The victory for Australian mining

It was a bold move by former Australian Prime Minister Kevin Rudd to take on the Australian mining industry. And in the end it cost him his job.

Rudd was proposing to increase the tax on excessive mining profits in order to spread the wealth more fairly.

But now Australia’s new, and first ever female Prime Minister, Julia Gillard has backed down to pressure and proposed a much softer set of taxation rules for the country’s wealthiest industry.

The popular leader

Kevin Rudd was one of Australia’s most popular prime ministers after he took over from John Howard in 2007.

In his first few years he ratified the Kyoto Protocol on climate change that Howard had refused to do.

He issued a long-awaited apology to Australia’s Aboriginal people for past injustices, including the ‘stolen generation’ where Aboriginal children were forcibly taken into white homes.

And thanks to his government’s economic stimulus packages (and the huge mineral demand from China) he steered Australia through the global financial crisis with the enviable claim of being the only rich country in the world not to have gone into recession.

Consequently, his popularity soared. His approval rating reached 71% in 2008 and was still 68% in October last year.

So with an election coming up this year, he felt confident enough to take on Australia’s mammoth and highly profitable mining industry.

His mining tax proposal

Due to the commodity boom fuelled largely by China’s growth, mining companies have raked in billions in handsome profits over the past decade, much of which has gone to overseas shareholders.

Kevin Rudd felt it was only fair to make mining companies pay more of that profit to the Australian people, who effectively own the minerals in the ground.

In May, he proposed a ‘Resource Super-Profits Tax’.

From 2012, this would have taxed mining companies at a rate of 40% for any profits over a ‘normal’ rate for return of 6% (measured against the total value of the company).

The mining industry was furious. Disputes raged over what tax rate the mining companies current pay. The governments believe it’s 17% while the industry claims it’s more like 35%.

However, the 35% figure includes royalties for the minerals, which shouldn’t be part of a tax bill as it’s really just their raw materials cost that they happen to be buying off the Australian people.

Nevertheless, it appeared that Rudd’s proposal was too much in the face of powerful opposition.

Rudd’s resignation

The Prime Minister’s initial downfall actually began over emissions trading.

Despite being one of his main campaign pledges, in late April Rudd decided to postpone Australia’s emissions trading scheme until at least 2013 due to a lack of votes in the Senate.

This left some voters disillusioned, while at the same time the mining industry had amassed AU$100 million for a PR campaign to further discredit Rudd and his ‘economy-ruining’ tax.

The country’s population was evenly split on the tax idea, however his Labor party colleagues were getting worried. Support for the party had dropped to 33% in May.

With the poor showing in the polls, bitterness within the party regarding Rudd’s controlling leadership style began to emerge, as did a challenge to his position.

Defiant on the evening of June 23, Rudd declared he would fight off any leadership challenge from his deputy Julia Gillard.

But the next morning – before a vote from his party that was expected to unanimously support Gillard for prime minister – Rudd handed in his resignation.

Regarding Gillard, colleagues believe she is more pragmatic in her approach and also friendlier with the business community, as she quickly revealed with her amended mining tax proposal last week.

The new mining tax proposal

Overall, Gillard’s revised ‘Mineral Resource Rent Tax’ is a considerable victory for the mining companies.

The tax only applies to iron ore and coal, rather than the industry as a whole. It only kicks in after a 12% net profit return has been reached, as opposed to Rudd’s 6%. And the tax rate has been dropped from 40% to 30%.

In addition to that, companies will be able to claim a 25% ‘extraction allowance’, bringing the effective rate of tax down to 22.5%.

Out of the $12 billion tax revenue that Rudd was hoping for, Gillard says the government will receive only $1.5 billion less under the new proposal.

That figure seems rather optimistic and may be counting on significantly more mining business going ahead as a result of the lower taxes.

In any case, as far as political battles go, the stakes were fairly high.

Kevin Rudd was for the most part a popular prime minister and is now the first ever that Labor has pushed out in the first term.

But that can be the price you pay when business meets politics. And with Gillard at the helm, Labor now appears more confident about the election year ahead. And the mining companies are happier.

By The Casual Truth