12 August, 2013

Legal News & Analysis – Asia Pacific – Australia – Tax

Fortescue Metals Group Limited and Ors v The Commonwealth of Australia [2013] HCA 34

Introduction

In a unanimous decision published on 7 August 2013, the High Court rejected Fortescue Metals Group Limited’s (Fortescue) claim that particular provisions of the Minerals Resource Rent Tax Act 2012 (Cth) (MRRT) and the associated acts dealing with the impositions of excise, customs and general mining taxes are unconstitutional.

In summary, the High Court’s decision determined the following issues:

a) whether the MRRT and its associated imposition acts discriminate between the States or give preference to one State over another; and 

b) whether there is a constitutional prohibition on the legislative powers of the Commonwealth Parliament to grant any aid or bounty on mining for metals, i.e whether the MRRT and its associated imposition Acts are valid.

Background Facts

The MRRT and the Minerals Resource Rent Tax (Imposition–Customs) Act 2012 (Cth),

Minerals Resource Rent Tax (Imposition–Excise) Act 2012 (Cth) and Minerals Resource Rent Tax (Imposition–General) Act 2012 (Cth) (the Imposition Acts) created and imposed a minerals resource rent tax beginning 1 July 2012.

The stated objective of the MRRT is to ensure that the Australian community receives an adequate return for its “taxable resources” having regard to their inherent value, their non-renewable nature and the extent to which they are subject to Commonwealth, State and Territory royalties.

Under the MRRT, a miner is liable to pay a 22.5 per cent tax on net profits over AUD 75 million which are derived from the extraction of iron ore, coal and coal-seam gas. However, a miner is allowed to offset its MRRT liabilities against various expenses including state royalty payments.

The MRRT and its Imposition Acts were forecast to raise approximately AUD 2 billion in 2012 – 13 and AUD 2.4 billion in 2013 – 14. The most recent downturn in the resources sector has significantly reduced the MRRT’s revenue. In the financial year 2012 – 13, the mining tax regime brought in approximately AUD 800 million.

The many interest groups lobbying against the MRRT and the imposition Acts include:

a) mining companies;

b) the Western Australia and Queensland governments; and

c) the National Liberty Party.

Fortescue led the constitutional challenge and filed a writ in the High Court on 22 June 2012. 

Fortescue’s Argument

Fortescue’s constitutional challenge had four bases:

a) the MRRT and its Imposition Acts discriminate between the States of the Commonwealth, contrary to section 51(ii) of the Commonwealth of Australia Constitution (Constitution);

b) as laws or regulations of trade, commerce or revenue, the MRRT and its Imposition Acts contravene section 99 of the Constitution by giving preference to one State over another State;

c) the MRRT and its Imposition Acts are invalid on the basis that the legislative powers of the Commonwealth do not authorise legislation directed to the control or hindrance of the States in the execution of their governmental functions; and

d) MRRT and its Imposition Acts are inconsistent with section 91 of the Constitution, which preserves a State’s power to grant an aid or bounty on the mining for other metals.

During the proceedings, the Solicitor-General of Western Australia and Queensland joined as interveners.

The High Court’s Decision

The High Court examined the drafting history behind the various sections of the Constitution. Section 51(ii) of the Constitution requires the Commonwealth Parliament to make laws for the peace, order and good  government of the Commonwealth with respect to taxation, but so as not to discriminate between the States or parts of the State. It was held by the High Court that in Australia, the Commonwealth Parliament is allowed to make laws which may have different effects in different States. French CJ pointed to the difficulties associated with trying to define the term ‘discriminate’. Nonetheless, the MRRT and its Imposition Acts were held to be valid and did not contravene section 51(ii).

Section 99 of the Constitution provides that “the Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.” The object was to “prevent federal favouritism and partiality.” The majority explained that because the MRRT and its Imposition Acts did not discriminate between States, a discussion of preference is unnecessary since preference does not exist. 

The majority rejected Fortescue’s argument that the MRRT and its Imposition Acts have contravened the Melbourne Corporation doctrine. The Melbourne Corporation doctrine precludes the Commonwealth from interfering in the States’ management and control of their ‘revenues and funds’. Fortescue argued that natural resources are essentially ‘revenues and funds’ belonging to the States. The High Court held that the MRRT and its Imposition Acts ‘do not impose any special burden or disability on the exercise of powers and fulfilment of functions of the States which curtails their capacity to function as governments.’

Lastly, the High Court considered section 91 of the Constitution which states that ‘nothing in this Constitution prohibits a State from granting any aid to or bounty on mining for gold, silver, or other metals, nor from granting, with the consent of both Houses of the Parliament of the Commonwealth expressed by resolution, any aid to or bounty on the production or export of goods.’ Fortescue argued that section 91 may be read to imply a prohibition on the legislative power of the Commonwealth Parliament to enact similar legislation. 

The majority rejected the argument and held that the section does not impose any limits on the legislative powers of the Commonwealth Parliament. French CJ agreed with the majority while Kiefel J added that section 91 must be read with section 90 of the Constitution which gives the Commonwealth government exclusive power over customs, excise and bounties. Kiefel J explained that the function of section 91 was to relax the prohibition arising from the exclusive conferral by section 90.

Conclusion

The High Court’s decision confirms the constitutional validity of the MRRT and its Imposition Acts. Miners are liable to pay the 22.5 per cent minerals resource rent tax. While the MRRT and its Impositions Acts has survived this constitutional challenge, its fate remains uncertain with the Australian federal elections scheduled for 7 September 2013. Opposition leader Tony Abbott has pledged that the Coalition will abolish the mining tax regimes. It remains to be seen whether the MRRT and its Imposition Acts will prevail following the federal elections outcome.