The proposed resources super profits tax (RSPT) will not harm mining investments over the long term, federal Treasury secretary Ken Henry says.
Smaller miners would become more profitable following the removal of the current royalties regime and its replacement with the RSPT, Dr Henry said.
He also said larger miners would still make super normal profits after the introduction of the proposed tax.
"As far as mining investment is concerned, it is certainly the case that our economic modelling for mining investment is projected to increase," Dr Henry said.
His comments came in response to a question at an Australian Economists Business lunch in Sydney on Tuesday.
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"Projects which are right at the margin at the moment because of royalties will become profitable projects if royalties are removed and the RSPT is imposed," Dr Henry said.
"Projects which are earnings super normal profits will continue to earn super normal profits."
Dr Henry said the proposed 40 per cent tax on the "super profits" of miners would represent world's best practice.
"Unlike royalties, which tax receipts, the allowance for corporate capital, by taxing only economic rents and super normal profits, does not distort production and does not distort investment decisions," he said.
"Further, because it's a tax on rents, it should have no impact on prices. "It would represent world's best practice in charging for the exploitation of non-renewable resources."
Dr Henry said that despite comparisons to the long-established petroleum resources rent tax (PRRT), the proposed super profits tax on miners would give investors a better deal.
Under the RSPT, the investors are entitled to a government guaranteed tax credit with a present value of 40 per cent of the initial investment.
But the tax credit under a PRRT evaporates if the expenditure earns insufficient income, Dr Henry said.
This was why the allowance for carrying expenditure forward to deduct against future income was higher under a PRRT than the proposed resource super profits tax.
Under the RSPT, the uplift rate was the long-term government bond rate. However, the long-established PRRT had a five per cent loading on top of the bond rate for most capital expenditure.
This was "to compensate investors for the risk they may not be able to utilise their tax credits", Dr Henry said. During the question and answer session, Dr Henry was criticised by BGF equities executive chairman Warwick Grigor. Mr Grigor said the proposed tax threatened Australia's primary comparative advantage, the mining industry.
"We're being seen as an unreliable country for investment," he said. "International investors do not trust this government or the Treasury for the advice it gives and it's going to have a long-term effect."
Dr Henry rejected the claim he had given bad advice to the government. "It is not our opinion that the (RSPT) in any way effects the pattern of Australia's comparative advantage," he said.
"Indeed, at least taking the long-term view, one should expect to see a higher level of mining sector activity."
