Australia's Commodity Boom Threatened By New Tax Hike

australia iron ore

Photo: leighton.com.au

The Australian government has announced a new tax regime whereby they’ll impost a 40% tax on commodities producers’ profits.Set to take effect in 2012, it is expected to slash $11.1 U.S. dollars in profits from Australian commodities producers.

Bloomberg:

“This will use super profits on resources owned by all Australians,” Rudd told reporters in Canberra, saying he’s prepared for a backlash to the measures. “This will help convert Australia’s strong economic position today into enduring prosperity.”

The changes set up a potential clash between Rudd and resources companies that make up 9 per cent of the economy and last week warned that a 40 per cent levy and double taxation with state royalties would threaten $108 billion worth of planned investment.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” BHP’s Chief Executive Officer Marius Kloppers said in an e-mailed statement today. The company’s effective tax rate will increase to 57 per cent from 2013 from 43 per cent now on its Australian earnings, it said.

Given that commodities are coming off a multi-year hot streak, this effort to heavily tax the ‘super profits’ of Australian producers seems like it could back fire. If we envision a China slow-down by 2012, then Australian commodities producers could be hit with a far higher tax rate right as they are in a downturn, ie. no longer earning ‘super profits’.

We realise that BHP’s CEO will likely spin any tax hike as a threat to Australian investor confidence, but at the same time we believe his point is partially valid — companies could curtail future investment, find it too risky given the potential for a global commodities slow-down in the next few years caused by China. Project IRR’s will be slammed by what appears to be a large tax hike, and thus many projects could fall below the threshold that makes them worthwhile.

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