07 Aug 2013

Mining tax beats challenge… and what it means for you

The High Court of Australia has this morning upheld the Federal Government's Minerals Resource Rent Tax (MRRT), ruling that the arguments forwarded by the plaintiff (Fortescue Metals Group (FMG)) were insufficient to overturn the controversial tax (Fortescue Metals Group Limited v The Commonwealth [2013] HCA 34).

The judgment is a win for the Government and means that the MRRT will remain in place, subject (of course) to any action to repeal it taken by a potential Coalition Government following 7 September's Federal election.

The important points

The decision means that the tax remains for coal and iron ore miners with mining profits greater than $75 million in the year.

Even if the Coalition is elected on 7 September and decides to proceed with its promised repeal of the MRRT, amending legislation still needs to be prepared and passed by both houses of Parliament, which is likely to take some time.

Accordingly, for the foreseeable future (and in all likelihood for the third and fourth instalment quarters of the 2013-14 year at least) miners should calculate their projected MRRT liability based on existing rules.

The arguments

FMG had argued that the tax:

  • discriminated between the States contrary to section 51(ii) of the Constitution;
  • gave preference to one State over another, contrary to section 99 of the Constitution; and
  • with respect to iron ore, rendered "illusory or inefficacious" a State’s ability to encourage mining, at odds with section 91 of the Constitution.

Essentially, FMG argued that because State royalties were allowances able to be deducted against MRRT revenue, there was discrimination between the States because the amount of MRRT payable will vary depending on the amount of royalty payable to the State in which the miner was located.

Similarly, this meant that States could not differentiate themselves by lowering or raising royalties (because in real terms, the varying MRRT would effectively cancel out any difference).

The Attorneys-General of Western Australia and Queensland intervened in support of the plaintiffs, reiterating the arguments made by the original plaintiffs and contending that the MRRT curtailed State sovereignty contrary to the "Melbourne Corporation" principle.

Submissions in the hearing followed those in the filed documents, supplemented by arguments relating to section 51(ii) and the "Melbourne Corporation" principle by the Solicitors-General of Queensland and Western Australia respectively.

On behalf of the Government the Commonwealth Solicitor-General contended that it was the royalties (and not the MRRT Act) which differentiated between the States, royalties were but one "allowance" leading to variance in the amount of MRRT collected (and should not be considered in isolation) and that the "discrimination" complained of was not of the type prohibited by the Constitution, as described by the High Court in Conroy.

The decision

The Court unanimously held (in four separate judgments – Chief Justice French, Justices Hayne, Bell and Keane, Justice Crennan and Justice Kiefel) that the MRRT legislation was not invalidated by the Constitution, because:

  • following the High Court's decision in Permanent Trustee Australia Ltd v Commissioner of State Revenue (Vic) (2004) 220 CLR 388 and despite FMG's contentions that the Court should ignore aspects of that case, a law would only be found discriminatory if the distinction drawn by it was not "appropriate and adapted to the attainment of a proper objective";
  • the "high purposes" protected by the Constitution "are not defeated by uniform Commonwealth laws… which have different effects between one State and another because of their… interactions with different State legal regimes";
  • it is not right to say that the tax differs depending on the location of the miner; it remains at 22.5% irrespective of the State in which the miner operates. It is State royalties which vary;
  • because the laws did not discriminate between one State and another (in contravention of section 51(ii) of the Constitution), neither did they give preference to one State over another (contrary to section 99 of the Constitution);
  • the MRRT legislation was not aimed at States and did not impose any special burden or disability on the exercise of powers and fulfilment of functions of States that contravened the "Melbourne Corporation" principle; and
  • finally, section 91 of the Constitution was not framed in terms of a prohibition but rather, preserved States' legislative powers with respect to granting certain kinds of aid or bounty; it did not limit the legislative powers of the Federal Parliament. Accordingly, neither did the MRRT Act contravene section 91.

Where to from here?

It is noted that the Court's decision was not entirely unexpected, with many Constitutional and tax law experts considering that the challenge had, at best, a moderate chance of success.

As the ultimate court of appeal in Australia, the High Court's decision has meant that the MRRT may now only be removed by amending legislation passed by both houses of Parliament. The constitution of the Senate following the election may therefore be of particular importance to interested parties, as the Coalition has indicated that if elected it intends to repeal the legislation.

Notably for petroleum producers however, in April the Coalition indicated that even if elected it intends to retain the extension of the Petroleum Resource Rent Tax to onshore projects.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.