Everybody is trying to work out what effect the just announced increase in the Resource Tax have on the market. BHP claims that their effective tax rate will rise to 57% on income. What is clear from the above chart is that the knowledge of tax seems to have appeared in trading around the 12th of April. The fall in the Capitalization of the effected stocks is over $40 Billion dollars over the period (from $345 B to $304 B).

The overall market Capitalization of the ASX 200 is currently $1,113 Billion, which has fallen in total by $52.5 Billion over the same period. So the fall in the market over the past few weeks is wholly accountable by a very knowledgeable market. XJO peaked at 5002 on the 15th April, so without the Resource Sector, the market would have only fallen 25 points, rather than the current 224 points.

Unfortunately the tax is a fairly vague concept at this stage. The legislation has not been written, no consultation yet with the minor parties, let alone introduced into the lower house of Parliament, or the Upper house. And the concept needs to get through a General Election given this timetable. The general feedback I have had is that people are not necessarily against an increase in the Resource tax, but the implementation, calculations, auditing and compliance appears at the very least a convoluted outcome. It has similar fingerprints to the Federal deal with the States to take control over part of the GST, which had flowed directly to States. In return for giving up part of the GST take the States got increased funding for Health care. Now the current resource tax, which is levied on revenue, flows directly to the States. But the Federal Government is saying that Companies will receive a tax credit for payments made to the States. As the Federal tax is levied on profit, does that mean that if a company makes a loss they will be refunded the State tax by the Federal Government?

You will need to first calculate what they define profit to be. The current broad proposal is that it is the profit a company makes above a hurdle rate of the Government Bond rate on return of assets. So, if a company has $1 billion in assets, and the Government Bond rate is 6%, then any return above $60 million (6%) will be taxed at 40%, less any payment made to the State Revenue tax. A few questions come to mind:

What is the Bond rate? Is it the 10 year rate, the 5 year rate, or the 20 year rate.? Is it the same rate throughout the financial year?, or is it a moving average variable.

What is profit? Only Australian Revenue & Expenditure, I presume, but watch for the transfer pricing. What are the deductions for exploration, for depreciation, and is it the same set of accounts or do separate accounts need to be maintained, with varying definitions of revenue and expenses. In financial planning, there are many definitions of Salaries & Wages, depending on whether it is being used for Superannuation, Fringe Benefits tax, etc.

What is the 6% return based on? Market Capitalization, Enterprise Value, Historical Asset cost, Current Asset Valuation? Paid up capital? Is Goodwill included?

The market is confused. The average Investor with a Superannuation fund planning for his retirement is simply questioning why is value of his fund is declining. Investors now know that the 15% tax on his fund is not the only tax he has to plan for. And if you were a mining company with a range of exploration options, trying to maximise shareholder wealth, their preference will be to look for the best return on funds employed, whilst trying to minimise regulatory risk. According to RBA statistics (release D4), Government debt has increased from $179 Billion in March 2009, to $277 Billion in March 2010, which is about 22% of Gross Domestic Product. And we all know Government Debt is future taxation. In an election year, the risk of increased taxation will probably rest with Business.

Mineral Deposits Ltd (MDL) (Cap. $544m) is a West African gold explorer. In the last 10 days it has maintained a $0.96c share price. Newcrest, which has predominantly Australian assets, has fallen 10%, or $1.7 Billion in value. If the Gold price ever goes to $2,000 (or higher), which Country exposure would you prefer? In Australia, any increase in the price of Gold that represents a 6% return, will be taxed at 40%. Who would have thought that Senegal would give better asset exposure?