1                This working paper describes how the Commission estimated what royalty revenue each State would have raised from mining if it made the Australian average effort.  The development of the assessment method is in Volume 3 of the 2004 Review Working Papers. 

Mining royalties

2                All States (apart from the ACT, which does not have any mineral production) levy mining royalties on minerals produced.  Table 1 shows that average mining revenue at $196.87 per capita was 7.82 per cent of States own source revenues in 2005-06. 

Table 1                        Mining revenues per capita, 2007 Update

Source:Data collected by the Commission from the States.

3                Mining royalties include grants from the Commonwealth to the States in lieu of royalty payments.  These payments relate to off‑shore petroleum and gas and, for the Northern Territory, uranium.  The payments depend on revenue sharing agreements between the States and the Commonwealth. 

4                State mining royalties vary from mineral to mineral and from State to State.  The royalty rates for 'hard rock' minerals such as copper and gold are around 4 per cent of the value of production, while for oil and gas the rate is about 10 per cent of the value of well head production.  For coal, the rate differs depending on the type of coal[1] and how it is mined.  Low grade coals (such as lignite or brown coal in Victoria) used for domestic power generation typically attract a lower royalty rate than (higher value) metallurgical coal.  New South Wales, a major coal-producing State, also distinguishes between coal mined underground and by open-cut.  For bulk materials (salt, building material etc), royalties are usually levied on a cents per tonne basis rather as a percentage of the value of production. 

Why revenues raised from mining royalties differ from state to state

5                Table 2 shows that revenues raised from mining royalties per capita differ greatly across States and from the Australian average.  The Commission seeks to understand the reasons for the differences.  If the reasons are to do with royalty provisions, they are differences in revenue raising effort due to policy differences — and have no impact on States' GST revenue shares.  If the reasons are due to circumstances beyond a State's control, they are revenue raising advantages/disadvantages.  The Commission takes these into account in its revenue assessment and they do affect States' GST revenue shares. 

Table 2            Mining revenue per capita, 2007 Update

Source:Data collected by the Commission from the States. 

 

Box 1:  The Commission's concept of average The Australian average revenue per capita is not a simple average of the revenue per capita for the eight States.  It is a population weighted average, calculated by dividing the total revenues raised by all States by total population of all States.   Population weighting gives equal weight to people irrespective of their State of residence.  But, since more Australians live in New South Wales, that State carries more weight in the calculation of the average.  For example, more than 33 per cent of Australians live in New South Wales, and less than 3 per cent in Tasmania.  Population weighting gives the experience of New South Wales ($75.24 per capita in 2005-06) about 14 times the weight of the experience of Tasmania ($49.20 per capita).  This means that the average revenue per capita is usually closer to the revenue per capita of New South Wales than the revenue per capita for Tasmania.  This concept of average also applies to the assessment of the average effective tax rate.  In calculating the average effort to raise revenue, it divides the total revenue raised by all States by the total revenue bases of all States.  This gives weight to the revenue effort of each State according to its share of the total Australian revenue base.

 

6                The drivers of State revenues per capita are likely to include:

·                policy influences on revenue effort such as royalty rates, royalty rate structure, exemptions and concessions; and

·                non policy influences on taxable production such as:

-               value and volume of mineral production relative to States' population;

-               composition of mining production; and

-               mine characteristics (for example whether their coal mines are open cut or underground). 

7               
 Table 3 compares the royalty rates for selected minerals in each State.  It shows that Victoria generally had the lowest rates of all States.  Western Australia had generally higher rates. 

Table 3            Actual Mining royalty rates, 2005‑06

	NSW	Vic	Qld	WA	SA	Tas(a)	ACT	NT(b)
	%	%	%	%	%	%	%	%
Open cut coal	7.00	5.88(c)	7.00	7.50	2.70(c)	5.00	na	18.00
Underground coal	6.00	5.88(c)	7.00	7.50	2.70(c)	5.00	na	18.00
Oil and gas	10.00	10.00	10.00	10.00	10.00	na	na	10.00
Value based minerals	4.00	2.75(d)	2.50-7.50	2.50-5.00	2.50	5.00	na	18.00

(a)        Tasmania applies a composite royalty, which is a combination of an ad valorem royalty and a profit tax.  The composite rate is capped at 5.00 per cent of net value of production. 

(b)        The Northern Territory applies a profit-based royalty and hence this royalty rate is not directly comparable with the rates applicable in the other States.

 (c)       Both Victoria and South Australia determine their coal royalty on a notional price per gigajoule of contained energy.

(d)        Excludes gold, on which no royalty is levied.

Source: Data for royalties other than heat coal drawn from Minerals and Petroleum Exploration & Development in Australia A Guide for Investors Leaflets 19 and 20 (forthcoming), Department of Industry Science and Resources. 

8                Table 4 shows a broad indicator of ability to raise mining royalties.  It suggests that Queensland, Western Australia and the Northern Territory (on a per capita basis, show in the table) have above average revenue raising ability. 

Table 4            Broad indicator of ability to raise mining royalties, 2005-06

	NSW	Vic	Qld	WA	SA	Tas	ACT	NT	Aust
(a) General indicator
Value of mining production $pc	1 665	197	7 164	15 139	2 092	1 767	0	12 334	3 833
Factor income from mining $pc(a)	1 056	687	5 066	14 670	1 157	681	6	14 693	3 221
(b) Ratio(b)
Value of mining production	43.45	5.14	186.91	395.00	54.59	46.10	0.00	321.82	100.00
Factor income from mining	32.79	21.34	157.29	455.50	35.94	21.14	0.19	456.22	100.00

(a)        Includes Bass Strait oil and gas production for Victoria, and offshore oil and gas for Western Australia and the Northern Territory. 

(b)        Calculated by dividing the figure for each State by the Australian average figure. 

Sources: State data and the Australian National Accounts (State Accounts), 2005-06, ABS Cat. No. 5220.0, Tables 24 - 32. 

Assessing States' capacities to raise revenues

The equalisation task

9                The box below outlines the Commission's framework for measuring abilities to raise revenues from own bases.  For each kind of tax, the Commission measures the revenue base available to each State, based on the average State policy of how the tax is levied, not the State's own policy.  The assessed revenue base is policy neutral. 

Box 2: Revenue assessment framework for each category of tax to be assessed Aim: to measure the revenue base available to each State assuming it applied the average policy for levying the tax[2].  Step 1:  The first step is to review States' legislation and provisions to establish how the tax is levied — who pays it, on what activities or assets is it levied, and what exclusions from taxable liability are allowed by the States.  Step 2:  The second step is to establish the average policy.  The average policy is the policy applied to the majority of the total tax base and by a majority of States.  Where policy differences between States are negligible, the actual revenues raised by each State would be an appropriate measure of each State's relative ability to raise revenues from own revenue bases.  In this case, it would not be necessary to measure the revenue base itself.  It is called the actual per capita (APC) method of assessment.  It attributes differences in observed revenues per capita between States entirely to differences in abilities to raise revenues from own revenue bases.  Most often, observed differences in per capita revenues are due to both differences in revenue effort (policy) and to circumstances beyond the direct control of State governments (revenue raising advantages/disadvantages).  Step 3:  The next step is to determine the best conceptual measure of the revenue base under the average policy.  The preference is to measure revenue bases under average policy settings from the number and value of activities, transactions or assets subject to the tax.  A broader measure (such as household disposable income, or total private expenditure) is adopted if: ·                the tax itself is broad and its incidence is not easily shifted across State boundaries; ·                differences in State policies have large effects on the relative number and value of activities, transactions, or assets that are taxable in each State, and it is not possible to adjust the data to remove the effects of the policy differences — in this case, data from a third party, such as the Australian Bureau of Statistics (ABS), may be used to overcome some of the problems inherent in State-provided data; or ·                data on the preferred conceptual measure of the revenue base are not available.  However, broad measures tend to be more distant from the States' actual tax bases, and there is a judgment to be made as to how well they reflect the ability to raise taxes.  Where differences between each State's policy and the average policy are very large, and it is impossible to estimate a representative and policy neutral revenue base with confidence, the Commission uses State mean resident populations as the revenue base.  This implies equal ability to raise revenues per capita in each State.  This is the equal per capita (EPC) assessment method.  It attributes differences in observed per capita revenues between States to policy, and does not cause any redistribution of GST shares.

Assessing the revenues for mining royalties

The revenue base

10            In assessing capacity to raise revenue from mining royalties, the aim is to measure a revenue base that reflected the value (and volume) of minerals production subject to mining royalties in all States, assuming the average policy was applied in all States. 

11            Differences in key State royalty policies, summarised in Table 3, are significant, which rules out the use of the actual per capita revenues as a measure of each State's ability to raise revenues. 

12            To overcome the impact of differences in royalty rates for types of minerals and differences in State policies, the Commission assesses capacity in separate components, each of which has a different revenue base.  The components were:

·                grants in lieu of royalties (for example, covering Australian government grants in lieu of royalties as well as petroleum revenues collected by Western Australia but shared between Western Australia and the Australian government): these revenues are paid to the States by the Commonwealth and hence are assessed by the actual per capita method;

·                oil and gas: the revenue base is value of production;

·                coal (heat, open cut and underground): the revenue base is value of production, but with State specific adjustments;

·                value based minerals: the revenue base is value of production, but with State specific adjustments — value based minerals included bauxite, copper, diamonds, gold, iron-ore, lead, manganese, nickel, uranium (excluding the Northern Territory[3]), and zinc; and

·                volume based minerals: the revenue base is the volume (tonnes) of production — volume based minerals included granite, marble, sandstone, slate, crushed and broken stone, gravel, fine aggregates, limestone, clays, kaolin. 

Calculating the revenue base

13            The following tables show the calculation of the revenue base for the years 2001‑02 to 2005‑06. 

14        Table 5 shows the calculation of mining revenue by component, excluding grants in lieu of royalties.  Table 6 shows the calculations of the revenue base components including grants in lieu of royalties. 

15            In the 2004 Review, the Commission judged that New South Wales (for underground and open cut coal and value based minerals) and Tasmania (for value based minerals) were unable to pay the assessed average royalty rate and discounted their value of production for the relevant components of the mining revenue base.  As discussed below, the Commission decided to remove these discounts for New South Wales and Tasmania from 2004-05.  Table 7 presents the relevant State specific adjustments to the component revenue bases. 

16            Table 8 shows the revenue base components — weighted for value and volume of production data and adjusted for State specific adjustments. 

17            Table 9 sets out the calculation of the assessed revenue bases. 

Table 5            Calculation of total mining revenue by component

Table 6                Revenue base components, 2001-02 to 2005-06 

Table 6            Revenue base components, 2001-02 to 2005-06  (continued)

Table 7            State specific adjustments

(a)        The Commission decided to remove the discounts from 2004-05. 

Table 8                        Calculation of adjusted component revenue bases 

Note:    The revenue base is the State provided data in Table 6 multiplied by State specific adjustments in Table 7. 

 

Table 8            Calculation of revenue base components (continued)

Note:           The revenue base is the State provided data in Table 6 multiplied by State specific adjustments in Table 7. 

 

Table 9                        Calculation of assessed revenues

Table 9                Calculation of assessed revenue^(a) (continued)

(a)        For each component, a State's share of revenue base is the size of component (Table 5) multiplied by its share of the relevant revenue base component (Table 8). 

 

18            Table 10 shows the revenue base for all of the years of the assessment period. 

Table 10          Assessed revenues for mining royalties, 2007 Update

Calculating assessed revenues per capita

19            Assessed revenues per capita were calculated by applying the Australian average effective rate of tax to the revenue base of each State and dividing by State population.  Table 11 shows the calculation.  Table 12 shows the assessed revenue calculated in terms of revenue capacity.

Table 11     Calculation of assessed revenue from effective rates of tax, 2005-06

(a)        Calculated for each State by dividing its actual revenue by its revenue base. 

Table 12          Calculation of assessed revenue from category capacity ratios, 2005-06

(a)        State revenue base pc divided by Australian revenue base pc. 

20            This approach has the advantage of making explicit the relative revenue capacity ratio.  Also, by comparing actual revenues per capita with the assessed per capita revenues, a relative effort ratio can be derived.  Table 13 shows the actual and assessed revenues for 2005‑06.  Figure 1 shows them pictorially. 

Table 13          Mining revenue assessment results, 2005‑06

(a)        State revenue base pc divided by the Australian average revenue base pc.  This is the same as dividing each State's assessed revenue pc by the Australian average revenue pc. 

(b)        Actual revenues pc divided by assessed revenues pc. 

21            Table 23 at the end of this section shows the average, actual and assessed revenues per capita for each State for all years of the 2007 Update. 

Figure 1          Mining revenue, assessed revenue per capita, actual revenues per capita and average revenue per capita, 2005‑06

Relative abilities to raise revenues

22            In 2005‑06, Queensland, Western Australia and the Northern Territory had above average ability to raise mining royalties, because of their above average value of mining production per capita. 

23            New South Wales, Victoria, South Australia, Tasmania and the ACT had below average ability to raise revenues because of their below average value of mining production per capita. 

Revenue efforts

24            In 2005‑06, Western Australia had above average revenue effort, levying relatively high royalty rates.  Victoria had the lowest revenue effort because it had the lowest rate of tax, with gold production for example exempt from royalties.  The Northern Territory also had a relatively low effort.  While the royalty rate in that State appears to be high at 18 per cent of net returns, it is actually much lower when calculated as an ad valorem equivalent.  The Northern Territory also exempted construction and other materials from royalty. 

GST revenue distribution for the 2007 Update

25            Table 14 shows the assessed revenue difference from the Australian average for 2005-06 in dollars.  It provides an indication of the impact of the mining revenue assessment on GST revenue shares.  The difference is calculated by:

·                subtracting each State's assessed revenue per capita from the average revenue per capita; and

·                multiplying by each State's population. 

Table 14          Assessed revenues, difference from average, 2005-06

(a)        Extent of difference from equal per capita (sum of negatives, or positives). 

26            Table 15 below shows the assessed difference from average in $ millions.  The average of these amounts over the five year reference period provides an indication of the impact of the assessment on GST revenue shares. 

Table 15          Assessed revenues, difference from average, 2007 Update

27            These amounts were assessed in the context of the size of GST revenue pool in each reference year.  The actual impact of the assessment on GST revenue shares in the application year depends on the growth in the size of the GST revenue pool between the reference years and the application year. 

28            The effect of the assessed differences on the 2005‑06 GST revenue pool is shown in Table 16. 

Table 16          Mining revenue contribution to assessment of GST revenue distribution,2007 Update

(a)        Extent of difference from equal per capita (sum of negatives, or positives). 

29            The Commission estimated that the States with above average assessed revenue per capita —Queensland, Western Australia and the Northern Territory — required less assistance totalling $1556.3 million to provide the average level of service.  The other States with below average assessed revenues per capita — New South Wales, Victoria, South Australia, Tasmania and the ACT — needed additional assistance totalling $1556.3 million. 

30            Queensland, Western Australia and the Northern Territory are the main mining centres in Australia, with greater mine output per capita than the other States.  The mining sectors in the other States (including New South Wales, despite its coal mining sector) are relatively small. 

31            The ACT, on the other hand, has no mining within its borders. 

Changes in GST revenue distribution: U2007 Update compared WITH 2006 Update

32            Table 17 shows:

·                the impact of the 2006 Update assessment on GST revenue shares;

·                the impact of the 2007 Update assessment on GST revenue shares; and

·                the difference.

33            The table also breaks the difference into smaller parts. 

What has changed?

34            The main changes the Commission examines are:

·                revisions to the financial and assessment data that were used in the 2006 Update; and

·                advancing the reference period one year — a new year comes into the reference period and the oldest year drops out. 

35            Figure 2 shows the reference periods for the two inquiries.

Figure 2          Advancing the reference period, 2007 Update

2000-01	2001-02	2002-03	2003-04	2004-05	2005-06
2006 Update
	2007 Update

 

36            The effect of revisions is estimated by replacing 2006 Update data with 2007 Update data for the years common years from 2001-02 to 2004‑05.  The effect of advancing the reference period one year is estimated by comparing the data of the new year entering the reference period (2005‑06) with the financial and assessment data of the year dropping out (2000-01).  In both cases, the Commission considers the impact of replacing financial data (actual revenues) separately from the effect of replacing assessment data (revenue bases). 

Table 17          Comparison of the 2007 Update and 2006 Update assessments^(a)

(a)        Assuming the 2006‑07 GST revenue pool and the December 2006 population. 

(b)        This figure shows the change in the amount redistributed among the States between the 2006 Update and the 2007 Update.  It does not necessarily equal the difference in the total redistribution from EPC between the two inquiries. 

Changes due to revising revenue data and revenue bases for years 2000‑01 to 2004-05

37            Changes due to revisions of revenue data.  There were minor revisions to the adjusted budget figures, and hence to the Australian average mining royalty per capita, but they had little effect on the GST revenue distribution. 

38            Changes due to revisions in the revenue bases.  Revisions to data on value of production (for example as a result of revisions to ABARE data for 2003-04 and 2004-05) had a small effect on the measures of the revenue bases.  The revisions reduced the relative capacity for Queensland in particular and increased the relative capacity of New South Wales and Western Australia and, to a lesser extent, South Australia and the Northern Territory.  This resulted in redistribution away from these States. 

39            Table 18 summarises changes in actual revenue and revenue capacity for 2000‑01 to 2004‑05.  It shows that changes to the average revenue capacities between the 2006 Update and the 2007 Update were minor. 

Table 18          Mining revenue assessment data, average of 2000-01 to 2004‑05

Changes due to revising revenue data and revenue bases for years 2000-01 to 2005-06

40            Table 19 shows how the average revenue and revenue base ratios for 2005‑06 were different from 2000-01. 

Table 19          Mining revenue assessment data, 2000-01 and 2005‑06

41            These changes can be understood mainly in terms of how the coal and value based minerals expanded relative to each other, and in absolute terms. 

42            Table 20 shows changes in the value of production (VoP) for coal, value based minerals and oil and gas between 2000-01 and 2005-06.  While the VoP for value based minerals rose significantly between 2000-01 and 2005-06, the VoP for coal increased by nearly twice as much as that for value based minerals and by nearly three times as much as the VoP for oil and gas.  This increased the weight for coal relative to that for value based minerals and oil and gas, increasing the relative importance of coal in this update. 

Table 20          Percentage change in the value of mining production (without the discounts) between 2000-01 and 2005-06

	NSW	Vic	Qld	WA	SA	Tas	ACT	NT	Aust
	%	%	%	%	%	%	%	%	%
Coal	99.8	65.1	189.2	18.6	0.1	13.1	0.0	0.0	144.9
Oil and gas	-100.0	-95.3	58.2	431.6	27.0	0.0	0.0	2.5	45.3
Value based minerals	94.5	111.5	61.2	61.7	75.3	169.7	0.0	29.6	63.0
Total (a)	98.1	64.9	100.5	61.9	53.1	159.4	0.0	28.7	77.5

(a)        Does not includes volume based minerals. 

43            Replacing revenue data.  The average per capita revenues increased by 76.4 per cent, considerably more than the per capita increase in the GST revenue pool of 35.0 per cent.  Because of that, the category became much more important. 

44            As a result, there was a larger redistribution of the GST revenue away from the States with higher revenue capacity — Queensland (as a large underground and open cut coal and value based minerals producer), Western Australia and the Northern Territory (as large value based minerals producers) — to the other States. 

45            Table 21 shows the effects decomposed by component. 

Table 21          Contribution to changes in the distribution of GST revenues due to changes in average revenue by mining components, 2000‑01 to 2005‑06

	NSW	Vic	Qld	WA	SA	Tas	ACT	NT	Aust
Actual per capita	-4.6	-3.4	-2.7	12.4	-1.0	-0.3	-0.2	-0.1	12.4
Coal	-2.5	32.7	-61.1	12.7	10.8	3.4	2.4	1.5	63.6
Value based minerals	19.9	17.1	-1.2	-36.9	2.6	1.0	1.1	-3.6	41.7
Oil and gas	-1.5	-1.1	0.9	-0.3	2.0	-0.1	-0.1	0.1	3.0
Volume based minerals	0.0	0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.1
Total all components	11.3	45.4	-64.1	-12.1	14.4	3.9	3.2	-2.0	78.2

46            Because of, as already noted, higher increases to coal production and royalty since 2000-01, the redistribution was away mainly from Queensland, the predominant coal producing State.  By contrast, the redistribution was substantial but relatively less from Western Australia, the main value based minerals producing State. 

47            For Western Australia, that less redistribution was further offset by increased redistribution to it because of coal ($12.7 million) and further by reduction ($12.4 million) in the actual per capita grants in lieu of royalties from the Commonwealth to Western Australia (while revenue for Western Australia from the North West Shelf rose strongly, oil and gas revenue from Barrow, Harriet and Thevenard Islands, which the State shares with the Commonwealth, declined). 

48            Replacing revenue base data.  There were other important changes which offset some of the effect of increases in the average revenue. 

49            Table 22 shows the contribution to the change in GST revenue distribution as a result of replacing the revenue base for 2000‑01 with that for 2005‑06 for each of the components of the mining category.  This table, together with Error! Reference source not found., adds to the update changes in Table 17. 

Table 22          Contribution of changes in the Mining revenue base components to the change in the distribution of GST revenues: 2000‑01 to 2005‑06^{(a) (b)} 

	NSW	Vic	Qld	WA	SA	Tas	ACT	NT	Aust
Actual per capita	-0.6	-0.4	-0.4	1.7	-0.1	0.0	0.0	-0.1	1.7
Coal	17.9	2.4	-22.7	2.4	0.1	0.1	-0.1	-0.1	22.9
Value based minerals	-4.8	-1.5	4.1	2.4	-1.5	-2.3	-0.1	3.6	10.2
Oil and gas	0.2	0.4	-0.5	-2.2	1.6	0.0	0.0	0.4	2.6
Volume based minerals	0.6	-0.1	-0.3	-0.1	-0.2	0.0	0.0	0.0	0.6
Total all components	13.4	0.9	-19.7	4.3	-0.1	-2.3	-0.2	3.8	22.4

50            Between Queensland and New South Wales, the two main coal producing States, production and royalty increased much faster in Queensland than in New South Wales.  As a result of this shift in relative capacity, there was further redistribution away from Queensland reinforcing the effect as noted earlier of average revenue on the State. 

51            There were also relative shifts in the value of production of value based minerals between States, including because of the removal of the discount applied to the value of production for coal (New South Wales) and value based minerals (Tasmania).  As a result, there was an increase in the relative importance of value based minerals production in New South Wales, Tasmania and, to a lesser extent, South Australia compared to that of value based minerals production in Western Australia, Queensland and the Northern Territory.  This offset further the effect of increases in royalty between 2000-01 and 2005-06 for Western Australia.  

52            In summary, the relatively large increase in royalties from and the value of production of coal (particularly open cut coal) compared with that for value based minerals resulted in a significant and larger redistribution of GST revenue grants away from Queensland. 

 

This chapter was prepared by the Revenue section of the Commonwealth Grants Commission.  If you have any questions about its content please contact Gautam Biswas on (02) 6229 8833 or Gautam.biswas@cgc.gov.au

Date:  15 February 2007 

Table 23          Assessment of revenue, Mining revenue