Australia's government girded on Monday for a battle with global miners over its plan to slap the industry with a new 40 percent profits tax, after two home-grown mining giants said the move would threaten investment.

Anglo-Australian miners Rio Tinto and BHP Billiton say the new tax, announced on Sunday, would jeopardize investment in the nation's biggest export sector and make it the world's most heavily taxed mining industry.

But the center-left government, which has made the tax a centerpiece of its re-election agenda this year, defended the move on Monday, stressing that the new tax would simply replace existing mining royalties charged by state governments.

Australian Treasurer Wayne Swan also said some of the money raised from the new tax would be plowed back into generous tax breaks for mining exploration and noted that miners would also benefit from a planned cut in corporate tax.

Our aspiration and intent is for the mining industry to grow, Swan told Australia radio on Monday, a day after he unveiled tax reforms designed to help the government return to power at the next general election expected late this year. Prime Minister Kevin Rudd is using the new 40 percent tax, to apply from July 2012, to help boost pension savings for workers in what he hopes will be a vote-winning formula.

But the mining industry, which accounts for more than half of Australian exports, has hit back hard, led by Rio Tinto and BHP Billiton, which dominate the nation's hugely profitable iron ore industry, the sector seen as most vulnerable to the profits tax.

Well funded and a powerful lobbying force, the big end of the Australian mining industry is preparing for battle and will look to the upper house of parliament, where the government lacks an outright majority, to block the tax.

Altering the rules for existing multi-billion dollar projects in mid stream -- after large amounts of capital have already been put at risk over many years -- would be the worst possible message Australia could send to investors, said David Peever, head of Rio Tinto's Australian operations.

BHP Billiton warned that the plan would seriously jeopardize future investments, with Chief Executive Marius Kloppers saying it would lift the mining group's local tax rate to around 57 percent from 43 percent.

MINERS BRACE FOR SELL-OFF

Another global coal miner, London-based Xstrata , said the new tax undermined long-term certainty for mining projects.

The government's intention to change the basis on which existing mining investments were entered into sends a particularly worrying signal and undermines Australia's reputation as a stable investment destination, hampering the ability of mining companies and other investors to assess the basis for, or to commit to, future long-term investment, Xstrata chief executive Mick Davis said.

Investment bank UBS predicted that Australian mining stocks faced a sell-off on Monday as investors digested news that it said could send a chill through mining mergers and acquisitions.

U.S. coal miner Peabody Energy might now pause over its $3.7 billion bid for the Australian miner Macarthur Coal to consider the implications of the new tax, chief strategist David Cassidy said at the weekend.

Swan has described the changes as historic. The government will reimburse mining companies for state-based royalty payments, and will cut the company tax from 30 to 28 percent by 2014.

One large mining state, Queensland, has already voiced support for the new tax, noting that Canberra's plan to reimburse miners for state resource royalties meant that the overall impact on Queensland's state government coffers was neutral.

But Western Australia, home to the iron ore industry and controlled by a conservative government, has warned the tax could destroy jobs and hurt investment.

Under the overall tax reform package unveiled on Sunday, compulsory employer contributions to pension funds would rise from 9 to 12 percent by 2019-20, boosting Australia's A$1.2 trillion retirement savings pool, the world's fourth-largest.

Funds management firms such as AXA Asia Pacific and AMP are expected to benefit from the pension reform.

Australia faces elections in the second half of 2010 and most likely in October, with Rudd ahead in opinion polls and tracking to win a second term in office.

(Reporting by Rob Taylor and James Grubel; Editing by Mark Bendeich)

Australia