Wednesday, 22 December 2010

Mineral royalties - and tax !

As part of their income stream, the states impose royalties on minerals extracted from the ground by miners. Now this is under attack by the Federal government as part of it's new rental tax on our mineral wealth.

The royalties that mining companies pay serves as a credit against their tax liability on profits. The Federal government is seeking to impose a freeze - and in future will only credit these payments on the level that was in effect at May 2, 2010.

The Treasurer is looking to stop the states increasing their revenue stream by increasing royalties - in the sure knowledge that it will not hurt the miners because they will use it as a tax offset.

Queensland and West Australia are certain to cry foul and fight this imposition. In effect, it isolates their return from minerals to a level that will become increasingly uncompetitive as inflation bites over the coming decades. The Reserve bank has set a 3% limit as the yardstick against which it measures interest rate rises. Even if that 3% is met, the value of money decreases 3% annually as a result.

From the Federal point of view, allowing royalties to be a tax offset unchecked gives the states open slather to increase their revenue flow without protest from the mining companies - because the miners simply write it off against the money flow to the Federal tax man !

This will almost certainly result in the matter going to the high court for a decision. It all boils down to the basics of state and Federal taxes - and that is an interesting can of worms that defy even the best lawyers !

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