HOST: But first up this morning the Prime Minister and the Treasurer have made their response to the Ken Henry taxation reform blueprint. The Prime Minister joins us on the program this morning. Prime Minister good morning.
PM: Thanks for having me on the program.
HOST: A tax grab on mining and resource companies, a resource rent tax, a hike of 40 per cent on Super Profits, many of those companies are West Australian. Why the tax grab?
PM: Well can I just say first of all that we've got mining companies operating in Queensland where I am today, and in the West, and South Australia and elsewhere. In fact the mining industry is a huge slab of the Queensland economy where I come from, as it is in the West, and I'm a strong supporter of the mining industry. The key thing is, are we getting enough return for the entire needs of building infrastructure in states like Queensland and West Australia in the future? We believe we can do better, and we're on about getting a fair return for local people, that's why we've brought in this Super Profits Tax for the mining industry.
HOST: How much money are we talking about over what period of time and how will it work?
PM: Well the Super Profits Tax is designed to do this: that is to impose a tax on Super Profits. If companies out there are not profitable at present then this tax is not going to be imposed on them. In fact it's a big difference that we advance, relative to a state based royalties regime which taxes the volumes of what people are mining as opposed to the profits that they make. Therefore we're only taxing profitable companies, and those which are generating Super Profits.
HOST: So how do you define a Super Profit PM?
PM: Well a Super Profit will be defined as if you've got a company which is earning, which is investing a certain amount of money, what you're then to do is to deduct their expenses, what you're then to do also is deduct further, the amount of money which would be calculated if, for example, they were investing their funds in long term bond markets. In other words, what would constitute a reasonable rate of return on investment.
HOST: But how do you define a Super Profit, what does that mean?
PM: Well it's the formula that I've just described which is - you have the total investment of the company, the total earnings of the company, you deduct their expenses, and then of course, you look at what would be a normal rate of return for that company if it was investing their money elsewhere and it's only when they go in excess of that, is a Super Profit Tax imposed.
HOST: But you know what I'm asking, and most people will be asking today, what's the difference between a profit and a Super Profit?
PM: Well let's go to the question for example of what you in the West will be very familiar with which is the Petroleum Resource Rent Tax, which underpins all the investments we've seen up there in the offshore areas of the northwest over the last 20 years. That's taxed at 40 per cent. That is exactly the sort of regime, in terms of that rate, that we would seek to apply to on-shore developments as well, and the overall thing is this: those taxes are only paid when Super Profits are being earned.
Secondly, for companies starting out, small to medium sized mining companies who are not earning profits at this stage, this benefits them enormously, and they are currently hit with the heavy hand of a State based royalties regime, which frankly, taxes volumes and not profits, but on top of that again for people in the West, a billion dollars worth of tax incentives now for the exploration industry. And what does all this add up to? Providing also, frankly, an additional source of funding for West Australia for its huge infrastructure needs for the future which otherwise have to be borne by the general taxpayer.
HOST: Prime Minister, is it my imagination or are you having trouble describing to my listeners what a Super Profit is? What's the difference between a small mining company in WA that is running a profit and a BHP or Rio Tinto? I still don't understand what a Super Profit comprises?
PM: As I said the formula as I described before is exactly that. It is calculated on the basis of a company in terms of first of all, their total level of investment, secondly the revenues they earn in a given year, thirdly you remove the expenses that they generate in a given year, fourthly you then take into account what that company would otherwise earn if they were putting their money, for example, into an investment on the long-term bond market, and it's only if they are profitable using that formula, and earning Super Profits, that you would impose this Super Profits Tax. It's not foreign, for example, to all those folk who are currently operating up there on the Northwest shelf, the Petroleum Resource Rent Tax has operated for the last 20 years and on that basis huge projects, like the Gorgon project, have come into being. So it's not a foreign concept but we are seeking to apply it across Australia, and that means the big mining projects in Queensland as well.
HOST: Plenty of Australians, West Australians, have money in mining company shares and many people in their superannuation, if mining becomes less profitable because of this tax grab, this will affect ordinary Australians won't it? There is a downside to this Super Profit Tax hike?
PM: Well we've looked very carefully through independent modelling as to the impact of the Super Profits Tax on the overall size and growth of the mining industry. When you put this package together, which is a tax on Super Profits, and bear in mind also companies like BHP are 40 per cent foreign owned, companies like Rio are 70 per cent foreign owned, when you put together this Super Profits Tax on their Super Profits, add to it the fact that we are now providing effectively a better tax regime for small to medium sized mining companies, because we're taxing profits rather than volumes, and then the additional tax benefits we're providing for the first time for exploration companies, the independent analysis we have to the Australian Government has the mining industry growing by 5.5 per cent over time. Therefore, the argument that this will somehow contract the mining sector is not well placed, and if you look at the operation of a similar regime in the offshore areas of Western Australia, the Northwest Shelf, this sort of regime has been existing for 20 years and we've seen huge developments up there.
HOST: I'm going to chat to the West Australian Mines Minister Norman Moore in just a moment on the program and I'd be very interested in the local response here, we haven't heard it as yet over here Prime Minister.
PM: Well here is the rest of the package, if I could just step back from your questions about the mining industry which are entirely legitimate in terms of what actually this does fund on the other side of the equation.
First of all for all companies in Western Australia including small businesses, their company tax rate goes down from 30 cents in the dollar to 28 cents in the dollar. For small businesses, and this is a huge boon to small businesses in the West, you'll have a tax break by funding instant write-offs for purchases of up to $5,000. This is really important - less time with the accountant, more time with your customers and your family.
For individuals, however, it means a big change for superannuation. Working families need more for their long-term super, and by increasing the Superannuation Guarantee from 9 to 12 per cent, we're giving better retirement incomes to working Australians.
But finally it's this. In West Australia, and you're about to talk to the WA Mines Minister, the number of times the WA government has come to me cap in hand, wanting money to invest in infrastructure over there, we've partnered with them already in projects in the Ord, the new port development at Geraldton, also in terms of Northbridge in the inner city, as well as investments in hospitals like the Midlands hospital, can I say this? When it comes to WA huge infrastructure needs we also need a new source of revenue. That's why this money would go into an infrastructure fund for Western Australia, in order to support these necessary investments for the long term. So, the WA Government can't turn around and say look we'd like all this extra investment to happen on our infrastructure on the one hand, but secondly we oppose the revenue coming from this new Super Profits Tax on the mining companies. It doesn't add up.
HOST: If superannuation contributions will be boosted as you say from 9 to 12 per cent over the next 10 years, will that mean that some low-paid workers could be paid less as companies compensate for that contribution?
PM: Ah no. We actually believe that whereas there's always going to be bargaining, bargaining occurring between companies and employees as it has happened in times past and will happen in times future, we believe that this sort of superannuation guarantee for the future really helps working families with their long term retirement income. Can I also say, if you put that together with the tax changes to income that I just mentioned before, and the big tax cuts rolled out over the last two to three years, something like an 18 per cent cut in taxes for people on about $50,000 a year. Altogether this is a better deal for working families, but there is still, Simon, much more work to be done, I accept that.
HOST: Can you clarify for us, there are some differences in opinion in the analysis I've been looking at this morning about taxes on the family home, the retirement home. How will, as part of your response today, how will you view the assets that comprise the family home and the income that that family home may possibly generate? Can you clear that up for us today?
PM: Well as the Treasurer made clear yesterday, in our response to the Henry Review, which is a comprehensive review of the entire Australian taxation system, there are a whole range of measures that we have embraced for reform. They are the ones we've just been speaking about, Super Profits Tax and what it does for super, for small businesses and for infrastructure.
Secondly, there's a whole range of things recommended in the Henry report which we've simply ruled out. One of them of course is including the family home in the means test, or introducing lands tax on the family home, requiring parents to work when their youngest child turns four. These are recommendations which we don't believe are acceptable in Australia today. So those are clearly identified in the attachment to the Treasurer's press release put out yesterday.
HOST: And just finally PM, there is criticism already this morning, we are in an election year, that you've shied away from some of those tougher decisions because you want to get back into office. How do you respond to that criticism this morning?
PM: Well, Simon, can I say to all your listeners this morning - one of the big things that gets put to me every time I'm in the West, and I'm there every month or two, is people are really concerned about the adequacy of their retirement income. This is a big change for that. Not just for younger people in the workforce, but if you're over 50 we're also providing new tax incentives for people to top up their super as well. But you can't simply pull this out of thin air, it's got to be paid for, as do the changes for small business, and the funding for infrastructure. It's got to be paid for from somewhere, and obviously, big mining companies in the West and in Queensland and elsewhere are going to jump up and down about this. I understand that, and many of them will fund the political campaign against this Government as we head to an election at the end of this year. So for someone to suggest that this is all sort of a lay down misere and there's no problem, frankly, they don't know the mining industry as well as I do, because they're not going to be a happy bunch of campers, at least a number of them.
HOST: Thanks for your time Prime Minister, thank you for talking to my listeners this morning. We appreciate it.
PM: Thanks Simon, thanks for having me on the program.