Author: Ken Parish
The threat of a High Court challenge to the Gillard government’s Mining Resources Rent Tax (MRRT) has received much publicity this week, following its passage through the Senate last Monday. It’s rather strange in a way, because putative plaintiff Andrew “Twiggy” Forrest (on behalf of his corporate vehicle Fortescue Metals Group Ltd) merely announced that he was “seeking legal advice” about the prospects of such a challenge. Meanwhile, notoriously litigious mining billionaire Clive Palmer encouraged “Twiggy” while stressing that he wouldn’t be launching a challenge himself, and WA Liberal Premier Colin Barnett said his government wouldn’t do so either but would join as a party if “Twiggy” commenced proceedings.
Assorted legal commentators have expressed opinions in the media, even though none of us actually know whether proceedings will be commenced or what grounds “Twiggy” Forrest might advance. Prominent tweeping QUT public law academic Peter Black appeared on ABC The Drum on Wednesday evening and opined that a challenge based on Constitution s 114 (Commonwealth can’t tax State property) might have prospects of success while other grounds probably don’t. That is a view I initially shared, but after some further preliminary research over the last few days I’ve reconsidered. Hence this article.
University of Sydney’s Anne Twomey also ventured some tentative observations on ABC’s PM radio program. The opening blurb suggests she thinks a challenge “has some chance of success if it proceeds”. However a realistic reading of Twomey’s actual remarks suggests they might better be characterised as exhibiting polite scepticism about the prospects of a successful challenge.
My own preliminary and equally speculative thoughts are set out below for what they’re worth.
Does the MRRT breach Constitution section 51(ii) or section 99?
Section 51(ii) is the Commonwealth’s taxation power but forbids tax laws which “discriminate between States or parts of States”. Twomey is negative about this potential ground:
But Sydney University constitutional law Professor Anne Twomey says that argument’s unlikely to succeed.
ANNE TWOMEY: The real issue is are you taxing equally across the board? So if your rate of tax is 10 per cent or 50 per cent or whatever, so long as it applies equally across the board to all the states and you’re not favouring one over another – that’s okay.
That was my initial reaction too. On the face of it the MRRT has a uniform rate of 30% on net profits from iron and coal mining throughout Australia (above a threshold profit of $50 million per year). “Discrimination” for the purpose of section 51(ii) (and for that matter “preference” for the purpose of section 99) has a well understood meaning. As long ago as 1906 in The Colonial Sugar Refining Co. v Irving (1906) A.C., 360, 367 the Privy Council laid down the general principle:
The rule laid down by the Act is a general one, applicable to all the States alike, and the fact that it operates unequally in the several States arises not from anything done by the Parliament, but from the inequality of the duties imposed by the States themselves.
In Cameron v Deputy Federal Commissioner of Taxation (Tas.) (1923) 32 CLR 68, 110 Isaacs J explained:
Discrimination between localities in the widest sense means that, because one man or his property is in one locality, then, regardless of any other circumstance, he or it is to be treated differently from the man or similar property in another locality.
More recently in Conroy v Carter (1968) 118 CLR 90, Menzies J put the principle even more clearly:
However, in my view, a law with respect to taxation cannot, in general, be said so to discriminate if its operation is general throughout the Commonwealth even though, by reason of circumstances existing in one or other States, it may not operate uniformly.
Aplying these principles to the MRRT, it could not be argued for example that it is discriminatory against Western Australia merely because most iron ore mines are located there, or that it is preferential to other States for a like reason. Such a differential outcome does not arise from “anything done by the Parliament”.
However, according to the Parliamentary Library’s Bills Digest on the MRRT, “Twiggy” Forrest’s intended argument is rather more sophisticated than that:
In their submissions to the Economics Legislation Committee’s inquiry into the Minerals Resource Rent Tax Bill 2011 [Provisions] and related Bills, the Institute of Public Affairs and Fortescue Metals Group Ltd raised arguments that the design of the MRRT may be in contravention of these two parts of the Constitution because it provides full credit for state royalties paid in relation to a mining project. Since the states vary in the royalties that they charge, this will result in uneven outcomes.
Of course, in a global sense the intent of the MRRT is to avoid rather than create a discriminatory/differential effect in different States by crediting miners subject to the MRRT for their liabilities under the various different State-based mineral royalties regimes. However, this lack of any discriminatory operation applies only if it is constitutionally permissible to examine the global or cumulative effect of the Commonwealth and State taxing regimes on mining companies taken together. On a strictly literal reading section 51(ii) is breached if the Commonwealth tax examined by itself involves expressly different rates or other elements as between States or parts of States. As Starke J put it in Cameron:
[A] law with respect to taxation which takes as its line of demarcation the boundaries of States . . . necessarily discriminates between them.
The Commonwealth’s MRRT regime credits miners in different States for differing amounts of State mineral royalty liabilities, with the result that different net amounts are payable to the Commonwealth on the same amount and value of coal or iron depending on the State in which it is mined. Although it might make practical sense to look at the global cumulative effect of Commonwealth and State taxes on coal and iron ore miners in assessing “discrimination”, I am unaware of any existing High Court authority on section 51(ii) which holds that this is the approach to be taken. It is simply not possible to predict with any confidence the attitude the Court would be likely to take. Consequently “Twiggy” Forrest would probably be well advised to commence proceedings given the amounts at stake.
Does the MRRT breach Constitution section 114 (taxing State property)?
Section 114 relevantly reads:
A State shall not, without the consent of the Parliament of the Commonwealth, … impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State.
The traditional view has always been that minerals, at least while still in the ground, are the property of the State government where they are found. This is an aspect of the common law prerogative rights of the Crown received as part of English common law on settlement of each colony. “Twiggy” Forrest may be expected to argue that the MRRT should be regarded as a tax on those minerals and hence a tax on State-owned property. Twomey is also fairly negative about the prospects of this argument:
ANNE TWOMEY: The Commonwealth’s most likely to argue that it’s not a tax on minerals at all but it’s a tax on the profits of corporations and indeed the Commonwealth has been taxing corporations and companies for a very, very long period of time and that it’s perfectly valid and that there are really no issues at all. But that’s the most likely approach that the Commonwealth is likely to take.
However, a 1992 High Court decision (South Australia v Commonwealth (the SA Trust case) (1992) 174 CLR 235) holds that a tax on capital gains on sale of property (as opposed to income derived from the use to which property is put) may be a tax on the property itself and hence in breach of section 114 where that property is owned by a State:
Although the distinction between a tax on property and a tax on transactions has continued to be a very important factor in the interpretation and application of the section, it has been acknowledged that a tax framed as a tax on transactions may nevertheless in some circumstances amount to a tax on property, that is, a tax on the ownership or holding of property.
There is a plausible argument that a tax on profits from the sale of minerals is a tax on capital gains and thus a tax on the ownership or holding of that property. The real problem with this argument for section 114 purposes in relation to the MRRT is that the minerals are simply not the property of the State at any material time. As the Parliamentary Library’s Bills Digest notes:
[T]he first hurdle any plaintiff will have in claiming section 114 immunity is establishing that the state is, relevantly, the owner of the property. (The immunity does not apply to property which is not owned by a state.)
The mining legislation of every single mainland State expressly provides that property in minerals vests in the miner once they have been mined. The Mining Act 1978 (WA) (where “Twiggy” Forrest’s mines are located) is a typical example. Section 85(2) (b) provides that the lessee of a mining lease “owns all minerals lawfully mined from the land under the mining lease.” There are corresponding provisions in Queensland, New South Wales, Victoria and South Australia.
The MRRT levies a 30% tax on the net profits from sale of coal or iron ore over a threshold annual amount. Both in form and in substance it is a tax on the income whether of a capital or revenue nature, earned by miners from sale of minerals of which they (not the Crown in right of a State) are the owners. It is difficult to see how this could plausibly be characterised as a tax on the minerals prior to their extraction, processing and sale, although the Parliamentary Library’s Bills Digest speculates on a possible line of attack for “Twiggy” Forrest:
However this is what may be argued—that there is a sufficient connection with the minerals under the ground that still belong to the Crown in right of the state, with the profits derived from such minerals in the hands of the taxed miner. Perhaps the argument will be sustained by some notional connection with the crediting of the royalty payments by the Commonwealth.
It is difficult to see how the fact that the Commonwealth refunds to miners an amount equal to the State mineral royalties they have paid on minerals subject to the MRRT could sensibly be argued somehow to turn a tax on sale profits into a tax on minerals in the ground.
Does the Commonwealth own the minerals anyway?
The last possibly relevant argument is one advanced by Twomey rather than miners or hostile State governments:
You’ve got the Crown in right of the state and the Crown in right of the Commonwealth and who gets what? The general view’s been taken in the past that it is the states that get the sort of property rights; so control of the soil and the subsoil and the minerals and all the rest of it and the Commonwealth gets other sorts of prerogative rights like powers in relation to external affairs and those sorts of things.
That may change in the future. There was some suggestion in a High Court case recently that the rights of the states in relation to minerals and royalties may have been wrongly distributed and that indeed the Commonwealth may well have some rights to royalties which it didn’t ever suspect that it did.
To the extent that this is ever held to be the case by the High Court, it would certainly result in short-term angst for miners and long term losses for State governments. It would mean that the States have been granting rights to mine and sell minerals that they never owned. No doubt the Commonwealth would need to enact urgent validating legislation to repair the resulting chaos. However such a decision would not invalidate the MRRT legislation. The Commonwealth can certainly tax minerals which it owns/owned.
I’m fairly certain that the recent High Court decision to which Twomey refers is Cadia Holdings Pty Ltd v New South Wales (2010) 242 CLR 195. It concerned the contemporary effects (if any) of the common law Crown prerogative held to exist by the Case of Mines decided in 1568 and later remedial UK legislation in the 17th century, all of which were received by the colonies as part of their law at settlement. The Case of Mines decided that the prerogatives of the Crown included ownership of precious or “royal” minerals (gold and silver), and also included any other base minerals mixed with them. That might be relevant for a few Australian mines affected by the MRRT e.g. the huge Olympic Dam mine in South Australia where uranium and other minerals including iron ore are mixed with gold.
Amusingly if nothing else, according to French CJ the Crown in the Case of Mines supported its assertion of this prerogative right to ownership of all precious metals inter alia by reference to the excellence of the monarch’s person, which “draws to it things of an excellent nature”. While this may have struck Tudor judges as a compelling argument in the time of Elizabeth I, the High Court is unlikely to exhibit quite the same awestruck admiration for her namesake successor, still less for her Australian Prime Minister Julia Gillard who would be the practical repository of any such prerogative right.
More relevantly for contemporary purposes, another rationale for the court’s recognition of Crown prerogative ownership of precious metals in the Case of Mines was the need to finance defence forces and the royal right to control coinage. Both these functions are vested exclusively in the Commonwealth under Australia’s Constitution, and it appears to be that which has led the High Court to flirt with the proposition that perhaps the Commonwealth rather than the States should be regarded as the repository of any such prerogative right today. In the joint judgment of Gummow, Hayne, Heydon and Crennan JJ, Their Honours observe in obiter at -:
The executive power of the Commonwealth of which s 61 of the Constitution speaks enables the Commonwealth to undertake executive action appropriate to its position under the Constitution and to that end includes the prerogative powers accorded the Crown by the common law. Dixon J spoke of common law prerogatives of the Crown in England, specifically the prerogative respecting Crown debts, as having been “carried into the executive authority of the Commonwealth”.
However, the creation of the federation presented issues still not fully resolved of the allocation between the Commonwealth and States of prerogatives which pre-federation had been divided between the Imperial and colonial governments, and of their adaptation to the division of executive authority in the federal system established by the Constitution. If regard be had to the treatment by Justice Field of the rationale for the Case of Mines, it might well have been thought that if the prerogative respecting royal metals survives at all today under the common law of Australia it accrues to the executive authority of the Commonwealth.
All fascinating stuff for a constitutional lawyer, though largely irrelevant to the validity or otherwise of the Gillard government’s MRRT legislation. I certainly hope “Twiggy” Forrest launches a challenge.