Queensland Resources Council (QRC) Chief Executive Michael Roche says the Australian Prime Minister has pointed out that the country’s long-term economic prosperity relies on boosting the nation’s productivity performance, with “Part of the answer lay[ing] in the government implementing its promised flow-through shares (FTS) scheme for junior explorers. Two reports by the government’s own Productivity Commission highlight the negative impact mineral resource depletion is having on the resources sector’s productivity and Australia’s productivity performance more generally.”

In its 2008 report, Productivity in the Mining Industry: Measurement and Interpretation, the Productivity Commission states that almost a third of the decline in mining industry productivity can be attributed to Australia’s ‘resource depletion’; in other words, lower quality ore grades that require more capital and labour to extract and process.

In its September 2009 submission to the House of Representatives Standing Committee on Economics Inquiry into raising the level of productivity growth in the Australian economy, the commission returned to this theme, pointing out that the depletion of known mineral resource deposits was a major factor in Australia’s overall rapid decline in productivity growth since 2003-04.

Roche: “Australia’s strong geological prospectivity is such that declining yields and falling mining industry productivity are entirely preventable. For a small investment estimated at approximately $100 million a year, the Rudd government’s implementation of its 2007 election promise for a FTS scheme for junior explorers would go a long way towards creating a financial environment conducive to further investment in exploration activity.”

Roche explained, it is the junior explorers that have the greater share of the riskier, but highly speculative, exploration activity. “However, because they usually have little or no taxable income, these junior explorers are unable to immediately deduct exploration expenses. Without such deductions, exploration costs are higher, resulting in lower levels of activity. When we hold back the junior explorers we see the results: fewer major new discoveries and therefore fewer new mining projects with worldclass quality deposits. What a FTS scheme does is accommodate the transfer of unusable corporate tax deductions through to a junior company’s shareholders.

“Eligible shareholders would then be entitled to use ‘exploration tax credits’ to offset their tax liabilities, thereby maintaining investment momentum, as demonstrated successfully in Canada for more than a decade.”

Roche said that the Henry Review of Taxation has been looking at FTS, but he warned that this important initiative should not be allowed to get caught up in a longer-term resource taxation agenda. “The 2010-11 Federal Budget is the perfect timing for the government to deliver this important down payment on tax reform and deliver on its election commitment.”