The Budget Papers had a box that discussed mining taxation – we covered the issue at the time of the budget. Well it seems that box came up in Senate Estimates (pg 98 – 100). David Bushby is a Liberal Senator from Tasmania.
Senator BUSHBY: I refer you to box 2 of the mining tax on page 5-9 of Budget Paper No. 1. In the footnote
to the chart on that page, Treasury states:
Although GOS is conceptually different to taxable income, it is the component of profits in GDP and is, therefore, the most appropriate economic base to analyse movements in the tax to GDP ratio.
You quote a 2007 Treasury staff paper to justify that view. When I go to that paper and look at it, it says something that seems to be slightly different to me. I will not read the whole quote. It says down the bottom:
As a consequence of these differences, it is misleading to compare trends in company tax collections to trends in GOS unless a corporate profit holds constant as a proportion of GOS.
The footnote in the budget does not seem to reflect the findings in the paper. The budget papers say that GOS is the appropriate parameter, whereas the paper you refer to says that it is misleading to compare company tax to GOS. Can you explain the divergence?
Mr Heferen: The footnote that I am reading says that, although GOS is conceptually different to taxable income, it is the component of profits of GDP and is, therefore, the most appropriate economic base to analyse movement in the tax to GDP ratio. It is not saying it is the same thing, and you should not think about it in a one- to-one sense. But, given the set of comparators around, it is the most appropriate economic base.
Senator BUSHBY: Even though the paper that that footnote refers to states that it is misleading to compare trends in company tax collection to trends in GOS?
Mr Clark: In relation to the use of GOS in the box, the footnote refers to GDP. So, in terms of the components of GDP to which you would compare company tax, GOS is the most appropriate of those components. So the box is a discussion of how the tax to GDP ratio changes as a result of the impacts of the changes to the mining sector. To that extent, GOS being the relevant component of GDP for comparison to company tax, it is the most appropriate base for that comparison. As it says in the paper, which it refers to in the footnote, if one were to construct an overall time series through history comparing company tax to a tax base, GOS is not the most appropriate comparator of company tax. You would need to make a bunch of adjustments to GOS to get something a bit closer to the concept of taxable income. From the perspective of this box, which is in terms of the components of GDP which you need to compare company tax to as an appropriate tax base, GOS is the appropriate measure.
Senator BUSHBY: It sounds like GOS is the most appropriate measure for demonstrating the government’s case. I will quote again from that paper regarding the trends in aggregate measures of Australia’s corporate tax level:
Corporate profit is the relevant economic income base for measuring the effective corporate tax rate because it is the conceptual base upon which income tax is levied.
The papers which you refer to in that footnote sound like they make a case for comparing taxable corporate income ratios rather than what you have actually presented in the budget paper.
Mr Clark: As I said, for the purpose of this particular box—
Senator BUSHBY: What were the purposes of that box, then?
Mr Clark: The purpose of this box is to comment on how the change in composition of the economy affects the tax to GDP ratio. As the mining sector’s share of the economy increases, the mining sector’s tax to GOS ratio is lower than the tax to GOS ratio of the remainder of the companies in the economy. As the mining sector’s share of the economy increases, given its tax to GOS ratio is lower, the overall tax to GDP ratio will fall.
Senator BUSHBY: But these charts do not actually have GDP in them.
Mr Clark: No.
Senator BUSHBY: Where does GDP come into the box?
Mr Clark: The box discusses GDP.
Senator BUSHBY: The box discusses, but the charts have no reference to GDP.
Mr Clark: The charts illustrate the reasons why the tax to GOS ratio is significantly lower for mining companies than for other companies. So the chart on the left shows the tax to GOS ratio for mining companies compared to other companies. The chart on the right shows how the tax to GOS ratio for mining companies is lower because mining companies can claim significantly more depreciation and other capital deductions compared to other companies.
Senator BUSHBY: As I say, I think they may well have been the best indicators to use for the purposes for which the boxes were intended, but I guess the question is: what really is the intent?
Mr Heferen: It also shows the rapid increase in investment over the projection and forecast years. I guess people sometimes ask, ‘Okay, if the investment is so strong, why isn’t the corporate tax bouncing back a lot faster?’ This has some of that explanation. It is saying that there are a range of mining companies making very large investments. We would expect down the track to see the profits and, therefore, the income tax they would pay, but we are not seeing it now because they are still in a large investment phase. I am not passing any judgement on whether that is a good or bad thing. It is an observation that that increased investment is one of the reasons why we are getting the growth in company tax to be around 20 per cent, 10 per cent and in that sort of order rather than something higher.
Senator BUSHBY: But the box concludes that the chart also shows that the introduction of the MRRT will increase the share of tax paid by the mining sector such that the sector’s share of tax increases towards its share of GOS. As I say, it is a conclusion that suits the government’s purposes quite well.
Senator Wong: It also happens to be a fact.
Senator BUSHBY: But the paper you refer to shows that this is not the relevant measure. Is that right?
Senator Wong: He has answered that question, Senator. He wrote the paper, so I suggest you listen to the answer he gave.
Mr Clark: The purpose of the paper that is referred to was to construct a comparator in aggregate across all company tax. It shows the adjustments required to corporate GOS in order to get something a little more close to taxable income for the purpose of constructing a theoretical tax base. It was not intended to be used as a comparator between industries. It is a construction designed to do an historical time series of analysis.
Senator BUSHBY: We will move on from that point. Your paper also says that the ratio of corporate tax to corporate income—the effective tax rate—is a better aggregate measure for the corporate tax burden than the corporate tax to GDP ratio because it takes into account variation in the factor share and wages plus profits of the corporate sector. Why didn’t you at least report this measure in the budget item?
Senator Wong: Which measure?
Senator BUSHBY: The measure of corporate tax to corporate income. The 2007 paper that it was quoted from says it is a better aggregate measure of the corporate tax burden.
Mr Clark: Because it was not relevant to this box. The share of corporate tax to corporate income was used to construct a time series in order to explain why in that case, back in 2007, the corporate tax to GOS ratio was increasing quite rapidly and to explain why that was in terms of the definitional differences between corporate GOS and the tax base. It turns out now that the company tax to GOS ratio has decreased quite a lot, and there would be similar reasons for that. It was not intended to be disaggregated into different industries. The purpose of the commentary in this budget was to look at the mining sector particularly and how that affects the tax to GDP ratio in terms of the compositional change in the economy.
Senator BUSHBY: Has Treasury calculated the corporate tax to taxable corporate income ratios across industries?
Mr Clark: For different industries?
Senator BUSHBY: Yes. Particularly for the mining industry but also for other industries.
Mr Clark: That is not an easy thing to do for a few reasons. The most difficult part is getting an industry split for corporate tax that is along the same definitions as the industry split that the ABS uses for corporate GOS. For example, many large businesses span several industries. The ABS will use the detailed information they have to actually split up the companies across different industries. The tax data does not allow that division. For example, for an industry that is in the retail sector and the wholesale sector, constructing a tax to GOS ratio for the retail sector and wholesale sector separately is just not possible.
Senator BUSHBY: Have you done it for the mining sector?
Mr Clark: No.
Senator BUSHBY: Are you aware of an exercise that was conducted by Professor Sinclair Davidson, where he shows that the mining sector’s tax to corporate income ratio was above 25 per cent, whereas for all other sectors together it is below 25 per cent?
Mr Clark: I do not know the specifics.
Senator BUSHBY: You are not aware of that study?
Mr Clark: I am aware Sinclair Davidson has done some calculations, but I am not aware. I do not know of the one that you are referring to.
Senator BUSHBY: Is anybody in Treasury aware of that? Have they had a look at it at all?
Mr Clark: It would depend on which one you are referring to. I think he has done several calculations.
Senator BUSHBY: I do not actually have a reference here of when he has done it, so I cannot give you the particular reference. He did an estimate which showed that the mining sector tax to corporate income ratio is above 25 per cent. So you personally have not done anything. You are not aware, Mr Heferen, of anybody else who has done an analysis of his findings?
Mr Heferen: No, Senator.
Senator BUSHBY: I will move on, then. …
Those calculations are in a report published by the Minerals Council of Australia.
Senator Bushby was on a roll, because he went on to ask about depreciation in the mining industry – we covered that issue here. This is what happened next.
Senator BUSHBY: … I note that the secretary in his post budget speech to business
economists states amongst other things that the implications for company tax in the mining sector growing more rapidly than anticipated and mining investment exceeding expectations. As set out in budget statement 5, these factors will tend to dampen tax receipts as a share of the economy as mining companies claim deductions associated with the depreciation of their capital stock. Of particular importance is the accelerated write-offs provided for many mining assets, which you have touched on. In revenue terms, what is the annual cost of the accelerated write-off provisions provided to the mining sector?
Mr Clark: The value of the write-offs for the mining sector is a label on the company tax return that also includes some other items. It is not separately identified on the tax return, so quantifying that exactly would not be possible.
Senator BUSHBY: Would be impossible?
Mr Clark: Would be impossible.
Senator BUSHBY: So if the government of the day decided to make changes impacting on the write-off, how would you assess the impact on the bottom line?
Mr Heferen: Are you referring just to the accelerated depreciation?
Senator BUSHBY: Yes. The accelerated write-off provisions.
Mr Heferen: We have estimates in our tax expenditure statement of the accelerated depreciation at large and then of the particular bits of capital, plant and equipment that are eligible for accelerated depreciation.
Senator BUSHBY: Do you have a figure there of what the impact is on the revenue of those provisions or that expenditure?
Mr Heferen: Reading from the tax expenditure statement 2011, which is our most recent one, the aggregate tax expenditure is by function. So there is mining, manufacturing and construction and there are various estimates across a range of years. It is in the order of, say, for 2011-12, expenditure of around $2 billion. For 2012-13, it is $2½ billion. I am just pausing over this. I beg your pardon—that will be the aggregate tax expenditure. So within that, an element of that would be accelerated depreciation. I am pretty sure part of that would be other various departures from a tax benchmark to be included.
Senator BUSHBY: This is just for the mining industry or across all sectors?
Mr Heferen: That was mining, manufacturing and construction. In the TES there will be elements for the various elements of accelerated depreciation. From memory, it is in the order of several hundred million dollars a year.
Senator BUSHBY: If you like, Mr Heferen, you can take that on notice.
Mr Heferen: We will take that on notice. Then we can provide the accurate figure and the reference in the TES to which it applies.
Some very good questioning going on there.