2014 UPDATE
NEW ISSUES FOR THE 2014 UPDATE – TREATMENT OF
IRON ORE FINES
STAFF DISCUSSION PAPER
CGC 2013-02-S
JUNE 2013
Document1
Paper issued
25 June 2013
Commission contact officer
Jeff Evans, 02 62298866, jeffrey.evans@cgc.gov.au
Submissions sought by
13 September 2013. Submissions should be emailed in Word
format to secretary@cgc.gov.au .
Submissions of more than 10 pages in length should include a
summary section.
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BACKGROUND
1
The commission aims to distil average policies from disparate State policies in as
neutral a way as possible. Due to the high concentration of particular minerals in
particular States, in the 2010 Review it achieved this in the mining assessment by
adopting an approach of grouping minerals with similar royalty rates together. The
commission considered that this approach gave the appropriate balance between
‘what States do’ and policy neutrality.
2
Specifically, the commission classified minerals into two groups:
3

high royalty minerals — oil and gas, export coal, lump iron ore and bauxite

low royalty minerals — other minerals, including iron ore fines.
This classification reflected ‘what States do’ — they applied a higher royalty rate to
some minerals than others. The commission characterised the difference between its
high royalty and low royalty groups as minerals with royalty rates above or below 5%.
Western Australian decisions
4
In June 2010, the Western Australian Government announced an agreement with 2
mining companies to remove the concessional royalty rate of 3.75% that applied to
around half the iron ore fines produced in the State. The agreement meant a royalty
rate of 5.625% would apply to all iron ore fines produced in the State.
5
Although the increase would not affect commission assessments until the 2012
Update, the commission decided to consider the issue in its 2011 Update and advise
States what it proposed to do. The commission subsequently received terms of
reference for the 2011 Update that directed it to not move iron ore fines from the
low royalty mineral group to the high royalty mineral group due to the removal of the
iron ore fines royalty rate concessions in 2010.1
6
In its 2011-12 Budget, Western Australia announced two further increases in the
royalty rate applying to iron ore fines. It would increase the rate to 6.5% from
1 July 2012 and to 7.5% from 1 July 2013. The second of these increases will align the
royalty rate on iron ore fines with that applying to lump iron ore, which the
commission assesses in the high royalty rate group.
7
The first rate increase will affect data for 2012-13, the most recent year of the 2014
Update, while the second increase will first have an effect in the 2015 Review. In the
2013 Update, the commission decided to defer consideration of the treatment of iron
ore fines until this update to allow more consultation with States and consideration
of any relevant recommendations of the GST Distribution review.
1
2011 Update terms of reference, paragraph 11.
2
What did the GST distribution review say on iron ore fines?
8
The GST Distribution Review recommended that, in the 2013 Update, the
Commonwealth Treasurer instruct the commission to consider the appropriate
treatment of iron ore fines for the 2012-13 assessment year and future years, in light
of Western Australia’s decision to bring the iron ore fines royalty rate to the same
level as that for lump iron ore.2 However, no such direction was given and the
commission decided to defer consideration of the rate increases until the 2014
Update to allow for further consultation with States.
9
More generally, the Review recommended that the commission and stakeholders
develop a new mining revenue assessment at the earliest opportunity. It said the new
assessment should avoid excessively large GST share effects, such as when a
commodity moves between groups under the current assessment.3
10
The 2015 Review terms of reference direct the commission to have regard to the
recommendations from the GST Distribution Review that it should develop a new
mining revenue assessment.
ISSUES
11
This paper deals with the issue of the most appropriate treatment for the assessment
of iron ore fine royalties in this update, following the increase in Western Australia’s
royalty rate to 6.5% in 2012-13. This treatment would operate for the 2014 Update,
pending consideration of a possible new mining assessment in the 2015 Review.
12
Proposals in this paper are made on the assumption that the terms of reference for
the 2014 Update will be similar to those for previous updates.
ANALYSIS
13
In the 2010 Review, the commission adopted a mining revenue assessment with 2
mineral groups as the appropriate balance between reflecting ‘what States do’ and
maximising policy neutrality. While a more disaggregated assessment would better
reflect what States do, it would have weakened the policy neutrality of the
assessment.
14
When the commission considered the placement of iron ore fines, it noted the
average rate States applied to iron ore fines in 2008-09 (4.7%) was:

2
3
Less than the average for the high royalty group. If iron ore fines were included
in that group (average 6.8% royalty including fines in 2008-09), the difference in
GST Distribution Review, Final Report, Recommendation 7.1, page 112.
GST Distribution Review, Final Report, Recommendation 7.2, page 113.
3
rates would be treated as below average revenue effort. Revenue capacity
would be assessed using the 6.8% rate, which is greater than 4.7%. So, the
assessed capacity for iron ore fines would exceed actual revenue raised.

15
More than the average for the low royalty group. If iron ore fines were
included in that group (average rate 3.8% in 2008-09), the difference in rates
would be treated as above average revenue effort. Revenue capacity would be
assessed using the 3.8% rate, which is less than 4.7%. So, the assessed capacity
for iron ore fines would be less than the actual revenue raised.
In the end, the commission included iron ore fines in the low royalty group because
its royalty rate was closer to the average for that group.
Removal of the royalty concession in 2010
16
Western Australia’s removal of the concessional royalty rate applying to around half
the iron ore fines produced in the State in 2010, increased the average royalty rate on
iron ore fines in 2010-11 to around 5.6%. This rate left iron ore fines neither clearly in
the low group, nor clearly in the high group.
17
To assist in resolving the appropriate treatment following the removal of the
concession for iron ore fines, the commission said that if mineral production were
spread more evenly across the States and policy neutrality were not an issue, then
(simplification concerns aside) its assessment would be based on an individual
mineral by mineral assessment. Such an assessment would capture the intrinsic
differences between the States in mineral production, appropriately weighted by the
specific royalty rates attached to each mineral. The commission analysed whether the
GST distribution that would result from moving iron ore fines to the high royalty
group would be closer to, or further from, a mineral by mineral assessment. Based on
that analysis it concluded that the better equalisation outcome was achieved if iron
ore fines remained in the low royalty group.
18
Subsequently, the commission received terms of reference directing it not to change
the treatment of iron ore fines before the next methodology review as a result of the
removal of royalty concessions in 2010.4 This direction related specifically to the
removal of the concession in 2010 and did not prevent the commission changing the
treatment of iron ore fines as a result of subsequent royalty rate increases.
Royalty increases announced in Western Australia’s 2011-12 Budget
19
For this update, the commission needs to consider its treatment of iron ore fines as a
result of Western Australia’s first increase in the royalty rate, to 6.5% in 2012-13. The
commission indicated in its 2011 Update report that it did not consider the placement
4
Direction was given in the terms of reference for the 2011 Update. Similar terms of reference were
given in the 2012 and 2013 updates.
4
of minerals into the high and low royalty rate groups should remain fixed, but rather
it should change to reflect the average practice of the States over time.
20
Four options for the commission are to:

not change the treatment of iron ore fines (that is, leave in the low royalty
group)

determine whether to assess iron ore fines in the low or high royalty group
based on which gives GST distribution closer to a mineral by mineral
assessment, once it has received data for 2012-13

move iron ore fines to a medium royalty group

move 50% of iron ore fines to the high royalty group in 2012-13.
Option 1: not change the treatment of iron ore fines
21
One option for the commission is to leave iron ore fines in the low royalty group in
this update. Western Australia will not align the royalty rate on iron ore fines with
that on lump iron ore until 2013-14. The 2013-14 assessment year will first affect the
mining assessment in the 2015 Review. Under this option, the treatment of iron ore
fines would not be considered until the commission’s deliberations on the mining
assessment for the 2015 Review.
Option 2: determine the placement of iron ore fines after considering data for 2012-13
22
In 2011-12, the average royalty rate for the high royalty group minerals was 7.8%,
whereas the average rate for the low royalty group (including iron ore fines) was
4.7%.5 If the first of the royalty rate increases had taken place in 2011-12, the average
royalty rate on iron ore fines would be around 6.5%, closer to the average for the
high royalty group than the average for the low royalty group.
23
However, using data from the 2013 Update, staff performed analysis similar to that
undertaken by the commission when it considered the removal of the concession in
2010. In contrast to considering average rates, the results suggest that had the
increase to 6.5% taken effect in 2011-12, leaving iron ore fines in the low royalty
group would have given an equalisation outcome closer to an individual mineral by
mineral assessment, than would moving iron ore fines to the high royalty group, but
only by a small margin.
24
The outcome of this analysis is sensitive to changes in value of production and royalty
revenue for different minerals. If the commission based its decision on whether to
assess iron ore fines in the low or high royalty group in 2012-13 according to which
gave the closest GST distribution to a mineral by mineral assessment, it would need
to undertake this analysis using data for 2012-13, which will be available later in the
update process.
5
These were average effective royalty rates for the 2011-12 assessment year in the 2013 Update.
5
Option 3: create a medium royalty group
25
Given that for 2012-13 iron ore fines may lie roughly midway between the low rate
group or the high rate group, an alternative option for the commission would be to
move iron ore fines to a medium royalty group. Moving iron ore fines to a medium
group would result in a closer equalisation outcome to an individual mineral by
mineral assessment than assessing iron ore fines in either the high or low royalty
groups in 2012-13.
26
A medium royalty group containing iron ore fines would be close to an actual per
capita assessment, given that around 98% of the value of iron ore fines production in
2011-12 was in Western Australia. However, this does not undermine the policy
neutrality of the assessment if a change is only made for this year, since the 2012-13
financial year will have been completed by the time the commission’s decision is
foreshadowed or taken.
27
Moving iron ore fines to a medium royalty group could be considered a method
change. However, the update guidelines developed and agreed with States after the
1999 Review6 allow the commission to make changes to accommodate State budget
developments. Staff consider that the change to royalty rates by Western Australia
would be classified as a significant budget development and a method change could
be made on that basis, after consultation with States.
28
To implement this option, the commission would require States to provide royalty
revenue and value of production data separately for iron ore fines. Some States have
had difficulty providing royalty revenue data (and in one case, value of production)
data for individual minerals due to confidentiality issues. Are States able to provide
value of production and revenue data separately for iron ore fines?
29
Table 1 compares options of leaving iron ore fines in the low royalty group, moving
them to the high royalty group, or moving them to a medium group, with assessing
the major minerals separately, for the 2011-12 assessment year. Moving fines to a
medium royalty group gives the closest result to the individual mineral assessment.
These are one-year impacts. Comparing the assessed needs in Table 1 when iron ore
fines are moved to the high group with those when they are left in the low group (the
current assessment) gives the impact of moving fines in one-year. If the change were
only made in the latest assessment year, the GST impact would be one third of this
(see the later section on backcasting).
Option 4: move 50% of iron ore fines to the high royalty group
30
A fourth option for the commission would be to assess iron ore fines partially in both
the high royalty group and the low royalty group. Western Australia will align its
royalty rate on iron ore fines with that on lump iron ore by increasing the rate on
6
These guidelines were last published in Chapter 2 of the 2009 Update Report.
6
fines in two steps. The commission could take a pragmatic approach and reflect the
impact of this decision on average policy by leaving half of iron ore fines in the low
royalty group and moving half of iron ore fines to the high royalty group in 2012-13,
when the first of the rate increases takes effect. The placement of iron ore fines in
2013-14 will be considered as part of the 2015 Review.
Table 1
Assessed needs in 2011-12 for different assessment options for iron ore
fines
NSW
$m
Vic
$m
Qld
$m
WA
$m
SA
$m
Tas
$m
ACT
$m
NT
$m
Iron ore fines left in low royalty
group
1 781
2 437
- 652
-4 316
426
166
171
- 13
Iron ore and coal assessed
separately
1 805
2 448
- 512
-4 613
514
164
171
23
- 23
- 11
- 140
297
- 88
2
0
- 36
Iron ore fines moved to high
royalty group
1 955
2 478
- 357
-4 928
490
175
171
16
Iron ore and coal assessed
separately
1 805
2 448
- 512
-4 613
514
164
171
23
151
30
155
- 316
- 24
10
0
-7
Iron ore fines moved to medium
royalty group
1 859
2 478
- 529
-4 661
490
178
171
15
Iron ore and coal assessed
separately
1 805
2 448
- 512
-4 613
514
164
171
23
54
30
- 17
- 48
- 24
13
0
-8
Difference
Difference
Difference
Source:
Note:
Staff calculation using data from the 2013 Update.
Royalty data for Queensland and the Northern Territory (and value of production data for the
Northern Territory) were estimated from total royalties (and value of production) because a
breakdown by mineral was not available.
Should any change be backcast?
31
Backcasting is used when the commission wants to make its relativities more
contemporaneous. It involves taking the conditions of the application year and
backcasting them into the assessment years of the relevant update.
32
For example, in 2014-15, the application year for the 2014 Update, the average
royalty rate applying to iron ore fines will be around 7.5%. If the commission were to
decide to move iron ore fines to the high royalty group as a result of that change, and
to backcast the change in treatment, it would move iron ore fines to the high royalty
group in all years of the 2014 Update.
33
The commission considers backcasting whenever there has been a major change in
Commonwealth-State relations. It does not normally backcast an individual State’s
change in tax rate. Rather, such a change would normally be allowed to progressively
7
work its way into the relativities. Staff propose to recommend that any change in
treatment of iron ore fines not be backcast.
RECOMMENDATIONS
Staff will consider their recommendation to the commission on the treatment of iron ore
fines in 2012-13 once State views have been received.
8