PERTH (miningweekly.com) – The economic assumptions that the Australian government is using to back its proposed super profits tax (SPT) are “flawed”, a new report by global consulting firm Ernst & Young (E&Y) has found.

“The model used by the government incorporated a key assumption that mining investment is completely immobile. We do not believe that critical assumption is realistic for the twenty-first century global mining industry,” the authors of the report stated.

Dr Thomas Neubig and Dr Robert Cline said that they believed the proposed SPT and the Australian Treasury’s economic analysis rest on a “flawed theory” and application of super profits taxation; an unrealistic assumption about the immobility of mining investment; and the absence of a complete analysis of the proposal’s economic and fiscal short-run, medium-run and long-run effects.

“[The] introduction of a new, untried tax on a critical sector of the Australian economy merits careful consideration and a complete analysis of the economic and fiscal effects.”

The Australian federal government in May announced plans to impose a 40% super tax on resources profits, from 2012.

The report which was commissioned on behalf of the Western Australian Chamber of Mining and Energy, and follows hot on the heels of a study commissioned by KPGM, on behalf of the Minerals Council of Australia.

The E&Y report stated that the proposed SPT could result in several of Australia’s new mining investment possibilities being deferred or curtailed, resulting in fewer jobs, reduced investment, and lower personal income tax revenue from workers both in the mining and associated industries.

The proposed SPT would also “significantly increase” the average tax rate applicable to mining activities in the country, thereby reducing the attractiveness of Australia for mining investment, relative to other mining geographies.

The consulting firm also found that the proposed SPT could raise the cost of capital requirement for both mining and non-mining Australian investments, owing to the increased political risk facing investors in Australian businesses.

“The proposal can also be expected to reduce the valuation of existing Australian mining companies, resulting in lower personal income tax collections from capital gains and other taxes. Lower valuations of mining shares could also reduce investors' portfolio values,” E&Y said.

The proposed SPT would further have the unintended consequence of increasing the volatility of Australian tax revenue. “SPT revenue would increase during high commodity price periods, but could be zero for extended periods during low commodity price periods.”

E&Y noted in its report that before making such a “significant change” the Australian policymakers and the public would need additional analysis of the SPT proposal to understand the potential policy risk.

“The government’s modeller performed sensitivity analysis of business capital, but we understand, never undertook sensitivity analysis of their key assumption that the Australian mining activity and investment capital was completely immobile.

“Given the flawed theory and application of a tax on super profits and the unrealistic assumption about the global mining industry, additional sensitivity analysis is required.”

Earlier this month, a KPMG report stated that nickel, copper and gold mines would be economically unviable if the new tax were introduced and that new mining projects in Australia would not be able to fill a void left by large project deferrals.