So Fortescue Metals is threatening a constitutional challenge against the Mineral Resource Rent Tax, passed by the Parliament in late March. This is unsurprising: Andrew Forrest has been vocally opposed to the deal negotiated between Prime Minister Gillard and the big mining companies from its inception. And why shouldn’t it? Fortescue Metals has nothing to lose (except some money on legal bills). It is however surprising that Western Australia has indicated that it will support the challenge. Western Australia is now looking to the newly elected LNP Government in Queensland to join the challenge as well. However, the States are not private litigants. Institutionally, they have far more to lose than some money on legal bills.
The Mineral Resource Rent Tax is imposed by three Acts: the Minerals Resource Rent Tax (Imposition — General) Act 2012; the Minerals Resource Rent Tax (Imposition — Customs) Act 2012; the Minerals Resource Rent Tax (Imposition — Excise) Act 2012. The reason for the different pieces of legislation is that s 55 of the Constitution requires that laws imposing taxation shall deal only with one subject of taxation, laws imposing duties of customs shall deal with duties of customs only, and laws imposing duties of excise shall deal with duties of excise only. The amount of taxation imposed is calculated by the Minerals Resource Rent Tax Act 2012.
The proposed constitutional challenge has been said to rest on two main bases. The first is that the legislation that imposes the tax are laws with respect to taxation passed under s 51(ii) of the Constitution, but they breach the prohibition in this sub-section that such a law must not discriminate between the States. (An alternative basis for framing a similar argument is that the law breaches the prohibition in s 99 of the Constitution that a revenue law must not give preference to one State, or part thereof, over another State, or part thereof.) The basic reasoning behind this argument is that the MRRT applies in a discriminatory way to Western Australia and Queensland: it is in those States that the majority of the tax will be paid by businesses because iron ore and coal are concentrated in these jurisdictions. In this way, the law can be said to be giving a preference to the trade and commerce of non-resource rich States. In my opinion, there is a good counter-argument to this point.
The High Court has accepted that provided a tax is applied equally across the board, just because it falls more heavily on States compared to others because of particular local history and circumstances, it is not discriminatory. Higgins J summarised the position in James v Commonwealth (1928):
[W]here a rule laid down is general, applicable to all the States alike, but it is found to operate unequally in the several States, not from anything done by the Commonwealth Parliament, but from the inequality in the conditions existing in … the States themselves … the Commonwealth Parliament has not been guilty of discrimination or preference between the States.
The large impost on companies operating in Western Australia and Queensland, while it may look discriminatory in practice, it is not discriminatory in the constitutional sense of the term under ss 51(ii) and 99.
The second base for the challenge is that the law is a Commonwealth tax on State property and therefore in breach of s 114 of the Constitution. I also think there is a good counter-argument to this claim. The Commonwealth has taxed the profits of corporations for a very long time. The MRRT has been specifically directed at the profits of those corporations engaged in mining mineral resources, and as such there is a very strong argument it is nothing more than a variation on corporations tax.
It has been suggested that there is a third basis for challenge: the impost is not a tax so as to be supported by s 51(ii) of the Constitution, but a penalty or a fee. I am perplexed as to how this could be argued. There is no proscription of certain conduct so as to make the impost a penalty for failing to discharge antecedent obligations. There is no service being provided, or licence to engage in a particular activity granted so that it could amount either to a fee for services or a licence fee.
The above counter-arguments to the constitutional challenge accept the assumption that the States own the minerals, particularly that there has been no taxation of State property contravening s 114 of the Constitution. However, this is not necessarily a guaranteed conclusion. Traditionally, the prerogatives of the Crown were thought to be divided between the State and Commonwealth Crowns at federation. In divvying these prerogatives up, it was thought the States held onto the proprietary prerogatives, that is, the property rights to precious metals. Evatt J had made this division in a 1940 decision called Federal Commissioner of Taxation v Official Liquidator of EO Farley Ltd. However, in 2010, Gummow, Hayne, Heydon and Crennan JJ all cast some doubt on this position. In a case called Cadia Holdings Pty Ltd v New South Wales, they said:
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.
The reasons of Isaacs J in The Commonwealth v New South Wales suggest that he was alive to these questions but did not need to pursue them. That case assumed the vesting at federation of royal metals in the States but decided that (i) the vesting in the Commonwealth of State property by operation of s 85(i) of the Constitution carried with it any royal metals, and (ii) subsequent acquisitions under federal land acquisition legislation also included any royal metals. Thereafter, Evatt J said that ‘as a general rule’ prerogatives which partook of the nature of proprietary rights and which before federation had been exercisable by the executive governments of the colonies were exercisable by the executives of the various States.
The present litigation was conducted on the same assumption, identifying the State as the repository of the relevant prerogative; the dispute was as to the scope of the prerogative with respect to the copper mined by Cadia. Accordingly, it is inappropriate to consider the matter further here.
French CJ made similar comments. So the High Court seems willing to at least entertain the idea that the Commonwealth may have rights to the minerals under the ground. This is a very significant development; and a very concerning one for the States, who stand to lose a source of revenue, not to mention the administrative headaches that may arise if previous royalty imposts are found to be invalid. The institutional, long-term interests of the States stand to lose if this argument were ever to be accepted in the Court.
The current High Court has indicated it is prepared to stir up doctrines previously believed long settled. We have seen this with the reinvigoration of the Kable principle to limit State legislatures in relation to their courts (see my earlier blog post on two of these cases, South Australia v Totani and Wainohu v New South Wales, here). We have also seen it in relation to s 109, where in Dickson v The Queen the Court questioned the previously accepted use of clauses expressly stating an intention by the Commonwealth Parliament not to cover the field so as to leave State legislation validly operating. (This was subsequently retreated from in Momcilovic v The Queen. This was the challenge to the Charter of Human Rights and Responsibilities Act 2006 (Vic). The Solicitors-General of the Commonwealth, Victoria, New South Wales, Western Australia, Tasmania, South Australia and the Australian Capital Territory made a joint submission reinforcing the importance of leaving the legal position as it current is. A joint submission of this nature is the first of its kind, and highlighted the importance of the issue to the long-term interests of the States, Territories and the Commonwealth. It can be access online through the High Court website, here).
Most significantly, in Williams v Commonwealth (the challenge to the National School Chaplaincy Program) in oral argument, the Court showed an interest in revisiting the breadth of the Commonwealth’s non-statutory executive power. The judges seem to suggest that the effect of federation on the breadth of the Commonwealth’s executive power had never been properly understood. The Commonwealth is now awaiting the outcome of this decision with bated breath – if the judges go ahead and change this it would invalidate decades of Commonwealth contracts. It may also provide the necessary springboard from which to revisit the distribution of the prerogatives between the State and Commonwealth Crowns at federation.
In short, the current High Court is an unpredictable one that has shown itself prepared to stir the constitutional pot. I am not sure why the States would be seeking to support a challenge that may provide a vehicle for the Court to reconsider the States’ ownership of minerals. If anything, Western Australia (and Queensland, although it has not yet said it will support the challenge) would be better advised to discourage the challenge coming before the Court. Although, if the challenge were to go ahead, I can understand why the States would want to be at the bar table to make submissions to the Court about the distribution of the prerogatives. However, they would be well advised to concede that there is no taxation on their property because of the taxes focus upon company profits, rather than arguing there is an impost on the minerals themselves. Supporting the challenge, at least as it is currently framed, seems to be motivated by short-term political interests; once it comes before the High Court, the States need to start thinking about the long-term interests of their polities. Sometimes, it is best to let sleeping judges lie.
Gabrielle Appleby is a Senior Lecturer at the University of Adelaide. She completed her masters thesis on the basis and scope of the Commonwealth Executive spending power, and has continued to research and write in the area.