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ACM Home arrow Federalism and the Mining Tax

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.


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.

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[ 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.

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[ 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.

 

   

 
Banana Republic Print E-mail
Written by Professor David Flint AM   
Tuesday, 25 May 2010



[A briefing on the coming election and the Constitution  will be given by ACM at Parliament House, Sydney on this Friday, 28 May, 1.00 pm for 1.30 pm.  For more information, contact ACM]




....Paul Keating...

In 1986, with a falling dollar, a declining manufacturing industry and increasing foreign debt, the then Treasurer subsequently  Prime Minister, Paul Keating, famously warned that if Australia did not correct this the nation would end up being a third-rate economy . . . a banana republic."*

I recalled this when I read an opinion piece on the proposed mining super profits  tax by Reg Nelson in the business pages of The Australian (“Opportunistic tax puts the national reputation  on the line,” 20/10). Mr. Nelson is a leading Australian geophysicist. He is now chief executive of Beach Petroleum and is a former chairman of the Australian Petroleum Production and Exploration Association.

Image

 [The cartoons on this page are  reproduced with the kind permission of Peter Nicholson of The Australian www.nicholsoncartoons.com.au or http://www.theaustralian.news.com.au]  



 

...super profits tax...




He began “I answered the phone this week to a familiar drawl: ‘Have you guys down there gone crazy? Why, I wouldn't waste a lousy Yankee penny, let alone a proud Texan dollar on your banana republic. You're worse than Chavez!’

“What could I say? Australia's large store of reputational credit has been raided and it is bankrupt in the reputational stakes.”

“As my friend said, the damage has already been done; our country is no longer seen as a stable place in which to invest resource dollars; and overseas investors see through the flimsy facade of the resource super-profits tax to its core, that of an opportunistic tax.”

“The tax as enunciated has nothing to do with resources, nor rental, nor royalties. It is not a tax on "super" profits, whatever they may be (perhaps other industries can answer that).”

“It is an additional tax imposed on a selected group of industries that happens, at the moment, to be profitable at this stage of the commodities cycle.”




....Mr. Swan responds...

But the Treasurer Wayne Swan denies this (“A tax that will boost growth,” The Australian 24/5) . He says the tax has been designed so that it promotes growth in the mining industry. It will provide “refundability of deductions if a project winds up, transferability of deductions between projects, and the bond rate uplift factor which maintains the value of these two deductions over time.”




...the constitution...


Image

 

ACM’s interest in this new tax is not political, it is constitutional.

First as to process, Parliament has been treated poorly. The Henry Review should have been first tabled in Parliament, with the debate centred there. We do not elect a four hour media lockup to consider such things. The Government was wrong to reply simultaneously – propriety demands that it wait until Parliament – and the nation, including those most affected  – to respond. 

 

 Second, the role of the Head of Treasury, Ken Henry, must cause all constitutionalists great concern.
As Professor James Allen says, in our Westminster system, the public service is there “to provide elected politicians with blunt, impartial advice. “

Professor Allen says he found it unsettling to see the Treasury Secretary “making sweeping, aggressive claims on behalf of the mining super tax, the very tax he dreamed up. There he was insisting the elected government must not back down. There he was, at times dripping sarcasm, telling the rest of us what was good for Australia and what the big mining companies would and wouldn't do....”

A wise government would have appointed someone outstanding in the tax area to undertake the review– there are a number of former judges who would have been more than appropriate.

When the government received the report, the Treasury Secretary could have then given the government the “blunt impartial advice” any government needs, instead of the Secretary being the owner of the proposal.




....the States own the minerals...

 

If the 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. 

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. 

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 to withdraw this aspect of the tax.)  





...nationalisation of private coal rights in New South Wales...



 

In New South Wales, coal rights were often 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.





.....is the new tax really an acquisition?.... 

 

 

 If it 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 the ownership of minserals 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. 

There will probably be different arguments in relation to existing mines compared with new ventures.





...other briefings...

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a FederationSuper Profits Tax: A Nationalisation Without Compensation?   
       

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

 

 

 

Read more...
 
Treasury head raises eyebrows Print E-mail
Written by Professor David Flint AM   
Saturday, 15 May 2010

Under the Westminster system, the public service is expected to be non-political. This has been undermined in recent years by governments of both sides, but it remains an important constitutional principle which provides a significant public benefit.

The Treasury Secretary Ken Henry’s statement that the proposed Resource Super Profits Tax will” grow” the economy caused some raised eyebrows.  The Treasurer was replying to reports which said the Treasury was understood to believe the loss of mining projects could have macroeconomic benefits by easing pressures in the national economy. This seems to be a view supported by the Deputy Governor of the Reserve Bank.  Dr. Henry does not agree.

Image



...political debate...


 

The debate about the tax and its effect on the economy will probably be central to the coming election. 

Had Dr. Henry been asked his views at, say, Senate Estimates, he would have been entitled to respond.  But to issue a press release is at the very least unorthodox, and could be intepreted as siding with one party and entering a political debate. 



...regrettable entry....




The Henry tax review recently released by the government did recommend a resources rent tax on onshore mineral extraction to replace the State’s royalties. It included  modelling which suggested  the tax as proposed would not hinder future investment. 

The government has announced a tax which is not identical to that recommended. 
Now a well known and respected former head of the Treasury, Mr. John Stone, says it was unfortunate that Dr Henry had become involved this week in the fierce public debate about the resource super-profits tax. (“Henry should 'stay quiet'” Nicola Berkovic The Australian 15/5)


"I think it regrettable that the secretary of the Treasury should enter into what is now clearly a political debate,” he said.

 
Super profits tax: constitutional challenges likely Print E-mail
Written by Professor David Flint AM   
Friday, 07 May 2010

 In our column posted before the release of the long awaited Henry tax review, we said this was expected to propose the replacement of State mining royalties with a federal resource rent tax. We said the model was likely to be the Hawke government's  offshore petroleum rent tax.

We said the Federal Government would probably claim they can better negotiate with international mining companies than the States can. We said the Western Australians and Queenslanders would be unlikely to surrender their mining income. While the report recommended the federal tax replace state royalties, the Federal government decided not to do this. Instead, there is to be a rebate for state royalties. 

But these are to be no higher than those imposed at the date of the announcement on Sunday 2 May. 

 

Ken Henry 

[ Dr Ken Henry AC, Secretary to the Federal Treasury ]



The proposed new resource super profits tax, if passed by the Federal Parliament, will most likely  be the subject of constitutional challenges. This column is principally concerned about the constitutional aspects of the new tax.  








...and Parliament?...



The Federal government unusually released both the report and its response simultaneously. And this was not to Parliament but to to a media lock up. The usual approach in a Westminster democracy is to table the report in Parliament and to allow for consultation and discussion first.  The Opposition was also given four hours notice in the lock up.  This is not the way to treat the Parliament.

 




...who owns the resources?...






The governments’ theme is that the resources belong to the people of Australia, that is to the Crown in the right of the Commonwealth.

That is surely wrong. The minerals are certainly owned by the Crown, but not the Crown in the right of the Commonwealth, except in relation to the territories.  The minerals are owned by the Crown, but it is the the Crown in the right of the States. It is thus for the State to concerned to determine the royalties payable on minerals extracted from that State.  

 




....is this a tax, or is it an acquisition, ie a nationalisation?...





Both the Commonwealth and States enjoy a power to tax although the High Court has seriously limited the State’s power to tax goods. The legal question is , is this new resource rent tax actually a tax?

Incidentally, it is curiously called a resources super profits tax, although it will impose a 40% tax on any profit in excess of the long term bond rate.  

Writing in another outlet on the day the Henry tax review was released, I noted that since the Federal Chifley government’s  legislation to nationalise the  banks in 1948 was blocked by a constitutional challenge, governments have realized that they don’t have to own assets to control them and more importantly, to extract a good part of the return, or obtain some political or environmental advantage or both at the cost of the land owner.

I referred to the case brought by the farmer Peter Spencer who went on a hunger strike earlier this year and the private member's bill introduced in the Federal Parliament to override the Queensland Wild Rivers Act which Noel Pearson says actually blocks the reasonable development of Aboriginal owned land located in the Cape York region. There may also be a constitutional challenge by the tobacco companies concerning the proscription on the use of their logos on cigarette packages.



 

... off shore and on shore...  

The model for the proposed tax is the way offshore oil fields are now taxed.

 In 1973, the Whitlam government, relying on a UN Treaty seized all offshore assets from the states and vigorously exploited them. The High Court upheld this under the external affairs power.  

Now a well structured resource rent tax is an efficient tax, a subject on which I once wrote a paper for an academic journal.  In an opinion piece in The Australian (7/5) Dr. Craig Emerson,  the Federal Minister for Competition Policy and Small Business tells how the Hawke government learned that the States were not prepared to hand over their royalties into a subsumed general resource tax. The Hawke government then replaced the offshore crude oil levy with a resource rent tax.




...important differnces between the Hawke tax and the Rudd tax....


Dr. Emerson does not mention two important differences between the Hawke tax and the Rudd tax. First, the Hawke resource rent tax only applied to new fields. The proposed Rudd tax applies to both new and existing ventures. (The government promises generous transitional arrangements.) Second, the Hawke resource tax was over resources owned by the Crown in the right of the Commonwealth. The Rudd onshore tax would be on resources vested in the Crown in the right of the States.

Now the miners, including Andrew Forrest and Clive Palmer, are alleging the proposed onshore tax is actually a nationalisation of 40% or more of their mining rights granted by the States. They say that with corporations tax they will be effectively paying up to almost 60% tax. The new tax will allow for exploration costs and losses on unsuccessful ventures as though the Federal government were a co-owner.

But this will be after  heavy initial costs and losses in unsuccessful ventures have been incurred. It could be said that the government is in effect cherry picking the most successful ventures, and only when they are in a profitable phase.  This was not the approach of the Hawke government.  In reply the Rudd government promises generous transitional arrangements.




....constitutional issues....




 

There are three important questions which will be asked if legislation is passed to impose the tax.  There would be others, including ones about the power to tax profits on minerals vested in the Crown in the right of a State and the effective capping of state royalties. (The legislation not to be introduced until late 2011, that is during the next Parliament.)

The first question is, does this  constitute an acquisition, rather than a tax.

If it is an acquisition, the second is whether this is for a purpose for which the Commonwealth has power to make laws.

And thirdly if it is an acquisition, is it  on just terms.  There will probably be different arguments in relation to existing mines compared with new ventures.

At least we know the answer to the third question. 





...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: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

The Constitution and the Henry Tax Review

 






 

 
The Constitution and the Henry Tax Review Print E-mail
Written by Professor David Flint AM   
Friday, 30 April 2010

One of the hidden costs of these endless republican and flag changing campaigns is that they distract from a proper consideration of those constitutional issues which call for a solution. We have instead spent the better part of two decades on an elite quest for an unattainable politicians’ republic and a squabble about which beach towel design should replace our Australian National Flag.


Now is the time to be serious and face the real problems relating to the governance of our indissoluble Federal Commonwealth under the Crown. One is the way the States have been made  dependent on the Federal Government and their responsibilities encroached on without the people agreeing to constitutional change. The solution is not in abolishing the States; it is in restoring what the Queensland Treasurer, Andrew Fraser , identifies as their financial sovereignty.

The people of the States agreed in 1900 to grant only limited powers to the Federal Parliament. They have more often than not refused to increase these. The clear will of the people expressed by referendums ought to be accepted, although in the Workchoices decision the High Court declined to do so. 

 

 

...Henry tax review...


 

This problem will be highlighted when the Henry Tax Review is eventually released on Sunday, 2 May, 2010, with  the opposition and media receiving a generous four hours’ notice. The government has been criticised for sitting on this so long and indeed,  having it undertaken by a Head of Treasury who would normally advise them on a report from such a review.  It is a curious way to use a departmental head.

More importantly, it is a principle of Federalism that the States should be essentially financially dependent on the voters who put them there and not on the Federal Government. This is so that their voters can hold them to account for the way in which they have managed the taxes which they have imposed on them.   

The politicians, State and Federal, Labor and Coalition, as well as some former High Court judges have managed to obfuscate the accountability and responsibility of both levels of government.

It is undeniable that of all federations, the Australian States are the most dependent on the Federal Government.

Image
[Federation inaugurated...the States were to be fiscally sovereign ]

The result is confusion, a blame game which will never end, and now, some exceptionally poor performing State governments. Western Australia with Queensland is now being eyed by Canberra as the goose which can lay the golden egg to provide even more money for Canberra to spend. 

     

...Grants Commission and WA...




As The Australian’s Economics Editor Michael Stuchbury says in “Canberra tries to pluck mining states' golden goose,” (27/4)  the latest Grants Commission report means Western Australia’s share of the GST will  fall by $222 million, or nearly $100 a person, next year. Premier Colin Barnett argues that the State will be $1.5bn a year worse off than if the GST were divided up on an equal  per capita basis . They keep only 68c in the GST dollar; he wants a floor of 75c in the GST dollar for Western Australia.

In the recent negotiations over hospital funding, the States asked to see the Henry Review before a decision was taken. The Federal government kept the report secret, but only Western Australia refused to hand over 30% of their GST as demanded by Prime Minister Rudd.

The fact is that the GST is a federal tax which Mr. Howard promised to the States because the High Court found several decades after Federation that the States had no power to tax goods, a decision which would have surprised the Founding  Fathers.

In 1999 Mr. Rudd gave the Federal Parliament his assessment of the GST: “When the history of this Parliament, this nation and this century is written, 30 June, 1999, will be recorded as a day of fundamental injustice - an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians, it will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up.” 




...a federal resource rent tax?...

 



The Henry Review is predicted to propose the replacement of State mining royalties with a federal resource rent tax, which economists say is more efficient in retaining a greater proportion of our mineral  wealth here. The model will be the Hawke government's 40 per cent offshore petroleum rent tax, which Canberra could impose as a result of a favourable High Court ruling. The Federal Government will claim they can better negotiate with international mining companies than the States can.

The Western Australians and Queenslanders will be unlikely to be willing to surrender their mining income. As we mentioned above, the Queensland Treasurer , Andrew Fraser has come out as a strong defender of the State's fiscal sovereignty.

Western Australia,Queensland and other States may argue that the Constitution does not allow the Commonwealth to impose such a tax, and that was the intention of the Founding Fathers.  ACM of course has no position on these issues apart from a commitment to our indissoluble Federal Commonwealth under the Crown.  



...another convention?...

 

This problem can be solved neither by the politicians nor by the judges nor by the experts. Only the people can. The solution may well lie through a convention on the 1998 model, but sitting longer.

 

Image

 

That model was half elected, but this time postal voting should not be used. The remainder came from the leaders of the nine Parliaments, together with certain eminent persons. There were also some delegates chosen from otherwise underrepresented groups, for example, youth and Aboriginal and Torres Strait Islander Australians.

 

Such a convention could only be successful if the nominated component were chosen fairly as John Howard did in 1998, not by the sort of infantile gerrymander which so marred the 2020 Summit.





...subsequent 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: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

 

 
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