ABC News quoted Mr Martin Ferguson resources minister of Australia as saying that the biggest challenge facing WA's magnetite iron ore industry is state royalty increases.

He was responding to Premier Mr Colin Barnett's criticism of the government's deal with the Independents over the mining tax which he says will result in even more pain for WA.

Mr Barnett says the deal, which will include a review of the GST distribution, will penalize states which increase royalty rates.

Mr Ferguson said that under the new federal system, the Mineral Resource Rent Tax miners will be taxed on profits. The tax is specifically structured to actually, in essence, mean small miners pay very little tax. Take the magnetite industry, for example, and have a look at the taxing point; in terms of the magnetite industry, at that taxing point, the dirt is worth very, very little."

Mr Barnett said that Mr Ferguson's argument is ridiculous. He said that "Under a royalties scheme, it guarantees that every molecule, every grain of mineral is actually paid for. I think that's proper. The Federal Government proposal would be to give away minerals to companies if they don't make a profit; who would do that? It would be just stupid."

The states have the right to require companies to pay royalties for the minerals. But, under a deal reached with the big miners, the Federal Government would credit the companies for the royalties imposed by the states. And, it has warned states they would be penalized if they increased royalties.

Mr Ferguson maintains the real problem for small mining companies in WA is the royalties system. He said that "Irrespective of profits, they'll be taxed on the amount of commodity they actually produce from day one, no write off for investment in capital equipment or whatever."

He said that "There's already a whisper in Western Australia; the WA Government is now going to have to give a holiday with respect to royalty payments to the magnetite industry to try and continue to make WA attractive for investment in the industry compared to other states and territories."

Mr Ferguson warned states of the consequences. He said that "If states basically want to whittle away at the revenue stream in terms of increasing royalties, therefore, they are going to have to front up to the fact that that reduces the amount of money we've got to spend in their resource areas."

(Sourced from www.abc.net.au)