Government To Own 57% of BHP Billiton’s Australian Operations

Before I get on to today’s Money Morning, an important announcement…

As you should know by now, we’re not afraid to dish up a big serving of criticism based on the nonsense we see from the mainstream press and mainstream financial advisers.

However, one of the criticisms we get from some readers is, “Well, what should I do about it smarty pants?”

It’s a fair question. It’s all very well to carp from the sidelines, but at some point, as a business, we’ve got to put our cards on the table. So that’s exactly what we’ve done.

Before you read any further, I want you to spend a few moments reading a special report put together by my colleague and editor of The Daily Reckoning, Dan Denning.

The report is titled, “Exit the Dragon.“ Quite frankly, Dan couldn’t have timed this report any better. The outcome of the government’s response to the Emperor Henry tax review tells you that Australia has all its eggs firmly in the China basket.

And in my view that’s an appropriate reference to the Chinese economy, because it won’t be long before the Chinese economy is revealed as a basket-case economy – supported by Western credit, excessive government spending, manipulation, and corruption.

If you want to know how to prepare your investment portfolio for the 21st Century’s biggest economic collapse you’ve got to read what Dan has to say.

So, click here for Dan’s “Exit the Dragon“ special report. I believe it’s the most important financial report you’ll read this year!

….

Now, back to business…

Direct from Fitzroy Street, St Kilda, this morning we bring you this special edition of Money Morning. We’re hot off the press just 21.5 hours after the release of Emperor Ken Henry’s Tax Review.

On Friday we lost count of the number of emails we received from media outlets and special interest groups telling us they’d send out their response to Emperor Henry’s review within minutes of the government releasing it.

We could hardly wait.

But personally, we don’t know why they bothered. They could have rocked up to work this morning, as your editor did, give everything a quick scan, and then come to the conclusion that Australia’s resources sector is one step away from nationalisation.

As we pointed out on Friday, there would be the apparent good news for the little Aussie battlers…

“Bonus for low-paid and older workers” reveals one of the sub heads on the front page of today’s Australian Financial Review (AFR).

Other sub heads tell readers that “Simplified tax returns on way” and “Miners slugged 40pc tax”.

But don’t bother reading the mainstream press. All you’ll get from them is the pathetic line that, “the government missed on opportunity”, or as Tony Harris in the AFR puts it, “1000-page exercise in wasted opportunity”.

What would you expect from the limp-wristed mainstream press? An industry which is firmly in the category of “the government must do something.”

Anyway, we’ve taken a look at the government’s response to Emperor Henry’s report. Although we’ll be honest and say we haven’t read the whole thing yet – which is understandable considering we only bothered to take a peek about two hours ago.

But we thought our first task should be to make some sense out of the Resource Super Profits Tax (RSPT). The details are contained in this report.

All we can say is that the government has done an excellent job in the spin-doctoring department. Both in terms of the name of the tax and the information it leaked about it beforehand.

And guess what? The mainstream press has fallen into line, unquestionably picking up the jargon and spinning the misinformation fed to it by the government.

Let’s take the name of the tax itself – Resource Super Profits Tax. What does that say to you? Well, it arguably gives the impression that this is a tax on “super profits” – whatever that is.

That it’s not a tax on “normal profits” just on “super profits.” As we pointed out last week, there’s no such thing as a normal profit. And there’s certainly no such thing as a super profit. There are just profits. That’s all.

The yarn being spun last week by the press, based on leaked information was that excessive profits would be taxed more than so-called normal profits.

The reality is completely different. Based on our reading of the report, the Resource Super Profits Tax is a, erm, profit tax. It taxes profits. Just like any other company tax.

You can see that from the worked example in the table below that I’ve copied from the report:

There’s nothing in that worked example about normal profits and super profits. It’s just a tax on profits.

The only difference is an indexation allowance at Item 3.

And according to BHP Billiton:

“The imposition of this new tax would result in an increase in the total effective tax rate on the Group’s profits earned from its Australian operations from around 43 per cent currently to around 57 per cent from 2013.”

In effect, the Australian government is nationalising 57% of BHP Billiton’s Australian operations without any compensation.

It’s the next step towards nationalisation. If you think we’re going over the top here, let me ask you what the difference is between the government taxing 57% of profits, and the government taking a 57% stake in the business and receiving the profits as a dividend?

Of course there is one difference, and that is, in the case of a 57% tax rate the government is getting a majority stake for free.

Even Venezuela’s Hugo Chavez would stop to think before doing that.

As I mentioned last week, the notion that Australians own stuff in the ground in the middle of Western Australia, prior to it being discovered and dug-up is ridiculous.

The idea that a non-investor in Malvern, Surry Hills or Geelong should own a minority stake in a patch of dirt near Kalgoorlie is too stupid for words.

And the idea that Australia’s mining companies and investors should put their balls on the line for billions of dollars with no guarantee of success and then have to hand over 57% of the profits to the government is criminal.

But even if BHP Billiton is at the high end of the scale, even 50% or 40% is too much to hand over when the explorer and the investors have taken on 100% of the risk.

It’s inarguable.

At least when Venezuela’s Hugo Chavez nationalises companies he’s up front about it. And what’s more, he’ll hand over cash in return for the stake.

According to our friends at the Encyclopaedia of Wikipedia:

“The nation’s largest private electricity producer, 82-percent owned by US-based AES Corp, was obtained by paying $740 million to AES for its share – fair compensation according to financial analysts cited by Reuters. In 2008, cement production was largely nationalised, with Venezuelan-located plants belonging to Mexico’s Cemex, switzerland’s Holcim, and France’s Lafarge being bought by the government. Compensations of $552 million for Holcim and $267 million for Lafarge were agreed upon, with both of those companies agreeing to stay on as minority partners and retaining 10 to 15 percent shares… In 2007 the main telephone company, CANTV, was nationalised by buying US-based Verizon Communications’ 28.5 percent share for $572 million – again, fair compensation according to analysts cited by Reuters.”

By the way, here’s a link to one of the Reuter’s articles detailing the nationalisations.

So, in the instance of Lafarge, Venezuela paid the company $267 million for a majority stake in the businesses. And Lafarge stayed on to help operate the business and presumably take a cut in any profits.

Yet here, investors in BHP Billiton don’t get a brass farthing from the government, it simply introduces an ad hoc bunch of taxes that will rip away 57% of shareholder’s profits from the Australian operations.

Oh yeah, I know, the government will go on about tax credits and rebates and all sorts of other things. But that’s like a thief saying, “I know I stole $100 from you, here’s $5 back and we’ll call it quits.”

You wouldn’t accept that argument from a drugged-up petty crook, so why would you accept it from a drugged-up coercive government?

Western governments are embarrassing themselves by following the same discredited socialist policies that the Eastern Europeans and Soviets tried before their economies imploded.

But that’s where the government spin goes into overdrive. Because this tax windfall – remember it’s really a tax not a super profits tax – will be spent on infrastructure projects for the states.

If that doesn’t send alarm bells ringing then I don’t know what will. Given the complete disaster of government infrastructure projects so far, you can be assured it will end in disaster too. Swamped with favours for mates, corruption and a monumental waste of profits that would otherwise have gone to real investors.

Make sure you’re under no illusion. This is a tax like any other tax. It penalises initiative and entrepreneurial risk taking in order to line the coffers of a parasitic government bureaucracy.

You see, the government has not only put all its eggs in the China basket, believing the resources boom will last forever, but it’s now so confident of it that it thinks it can give the basket a big old shake without breaking anything.

Oh, and by the way, don’t be fooled by the cut in the company tax rate for other businesses. That’s little more than an attempt to offset some of the cost for increasing the superannuation guarantee to 12%.

Incidentally, that move in itself proves what we’ve argued all along that superannuation is just another tax.

But anyway, the fact that the government is only moving now, six years after the resources boom began, should be as clear a sign as any that the China economic boom will soon become a China economic bust.

Cheers.
Kris.

Tagged as: bhp billiton