Don't Tinker with Australia Mine Tax: Reform Boss

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"Australia risks turning its new mining tax into a net tax subsidy for resource companies. . ."

Australia risks turning its new mining tax into a net tax subsidy for resource companies if it bows to miners' demands to change the way the impost is calculated, the architect of the scheme said on Tuesday.

Ken Henry, the government's top treasury official, warned of the perverse outcome in a speech replying to outcries from the mining industry, which has warned of huge investment losses if the 40% tax goes ahead as planned in 2012.

Henry devoted much of his remarks to the inner workings of the profits-based tax which, if altered, could soften its blow. If changed under pressure from miners, he warned, these could deliver large offsetting tax breaks amounting to a subsidy.

Under the complex tax proposal, major tax breaks and credits can accumulate in the development phases of a project, before it becomes profitable and therefore eligible for the 40% tax.

"This would generate a significant subsidy for investment in the mining sector and, ironically, create incentives to delay resource production," Henry said.

Unlike Australia's only other major profits-based resource tax, which applies to the offshore oil-and-gas industry, the new mining tax contains tax breaks that are preserved for the life of a project and can be cashed out when it is ultimately shut down.

Miners want the entire tax overturned, hoping parliament's upper house will block it; but, in the meantime, are lobbying the government hard for a compromise and urging it to change the calculation of the tax, in ways that Henry is resisting.

The government is negotiating with miners on implementation of the tax, but Henry warned against meddling with its key inner workings.

One of those key conditions effectively keeps a portion of earnings outside the scope of the tax, roughly defined by the government as a return on mine assets equal to the 10-year government bond rate, currently about 5.5%.

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