June 2 (Reuters) – Australia’s mining industry and government on Wednesday sought to cool tensions over a planned new 40 percent mining profits tax that has unnerved both investors and voters. [ID:nSGE6500L0]

Miners claim the proposed tax, due to start in mid-2012, will hit economic growth and stifle investment in the booming resources sector. The government argues the tax will make sure miners pay fair taxes on limited national resources and help fund national savings.

WHAT HAS CHANGED SINCE PLANNED TAX FIRST UNVEILED?

Nothing.

Prime Minister Kevin Rudd remains adamant the 40 percent rate for the Resource Super Profits Tax is set in stone. He has said negotiations with miners will be protracted and has discounted a resolution with miners before 2010 elections expected in October. [ID:nSGE650012]

The conservative opposition opposes the tax and has promised to abandon it if it wins office, making the mining tax a central issue for the upcoming election campaign. [ID:nSGE64C0A4]

Legislation for the tax is unlikely to be drafted until early 2011 and then begin its passage through parliament. The government does not currently control the upper house Senate, where the tax legislation must pass, and is unlikely to control it after elections.

WILL THE GOVERNMENT BACK DOWN?

Rudd will not reverse course on the tax. He has lost voter support due to backflips on a range of policies, and more backdowns would hurt his poll standing. It could also undermine his leadership within the centre-left Labor Party

Rudd is also losing poll support to the Greens, who are anti-mining and support the tax and more regulation on the industry. Any major concessions by Rudd could further erode his re-election chances and see more Labor votes leak to the Greens.

Rudd has linked the mining tax to cuts in the company tax rate, and to higher payments into worker pension funds. Some political analysts believe Rudd is happy to prolong the fight with the mining industry because the overall tax package will eventually be a vote winner.

IS TAX THRESHOLD LEVEL THE KEY?

Rudd and Swan have left open the option of changing the threshold profit rate at which the new tax kicks in.

The threshold is set to match the 10-year government bond yield AU10YT=RR of around 5.3 percent. Miners say it is unrealistically low and should be closer to the 12 percent rate used for a similar Petroleum Resource Rent Tax.

But the architect of the tax, Treasury Secretary Ken Henry, has cautioned against changing the threshold because of the generous concessions built into the new tax. [ID:nSGE64H0C9]

WILL THE TAX REMAIN RETROSPECTIVE?

Australia’s two largest miners, Rio Tinto RIO.AX

The government says such exclusions would forfeit too much revenue and discourage miners from expanding.

Miners can currently offset tax credits for exploration and development costs, resulting in a lower effective tax rate than 40 percent. As part of a deal, the government may allow more room for existing projects to offset their previous exploration and development costs.

WILL THE TAX MAKE PROJECT FUNDING HARDER?

Andrew Forrest, chief executive of iron ore miner Fortescue Metals Group (FMG.AX), says unlike company tax, the new mining tax will hit firms higher up the profit statement before deducting interest on borrowings. This means banks will not fund new projects unless businesses stump up more equity.

Playing the nationalist card, Forrest says this opens the door to deep-pocketed foreign firms, especially state-owned Chinese ones, to buy up stakes in new projects. A compromise could involve financing costs being excluded from calculations.

(Additional reporting by James Regan in SYDNEY and Rob Taylor in CANBERRA; Editing by Michael Perry)