Gathered on one side of the cabinet table were the newly-installed Prime Minister Julia Gillard, her Treasurer Wayne Swan and her Resources Minister Martin Ferguson. On the other were the heads of Australia’s three big mining companies: BHP Billiton, Rio Tinto and Xstrata.
Absent were the key people from the Treasury – the ones who really understood the tax being discussed.
As the then Treasury head Ken Henry later told a Senate committee: “We were not involved in the negotiations, other than in respect of crunching the numbers if you like and in providing due diligence on design parameters that the mining companies themselves came up with.”
The smartest people were kept out of the room. They were ferried draft agreements and asked to examine them quickly. They were unable to test with the miners the propositions they were putting to the government.
The 1½-page heads of agreement signed by the ministers and executives on July 1, 2010, replaced the 40 per cent resource super profits tax with a much weaker 30 per cent minerals resource rent tax applying only to coal and iron ore. An “extraction allowance” cut the actual rate paid to 22.5 per cent. It would be paid only if the profits themselves reached a much higher hurdle.
And then there was the drafting error.
The agreement allowed “all state and territory royalties” to be deducted from the tax.
Ferguson thought the words referred to “royalty rates that applied, or changes to royalty rates that were scheduled to apply in the future, as at 2 May 2010”.
The interpretation made sense. Those were the royalty rates referred to in the original super profits tax. Agreeing to refund whatever any state government chose to charge in the future would expose the Commonwealth to an uncontrollable expense.
But read baldly, that’s what the ministers had signed up to.
Western Australia promptly lifted its iron ore royalty from 5.6 per cent to 7.5 per cent. It now grabs money the ministers believed the federal government would get.
Appearing before the Senate, treasury official David Parker later tried to explain the less-than-precise drafting this way: “This is a document which is 1½ pages long. One could say that the heads of agreement is, to use a musical analogy, a rather staccato document.”
The agreement allowed the mining companies to do more than deduct their royalty payments from the new tax. It allowed them to ”grow” the amount they could deduct at the long term bond rate plus 7 per cent, if low profits meant they owed less resource tax than the royalty payments.
The concession means the miners are unlikely to pay much of the new mining tax for some time to come.
Julia Gillard and her ministers brought peace on July 1, 2010, but at a heavy financial price.
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