mining companies) they are of less relevance.

Addressing the second point first – while it is true to claim that mining companies extract non-renewable resources, it can also be argued that miners need to outlay billions of dollars to create the infrastructure which allows those minerals to be exploited. Therefore, not only do mining companies give Australia’s natural assets like coal and iron ore a real value, but those minerals are then sold to other businesses and ultimately consumers. Effectively, the mining companies are being targeted because they happen to be the first (and most visible) link in a long chain of production.

Now consider the first point – do mining companies really generate ‘super’ profits and are they taxed fairly? The best way to determine the profitability of a company is to determine its return on equity – this is the percentage return which a shareholder receives for investing in an asset. (The amount of tax a company pays can be found in its annual financial statements).

An insight can be found by comparing the return-on-equity of Australia’s two largest mining companies (and the companies which would provide the bulk of the revenue collected from the proposed RSPT) BHP Billiton and Rio Tinto, with that of Australia’s largest investment bank, Macquarie Group.

Between 2004 and 2009, BHP generated a return on equity of 33 percent and Rio a return of 28 percent. Over that same period, Macquarie generated a return of 23 percent on shareholders’ funds. However, while BHP and RIO out-performed, they were largely boosted by record commodities prices – in 2009, as commodities prices retreated, their returns dropped sharply to 16 and 12 percent respectively.

More importantly, the relative tax rates paid by BHP and Rio far exceeded the tax paid by Macquarie. Between 2004 and 2009, BHP paid taxes and royalties of US$23.7 billion based on earnings of US$80.5 billion, this means BHP’s effective tax rate was 30 percent. RIO was similar, earning profits of US$48 billion and paying more than $11 billion in tax (equating to a tax rate of just over 23 percent).

However, the tax rate paid by Macquarie was far lower. Despite earning profits of $8.2 billion between 2004 and 2009, Macquarie paid a mere $1.4 billion in tax – meaning that Macquarie’s effective tax rate, courtesy of some smart tax practices, was a mere 18 percent. This was a little more than half the tax rate paid by BHP and less than a third of the rate of tax which mining companies would be required to pay if the RSPT is introduced.

However, not only did Macquarie Group pay an extraordinarily low rate of tax, it also benefited from a range of favourable government policies. As the global financial crisis was causing turmoil in September 2008, Macquarie CEO, Nicholas Moore is understood to have met with Financial Services Minister, Nick Sherry and spoken with Federal Treasurer, Wayne Swan. Within weeks, the Federal Government would introduce a wholesale funding guarantee, in which banks like Macquarie were able to rely on Australia’s AAA credit rating and obtain tens of billions of dollars in foreign funding. In addition, the Federal Government agreed to an unlimited guarantee on bank retail deposits.

Meanwhile, other Macquarie executives, including the head of its Markets Division, had extensive contact with ASIC. Within days of Macquarie’s lobbying, ASIC took the unprecedented step of banning short selling of publicly listed financial companies – a move which led to a 9 percent surge in Macquarie’s share price.

By contrast, throughout the global financial crisis, Australian mining companies, including Rio Tinto and Oz Minerals, which faced near collapse, were left to fend for themselves, forced to raise equity at a substantially discounted prices from Chinese investors and receiving no Government assistance.

Now, as the commodities boom temporarily re-occurs, the Federal Government is relying on mining companies to ensure that is able to transform its budget to surplus. It appears that the Federal Government has one rule for taxpaying miners, and another rule for the hard lobbying Martin Place bankers.

Adam Schwab
for The Daily Reckoning Australia

Adam Schwab
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia's Decade of Corporate Greed, featuring the inside stories of ABC Learning Centres, Babcock & Brown, Allco, MFS, Timbercorp, Great Southern Plantations, Telstra, Toll, Asciano and Village Roadshow is available from Borders, Dymocks and all good bookstores and online at Booktopia.
Adam Schwab

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Comments

  1. Hmm, I take from this article not that the RSPT is inherently a bad idea but that the tax treatment of the finance sector, Macquarie in particular, in grossly inadequate.

    I agree, but it’s kinda like comparing apples and oranges really.

    There’s no argument from me that Big Mac is getting an unreasonable free ride here but it’s direct a consequence of Government policy aimed at shoring up bank balance sheets just like the larceny in the US perpetrated by the Fed and its investment banking allies over there.

    Clearly this gross injustice needs to be addressed and soon. But similar things could be argued for removing negative gearing on existing housing or eliminating capital gains concession for a host of speculative “investment”.

    It’s a pretty specious argument to say that because Mac Bank is given a free ride that the mining sector ought to be as well.

    Try instead comparing the economics of mining with that of of running a trade exposed manufacturing, tourism or services business in Australia.

    Or perhaps the tax treatment of ordinary savings.

    Reply
  2. It isn’t what Mac does in Australia that Australian taxpayers have to worry about, it is the quality of their offshore assets and derivatives that back them. And how we will end up carrying the can on alot more than the explicitly guaranteed wholesale funding since 09 when it goes pop.

    And the point not made strongly enough is that this isn’t a bank, it is a merchant bank and we are taxpayer guaranteeing funding to back speculative betting. That idea was ridiculous up until conflicted bankster treasury official Paulson bailed out his former employer and yet let his “thundering herd” opposition die on the vine.

    And while MAQ source their funding offshore you can ask the regime in Dubai how easy it is (not) to allow default even if there was no sovereign guarantee and the banksters were themselves supposed to price the risk commercially when they provided the funding.

    Reply
  3. I disagree the Fed does have the right “Man”. If the government tries to get more tax out of the banks then the banks will pass on the costs to their customers. On the another the miners can’t pass on their costs because the price of minerals are set on the global market.

    Reply
  4. Wow Dimitri,
    You don’t think that higher taxes on commodites will flow through to you?? Higer taxes on anything equals higher prices and higher interest rates. Keep voting for Labour but just don’t complain when you have 15% interest rates on your mortgage because they’ve lost control of spending. Everyone with their hands out but no one wants to pay…..

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  5. KC write: “Higer taxes on anything equals higher prices and higher interest rates.”

    Sorry but that’s just plain wrong. You need to understand a little about markets to know why.

    It’s more accurate to say “higher taxes might mean higher prices for consumers or lower profit for producers or some combination thereof”, it depends on the markets for the commodities, goods or services being taxed.

    As for banks passing on tax increases, this is probably true in Australia because the banks face very little competition; they have pricing power in the domestic market.

    However tax rates have limited impact on interest rates except that very high taxes without commensurate public spending will probably lead to slower economic activity producing more un/underemployment and allowing or even requiring a more expansionary monetary policy and lower interest rates. Not that this is necessarily a good thing, as the GFC has shown.

    As for 15% mortgage rates, ain’t going to happen. Why? Because if it did it would precipitate a local housing collapse and a deflationary event the likes of which you have probably never experienced.

    Of course something like this looks set to happen anyway :-(

    Reply
  6. “As for 15% mortgage rates, ain’t going to happen…. . Of course something like this looks set to happen anyway :-( ”

    Didn’t think anyone could top Bill’s comment about US ability to manufacture fast trains, but there you are. :)

    Reply
  7. “As for 15% mortgage rates, ain’t going to happen.

    I hope they don’t, but I would not dismiss the possibility…

    Stillgotshoeson
    June 2, 2010
    Reply

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