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ACM Home arrow Federalism and the Mining Tax


 

Until recently the taxation of minerals and petroleum found within the territory of a State has been a matter for the State.

Land grants within the State normally reserved minerals to the Crown. But this is to the Crown in the right of the State, not the Commonwealth.

In 2010 the Rudd government proposed a 40% super profits tax on mines and petroleum found within the territory of the States.

The miners said this would lead to a total effective tax rate of 55% which would make Australia uncompetitive. When the Rudd government fell, the new Prime minister Julia Gillard and Treasure Swan negotiated an agreement with the three largest foreign miners for a substitute tax, the MRRT. 

This will lead to a lower effective tax rate for the three foreign miners than that payable by the others including the Australian miners. 

In addition the offshore PRRT will be extended to petroleum resources found within the territory of the States. Both taxes raise important constitutional and federalism issues which are discussed here.


Federal mining tax - states outraged Print E-mail
Written by ACM   
Monday, 28 November 2011

 

 
Commonwealth v WA - tax dispute Print E-mail
Written by ACM   
Saturday, 11 June 2011
The proposed federal tax on the states’ mineral resources goes to the very heart of our federal constitutional arrangements.


Image
[ Western Australian dissatisfaction with Canberra expressed in 1930]



...minerals tax...





The argument here is not against the taxation of mineral resources. That is a matter for parliament. The question is which parliament.
That question can only be determined by constitutional and legal principles.  
 


 ...federal minerals tax...
 
The context of the present dispute between Western Australia and the Commonwealth is that in the negotiations between the Federal government and the big three foreign miners before the 2010 election, Mr Swan and Ms Gillard had  agreed they could write off increases in state royalties against the new federal tax.   

 Unlike the earlier version, the proposed tax only applies to coal and iron ore.


 
...who owns the minerals?...


An argument in this debate is that minerals (and petroleum resources) belong to the people of Australia and should therefore be subject to a federal tax.   
Any minerals reserved to the Crown under a land grant remains vested in the Crown. 

But that is not, as lawyers say, the Crown in the right of the Commonwealth. It is the Crown in the right of Western Australia. 

In other words, the minerals are held for the benefit of the people of Western Australia - as determined by the Parliament of Western Australia. 
The same is true of every other state.




...taxation generally...





Our federation is in difficulties. Successive federal governments have taken an increasing proportion of the taxation revenues of the nation. A federal mining tax would be  another example of this trend.

As a result, Australia is the most fiscally centralised of all the OECD federations. 

The States and territories raise only 19 per cent of taxes but are responsible for 40 per cent of public spending.


..essential principle...


( Continued  below)



Read more...
 
Federal mining tax: a long way to go Print E-mail
Written by ACM   
Saturday, 09 April 2011

Notwithstanding the government agreeing to the broad ranging changes recommended by a committee headed by Don Argus, formally from the BHP Billiton company, it is unlikely that the miners not involved in the negotiations – that was most of them - will agree, reported Scott Murdoch in Hong Kong for The Australian (24/3)

Nor is Western Australia and possibly Queensland likely to accept that they cannot increase royalties, or that the commonwealht may punish them if they do.

The mining  tax raises important constitutional and legal issues touching upon the federal nature of our Commonwealth which we have discussed in these columns. Noe of these seem to have been resolved, apart froma grudging acceptance by the Commonwealth that they have agreed with the three miners that state royalties are deductible.


Read more...
 
Presentation on A Federal Mining Tax Print E-mail
Written by ACM   
Thursday, 17 March 2011

This is an  ACM presentation on the two proposals since 2010 for a Federal  mining tax.

Until recently the taxation of minerals and petroleum found within the territory of a State has been a matter for the State.

Land grants within the State normally reserved minerals to the Crown. But this is to the Crown in the right of the State, not the Commonwealth.

In 2010 the Rudd government proposed a 40% super profits tax on mines and petroleum found within the territory of the States. The miners said this would lead to a total effective tax rate of 55% which would make Australia uncompetitive.

When the Rudd government fell, the new Prime Minister Julia Gillard and Treasurer Swan negotiated an agreement with the three largest foreign miners for a substitute tax, the MRRT.

This will lead to a lower effective tax rate for the three foreign miners than that payable by the others including the Australian miners.

In addition the offshore PRRT will be extended to petroleum resources found within the territory of the States.

Both taxes raise important constitutional and federalism issues which are discussed in this presentation .

This part, Part I, serves as an introduction.  Parts II and III  are below.

Read more...
 
The federal balance must be maintained Print E-mail
Written by Professor David Flint AM   
Saturday, 29 January 2011
We have on several occasions back to April 2010 expressed our concern about federal government proposals to tax minerals found within the territory of the states. (See links below) 

This issue is crucial to any consideration of federal-state relations within the Australian constitutional system. ACM is committed to the defence of that system.

The Commonwealth is already flush with revenue. It controls vast taxation streams, so many that Australia has become the most fiscally centralised federation within the OECD.

The taxation by the federal government of mineral and petroleum resources belonging to the states will only make that bad situation worse.

Our Federal Commonwealth will be even more unbalanced. This, of course, was never the intention of our Founding Fathers. The people have never approved such a deviation from the fundamental original intention of our Constitution.

Image
[Sir Samuel Griffith and colleagues: Samuel Griffith Society ]


 


...federal taxation proposals...





The first version of the tax, the Super Profits Tax, was a crucial element in the overthrow of the former Prime Minister Kevin Rudd and his replacement by his deputy Julia Gillard.

Its successor tax, the minerals rent resource tax (MRRT) was designed in rushed secret negotiations between the Prime Minister, Treasurer and three foreign miners.  They came to an agreement just before the 2010 Federal Election.

But after the election a dispute arose between the government and the three foreign miners as to whether the agreement provided that any increases in state royalties should be allowable as deductions.

The government now seems to accept that the agreement provides that any such increases should be allowable. It is believed that the federal government will attempt to ensure the states do not increase their royalties.  

In addition the government proposes to extend the offshore Petroleum Resource Rent Tax (PRRT) to petroleum and gas found within the territory of the states.



...ownership of the minerals...



[Continued below]
Read more...
 
Super Profits Tax: A Nationalisation Without Compensation? Print E-mail
Written by ACM   
Monday, 07 June 2010

If the Super Profit Tax were to be enacted after the election, there would be at least four constitutional questions which could be raised in the likely constitutional challenges.

First, is it a tax on "on property of any kind belonging to a State"? The Commonwealth is not allowed to impose such a tax under section 114 of the Constitution.

The second question is whether the tax is in fact an acquisition or a nationalisation. The proposed tax involves the Commonwealth taking 40% of the so-called super profits, but bearing 40% of the losses. This could be argued to be the effective acquisition of a share in each mine.


(When the Commonwealth is actually called on to share losses when these are large and incurred a foreign investor, it is likely there will be enormous public pressure for this aspect of the tax to be withdrawn.)

Minerals are usually reserved to the Crown, but minerals in the States are not reserved to the Crown in the right of the Commonwealth. They are usually reserved to the Crown in the right of the State. This can often be seen on the relevant Crown Grant.

In New South Wales, coal rights were sometimes granted with the land. In 1981 the Wran Labor government introduced legislation to nationalise these rights. The compensation provisions were inferior to that required by the Constitution in relation to acquisitions by the Commonwealth.

The Greiner Coalition government legislated to provide for restitution and more generous compensation in 1990. This was reversed to some extent by legislation introduced by the Carr Labor government in 1997.


This unsatisfactory affair points to the need for entrenched rights to fair compensation in State Constitutions.


If the tax is an acquisition, the third question is whether this is for a purpose for which the Commonwealth has power to make laws, bearing in mind that mineral ownership is a matter for the States.

Fourth, if it is an acquisition, is it on just terms? The answer would definitely be in the negative - there is no provision for compensation. The Constitution requires that an acquisition be on "just terms".


...prominent economist shows how this is a nationalisation of 40%....




A prominent economist has now come forward to show that what is being attempted is a nationalisation or acquisition. To be valid, this must be for the purposes of the Commonwealth, and miners must be on just terms.   

 

Ben Smith, formerly Head of economics at the Australian National University, was described in the press as a leading proponent of the new tax. In The Australian “Government should pay up front for its share of mining companies' costs “(7/6) he points out he is not. He supports the government acquiring a share in all mines as a compensation for mineral depletion, the so called Brown tax.



Under this the government would pay a share (say 40 per cent) of all exploration and mine development costs and takes that share of the profits, just as a private sector joint-venturer would do. He says that calling this a "tax" is rather misleading. “Calling it a "super profits tax" is ridiculous. In fact, the RSPT is the Brown Tax but with a twist.”

The twist, he says, is that under super profits tax the government pays for its 40 per cent share of costs by borrowing from the mining company, guaranteeing to repay the loan either from its share of the profits or, if necessary, by cash payment at the end of the project's life.

So for every $100 of initial project cost the company still has to put up $100, but only $60 of this is actually investment in the project. The other $40 is – and this is difficult to believe- a loan to the government. I I should add thta this is an interest free unsecured loan to the government.”

This requires the company, he says, to hold a sort of unofficial government bond (paying interest at the government bond rate) in addition to funding its share of the project.

“Mining companies,” he say “ aren't in the business of holding government bonds but, in principle, they can borrow from people who are (such as banks) at no greater interest rate than the government is paying, thereby passing the job of lending to the government on to someone else and separating it from the task of raising the finance needed to fund their 60 per cent share of projects.”

While believing th RSPT is superior to current arrangements he says subject to easily exaggerated fears that a future government may renege on its guarantee. I do not think these fears are at all exaggerated. When the first losses come up for recoupment, imagine the reaction when the media inform the people that a cheque for several billion dollars must be drawn in favour of a foreign investor. What if it is a company owned by a foreign government?

The source of those concerns is the "twist". The solution is to remove it. The government should pay its 40 per cent share of project costs up-front, funding this by borrowing in the capital market and issuing government bonds. This would replace unofficial government debt with official debt and, so long as the commitment to honour both is the same, a proper government accounting system should treat the two cases identically.

They are only different if unofficial debt to mining companies is considered easier to default on than official debt, which is exactly what those on the other end of the super profits tax are worried about.


 






...other ACM briefings...

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a Federation

     

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

 

 

 
Super Profits Tax: Massive International Law Claims Likely Print E-mail
Written by ACM   
Sunday, 06 June 2010

 Another concern about the Resource Super Profits Tax proposal is that it may breach international law and lead to a large number of very substantial claims to a Washington based international agency. These could be made under any of several treaties the Federal government has entered into under the external affairs power in the Constitution. In the video below, Professor David Flint explains how these claims could arise. 

Foreign investors are entitled to assume they will not be subjected to laws which expropriate their assets without compensation. International law protects such investment.

Image
[ Washington, but not for tourism ]




...treaty making power...


The Federal Constitution grants a power with respect to external affairs to the Federal Parliament. Under this, the Federal government has entered into a number of treaties to protect foreign investment.

Hitherto there was no obvious need for Australia to do this to encourage foreign investment. Foreign investors would only be concerned about unstable countries being parties to these treaties, not a country with the record Australia has, or perhaps we should say had until recently.

Australia has long been seen as one of the most stable countries in the world, one where foreign investors could expect to be treated fairly and consistently.


No more. Now we hear the code words "sovereign risk" and "country risk" mentioned in relation to investment here.




...potential claims...




If the tax is in fact enacted, foreign investors could claim that the tax is retrospective, and substantially affects existing projects. They would say that they came to Australia expecting to pay Federal taxes, company tax and the GST, and that they had entered into negotiations with the States or were aware of the rate of royalties charged by the owners of the minerals, usually the State governments.

Under one or more of up to 22 international treaties in which the Commonwealth has pledged to protect foreign investment. The foreign investors could claim that Australia was in breach of its commitments to protect this investment.



...international arbitrations...




These breaches could lead to Australia being required to take part in a large number of international arbitration proceedings before an agency of the World Bank. One might be a test case for the others.

In the proceedings the foreign investors would ask for a remedy which is prompt, adequate and effective. This could involve orders for restitution, or for compensation.

This could result in a future Federal government -- that is the taxpayers, and particularly the next generation - having to pay enormous amounts of compensation to foreign companies. At the same time new investment would most likely fall.

The action of the government in so peremptorily announcing such a massive tax and in indicating that the core is non-negotiable, has for the first time raised the factor of sovereign risk in relation to investment in Australia.



...sovereign risk...




Sovereign risk is usually in issue in relation to unstable countries. As the ANZ states, ssovereign risk implies the possibility that conditions will develop in a country which inhibit repayment of funds due from that country, such as exchange controls, strikes or declarations of war

An international lender should (but does not always) compensate for perceived sovereign risk by adjusting the interest rate charged. In other words, lenders to investors in Australia can be expected to increase the interest rates charged.




...country risk...




An associated consideration is country risk, which the ANZ says is the risk associated with dealing with another country, including the legal, political, currency and settlement risks.

For the first time in the history of Australia , foreign investors and lenders considering new projects both in the country and offshore are considering the issues of sovereign and country risks.




...other briefings on the Super Profits Tax...


Super Profits Tax: Not in a Federation 

Super Profits Tax: A Nationalisation Without Compensation?        

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

 




 

 
Super Profits Tax: Not in a Federation. Print E-mail
Written by ACM   
Saturday, 05 June 2010

 When the Australian colonies agreed, humbly relying on the blessing of Almighty God, to unite in one indissoluble Federal Commonwealth under the Crown and under the Constitution, it was assumed the States would continue to rely on taxes they raised and to face the electors and account to them how they had spent their money.

The Founding Fathers, erudite men that they were, were well aware of the fundamental point made by the American Founders, that:

"In a federation, the individual States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants." (The Federalist Papers)

In the video below Professor David Flint explains how this principle was intended to apply to Australia when the Constitution was written.

 



But over the years, with High Court interpretations and political machinations we have reached the stage where the original intention of the Founding Fathers has been thwarted. The result is that to day, our Federal  Commonwealth of Australia is the most fiscally centralised of the OECD federations. The  States and territories raise only 19 per cent of taxes but are responsible for 40 per cent of public spending.

While the benefit to Australia from being a federation is estimated to be 10 per cent of the GDP, this could be raised significantly by further decentralising our taxation system, thus raising average incomes by $4,188 per annum. (The 2007 Twomey-Withers Report to the Council For the Australian Federation.)

The result is that the States are over dependent on the Commonwealth; technically we live in a federation poisoned by "vertical fiscal imbalance".

Just as healthy adults who are welfare dependent tend to lead dysfunctional lives, this imbalance has tended to reduce the quality of State governments, making them dysfunctional and reducing them to mere service providers and not true governments.

The Commonwealth government this year has already tried to take  30% of the GST, a Federal tax which John Howard valiantly tried to give the States to make up income they had lost thanks toa centralising High Court.  Alone among the States, the Western Australian government has vetoed this. 

The proposed super profits  tax will only exacerbate this situation and make the States even more dysfunctional. The proposal in the Henry Review was that the Commonwealth take over State royalties. Fearful of the fight a direct seizure would provoke, the government will probably cap them and slowly expropriate them.

The decision how the people are to benefit from mining is a matter for the States, not Canberra. That is after all what the Constitution, approved by the Australian people, intends.





...other ACM briefings...

Super Profits Tax: Massive International Law Claims Likely


Super Profits Tax: A Nationalisation Without Compensation?

         

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

 

 

 
Super Profits Tax: Who Owns The Minerals? Print E-mail
Written by ACM   
Wednesday, 02 June 2010

The proposed Federal Resource Super Profit Tax to be levied on the mining and other industries invites the question who owns the minerals.

The Rudd government argues that this tax must be introduced to ensure a fair return to the people of Australia who they say own the resources.

This is not so. The minerals are vested in the Crown, but not the Crown in the right of the Commonwealth, except for the territories. The minerals are vested in the Crown in the right of the relevant State.

Image

If we look at a typical Crown Grant, that is the first grant of a particular parcel of land, it is normal to find words like this in the document:   

“We do hereby reserve to Us Our Heirs and Successors all precious metals coals and minerals of every description including crude oil ...” 

It is signed ” Witness Our Trusty and Well Beloved.... Governor in and over the Colony .....”

The Crown Grant above comes from Fiji; grants were similar throughout the Empire. This one was chosen because it is printed and therefore more legible.


There are exceptions. In NSW coal was granted with the land. In 1981 these private coal rights were nationalised under legislation introduced by the Wran Labor government without the provisions of the just terms which are required under the Federal Constitution. A subsequent government, the Greiner government  offered fair compensation or restitution.The next government, the Car Labor government renationalised most of the coal.

 

In this video briefing on the proposed Federal Resource Super Profit Tax, Professor David Flint discusses the constitutional and legal issues relating to the ownership of minerals in Australia.





....other briefings....

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a Federation


Super Profits Tax: A Nationalisation Without Compensation?          

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

    

 

 
Super Profits Tax: Canberra or the States? Print E-mail
Written by ACM   
Tuesday, 01 June 2010

Ensuring a return to the people from minerals is not Canberra’s business. That is the constitutional position, argues Professor David Flint in this video of ACM’s first briefing on the proposed Resources Super Profits Tax.

Our constitutional system is centred on our Federal constitution, but includes all of those laws, customs and institutions by which the people have agreed to be governed.

 This brings in that golden thread of history that takes us back through the Glorious Revolution of 1688 to the Magna Carta, and forward through those signal documents through the twentieth century which established our independence.

Image
[ Not their business ]

The Parliament consists of the representatives of the people. It is their forum, the place where the great legislative and policy proposals concerning our nation must be debated and decided.  

That is where the Henry Tax Review should have been tabled so that it could be debated in each chamber and across the nation, especially by those most concerned.

This should have been well before the government, advised by the independent public service, responded with its policy proposal.   

 Instead the review and the non government MP’s were put in a four hour media lockup to see not only the report but the government response.

The Federal Parliament was treated with contempt and the public service compromised.

Then we come to which polity has jurisdiction and authority over minerals and the other wealth from the ground.

Under our Federal Constitution, the people of each of the original states, humbly relying on the blessings of Almighty God, agreed to unite in an indissoluble Federal Commonwealth under the Crown and under the Constitution.

Image
[ Their business, along with the other states ]

This was to establish a Federal Parliament with limited specified powers. None of those extend to the ownership and control of the minerals and other earth resources in and of the States. The Federal government claims it is acting because the minerals belong to all Australians. Most do, but they are not vested in the Crown in the right of the Commonwealth.



...minerals vested in the Crown...


 

The Crown our oldest institution and our constitutional guardian, has several manifestations.

There is the Crown in the right of the Commonwealth, and there is the Crown in the right of Western Australia, and the Crown in the right of Queensland, and South Australia, Victoria, Tasmania and New South Wales.

 Minerals are normally vested in the Crown in the right of the States. It is for the States to ensure that Australians receive a fair return through State royalties, not for the Federal government.





...land grants...

 

Land grants by the Crown usually but not always reserved the minerals in the land granted to the Crown. This was always the Crown in the right of the relevant Colony, now State.

In further briefings Professor Flint will explain the argument that the tax is a nationalisation and whether this is in breach of the Constitution. He will refer to the nationalisation of private mineral rights in NSW.

He will also explain the argument that this is a tax forbidden by the constitution, and whether it is in breach of Australia’s international obligations.

 

   

 
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