The Henry Review is a mixed if rather neutral bag for the CFO – unless of course you are a miner. The Australian Government has announced a number of key policy measures in response to Henry's Australia's Future Tax System that will have a profound impact on Australia's resource industry: The announced measures are the introduction of a Resource Super Profits Tax (RSPT) at a rate of 40% on all petroleum and mining projects; and a refundable Resource Exploration Rebate (RER).
At a wider level, CFOs and company shareholders will welcome some tax relief with the reduction in the corporate tax rate from 30% to 28% and for business an immediate write off for assets valued at less than $5,000 although they will have to wait for at least two years before these measures commence. This is not the news that CFOs and business owners wanted in a patchy economy where retail spending on non-discretionary items is stagnant. While changes to the superannuation guarantee rate progressively rising to 12% will assist retirement funding the additional impost to business will create upward pressure on wages. Yet another factor to contend with in forward budgetary planning.
While the public brawl between the miners and the government rages another debate about whether a resource taxpayer is financially better or worse off under these announcements depends upon where they sit on the exploration, development or production spectrum. One inevitable position is the additional compliance burden the RSPT presents for the resources industry. Many CFOs in industry will appreciate that developing a resource project is a highly risky and long term venture and will be looking anxiously at the sheer load of compliance that this will demand for any other new ‘Henry initiatives’.
Dr Henry and the Australian Government are clearly banking on the likelihood that Australia will remain internationally competitive in attracting capital to invest in the development of our non-renewable resources, even with a RSPT. CFOs in an industrial or service sector will understand how sensitive shareholders are to managing their exposure to risk at a time when most corporates have a highly security- conscious bank and capital markets sector to contend with. The Henry Review if anything (at this point) seems to have led to further tightening of credit markets even further, although arguably, the PIGS crisis in Europe is the main culprit in the so-called risk premium rate associated with raising private (and public) debt.
Stock markets reacting to the proposed RSPT by adding a risk premium as well as discounting future earnings under the tax regime, are a stark reminder to CFOs about the value of certainty in assessing share values. The RSPT is an illustration of uncertainty being factored into the share price. Financial analysts will be revising their stock valuation models in the resources sector for sure and perhaps at the margins where there is some crossover (for example engineering contractors with contracts to the mining or engineering services sector exposed to the sector). One of the key design principles Henry refers to for a tax and transfer system is simplicity. The RSPT fails the simplicity test. It introduces a new tax regime, it does not replace any existing taxes and it will be complex to transition into and comply with. This will not be good news for the CFO in presenting any of the variables going forward in their cash flow forecast or ROI assessments.
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